Category: Tax Planning

The Marriage of Divorce and Estate Planning

August 11, 2016

In case you missed the series about the impact of divorce on estate planning, here is a brief recap of some points to consider.

1.  The Property Settlement Agreement may require that you maintain life insurance for any minor children.  If that is the case, then have you revisited your estate plan recently?  What obligations to maintain life insurance do you have?  Does the Property Settlement Agreement have certain requirements for the creation of a trust, and if so, what are those requirements?  Have the requirements of the Property Settlement Agreement been fulfilled or incorporated through your estate plan?  Are there any provisions of the Property Settlement Agreement that will survive death?

2. When was the last time you updated your beneficiary designations on qualified retirement accounts (e.g., 401(k) or IRA accounts), annuities, life insurance or payable on death or transfer of death designations on bank or brokerage accounts?

3.  What should happen to your real and personal property?  Are there steps you need to take to ensure your real and personal property are distributed to the individuals or entities you want to have benefit?

4.  If you are divorcing and have a disabled child, how is that child being provided for upon the incapacity or death of a parent?  Is eligibility for public benefits preserved through a properly structured special or supplemental needs trust?  Who has authority to make healthcare decisions for the child and in what manner?  Has guardianship been determined and the terms in which parents plan to share guardianship specified, if applicable?

5.  What happens if an estate plan already exists and you do nothing to update it?

#estateplanning #divorce @bgnthebgn

ALERT – Valuation Discounting Impacted By New Regulations

August 4, 2016

Estate planners and valuation experts have been advising clients for the last year that the IRS and Treasury would be issuing new regulations that would make it harder to transfer business interests without incurring estate or gift tax.   The proposed regulations are now here and will reduce the availability of discounting for transfers of business interests that are subject to certain restrictions (e.g., restrictions on marketability).  The proposed regulations will go through a 90 day public comment period and a public hearing is scheduled for December 1, 2016.  The proposed regulations will be effective as to transfers that occur on or after the date the regulations become final, and in certain circumstances, as to transfers occurring 30 or more days after the regulations become final.  Thus, those who hold interests in closely held businesses should contact their professional advisors to determine whether they need to take action before the regulations are finalized.  #valuationdiscounts #2704regulations #businessvaluations #estateplanning #businessplanning @bgnthebgn

ALERT – UPDATE 2.0 – New Rules for Basis Consistency

March 26, 2016

In an earlier post I described the new rules for basis consistency about which executors and their advisors must be aware.  In an update to that earlier post, I highlighted the regulations that had been issued.  The deadline for complying with the new rules was March 31, 2016.  On March 23, 2016, the IRS issued another notice further extending the deadline to comply with the new rules until June 30, 2016.   This extension gives executors and their advisors more time to digest the new rules and regulations, and hopefully, more accurately complete Form 8971 and Schedule A.  #estateadministration #taxplanning #basisconsistency #form8971 #IRSregulations #taxplanning #estatetax

ALERT – UPDATE: New Rules for Basis Consistency

March 6, 2016

I previously posted about the new rules for basis consistency about which executors and their advisors must be aware.  I noted that the IRS had indicated that regulations would be forthcoming.  Late last week the proposed regulations were released relating to both Section 1014(f) and Section 6035 and I have highlighted a few points below.

One of the biggest issues about which clarity was being sought was whether an executor of an estate in which an estate tax return is being filed to take advantage of portability needs to complete and file Form 8971.  The proposed regulations exclude such returns from the requirement; that is, if an executor is simply filing for portability, then Form 8971 is not required. 

For those who are required to file an estate tax return, the regulations provide some additional guidance as to how an executor is to go about satisfying this new requirement.  For example, if at the time the Form is due, the executor does not yet know what assets a beneficiary will receive, then the executor must report all assets the beneficiary may receive. This ultimately means that the same assets may be reported to several different beneficiaries.  This also means that an executor will be required to supplement the initial filing of Form 8971 and make it clear to the beneficiaries which filings are the final ones.

Moreover, it now appears that when a beneficiary who originally received an asset from an estate subsequently transfers that asset to another family member or entity, the transferring beneficiary will also be required to file Form 8971 with the IRS and report the basis to the family member or entity.  This requirement impacts many individuals who otherwise had no reporting requirement to the IRS and may not be paying attention to the fact they now have these requirements.

Lastly, the new rules, as clarified by the regulations, do not allow for a step-up in basis (a discussion from an earlier post) in certain circumstances.  After discovered assets that should have been disclosed on the estate tax return and were initially not, will have a zero basis, and therefore, be subject to greater income taxes consequences when sold unless certain corrective measures are taken.

