The beneficiary defective inheritor’s trust (BDIT) allows you to enjoy the benefits of a traditional trust without giving up control over your property. BDITs can hold a variety of assets, but they’re particularly effective for assets that have significant appreciation potential or that may be entitled to substantial valuation discounts, such as interests in family limited partnerships and limited liability companies (LLCs).

Why it works

The BDIT’s benefits are made possible by one critical principle: Assets transferred by a third party (such as a parent) to a properly structured trust for your benefit enjoy transfer-tax savings and creditor protection, even if you obtain control over those assets.

IRS rules prohibit you from transferring assets to beneficiaries on a tax-advantaged basis if you retain the right to use or control the assets. But those rules don’t apply to assets you receive from others in a beneficiary-controlled trust. The challenge in taking advantage of a BDIT is to place assets you currently own into a third-party trust.

How it works

The classic BDIT strategy works like this: Let’s say Jane owns her home and several other pieces of real estate in an LLC. She’d like to share these properties with her two children on a tax-advantaged basis by transferring LLC interests to trusts for their benefit, but she’s not yet ready to relinquish control. Instead, she arranges for her father to establish two BDITs, each naming Molly as primary beneficiary and trustee and one of Molly’s children as a contingent beneficiary.

To ensure that the BDITs have the economic substance necessary to avoid an IRS challenge, Jane’s father “seeds” the trusts with cash. He also appoints an independent trustee to make decisions that Jane can’t make without jeopardizing the strategy, including decisions regarding discretionary distributions and certain tax and insurance matters.

In addition, in order for each trust to be “beneficiary defective,” the trust documents grant Jane carefully structured lapsing powers to withdraw funds from the trust. This “defect” ensures that Jane is treated as the grantor of each trust for income tax purposes.

After the BDITs are set up, Jane sells a one-third LLC interest to each BDIT at fair market value (which reflects minority interest valuation discounts) in exchange for a promissory note with a market interest rate. When the dust settles, Jane has removed the LLC interests from her taxable estate at a minimal tax cost, placed them in trusts for the benefit of herself and her heirs, and provided some creditor protection for the trust assets.

Unlike a traditional trust strategy, however, this strategy allows Jane to retain the right to manage and use the trust assets, to receive trust income and to withdraw trust principal in an amount needed for her “health, education, maintenance or support.”

Talk with Holbrook & Manter to determine if a BDIT makes sense as part of your estate plan.

Proactive tax planning is a vital exercise for all business owners and individuals. Please note the tax deadlines for the third quarter of 2018 below:

July 16 :

If the monthly deposit rule applies, employers must deposit the tax for
payments in June for Social Security, Medicare, withheld income tax, and nonpayroll
withholding.

July 31: 

If you have employees, a federal unemployment tax (FUTA) deposit is due if
the FUTA liability through June exceeds $500.The second quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is also due today. (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 August 10 to file the return.

August 15:

If the monthly deposit rule applies, employers must deposit the tax for
payments in July for Social Security, Medicare, withheld income tax, and nonpayroll
withholding.

September 15:

Third quarter estimated tax payments are due for individuals, trusts,
and calendar-year corporations. If a six-month extension was obtained, partnerships should file their 2017 Form 1065 by this date. If a six-month extension was obtained, calendar-year S corporations should file their 2017 Form 1120S by this date. If the monthly deposit rule applies, employers must deposit the tax for payments in
August for Social Security, Medicare, withheld income tax, and nonpayroll
withholding.

The most effective estate planning strategies often involve the use of irrevocable trusts. But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth?

If your marriage is strong, a spousal lifetime access trust (SLAT) can be a viable strategy to obtain the benefits of an irrevocable trust while creating a financial backup plan.

Indirect access

A SLAT is an irrevocable trust that authorizes the trustee to make distributions to your spouse if a need arises. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $11.18 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ creditors, including any former spouses.

The key benefit of a SLAT is that, by naming your spouse as a lifetime beneficiary, you retain indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse.

To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations.

Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.

Risks

There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. But there may be ways to mitigate this risk.

