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Hooray for Continued Valuation Discounts for Family Limited Partnerships and for Francis Ford Coppola and “The Godfather!”

By: Mark Rhea, J.D.- Senior Assistant Accountant

Valuation discounts are not very hard to understand. I’ll start by asking a simple question, if you had an opportunity to purchase one share of ABC , Inc., which share would you pay more for – the share that had no restrictions on its resale or the share with restrictions? The natural answer is that you would pay less for the shares that had  restrictions on their resale. This raises the question of how much less does the share with restrictions on its resale command. Whatever that amount is, that is a valuation discount, specifically a discount for lack of marketability or lack of control – depending upon the precise fact pattern of the situation.

Since in the issuing of Rev. Rul. 59-60 which provided the foundation for guidance for valuation discounts almost 60 years ago, valuation discounts have been applied to shares of all kinds of business entities including family entities such as family limited partnerships. However, recently under the prior administration the IRS did not like the fact that family limited partnerships were able to use valuation discounts for gift and estate tax purposes. Many family entities have agreements and guidelines that contain restrictions for who can own an interest in the entity and how it can be sold. The IRS believed that using these restrictions as justification for a lack of marketability was primarily a way to dodge taxes. Their solution through proposed Sec. 2704 regulations was to eliminate the lack of marketability discount for family entities for gift and estate tax purposes.

Thankfully, through the recent actions of the U.S. Treasury under the current administration, these proposed regulations by the prior administration are not going anywhere and family entities can still use lack of marketability discounts when valuing an interest in a family entity for gift and estate tax purposes.

However,  the restrictions that are placed in the operating agreement or guidelines of a family entity regarding who can own it and who can control it have non-tax benefits. In watching “The Godfather” you can see the benefits of these kinds of restrictions demonstrated in the actions of the Corleone family. Don’t want your abusive and betraying son-in-law Carlo Rizzi from doing anything important in the family business? Put restrictions on who can control or own portions of the family business. Afraid your feeble-minded son, Fredo could assume any control over the important aspects of the family business? Place restrictions on who can control decision-making by limiting it to a small number of trusted family members. Do you know that your son, Michael has a great plan to keep the family business and its wealth going for years to come? Restrictions on who is in charge can help with ensuring smart wealth management and transfers of wealth in the future.

Regardless of how many of the these restrictions are in place for a family limited partnerships, without communication and an understanding of the restrictions regarding the roles all family members play in the partnership, trouble may ensue. Just as Vito Corleone called a meeting of the all of the families in New York and beyond after Sonny met his demise on the causeway, it is important for families to keep the lines of communication open and meet on a regular basis to discuss issues of concern. Not only is regular communication important, but also the family members must understand issues facing the partnership and their rights and roles that they play in it. After all, what good is a meeting if no one understands what’s happening?

At Holbrook & Manter, CPAs we want to help you succeed and address issues that your family limited partnership has and guide it in a prosperous direction. Inspiration for the blog was not only from Francis Ford Coppola’s “The Godfather,” but also from the article “Nontax Concerns Raise Need for Family-Entity Planning” by Jim Brennan and Daisy Medici. See Brennan, J. and Medici, D. (2017). Nontax concerns raise need for family-entity planning. Retrieved December 19th, 2017, from RIA Checkpoint.

Have you taken state estate taxes into account?

The Tax Cuts and Jobs Act has doubled the federal gift and estate tax exemption, with inflation-adjustments projected to raise it to $11.18 million for 2018.This means federal estate taxes are a concern for fewer families, at least in the short term. (The doubled exemption expires December 31, 2025.) But it’s important to consider how state estate or inheritance taxes may affect your estate plan.

There’s uncertainty about how states will respond to the increased federal estate tax exemption. One line of thought is that many states will continue to “decouple” from the federal exemption and impose their own estate tax exemptions at a lower amount.

Establishing residency in a new state

If your estate is large enough that estate tax liability is a concern, one option is to move to a state that imposes low or no estate or inheritance taxes. But moving to a tax-friendly state doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve cut all ties with your former state, there’s a risk that the state will claim you’re still a resident and are subject to its estate tax.

