2015 YEAR-END TAX PLANNING

Hoffman8Year-end tax planning for individuals, trusts and businesses provides not only the opportunity to review the activities of the past year, it also generates an invaluable opportunity to leverage tax planning techniques as they relate to new developments.  As in past years, individuals and businesses need to question the status quo, explore new strategies, and evaluate potential plans – most of which is done best before the current tax year closes.  This letter explores some of the traditional year-end planning techniques and how events in 2016 may impact this planning.  We are ready to help you plan efficiently and effectively for 2015 and future years.

Traditional Year-End Planning Techniques

While new and pending developments play a critical role in year-end tax planning, traditional year-end planning techniques should not be overlooked.  These techniques principally hinge upon the goal of smoothing out taxable income between the year about to close and the next year as best as can be predicated.  In turn, such planning relies on strategies to accelerate or deferred income and expenses as required.  Some of the most common techniques include:

Income Acceleration into 2015 (for deferral to 2016, delay the following actions):

  • Selling outstanding installment contracts
  • Receive bonuses before January
  • Sell appreciated assets
  • Redeem U.S. Savings Bonds
  • Declare special dividend
  • Complete Roth conversions
  • Accelerate debt forgiveness income
  • Maximize retirement distributions
  • Accelerate billing and collections
  • Avoid mandatory like-kind exchange treatment
  • Take corporate liquidation distributions in 2015

Deductions/Credit Acceleration into 2015 (for deferral to 2016, take contrary actions as appropriate):

  • Bunch itemized deductions into 2015/Standard deduction into 2016
  • Don’t delay bill payments until 2016
  • Elect Expanding/accelerated depreciation
  • Pay last state estimated tax installment in 2015
  • Dont delay economic performance
  • Watch AGI limitations on deductions/credits
  • Watch net investment interest restrictions
  • Match passive activity income and losses

You should discuss with your accountant if you are contemplating any of these actions.

Georgia Tax Credits

The State of Georgia has several credits that can be used to offset Georgia income taxes.  One of these is the Education Expense Tax Credit.  This tax credit is for contributions made to Georgia Student Scholarship Organizations.  These organizations provide scholarships for students to attend primary and secondary private schools.  Each year the State sets aside a specific amount of money which is available to taxpayers who are pre- approved to participate in the program.  A married taxpayer filing a joint return can claim up to $2,500, and a single taxpayer up to $1,000.  The benefit to an S corporation shareholder, LLC member or partner of a partnership can even be greater – up to $10,000, limited to 6% of the related income.  Since there is only a finite amount available, the 2016 fund will be utilized early in 2016.  It is  important to apply early in order to take advantage of this program.  Many of the Student Scholarship Organizations are currently accepting “pre-registration” for the 2016 credits.  This credit is a win/win since the contribution is deductible on your federal income tax return, and a dollar for dollar tax credit is allowed as an offset to your Georgia income tax.

The film industry is entitled to a special Film Tax Credit for film production in Georgia.  The Georgia law allows for these credits to be transferred to other taxpayers.  As a result, unused credits are sold by the film companies at a discount and you can purchase the credits to satisfy your Georgia income tax liability.  Additionally, you get a full itemized deduction for the gross amount of the credit but you must report the discount as a capital gain.

Qualified Land Conservation Contributions

Another tax planning opportunity exists for a charitable contribution deduction for the donation of a land conservation easement to a government unit or charity for conservation purposes.  The amount of the charitable deduction is the difference between the appraised value of the land before and after the conservation easement.  The deduction is limited to 50% of the donor’s adjusted gross income with a 15 year carryover of any unused deduction.  These rules were made permanent for all years beginning after December 31, 2014, by the Conservation Easement Incentive Act of 2015.  You do not need to contribute your own land in order to benefit from the conservation easement charitable deduction – the benefit is also available by investing in syndicated conservation easement partnerships.  If interested in learning more, please contact our office for additional information.

Georgia also has a state tax credit under the Georgia Conservation Tax Credit Program.  A state income tax credit is allowed for property donated for conservation purposes by approved qualified donors up to the lesser of $250, 000 or 25% of the value of the donation for individuals.  Any unused credit can be carried over for 10 years.  Qualified landowners are also allowed to sell the income tax credit to other taxpayers, subject to certain regulatory restrictions.

Year-End Individual Planning

Assessing current income or expenses, gains and losses, to map out a year-end buy, sell or hold strategy makes particular sense as markets, and the economy in general, continue to make adjustments.