If you’re considering using a SLAT, contact us to learn more about the benefits and risks of this type of trust. Your CPA plays a vital role in your trust & estate planning.

Passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 has led to confusion over some longstanding deductions. In response, the IRS recently issued a statement clarifying that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible.

How it used to be

Under prior tax law, a taxpayer could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan (other than debt used to acquire a home) up to $100,000. The home equity debt couldn’t exceed the fair market value of the home reduced by the debt used to acquire the home.

For tax purposes, a qualified residence is the taxpayer’s principal residence and a second residence, which can be a house, condominium, cooperative, mobile home, house trailer or boat. The principal residence is where the taxpayer resides most of the time; the second residence is any other residence the taxpayer owns and treats as a second home. Taxpayers aren’t required to use the second home during the year to claim the deduction. If the second home is rented to others, though, the taxpayer also must use it as a home during the year for the greater of 14 days or 10% of the number of days it’s rented.

In the past, interest on qualifying home equity debt was deductible regardless of how the loan proceeds were used. A taxpayer could, for example, use the proceeds to pay for medical bills, tuition, vacations, vehicles and other personal expenses and still claim the itemized interest deduction.

What’s deductible now

The TCJA limits the amount of the mortgage interest deduction for taxpayers who itemize through 2025. Beginning in 2018, for new home purchases, a taxpayer can deduct interest only on acquisition mortgage debt of $750,000.

On February 21, the IRS issued a release (IR 2018-32) explaining that the law suspends the deduction only for interest on home equity loans and lines of credit that aren’t used to buy, build or substantially improve the taxpayer’s home that secures the loan. In other words, the interest isn’t deductible if the loan proceeds are used for certain personal expenses, but it is deductible if the proceeds go toward, for example, a new roof on the home that secures the loan. The IRS further stated that the deduction limits apply to the combined amount of mortgage and home equity acquisition loans — home equity debt is no longer capped at $100,000 for purposes of the deduction.

Further clarifications

As a relatively comprehensive new tax law, the TCJA will likely be subject to a variety of clarifications before it settles in. Please contact Holbrook & Manter for help better understanding this provision or any other.

By: Linda Yutzy, Administrative Assistant

Most of us have heard the quote from Benjamin Franklin, “In this world, nothing is certain except death and taxes.”  It would be safe to say that no one enjoys paying taxes and not many really want to think about death either.  But, both require planning and thought.

For many of us, after the New Year rolls around, we make our resolutions and then promptly forget them.  The end of January comes and we receive our mail marked “Important Tax Document Enclosed” and realize that we need to get some documents together for our taxes to be prepared – that’s worse than going to the dentist!  And, while we should see our dentist regularly, we should also be proactive with our tax planning.  It is always a good idea to follow up with your tax preparer if your tax situation changes; you have a move, a new baby, a different, job, an inheritance, or other life altering event. 

If none of the above situations apply to you, it is still a good idea to be organized and ready for the tax preparation.  Don’t wait until April 1^st to get your tax information together.  Keep a file folder ready for any tax documents that arrive.  It is a good idea to make up a folder at the beginning of a new year and put any tax related documents in that folder as you receive them.  Did you make a donation to Goodwill?  Put your receipt and the amount donated in the folder.  Did you sell or buy a new home?  Make copies of the settlement statements and put them in the folder.  Simple things like that can make getting ready for the accountant so much simpler.

Preparing for taxes is not usually greeted with warm, fuzzy feelings and neither is preparing for death.  Hopefully, it will not happen for a very long time, but all of us still need to prepare for it – young or old, married or single.  We do not want our families and loved ones to be overly burdened with our passing.  It is difficult to deal with the loss and the gaping hole that is left, but to be completely unprepared compounds the grief and the loss for those left behind.  Below are some suggestions to get started in the process of getting prepared:

·         Write a Last Will and Testament – it does not have to be fancy or minutely detailed, but at least get a basic will in place.  There are templates that can be found online that can be used to prepare a legal will.  It is a good idea to check on the legal requirements for a will in your state.

