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Power of attorney abuse: What you can do about it

A financial power of attorney — sometimes called a “power of attorney for property” or a “general power of attorney” — can be a valuable estate planning tool. The main disadvantage is that it’s susceptible to abuse by scam artists, dishonest caretakers or greedy relatives.

Help or harm

The most common type is the durable power of attorney, which allows someone (the agent) to act on behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so as a result of illness, advancing age or other circumstances.

A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t able to do so him- or herself. But in the wrong hands, it provides an ample opportunity for financial harm.

Take steps to prevent abuse

If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse:

  • Make sure the agent is someone you know and trust.
  • Consider using a “springing” power of attorney, which doesn’t take effect until certain conditions are met.
  • Use a “special” or “limited” power of attorney that details the agent’s specific powers.
  • Appoint a “monitor” or other third party to review transactions executed by the agent, and require the monitor’s approval of transactions over a certain dollar amount.
  • Provide that the appointment of a guardian automatically revokes the power of attorney.

Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions.

Act now

If you have elderly parents who’ve signed powers of attorney, keep an eye on their agents’ activities. When dealing with powers of attorney, the sooner you act, the better. If you’re pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you’re mentally competent. Contact us for additional details.

Your accountant is an important player when it comes to your trust & estate plans. Contact us today to get us involved in your planning process.

How Do I Set Up a Family Office?

A Quick Guide to Building Your Family Office Structure & Organizing Accounting

A family office office is essentially a private team dedicated to managing the finances of a wealthier family and high net-worth individuals. These wealth management entities help steer a family’s investments in the right direction and, in the United States, they are rapidly growing in popularity. But what does it take to open a family office? What practices should you employ and what tactics should you avoid?

Holbrook & Manter is here to help guide you along the way with some of the top tips for setting up a family office.

Establish What Your Family Office Offers

Family offices are typically classified into three different class depending on which services they offer.

  • Class A: Comprehensive financial oversight, estate management and objective fiscal consulting for a flat monthly fee.
  • Class B: Investment advice and consulting for an as-needed fee, but does not directly manage illiquid assets.
  • Class C: Basic estate and administrative (bookkeeping, mail sorting, etc.) and is run directly by the family.

Most family offices provide the following services:

  • Investment management
  • Wealth transfer management
  • Business advising & consulting
  • Estate planning
  • Education planning
  • Philanthropy & charity management
  • Bookkeeping, record keeping, reporting & communications
  • Legal, compliance & tax advising
  • Investment risk management

Create a Proper Funding Structure

The initial family office capital investment will be a large sum, however a structure must be set in place to cover costs over the course of time. Are different individuals investing more money than others or will you rely on a flat fee for all participating parties? These funds will go to further investments and additional outsourced financial services as needed.

What You Should Avoid When Direct Investing on Behalf of the Family

  • Making any contractual moves and major decisions without a lawyer’s review
  • Rushing into investments without performing in-depth research and leaning too heavily on third parties outside of the family for guidance
  • Investing your money into ventures that have stalled or shown signs of failure
  • Not balancing the objective best interests of the family, as a whole, with the voices of a few key influencers’ passions within the family
  • Not having a clear exit strategy for both well-performing assets and poorly-producing investments

Decide If It’s Worth It

This is a simple step for a complicated undertaking. While family offices can be effective in the long-term, they can be costly if not managed properly. Ask yourself the following:

  • Do I have enough professional connections to help navigate through the tough spots and make the best moves for the family?
  • Will I be able to dedicate myself fully to the needs of the family and solidify confidence throughout the entire process?
  • Is there enough up-front capital for this venture?

If yes to all, get in contact with an expert family office service provider, consult the family and start making moves!

These are just some of the best practices to follow when setting up a family office. For more information regarding our family office services and additional professional advising, contact Holbrook & Manter today!