Income and Capital Gains/Dividends

Spikes in your income, whether capital gains or other income, may push capital gains into either the top 39.6 percent bracket (for short-term gains), or the 20 percent capital gains bracket (for long-term capital gains).  Spreading the recognition of certain income between 2015 and 2016 may minimize the total tax paid for the 2015 and 2016 tax years.  And those individuals finding themselves in the 15 or 10 percent tax brackets should consider recognizing any long-term capital gain available to the extent that, with other anticipated income, will not exceed the top of the 15 percent bracket ($74,900 for joint filers and $37,450 for singles in 2015).

Net Investment Income Tax (“NII”)

Since creation of the 3.8% NII tax, individuals have learned that NII encompasses more than capital gains and dividends.  NII includes income from a business in which the taxpayer is a passive participant.  Rental income may also be considered NII unless earned by a real estate professional.  The NII threshold amount is equal to: $250,000 in the case of joint returns or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case.  These threshold amounts are not indexed for inflation.

Planning Opportunity

Along with reviewing traditional techniques, individuals should examine carefully the potential impact of the NII tax, capital gains and dividends, alternative minimum tax (AMT), Additional Medicare Tax, “kiddie tax”, and more.  For some taxpayers, year-end strategies to keep income below certain thresholds may be valuable, such as the thresholds for the NII tax, the Additional Medicare Tax, the Pease limitation on exemptions and itemized deductions, and others.  Of course, the nuances of every individual’s situation must be taken into account. For example, not all capital gains are treated the same, or taxed the same.  The maximum tax rate on qualified capital gains and dividends increases from 15 to 20 percent for taxpayers whose incomes exceed the thresholds set for the 39.6 percent rate ($464,850 for joint filers and $413,200 for singles in 2015).  The maximum tax rate on qualified taxable gains and dividends for all other taxpayers remains at 15 percent; except that a zero-percent rate applies to taxpayers with income below the top of the 15 percent tax bracket.  The maximum tax rates for collectibles and unrecaptured Code Sec. 1250 gain are 28 and 25 percent, respectively.

New Legislation and Tax Extenders for Individuals

Equally important is not to overlook new tax legislation. So far in 2015, only a handful of tax bills have been passed by Congress and signed into law by President Obama.  Two new laws affect public safety officers.  A trade bill also makes a change to the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs.  Congress also renewed the Health Care Tax Credit for qualified individuals.

Congress has not (as of the date of this letter) renewed the so-called tax extenders.  Many individuals have used the extenders, such as the state and local sales tax deduction, higher education tuition and fees deduction, Code Sec. 25C residential energy credit, IRA distributions directly to charities, and many more to maximize tax savings.  As in the past years, it’s a waiting game.  For year-end planning purposes, it is generally anticipated that Congress will renew these popular tax breaks, making them available for 2015.  It is unclear if Congress will also extend them into 2016.  Our office will keep you posted of developments.

Estate and Gift Taxes

The maximum federal unified estate and gift tax rate is 40 percent with an inflation-adjusted $5,000,000 exclusion (up to $5.43M for gifts made and estates of decedents dying during 2015 and $5.45M for 2016).  The annual use-it-or-lose-it gift tax exclusion allows taxpayers to gift up to an inflation-adjusted $14,000 to any individual ($28,000 for married individuals who “split” gifts) tax free and without counting the amount of the gift toward the lifetime $5,000,000 exclusion (adjusted for inflation) and, with proper planning, double for married couples who share the exclusion.

Affordable Care Act (“ACA”)

Unless exempt, the ACA requires that all individuals carry minimum essential coverage or make a shared responsibility payment.  Individuals with health insurance coverage should ascertain that their coverage satisfies the ACA’s minimum essential coverage requirements.  Individuals without minimum essential coverage may be liable for a shared responsibility payment unless exempt.  Individuals who obtain health insurance coverage through the ACA Marketplace may be eligible for the Code Sec. 36B premium assistance tax credit.

Planning For Retirement

Year-end is a good time to review if your retirement savings plans and tax strategies compliment each other.  Individuals can contribute up to $5,500 to an IRA or Roth IRA for 2015.  If they qualify, individuals can also make an additional so-called “catch-up contribution” of an additional $1,000.  This treatment is targeted to individuals age 50 and older.  Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold.  For example, married couples filing jointly will begin to see their contribution start to phase out when their AGI is $183,000.  Once their AGI reaches $193,000 or more, they can no longer contribute to a Roth IRA.  For single filers the corresponding income thresholds for 2015 are $116,000 and $131,000.  Please note that individuals have until April 18, 2016, to make an IRA contribution for 2015.

