CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
IRS Shows No Mercy. Several previous issues of this newsletter have addressed problems with IRA distributions when mistakes are made in regard to timing, beneficiary designations, and similar matters. A recent Tax Court case, Summers, TCM 2017-125, held that there was no equitable relief against the 10% penalty imposed on an early distribution from an IRA. In the Summers case, the parties, in conjunction with the dissolution of their marriage accomplished without attorneys (that was their first mistake!), reached an agreement which included that the husband’s IRA would be divided equally between the husband and the wife. The entire account was liquidated, which was accomplished before the dissolution decree was entered, and as a result, the dissolution decree stated that a retirement plan did not exist. The husband reported the distribution, but did not report any additional tax because of the early withdrawal. The IRS imposed a 10% penalty. At the Tax Court, the husband argued that the exception for a payment pursuant to a “qualified domestic relations order” should apply. The Tax Court held that the husband was not entitled to claim the exception because the distribution was made entirely to him rather than partly to the former spouse and it was not made pursuant to a qualified domestic relations order even though there was an agreement between the parties. The Tax Court had sympathy for the husband’s position, but stated that it was not at liberty to add equitable exceptions to the statutory scheme. There seems to be an increasing trend toward people acting without the advice of counsel and a growing consensus today that people do not need attorneys for common lifetime transactions. The decision to act without the advice of counsel in many, if not most, instances, will result in unanticipated consequences that may come back to harm you many years in the future, or even after your death, because of common mistakes that people make even in the most simple of everyday transactions.
A Gifting Strategy. As the new year begins, it is time for people to plan ahead in the area of charitable gifts. There are many issues that need to be considered, such as the kind or type of asset that might be given, the timing of the gift, and how it should be implemented. If a taxpayer intends to get a tax deduction, the taxpayer should be sure to obtain an appropriate receipt. While cash gifts are good, gifts of appreciated assets may be better, since a taxpayer can claim the market value of the asset for the purpose of the deduction without paying tax on the appreciation. Gifts from IRAs or other retirement accounts can be the best source of charitable gifts, and it should be remembered that a transfer can be made directly from an IRA custodian to a favorite charity, without going through a person’s individual account, and by doing so the taxpayer can avoid paying tax on the distribution. This so-called “IRA roll-over” (which is not really a roll-over at all), is available for up to $100,000 to a qualified charity. Such an IRA gift can be very helpful. Charitable gifts can reduce taxes when a significant taxable event occurs, such as the sale of a business or assets having significant value. An offsetting charitable gift might be made at approximately the same time that the transaction occurs to reduce or eliminate the tax burden. The point is that people need to plan ahead and be aware of the tax rules when they are considering charitable gifts.
Business Succession – Transfers Through Trusts. As we continue considering issues relating to business succession (e.g., due to the retirement or death of the business owner), it should be noted that business interests are often transferred through trusts. For example, a trust for the benefit of a child might protect the business interest against claims from outside creditors, including spousal claims. If business interests will be held by a trust, it is very important that the trust include appropriate administrative powers. If the trustee does not have the power to retain a business interest without liability for doing so, even if it is not as productive as other potential investments, then the trustee may be forced to liquidate the business interest. The trustee must be given the appropriate voting power, as well as clearly defined authority to operate and manage the business, to make decisions regarding the sale of the business enterprise, and similar matters. Because a trustee has fiduciary responsibilities and potential liability for such acts and decisions, the trustee must be given broad discretion and latitude due to the risks inherent in a small business enterprise.
Insurance Mistakes (Continued). Another common mistake that people make in dealing with life insurance is the possibility of creating phantom income by surrendering the policy or allowing it to lapse when the policy is subject to an outstanding loan. In the same way that a sale of any asset can give rise to taxable income, when a policyholder receives an economic benefit due to the surrender, lapse, or maturity of the policy, the amount of any outstanding loan is treated as an amount realized from the disposition of the policy. This means that if the investment in the policy (typically the aggregate premiums paid, less dividends, unrepaid loans, accumulated interest on loans, etc.) will give rise to a taxable transaction. It should be noted, however, that policy interest used to purchase paid-up additions will not be treated as a reduction in the investment in the policy. Consequently, as with many other transactions, even common transactions involving life insurance should be scrutinized closely and professional advice sought regarding the legal, tax and other consequences of a contemplated transaction.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.