·         Designate a Power of Attorney – choose someone you trust to be a power of attorney just in case you are unable to sign important documents.  The POA does not have to be a family member or close friend.  Sometimes a trusted advisor is a great option – notice the emphasis on trust!

·         Prepare a Living Will and designate a Medical Power of Attorney – again, choose someone you trust to make decisions you would want to have made when you no longer can make them.  Discuss with the MPOA your wishes and the decisions you would want to have made, too.

·         Keep a master file of where important papers are located – insurance policies, mortgages, wills, trusts, Healthcare power of attorney, etc.  Include in that list your bank accounts and safe deposit box if you have one, your broker and broker accounts, your CPA, your attorney, your financial planner, etc.  Let your POA or relatives know where this file is located.

·         Outline your funeral or memorial service – if there are certain things you want, make them known.

·         Keep a list of your online presence – keep logins and passwords saved where a trusted family member or friend can find them.

All of these items can be updated as needed.  As your family grows, your last will and testament will most likely change.  You may consider setting up a trust to see to the needs or your family.  There are so many options!  If you have questions on how to get started and what to do, contact our office.  We would be happy to assist you!

Holbrook & Manter is proud to once again be a finalist for a Columbus CEO Magazine “Best of Business” award. Voting for the 2018 poll is now open.

We are nominated in the “Best Accounting Firm” category (less than 20 CPAs). You will find this under the “financial” section of the voting ballot. We were honored to be named the winner in this category in 2015.

The ballot can be accessed at http://www.columbusceo.com/ and voting is open through July 27, 2018.

Our team values and appreciates all the hard work each of us provides to support each other, and most importantly, our clients. We also value and encourage supporting all businesses in the region. Vote now for all of your favorites!

Voting only takes a moment. We appreciate your support.

Around this time of year, many people have filed and forgotten about their 2017 tax returns. But you could get an abrupt reminder in the form of an IRS penalty. Here are three common types and how you might seek relief:

1.      Failure-to-file and failure-to-pay. The IRS will consider any reason that establishes that you were unable to meet your federal tax obligations despite using “all ordinary business care and prudence” to do so. Frequently cited reasons include fire, casualty, natural disaster or other disturbances. The agency may also accept death, serious illness, incapacitation or unavoidable absence of the taxpayer or an immediate family member.

If you don’t have a good reason for filing or paying late, you may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for relief, you must have: 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due. Despite the expression “first-time,” you can receive FTA relief more than once, so long as at least three years have elapsed.

2.      Estimated tax miscalculation. It’s possible, but unlikely, to obtain relief from estimated tax penalties on grounds of casualty, disaster or other unusual circumstances. You’re more likely to get these penalties abated if you can prove that the IRS made an error, such as crediting a payment to the wrong tax period, or that calculating the penalty using a different method (such as the annualized income installment method) would reduce or eliminate the penalty.

3.      Tax-filing inaccuracy. These penalties may be imposed, for example, if the IRS finds that your return was prepared negligently or that there’s a substantial understatement of tax. You can obtain relief from these penalties if you can demonstrate that you properly disclosed your tax position in your return and that you had a reasonable basis for taking that position.

Generally, you have a reasonable basis if your chances of withstanding an IRS challenge are greater than 50%. Reliance on a competent tax advisor greatly improves your odds of obtaining penalty relief. Other possible grounds for relief include computational errors and reliance on an inaccurate W-2, 1099 or other information statement. Reach out to Holbrook & Manter for assistance with these matters. We are ready and willing to help. 

A common estate planning mistake is to designate a minor as beneficiary — or contingent beneficiary — of a life insurance policy or retirement plan. While making your young child the beneficiary of such assets may seem like an excellent way to provide for him or her in the case of your untimely death, doing so can have significant undesirable consequences.

Not per your wishes

The first problem with designating a minor as a beneficiary is that insurance companies and financial institutions generally won’t pay large sums of money directly to a minor. What they’ll typically do in such situations is require costly court proceedings to appoint a guardian to manage the child’s inheritance. And there’s no guarantee the guardian will be someone you’d choose.