Posted in News

Important Tax Deadlines for Q2 of 2018

April 17 — This day can be a double whammy for some folks…. besides being the last day to file (or extend) your 2017 personal return and pay any tax that is due, 2018 first quarter estimated tax payments for individuals, trusts and calendar-year corporations are due that day. Also due- 2017 returns for trusts, calendar-year estates and C corporations, FinCEN Form 114 (Report of Foreign Bank
and Financial Accounts [but an automatic extension applies to October 15]), and any
final contribution you plan to make to an IRA or Education Savings Account for 2017. In addition, Simplified Employee Pension and Keogh contributions are due today if you haven’t extended your return.
June 15 — Second quarter estimated tax payments for individuals, trusts and calendar-year corporations are due today.

Contact Holbrook & Manter today for assistance with your tax needs.

Don’t violate state law by keeping a trust a secret

If your estate plan includes one or more trusts, you may have a good reason for wanting to keep them a secret. For example, you may be concerned that, if your children or other beneficiaries knew about the trust, they might spend recklessly or neglect educational or career pursuits. Despite your good intentions, however, the law in many states requires trustees to disclose certain information to beneficiaries.

Disclosure requirements

One example can be found in the Uniform Trust Code (UTC), which more than 20 states have adopted. The UTC requires a trustee to provide trust details to any qualified beneficiary who makes a request. The UTC also requires the trustee to notify all qualified beneficiaries of their rights to information about the trust.

Qualified beneficiaries include primary beneficiaries, such as your children or others designated to receive distributions from the trust, as well as contingent beneficiaries, such as your grandchildren or others who would receive trust funds in the event a primary beneficiary’s interest terminates.

Use a power of appointment

One way to avoid the disclosure requirements is by not naming your children as beneficiaries and, instead, granting your spouse or someone else a power of appointment over the trust. The power holder can direct trust funds to your children as needed, but because they’re not beneficiaries, the trustee isn’t required to inform them about the trust’s terms — or even its existence. The disadvantage of this approach is that the power holder is under no legal obligation to provide for your children.

Before taking action, it’s important to check the law in your state. Some states allow you to waive the trustee’s duty to disclose, while others allow you to name a third party to receive disclosures and look out for beneficiaries’ interests. In states where disclosure is unavoidable, you may want to explore alternative strategies. If you have questions regarding trusts in your estate plan, please contact Holbrook & Manter today.

Estate Planning Tips for the Sandwich Generation

The “sandwich generation” accounts for a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. In some cases, this includes providing parents with financial support. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include aging parents as well.

Including your parents as beneficiaries of your estate plan raises a number of complex issues. Here are five tips to consider:

1. Plan for long-term care (LTC). The annual cost of LTC can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Medicare. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.

2. Make gifts. One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which allows you to give each parent up to $15,000 per year without triggering taxes.

3. Pay medical expenses. You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.

4. Set up trusts. There are many trust-based strategies you can use to financially assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.

5. Buy your parents’ home. If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.

As you review these and other options for providing financial assistance to your aging parents, try not to overdo it. If you give your parents too much, these assets could end up back in your estate and potentially exposed to gift or estate taxes. Also, keep in mind that some gifts could disqualify your parents from certain federal or state government benefits. Contact Holbrook & Manter today for additional details.

Tax Reform & Employee Meals/Entertainment

Years and years ago, the notion of having a company cafeteria or regularly catered meals was generally feasible for only the biggest of businesses. But, more recently, employers providing meals to employees has become somewhat common for many midsize to large companies. A recent tax law change, however, may curtail the practice.

The Tax Cuts and Jobs Act will phase in a wide variety of changes to the way businesses calculate their tax liabilities — some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall in the latter category.

Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be completely nondeductible.

If your business regularly provides meals to employees, H&M can assist you in anticipating this changing tax impact. Contact us today.

Ease Estate Tax Liability with a Joint Home Purchase

If you’re planning on buying a home that you one day wish to pass on to your adult children, a joint purchase can reduce estate tax liability, provided the children have sufficient funds to finance their portion of the purchase. With the gift and estate tax exemption now set at an inflation-adjusted $10 million thanks to the Tax Cuts and Jobs Act, federal estate taxes are less of a concern for most families. However, the high exemption amount is only temporary, and there’s state estate tax risk to consider.

