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ACTEC Trust & Estate Talk
Trump Accounts (IRC §530A): Estate, Tax, and Wealth Planning Considerations
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A
Trump Accounts, which is Internal revenue code section 530A estate tax and wealth planning considerations that is the subject of today's ACTEC Trust and Estate Talk.
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Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. This series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with Today's topic.
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I'm Actech fellow Connie Iister from Boulder, Colorado. Trump accounts under Internal Revenue Code 530A introduces a new child investment vehicle with tax deferred growth contribution limits and automatic conversion to a traditional ira at age 18. While designed for long term savings, these accounts raise important questions about beneficiary designations, trust coordination, income tax timing and transfer planning. ACTAC Fellow Susan Bart of Arizona and Illinois joins this episode to examine the technical implications estate planners and wealth advisors need to understand before clients begin funding them.
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C
Thank you, Connie. The Trump accounts add a new layer of complexity to the already complex area of different vehicles for saving for minors. The Trump accounts will be up and running were promised by July 4th of this year, one year after the bill was signed into law. And one of the big lures of the Trump accounts is that every US citizen who is born during 2025 through 2028 and has a Social Security number may open up one of these accounts and elect to get $1,000 of funding from the government to start their Trump account. Parents in order to open a Trump account, the guardian or parents will need to complete an application. And there already is a draft of IRS form 4547 to open a Trump account. But there also will be an online mechanism for opening Trump accounts as well. And there actually are two different elections that'll need to be made for children born in 2025 through 2028. One is the election to open an account and then there's a second election that needs to be made in order to qualify for the thousand dollars of seed money. The program is in development, yet we don't know which financial institutions will be offering the Trump accounts and managing the investments. We do know that the Trump accounts have to be invested in broad based equity funds like the S&P 500 that are primarily invested in US equities and that have very low cost ratios of less than 10 basis points for the investment side. And we are all waiting to hear what institutions will be offering these Trump accounts. Contributions to the accounts can be made by four different players. One is the government and an example of that is the seed deposits for certain beneficiaries. In addition, charitable organizations can decide to make contributions to Trump accounts so long as they are choosing a class of beneficiaries that are broad based in a particular geographic area and the class needs to be approved by the government before they go about this. So for example, Michael and Susan Dell of Dell computers will contribute $6.25 billion to Trump accounts. My understanding is that they will be for children under the age of 10 in certain geographic areas with net income on average less than $150,000 and they will be for beneficiaries who are not getting the thousand dollar. Government seed money and other charitable entities may well follow and also offer some funding for these Trump accounts. The other two classes of people who can fund Trump accounts are one Employers. So an employer can decide to offer as a benefit contributing to a Trump account for the employee, obviously if they're a teenager and under 18, or for the children of an employee. The employer though is limited to no more than $2,500 a year per employee. So that is one cap. The last group that can fund Trump accounts is individuals which most likely to be family members of the beneficiary such as parents and grandparents, and they can also contribute to the Trump account. Except that total contributions from individuals and employers cannot exceed $5,000 per beneficiary each year. So it's a rather limited amount that can be contributed. One alert on the individual side is if you think about the gift tax annual exclusion, a contribution to a Trump account should not qualify because you cannot withdraw that money until the beneficiary is age 18. That is in my mind the very definition of a future interest and not a present interest. Section 529 has very particular language in the statute that says, well, regardless of the normal rules, contributions to 529 accounts count towards the gift tax annual exclusion. We are missing that language in the section 530A which Actec has pointed out now twice in comments both on the statute and and on notice 2025-68. I expect that there'll be either a technical correction or regulations to make clear that you are not expected to file a gift tax return and use a portion of your lifetime exclusion to make a contribution into a Trump account. What happens with the account while the beneficiary is growing up is the money will stay in the account. There may be some limited options to roll over from one Trump account to another, but there are no permitted distributions with one small exception. In the year that the beneficiary attains age 17, if they have a disability, you can do a rollover to an able account. Otherwise money cannot be taken out until the year in which the beneficiary attains age 18. And at that point what happens is it automatically becomes an IRA for the beneficiary. Its source is still from the Trump account, but the normal IRA rules would apply. And there is the RUB one the 18 year old can take a distribution from the IRA. It will be subject to income tax, it will be subject to a penalty. But no one can stop them from taking a distribution if they think they have a good use for the money, whether it's taking a beach vacation, a ski vacation or a trip to the casino. The other thing to consider is that the distributions are going to be subject to ordinary income tax. The only exception is the amount of contributions that were contributed by individuals, by family members that's not taxed. But the growth on that, any employer contributions, any charitable contributions, and the seed money from the government, whatever that grows to, all the rest is subject to ordinary income tax when it is distributed and the ordinary IRA rules apply. So there'll be a penalty if the beneficiary in general takes funds out prior to age 59 and a half. With limited exceptions in the IRA rules such as funding higher education, disaster relief, further adoption of a child, and a little bit for first time home ownership. But in general, these are tended as very long term investments that are not going to be taken out until the beneficiary reaches a retirement age. When you compare the Trump accounts to section529 accounts in general, I think you're going to Prefer a section529 account so long as there might be some type of educational need that the beneficiary will have.529 accounts of. Permissible qualified distributions keep getting broader as time goes by. Qualified distributions now include not only college and graduate school, they also include primary and secondary school and related expenses. Up to $20,000 a year per beneficiary. You can roll over from a 529 account up to 30, $35,000 into a Roth IRA for a beneficiary, you can change the beneficiary. And if something comes out of a 529 account as a qualified distribution, there is no federal income tax and usually no state income tax on the distribution. In contrast, anything coming out of a Trump account, except for the actual amount of contributions put in by individuals, is going to be subject to income tax when it's distributed. So in general, you may want to fund the 529 accounts before you start putting your own money in a Trump account. And in any event, wait until we get clarification on the gift tax annual exclusion question. Of course, if you have a beneficiary who qualifies to receive the government seed funds or funds from a charity in a Trump account, you may want to open a Trump account to receive that essentially free money. We will keep following the Trump accounts as we learn more and hope that they are up and running and we're ready to receive contributions starting in July.
- [11:44]
A
Thanks, Susan. What a nice rundown and bullet point summary of these new investment accounts. We're we really appreciate your time and expertise today.
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Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit actec.org Please subscribe to this series and leave us a rating or a review.