For example, let’s suppose you’re divorcing your spouse and you’ve appointed your minor children as beneficiaries. If you die while the children are still minors, a guardian for the assets will be required. The court will likely appoint their living parent — your ex-spouse — which may be inconsistent with your wishes.

Age of majority

There’s another problem with naming a minor as a beneficiary: The funds will have to be turned over to the child after he or she reaches the age of majority (18 or 21, depending on state law). Generally, that isn’t the ideal age for a child to gain unrestricted access to large sums of money.

A better strategy

Instead of naming your minor child as beneficiary of your life insurance policy or retirement plan, designate one or more trusts as beneficiaries. Then make your child a beneficiary of the trust(s). This approach provides several advantages. It:

• Avoids the need for guardianship proceedings,
• Gives you the opportunity to select the trustee who’ll be responsible for managing the assets, and
• Allows you to determine when the child will receive the funds and under what circumstances.

If you’re unsure of whom to name as beneficiary of your life insurance policy or retirement plan or would like to learn about more ways to provide for your minor children, please contact us. Your accountant is an important player in your estate planning, we would be happy to assist you.

Sometimes an M&A deal ends up not only in a different place from where it started, but in a different guise. Whether it’s due to shifting market conditions or other unforeseen factors, a buyer’s acquisition strategy may change during the course of deal negotiations. For example, a transaction initially intended as a full company sale might become a division spinoff or strategic partnership. The key to success when objectives change is for deal parties to remain flexible.

Evolutions happen

What makes a prospective buyer change its acquisition objectives midstream? Due diligence might reveal that the selling business, which seemed like an ideal fit, would in fact be difficult to integrate. Or a seller may have more debt obligations or unprofitable product lines than its potential buyer realized.

In many cases, such issues can be worked out before or after the deal closes. But it may make more sense to recalibrate the deal — particularly if the buyer is primarily interested in one particular division. In that case, a spinoff of that division might be in everyone’s best interests. The buyer would pay only for a unit that suits its strategic model and the seller would receive a cash infusion and retain its core business.

When partnerships make sense

Here’s another scenario: After initial discussions with a buyer about a full sale, a seller gets cold feet or simply prefers a slower integration. So it proposes a strategic partnership instead of an acquisition. Forming such a partnership can provide a structure for potential buyers and sellers to learn how to work together. The two may share common principles, such as administrative resources or raw materials. More important, their collaboration enables them to work out any cultural integration issues.

Strategic partnership agreements often contain a clause allowing the buyer to make an ownership bid after a specified period of time. Agreements can also be informal and allow the relationship to evolve and possibly dissolve at a certain point.

Trouble coming up with the funds to make an acquisition also occasionally forces buyers to recalibrate. If the financing it needs isn’t available, a buyer might take a minority stake in a company as part of a longer-term acquisition bid.

Scaling up

Changing objectives don’t always result in a more limited deal. In some cases, buyers and sellers discover during early discussions that there’s more potential value in a transaction than they thought. What originally was intended to be a partial acquisition or a strategic partnership may become a full sale.

If this occurs, the parties may need to restart the deal, either because the buyer has to secure additional financing or the seller needs its board’s approval to make a full sale. But if the price is right and the value proposition is clear, such obstacles usually aren’t difficult to overcome.

Greater good

Although M&A transactions with clear, unchanging objectives often close faster and with less hassle, they aren’t always possible. Both buyers and sellers can benefit by entering into negotiations with an open mind. That way, if issues arise, the participants will have the flexibility to make the best deal — regardless of how much it differs from their original conception. H&M is skilled at assisting those navigating through M&A deals. Contact us today for more information and for help with your next deal. 

Personal tax exemptions and the standard deduction have looked largely the same for quite some time. But, in light of the Tax Cuts and Jobs Act (TCJA) passed late last year, many individual taxpayers may find themselves confused by the changing face of these tax-planning elements. Here are some clarifications.

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. If they choose not to itemize, they can take a standard deduction based on their filing status: $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

For 2018 through 2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from family tax credits. Please remember that tax planning is a year-round, on-going exercise. Contact us today for more information.