Current and remainder interests

The joint purchase technique is based on the concept that property can be divided not only into pieces, but also over time: One person (typically of an older generation) buys a current interest in the property and the other person (typically of a younger generation) buys the remainder interest.

A remainder interest is simply the right to enjoy the property after the current interest ends. If the current interest is a life interest, the remainder interest begins when the owner of the current interest dies.

Joint purchases offer several advantages. The older owner enjoys the property for life, and his or her purchase price is reduced by the value of the remainder interest. The younger owner pays only a fraction of the property’s current value and receives the entire property when the older owner dies.

Best of all, if both owners pay fair market value for their respective interests, the transfer from one generation to the next should be free of gift and estate taxes.

The relative values of the life and remainder interests are determined using IRS tables that take into account the age of the life-interest holder and the applicable federal rate (the Section 7520 rate), which is set monthly by the federal government.

Consider the downsides

The younger owner must buy the remainder interest with his or her own funds. Also, while the tax basis of inherited property is “stepped up” to its date-of-death value, a remainder interest holder’s basis is equal to his or her purchase price. This step-up in basis allows the heir to avoid capital gains tax on appreciation that occurred while the deceased held the property.

But, in most cases where estate tax is a concern, the estate tax savings will far outweigh any capital gains tax liability. That’s because the highest capital gains rate generally is significantly lower than the highest estate tax rate.

Keep it simple

In a world where many estate planning techniques can be complicated, a joint purchase isn’t. Contact Holbrook & Manter today with any questions you may have.

Tax Reform and the Section 179 Deduction

By: Zac Anderson, Staff Accountant

With the passing of the Tax Cuts and Jobs Act late last year, there will be many new changes that will affect taxpayers and businesses. One of the items has changed is the popular Section 179 expense.

What is Sec. 179 expense?

The original intent for the Section 179 expense was to aid small to medium-sized businesses with tax relief and to enable investment back into their business. Section 179 allows a business to deduct the full price of qualifying property in the year it is purchased and placed in service, rather than recovering the cost of the asset by depreciation over the useful of the asset.

For the 2017 tax year, the maximum amount that can be expensed is $510,000 of the cost of the qualifying property placed in service that year. This amount is to be reduced by the amount of qualifying property placed in service during the year that exceeds $2,030,000. For example, if the total amount of assets purchased and placed in service for the year was $2.1million, the Section 179 deduction would be $440,000 ($510,000 – ($2,100,000 – $2,030,000)). Historically, these amounts change slightly year-to-year to adjust for inflation.

Qualifying property is defined as depreciable tangible personal property or computer software. Some types of qualified real property fall into this as well.  There are special limitations for vehicles that have business use that exceeds 50%. For most cars, trucks, and vans the Section 179 deduction is limited to $11,060. Other certain vehicles weighing above $6,000 lbs, but no more than 14,000 lbs. qualify up to a $25,000 limitation.

Section 179 Changes

Beginning for the tax year 2018, the maximum amount that can be expensed for all qualifying property placed into service jumps up to $1 million and the phase-out threshold increases up to $2.5 million. There is also a slight expansion to qualified real property eligible for Section 179. These include depreciable property used primarily to furnish lodging, improvements to nonresidential real property after the date placed in service (roofing, heating/cooling systems, etc.).

The decision as to the timing to take Section 179 depreciation can be a great tax planning tool. Holbrook & Manter tax professionals are great resources to aid in the tax planning areas your company may need.

The Child Credit to Become Even More Valuable

The child credit has long been a valuable tax break. But, with the passage of the Tax Cuts and Jobs Act (TCJA) late last year, it’s now even better — at least for a while. Here are some details that every family should know.

Amount and limitations

For the 2017 tax year, the child credit may help reduce federal income tax liability dollar-for-dollar by up to $1,000 for each qualifying child under age 17. So if you haven’t yet filed your personal return or you might consider amending it, bear this in mind.

