Tax Planning | Begin the Begin

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:

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.
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.
The IRS will never call you threatening to sue you. Again, you always will get some sort of letter in the mail.
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.
The IRS neither asks nor requires you to use a specific payment method for your taxes, such as a prepaid debit card – the 21^st century version of cash — which likely will have no origin through the banking system.
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

Donor Advised Funds

December 31, 2015

As another year begins many individuals make resolutions. Very often one of those resolutions is to have an estate plan prepared or update an outdated estate plan. A couple of considerations in preparing an estate plan is whether you are charitably inclined and would you like to do more for your community? A donor advised fund is one way to set aside funds for charitable purposes that can be capitalized upon during your lifetime and within your estate plan. Moreover, a donor advised fund can continue after you are gone. Here is just one person’s rationale behind the creation of a donor advised fund that also allowed her to get more involved with her community. @CFNOVA #donoradvisedfunds #taxplanning #charitablegiving

Why Estate Planning Continues to Matter

December 30, 2015

There are those that wonder if estate planning will remain an important consideration given that many estate and gift tax planning provisions that were enacted in early January 2013 are ‘permanent’. However, we know that individuals have needs in addition to potential estate and gift tax planning, and estate planning encompasses much more than tax planning. Here are a few items to remember as to why estate planning continues to matter.

With the passage of the 2012 Tax Act, provisions now exist that will encourage individuals to continue focusing on estate planning. For example, for the foreseeable future, the gift, estate and generation-skipping transfer tax exemptions are unified, with exemptions of $5 million per person ($10 million for married couples), indexed for inflation, and a tax rate of 40% (for 2016 the exemptions will be $5.45 million per person). There are those that may rely on the ‘permanence’ of these provisions. However, as has been seen in the past, nothing tends to be permanent with Congress and commentators have been quoted that ‘permanent’ is in the eye of the beholder. With that said and given the continued uncertainly as to when Congress may next change course, including, but not limited to, passing additional provisions that reduce the availability of some advanced estate planning techniques, individuals who are considering making life time gifts to family members, including grandchildren, are well advised to make those gifts sooner rather than later and take advantage of the continued higher exemptions. For example, transfers of closely held business interests may be accomplished by utilizing the increased exemptions and applying valuation discounts that are available.

In addition, the 2012 Tax Act allows married couples to transfer any unused Federal estate tax exemption to a surviving spouse. This ‘portability’ provision has also been made ‘permanent’, but the executor must file an estate tax return in order to claim the unused exemption. Failure of the executor to timely file the estate tax return may result in future application of estate tax to the surviving spouse’s estate, if exemptions decrease and/or the estate increases, and the possibility of liability for exposure to the estate tax. In addition, individuals must understand that if a surviving spouse remarries and the new spouse dies, only the unused exemption of the second deceased spouse can be used. Therefore, the application of the portability provision must be analyzed at that time to determine whether it best fits the circumstances.

Finally, individuals living in Maryland and the District of Columbia need to remember that lower exemptions from estate tax exist. For example, Maryland’s exemption for 2016 is only $2 million per person and the exemption for the District of Columbia is currently only $1 million per person (although that may change). Thus, proper planning is essential to minimize the impact of those taxes.

Beyond estate and gift tax planning, many worry about what happens if they become incapacitated whether through an illness or accident. Planning for long-term care has gradually become and continues to be a major consideration in any estate plan. Individuals want to ensure that during any period of incapacity they have the appropriate fiduciaries in place to manage their financial and healthcare affairs. Without adequate planning, families may have to resort to the guardianship and conservatorship process, a court driven process, to gain access to assets and make important decisions. Furthermore, those without proper estate planning may find themselves and their hard earned savings wasted by family members, and therefore, not used or available for their care. Although conservatorship proceedings may be necessary in certain circumstances, a financial or durable general power of attorney would permit an individual to appoint an agent to act on their behalf with respect to their property, finances and personal affairs.

Moreover, planning for health care is also a necessary part of any estate plan, particularly now after the enactment of health care reform. Studies have shown that only between one-fourth and one-third of Americans actually have an advance medical directive or health care power of attorney. These studies have shown that in dealing with end of life circumstances, individuals who have had the detailed conversations about their health care ultimately reduce the emotional and financial costs associated with their end of life care, and therefore, reduce the overall burden on surviving family members. A healthcare power of attorney or advance medical directive allows an individual to appoint an agent to make medical decisions on their behalf.

Without the appropriate financial and medical powers of attorney in place, individuals are relying on their family members to make the ‘right decisions,’ which may not be in the best interest of the actual incapacitated individual. For example, sufficient assets may exist to keep an individual at home with the aid of home health care providers, but without specific direction in an estate plan and a trusted named fiduciary, those who have control of the finances, whether by default under state law or by familial relationship, may decide to sell the home and move the individual to a low-cost facility in order to preserve an inheritance for future generations (i.e., the person in control of the finances). This result does not satisfy the individual’s ultimate financial and health care goals.

Alternatively, individuals may use a revocable living trust to plan for incapacity and specifically outline how they want their assets used for their benefit and for the benefit of those who depend on them, including family members with special needs. Special needs planning can be accomplished through estate planning. Without such planning, special needs family members may not receive the care and support that was intended.

Estate planning encompasses much more than tax planning or planning for what happens immediately after one’s death. The laws are constantly changing. An individual’s family situations may change as well as their goals and objectives over time. Estate planning should, therefore, have a priority in all our lives. #estateplanning #taxplanning #incapacityplanning