What these new rules and proposed regulations tell us is that if you are dealing with a taxable estate, then you should consult with your professional advisor about various filing requirements to avoid missing a filing and incurring the resulting penalties.  #estateadministration #basisconsistency #form8971 #IRSregulations #taxplanning #estatetax

The IRS and Its “Dirty Dozen”

March 1, 2016

Last week I passed along a few tales of identity theft and phone scams involving the IRS.  The IRS also annually posts a list of the “Dirty Dozen” tax scams that may impact you or for which they look when reviewing tax returns. Number 1 on the list was identity theft and number 2 centered around phone scams.  As you can see, fraud and identity theft involving the IRS is becoming more common and you need to be aware of the most likely scams.  Moreover, the threat has increased now that it has been revealed that the recent IRS hack will impact many, many more taxpayers.  Be sure to talk to your professional advisors about possible ways to protect yourself.  #identitytheft #IRShacked #taxfraud #dirtydozen #protectyourself

Identity Theft and the IRS

February 22, 2016

Many of you may have seen that the IRS was hacked again recently and personal data was compromised.  My partner, Wayne Zell, was one such victim and he recently blogged about his arduous experience of proving who he was to the IRS once he received a letter from them.

Unfortunately, his experience is becoming all too common. Another partner, Eric Horvitz, also recently had an experience in which he received robot calls on his cell phone supposedly from the IRS telling him that he would be sued within days unless he returned the call. Although Eric knew it was a scam, he was curious and returned the call using his office phone and was asked to provide personal information. Once the person on the other end of the line knew that Eric understood this was a scam, the person hung up. Eric then provided the following valuable reminders:

  1. The IRS will never initially contact you by phone.  You will first receive a letter.  If you paid all of your taxes for a prior tax year, then a legitimate letter from the IRS likely will say that your tax return is being audited in some fashion.  If you did not pay all of your taxes for a prior tax year, then a legitimate letter from the IRS likely will be a bill that requests payment.  Your failure to address an initial IRS letter in a timely fashion will result with a follow up letter from the IRS in some fashion.

  2. If after receiving a letter (or likely letters) from the IRS, the IRS does call you. The IRS employee always will provide his name and should give his IRS employee number.  Ask what office the IRS is calling you from and later verify that the given IRS office does exist.  A legitimate phone call from the IRS likely means that you have ignored all prior letters from the IRS.  The person calling you likely is either a “revenue agent” – the IRS employee who will audit your return – or a “revenue officer” – the IRS employee who will demand payment.

  3. The IRS will never call you threatening to sue you.  Again, you always will get some sort of letter in the mail.

  4. Never call these scam artists back.  They are out to get your personal information in any way and your money.  Simply by calling them back on the telephone number on which they called you will give them a source of information with which they can steal your identity.

  5. The IRS neither asks nor requires you to use a specific payment method for your taxes, such as a prepaid debit card – the 21st century version of cash — which likely will have no origin through the banking system.

  6. The IRS will never threaten that the “police” will arrest you.  The IRS does have its own police officers.  They are called “special agents.”  If you are contacted by a special agent, then you likely will know why the IRS has contacted you.  In that case, tell the special agent to have a nice day and also tell him that your attorney will contact the special agent.  Then, get an attorney.  You will need one.

As if matters are not already difficult when dealing with the theft of your own identity, for those who have recently lost loved ones and are having to deal with filing final tax returns, the process has become even more complex because of the amount of identity fraud. It is not uncommon for a fraudulent tax return to be filed using a deceased person’s social security number that claims any refund. Usually, executors do not know it has happened until they go to file the final tax return and their filing is rejected.

The process for undoing the damage of the stolen identity can and will take months to resolve. Because there has been so much fraud, the IRS has started responding to requests for information about a deceased’s person’s tax returns with a letter indicating that they will not provide any such information until the executor (or perhaps the CPA or attorney) calls and proves the executor has authority to ask for and receive the tax information.  The call alone can take hours with you just sitting on hold.

There are ways that you can notify the IRS of your authority as an executor through particular IRS forms that are filed with the IRS. An experienced estate and trust administration attorney or CPA can guide you through that process and help complete the forms and get them filed in the proper order. The hope in submitting the IRS forms is that you can avoid hours lost on hold with the IRS and prevent fraudulent filings that create stress during any already stressful time after a loved one has died.

Ultimately, whether you are having to deal with identity theft or fraud involving the IRS at a personal level or as an executor, you should consider speaking with a tax professional, such as a CPA or an attorney. #taxplanning #identitytheft #IRSfraud #estateadministration

Why Has Income Tax Planning Become a Bigger Part of Estate Planning?

February 17, 2016

Many of you may have had your estate plan prepared at a time when the exemptions from Federal estate tax were much lower and the ability to use a deceased spouse’s exemption was unavailable. To ensure that a married couple maximized the use of the available exemptions, your estate plan may have been structured so that upon the death of one spouse, two subtrusts were automatically created for the benefit of the surviving spouse.  

As discussed in an earlier post, the estate tax laws have changed and exemptions from Federal estate tax were permanently set at higher levels. In addition, married couples are permitted to transfer any unused Federal estate tax exemption to a surviving spouse by way of a concept known as ‘portability.’ Thus, the need for an automatic allocation between two subtrusts upon the death of one spouse is no longer necessary in certain circumstances and may have unintended income tax consequences as follows.