Even if you’ve successfully established residency in a new state, you may be subject to estate taxes on real estate or tangible personal property located in the old state (depending on that state’s tax laws). And don’t assume that your estate won’t be taxed on this property merely because its value is less than the federal exemption amount. In some states, estate taxes are triggered when the value of your worldwide assets exceeds the state’s exemption amount.

Terminating residency with a previous state

If you’re relocating to a state with low or no estate taxes, consult with us about steps you can take to terminate residency in the old state and establish residency in the new one. Examples include acquiring a residence in the new state, obtaining a driver’s license and registering to vote there, receiving important documents at your new address, opening bank accounts in the new state and closing the old ones, and moving cherished personal possessions to the new state.

If you own real estate in the old state, consider transferring it to a limited liability company or other entity. In some states, interests in these entities may be treated as nontaxable intangible property. Contact Holbrook & Manter to learn more about how state estate or inheritance taxes may affect your estate plan

H&M’s Brian Ravencraft Pens Tax Article for Ohio’s Country Journal

Now in his third year of writing articles for Ohio’s Country Journal, H&M’s Brian Ravencraft turned his attention towards the new tax law for his most recent write-up.

His article begins like this:

On Dec. 22, President Donald Trump signed HR 1 into law. This new law implements the most significant changes to our tax code in more than 30 years. This article provides a general overview of some of the provisions that most impact farmers.

Read the rest of Brian’s summary at the link below and contact H&M with any questions you may have about the new tax law:


Tax Cuts and Jobs Act Expands Appeal of 529 Plans in Estate Planning

It’s common for grandparents to want to help ensure their grandchildren will get a high quality education. And, along the same lines, they also want the peace of mind that their wealth will be preserved for their children and grandchildren after they’re gone. If you’re facing these challenges, one option that can help you conquer both is a 529 plan. And it’s become even more attractive under the Tax Cuts and Jobs Act (TCJA).

529 plan in action

In a nutshell, a 529 plan is one of the most flexible tools available for funding college expenses and it can provide significant estate planning benefits. 529 plans are sponsored by states, state agencies and certain educational institutions. You can choose a prepaid tuition plan to secure current tuition rates or a tax-advantaged savings plan to fund college expenses. The savings plan version allows you to make cash contributions to a tax-advantaged investment account and to withdraw both contributions and earnings free of federal — and, in most cases, state — income taxes for “qualified education expenses.”

Qualified expenses include tuition, fees, books, supplies, equipment, and a limited amount of room and board. And beginning this year, the TCJA has expanded the definition of qualified expenses to include not just postsecondary school expenses but also primary and secondary school expenses. This change is permanent.

529 plan and your estate plan

529 plans offer several estate planning benefits. First, even though you can change beneficiaries or get your money back, 529 plan contributions are considered “completed gifts” for federal gift and generation-skipping transfer (GST) tax purposes. As such, they’re eligible for the annual exclusion, which allows you to make gifts of up to $15,000 per year ($30,000 for married couples) to any number of recipients, without triggering gift or GST taxes and without using any of your lifetime exemption amounts.

For estate tax purposes, all of your contributions, together with all future earnings, are removed from your taxable estate even though you retain control over the funds. Most estate tax saving strategies require you to relinquish control over your assets — for example, by placing them in an irrevocable trust. But a 529 plan shields assets from estate taxes even though you retain the right (subject to certain limitations) to control the timing of distributions, change beneficiaries, move assets from one plan to another or get your money back (subject to taxes and penalties).

529 plans accept only cash contributions, so you can’t use stock or other assets to fund an account. Also, their administrative fees may be higher than those of other investment vehicles. Contact Holbrook & Manter to help you plan for the distribution of your wealth using various estate planning strategies, such as a 529 plan.

Important Audit Changes on the Horizon

By: William Bauder, CPA, CGMA, CITP- Manager of Assurance & Advisory Services

Our firm has been keeping you updated on the most recent events surrounding tax reform, but, taxes aren’t the only things changing these days.  The accounting standards are also changing, and more frequently and more drastically than in recent history.  From 2014 to 2017 there were 70 separate Accounting Standards Updates (ASU’s) implemented.  In three year period preceding, 2011-2013, there were only 33 ASU’s implemented. There are more coming too.  In 2017 the FASB put out 14 standards for comment. During 2015 and 2016 only a combined 10 standards were put out for comment.  Currently, the FASB has 29 separate projects in some phase of exploration.  The changes are going to keep coming.  Make sure you are staying up to date and working closely with your accounting professionals. 