The credit is, however, subject to income limitations that may reduce or even eliminate eligibility for it depending on your filing status and modified adjusted gross income (MAGI). For 2017, the limits are $110,000 for married couples filing jointly, and $55,000 for married taxpayers filing separately. (Singles, heads of households, and qualifying widows and widowers are limited to $75,000 in MAGI.)

Exciting changes

Now the good news: Under the TCJA, the credit will double to $2,000 per child under age 17 starting in 2018. The maximum amount refundable (because a taxpayer’s credits exceed his or her tax liability) will be limited to $1,400 per child.

The TCJA also makes the child credit available to more families than in the past. That’s because, beginning in 2018, the credit won’t begin to phase out until MAGI exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseouts of $110,000 and $75,000. The phaseout thresholds won’t be indexed for inflation, though, meaning the credit will lose value over time.

In addition, the TCJA includes (starting in 2018) a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child, parent, sibling, niece or nephew, or aunt or uncle). Importantly, these provisions expire after 2025.

Qualifications to consider

Along with the income limitations, there are other qualification requirements for claiming the child credit. As you might have noticed, a qualifying child must be under the age of 17 at the end of the tax year in question. But the child also must be a U.S. citizen, national or resident alien, and a dependent claimed on the parents’ federal tax return who’s their own legal son, daughter, stepchild, foster child or adoptee. (A qualifying child may also include a grandchild, niece or nephew.)

As a child gets older, other circumstances may affect a family’s ability to claim the credit. For instance, the child needs to have lived with his or her parents for more than half of the tax year.

Powerful tool

Tax credits can serve as powerful tools to help you manage your tax liability. So if you may qualify for the child credit in 2017, or in years ahead, please contact Holbrook & Manter to discuss the full details of how to go about claiming it properly.

A Closer Look at the Domestic Production Activities Deduction

The domestic production activities deduction (DPAD) provides a tax break for certain “domestic production activities.” Unfortunately, many businesses tend to overlook this valuable tax break because they believe it’s applicable only to certain industries. In fact, the deduction remains available to a wide range of businesses for the 2017 tax year.

Significant benefits

Calculating the DPAD is complex. Generally, the deduction is equal to the lesser of 9% (6% for “oil-related” activities) of a company’s income from qualified production activities or its taxable income. In addition, the deduction can’t exceed 50% of W-2 wages for the year that are attributable to domestic production.

To determine its qualified income, a business needs to start with its gross receipts from qualified domestic production activities and subtract the cost of goods sold and certain other costs allocable to those activities.

Industry specifics

Over the last couple of years, the IRS has issued guidance related to the application of the DPAD to several specific industries. These include:

Contract manufacturing. Which party to a contract manufacturing arrangement is entitled to claim the DPAD? Under current rules, the answer depends on which party enjoys the benefits and bears the burdens of ownership. That, in turn, depends on several factors, including which party:

  • Retains legal title to manufactured property during production,
  • Controls the property and the process,
  • Bears the risk of loss or damage,
  • Receives profits from the property’s sale, and
  • Pays property taxes.

To eliminate the uncertainty associated with this analysis, proposed regulations would establish a bright-line test under which the party that actually performs the activity would be entitled to claim the deduction.

Construction. Qualified production activities include those associated with the construction or substantial renovation of U.S. real property, including those “typically performed by a general contractor,” such as management and oversight of the construction process. Proposed regulations would clarify that a contractor whose activities are limited to approving and authorizing invoices and payments is ineligible for the DPAD.

Testing and packaging. Under current rules, qualified production activities may include testing of component parts, packaging, repackaging, labeling and “minor assembly.” Proposed regulations would exclude these activities if the taxpayer isn’t otherwise involved in manufacturing, producing, growing or extracting the property in question.

Assistance available

If your business has claimed the DPAD before, or if you think you may be able to for the 2017 tax year, please contact us. Holbrook & Manter can assist you with both the calculations involved and compliance with IRS rules. Contact us today.