As you may know, upon the death of one spouse, the tax basis in certain assets owned by that spouse is adjusted to the fair market value as of the date of death. This adjustment is often referred to as a “step-up” or “step-down” in basis. Assets funded into the subtrusts will receive a basis adjustment on the death of the first spouse. Upon the death of the surviving spouse, only assets held in one of the subtrusts (i.e., the Marital Trust) will be adjusted to the fair market value as of the date of death of the surviving spouse. The assets of the other subtrust (i.e., Credit Shelter or Bypass Trust) continue with the same tax basis that was received upon the death of the first spouse. Therefore, the beneficiaries under your estate plan after both of you are gone may pay more in capital gains tax on any assets held in the subtrusts if automatic allocation is made between the subtrusts and the assets appreciate in value after the date of death of the first spouse.

To provide maximum flexibility to the family following the death of the first spouse, you should consider amending your estate plan to remove the automatic allocation and having all the assets pass to one subtrust. The surviving spouse would then have the ability to reallocate (i.e., disclaim) a portion of the assets, if necessary, but the reallocation would be made after evaluating both the income tax and estate tax situation at that time.

Realizing this may be a lot to digest, the main point is that if you have not recently reviewed your estate plan, you should do so to see if any changes need to be made. Rest assured that any change would be implemented only after collaboration and concurrence of all of your advisors (i.e., your financial advisors, your accountant and your attorney). #estateplanning #taxplanning #incometaxplanning #portability #estateplanupdate

ALERT – New Rules for Basis Consistency

February 13, 2016

If you are an executor of an estate or an advisor to such executor, then you need to be aware of two new statutes that may impact you and a change in the initial deadline. Included in the Surface Transportation and Veterans Health Care Choice Improvement Act that was effective on July 31, 2015, were two statutes that require the executor of an estate to report to the IRS and to the beneficiaries of the estate the basis (in this case, fair market value of the asset that is determined after a death) of the assets that the beneficiaries are to receive from the estate.

Section 1014(f) requires that the basis the beneficiary receives be consistent with the value as reported on the estate tax return. Section 6035 is the reporting requirement on new Form 8971. Under Section 6035, executors are required to provide certain information on Form 8971 to beneficiaries no later than the earlier of (a) 30 days after the estate tax return was due (taking into account any extensions), or (b) 30 days after the estate tax return is filed. In Notice 2015-57, effective on August 21, 2015, the initial deadline for such reporting was extended to February 29, 2016 to allow for the promulgation of regulations.

On February 11, 2016, Notice 2016-19 was released in which the initial deadline was further extended to March 31, 2016 to allow for more time to issue regulations relating to these new statutes. Among other items that are in need of clarification is whether an executor of an estate in which an estate tax return is only being filed to take advantage of portability needs to complete and file Form 8971. The recent Notice advises executors and others to not file Form 8971 until the release of the regulations, which are expected “very shortly.” Thus, executors and advisors remain in limbo in certain situations and will need to stay tuned for further updates.  Furthermore, beneficiaries need to be aware that they will be receiving this information and will be responsible for maintaining accurate records.  #estateadministration #taxplanning #basisconsistency #form8971

If I Won a $1 Million in the Lottery or $1.5 Billion…

January 13, 2016

Today there is a lot focus on the Powerball lottery that currently has a jackpot of $1.5 billion (and climbing) and many discussions are being had detailing what one would do if they won. Some of the considerations include making gifts and loans to friends and family members.

Although chances of winning are 1 in 292 million, if you are in a position to consider making gifts or loans to friends and family members, there are a few key points to remember as to minimize any gift tax consequences. As highlighted in an earlier article, we each have the ability to gift during our lifetimes without incurring gift tax. The current exemption is $5.45 million per person above which a 40% flat tax is imposed. In order to utilize that exemption, a gift tax return is required.

Furthermore, each of us has the ability to gift up to $14,000 per person to an unlimited number of people each year. If you are married, a married couple can gift up to $28,000 per person each year. These annual gifts do not count against the lifetime exemption, and are therefore a separate method in which gifting can be made.

IRS regulations also permit you to pay the tuition expenses for a full-time or part-time student directly to the “qualifying educational organization” without having to claim an exemption from gift tax or incurring gift tax. Tuition expenses do not include books, supplies, dorm fees, board or other such expenses that are not direct tuition expenses.

In addition, you can pay for “qualifying medical expenses” that include expenses for diagnosis, cure, treatment, prevention as well as amounts paid for medical insurance. This exemption does not include any expenses that were reimbursed ultimately by medical insurance. Again, such expenses can be paid directly and you would not have to claim your lifetime exemption or incur gift tax

And what about making loans to friends and family? Be sure that any loan you make is not deemed to be a gift. That is, the loan should impose interest at current fair market values. Applicable Federal Rates (AFR) for January range from 0.75% for short term loans (up to 3 years) to 2.65% for long term loans (over 9 years). Loans can be structured in a myriad of different ways.

So, while you are thinking about what you would do if you won a million dollars or more in the lottery, be sure to keep in mind a few gift exemptions that are available to you that help minimize potential tax consequences and good luck! #powerball #ifIWonPowerball #winningthelottery #lottery #gifttax #estateplanning #taxplanning