Below are some of the larger standards on the horizon:

New Revenue Recognition Standards:

  • ASU 2014-09 (ASU 2015-14 delays implementation by 1 year)
  • This goes into effect for fiscal years beginning after 12/15/18 for all non-public entities.
  • It is important to note, this standard will affect all industries; all those who follow GAAP accounting standards will be affected by this.

New Not-For-Profit Standards:

  • ASU 2016-14 brings about the largest change to NFP accounting in 25 years.
  • This standard goes into effect for fiscal years beginning after 12/15/17.
  • These new standards change the three classes of net assets to two. Increased disclosure on liquidity. A statement of functional expenses must be presented. New standards may also present a direct method cash flow without also doing an indirect cash flow.

New Lease Standards:

  • ASU 2016-02 goes into effect for fiscal years beginning after 12/15/19 for non-public companies.
  • As an extreme generalization: any lease the entity has will now be treated as a capital lease- meaning there should be an asset and liability on the books.

Income Taxes Disclosure:

  • ASU 2015-17 goes into effect for fiscal years beginning after 12/15/17 for non-public companies.
  • In the case of this change, a breakout of deferred tax assets/liabilities between current and long term will no longer be required.

Standards to look for this year:

  • Keep an eye on ASU 2015-11 – this one relates to inventory. This one goes into effect for fiscal years beginning after 12/15/16 and means that inventory should be valued at the lower cost or net realizable value (no longer at lower of cost or market).

Again, these were just a few of the standards that have changed, are scheduled to change, or the FASB is looking into changing in the coming years.  If you have questions about these or any other accounting matters, feel free to give our firm a call or send me an email.  Thanks and good luck navigating these changes!

Ohio Tax Amnesty: Could you be Eligible?

Ohio is offering tax amnesty on penalty and interest for both business and individual tax returns from January 1, 2018-February 15, 2018. This could be good news for those that are delinquent on tax returns or tax payments.

According to the Ohio Department of Taxation, all penalties and half the interest will be waived on qualified delinquent taxes for both individuals and businesses.

We invite you to visit www.ohiotaxamnesty.gov if you are behind on your tax payments. This website is a powerful resource that will not only explain tax amnesty to you, but will also allow you to see if you are eligible. Be sure to visit the FAQs page to have all of your questions answered about this savings opportunity.

Please contact Holbrook & Manter today for assistance with this matter. Now is the time to wipe the slate clean and become current on your taxes. We can help you and set you on the right tax path moving forward.

Again, that website is: www.ohiotaxamnesty.gov




Tax Cuts and Jobs Act: Key Provisions Affecting Estate Planning

We are committed to keeping you updated on The Tax Cuts and Jobs Act of 2017 (TCJA) -a sweeping revision of the tax code that alters federal law affecting individuals, businesses and estates.  Taking a look at estate tax law, the TCJA doesn’t repeal the federal gift and estate tax. It does, however, temporarily double the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption.

From December 31, 2017, and before January 1, 2026, the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts double from an inflation-adjusted $5 million to $10 million. For 2018, the exemption amounts are expected to be $11.2 million ($22.4 million for married couples). Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.

Estate planning remains a necessity

Just because fewer families will have to worry about estate tax liability doesn’t mean the end of estate planning as we know it. Nontax issues that your plan should still take into account include asset protection, guardianship of minor children, family business succession and planning for loved ones with special needs, to name just a few.

In addition, it’s not clear how states will respond to the federal tax law changes. If you live in a state that imposes significant state estate taxes, many traditional estate-tax-reduction strategies will continue to be relevant.

Future estate tax law remains uncertain

It’s also important to keep in mind that the exemptions are scheduled to revert to their previous levels in 2026 — and there’s no guarantee that lawmakers in the future won’t reduce the exemption amounts even further. Contact us with questions on how the TCJA might affect your estate plan. We’ll be pleased to review your plan and recommend any necessary revisions in light of the TCJA.

First Quarter Tax Deadlines for 2018

Don’t miss these important tax deadlines for 2018:

January 16 — Individual taxpayers’ final 2016 estimated tax payment is due.

January 31 — File 2017 Forms W-2 (“Wage and Tax Statement”) with the Social
Security Administration and provide copies to your employees.

-File 2017 Forms 1099-MISC (“Miscellaneous Income”) reporting nonemployee compensation payments in box 7 with the IRS and provide copies to recipients.

-Most employers must file Form 941 (“Employer’s Quarterly Federal Tax Return”) to report Medicare, Social Security, and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. Employers who have an estimated annual employment tax liability of $1,000 of less may be eligible to file Form 944 (Employer’s Annual Federal Tax Return).

-File Form 940 (“Employer’s Annual Federal Unemployment [FUTA] Tax Return”)
for 2017. If your undeposited tax is $500 or less, you can either pay it with your
return or deposit it. If it is more than $500, you must deposit it. However, if you
deposited the tax for the year in full and on time, you have until February 12 to file
the return.

-File Form 943 (“Employer’s Annual Federal Tax Return for Agricultural
Employees”) to report Social Security, Medicare, and withheld income taxes for
2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed
return. If you deposited the tax for the year in full and on time, you have until
February 12 to file the return.

-File Form 945 (“Annual Return of Withheld Federal Income Tax”) for 2017 to report
income tax withheld on all nonpayroll items, including backup withholding and
withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.

February 28 — File 2017 Forms 1099-MISC with the IRS.

March 15 — 2017 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return is not extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

Tax deadlines can be a lot to process and missing even just one of them can result in penalties. Let Holbrook & Manter monitor the deadlines for your business and your personal taxes all year long. Contact us today to learn more about our tax services.

Estate Planning Strategies: Planning for Incapacity

Most estate plans focus on what happens after you die. But without arrangements for what will happen in the event you become mentally incapacitated, your plan is incomplete. If an accident, illness or other circumstances render you unable to make financial or health care decisions — and you don’t have documents in place to specify how these decisions will be made, and by whom — a court-appointed guardian will have to act on your behalf.

Choosing the right tools

There are several tools you can use to ensure that a person you choose handles your affairs in the event you cannot:

Revocable trust. Sometimes called a “living trust,” it’s designed to hold all or most of your assets. As trustee, you retain control over the assets, but in the event you become incapacitated, your designee takes over.

Durable power of attorney. This authorizes a designee to manage your property and finances, subject to limitations you establish.

Living will. It expresses your preferences regarding life-sustaining medical treatment in the event you’re unable to communicate your wishes.

Health care power of attorney. Sometimes referred to as a “durable medical power of attorney” or “health care proxy,” this authorizes your designee to make medical decisions for you in the event you can’t make or communicate them yourself.

HIPAA authorization. Even with a valid health care power of attorney, some medical providers may refuse to release medical information — even to a spouse or child — citing privacy restrictions in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). So it’s a good idea to sign a HIPAA authorization allowing providers to release medical information to your designee.

For these tools to be effective, you must plan ahead. If you wait until they’re needed, a court may find that you lack the requisite capacity to execute them. Also, be sure to check the law in your state. In some states, certain planning tools aren’t permitted, or go by different names. Holbrook & Manter can help you address incapacity in your estate plan. Contact us today.

The Tax Cuts and Jobs Act has Passed

By: Justin Linscott, CPA, CFP®, CITP, CGMA- Principal

We have been doing our best to keep you updated on the activities taking place in Washington D.C. surrounding tax reform. The House & Senate have now voted on and passed the tax reform bill. The passage of the Tax Cuts and Jobs Act, H.R. 1 could change your tax strategies and burden. H&M is prepared to help you maneuver through this new tax climate. Changes are now truly on the horizon- from deductions that will disappear to the amount of federal tax you will pay. The highlights from the bill that could affect you are many, but to highlight a few:

*Disappearing or reduced deductions, larger standard deduction

*Substantially increases the alternative minimum tax (AMT) exemption amount

*Other year-end strategies

Our commitment to proactive tax planning remains a top priority, especially given these recent events. We have a document that explains this tax reform in greater detail while also offering advice on financial moves to make now in light of the passage of this bill. Please reach out to me (JLinscott@HolbrookManter.com) or any H&M team member for a copy of this document.