Traditional IRAs and Roth IRAs are very different savings vehicles.  A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed.  Some individuals may be contemplating rolling over a workplace retirement plan into an IRA.  Very complex rules apply in these situations and rollovers should be carefully planned.  The same is true in converting a traditional IRA to a Roth IRA.  Every individual has unique goals for retirement savings and no one plan fits all.

Retirement – Higher Deduction Options

Business owners seeking to make significant pension contributions should consider a Cash Balance Plan for their company.  In the right situation, an owner/employee can contribute up to 100% of their annual compensation limited to $210,000 for 2015.  However, skilled assistance is required to set up this type of plan and the plan requires annual administration not required for many defined contribution plans (401K, SEP, etc.).  For a 2015 deduction, the plan must be established by December 31, 2015, even though the actual contribution can be deferred until the due date of the tax return with extensions.

Life Events

Marriage, the birth or adoption of a child, the purchase of a new residence, a change in filing status, retirement, and many more life events impact year-end tax planning. Of course, timing is a factor.  In some cases, a life event may be planned; in others, events occur unexpectedly.  The possibility of significant changes and/or significant or unusual items of income or loss should be part of a year-end tax strategy.  Additionally, taxpayers need to take a look into the future, into 2016, and predict, if possible, any events that could trigger significant income or losses, as well as a change in filing status.

Year-End Trust Planning

Many of the tax planning strategies for individual taxpayers are also applicable to trusts.  As with individuals, spreading the recognition of income between tax years may minimize trust taxes. Another tax minimization strategy for a trust is to shift trust income from a high rate trust to a lower rate beneficiary.

Income and Capital Gains/Dividends

The tax brackets for trusts are  more compressed than the tax brackets for individuals.  For example, in 2015, the 39.6% tax bracket for individuals filing jointly begins at $464,850 of taxable income, but for trusts the 39.6% bracket begins at only $12,300 of taxable income.  As a result, shifting trust income to the beneficiary may produce significant tax savings.  One way this can be achieved is by making distributions from the trust to the beneficiary.

Net Investment Income Tax

While the 3.8% NII tax threshold for individuals is $250,000 for married filing joint and $200,000 for individuals filing single, the 2015 NII tax threshold for trusts begins at only $12,300 of taxable income.  This can result in a substantial amount of trust income being subject to the additional 3.8% NII tax.  However, trust exposure to the NII tax may be reduced through distribution planning (See the following paragraph).

Beneficiary Distributions & The 65 Day Rule

When distributions are made from the trust to the beneficiary, the trust is allowed a deduction for the distribution of certain classes of income.  The income is then included on the beneficiary’s individual income tax return.  In many cases, the beneficiary’s individual income tax rate is lower than the income tax rate for the trust.  This results in less total income tax on the trust income.

A trust can elect to treat distributions made in the first 65 days of the tax year as a distribution of current year or prior year income.  Therefore, a distribution made by March 5, 2016, can be treated as a distribution of 2015 trust income.  This allows some additional time to determine the income for the trust and determine if a distribution should be made to the beneficiary.

The decision on whether to make a distribution, and the amount of the distribution, should be reviewed each year.  The tax related factors can change from year to year and there are also other non-tax factors that should be considered.

Year-End Business Planning

As in past years, business tax planning is uncertain because of the expiration of many popular but temporary tax breaks that have been part of an “extenders” package of legislation.  Also added to the mix is the far-reaching ACA.  Other changes to the tax laws in 2015 made by new regulations and other IRS guidance should also be considered in assessing year-end strategies.

Code Sec. 179 Expanding

Code Sec. 179 property includes new or used tangible property that is depreciable under Code Sec. 1245 and  is purchased to use in an active trade or business.  Under enhanced expensing, for 2014 and prior years, businesses could write off (“expense”) up to $500,000 in qualifying expenditures.  This $500,000 cap was not reduced unless total expenditures exceed $2,000,000.  Until the enhanced provisions are extended, businesses can write off up to $25,000 of qualifying expenditures.  This cap is reduced if total expenditures exceed $200,000.

Bonus Depreciation

Congress provided for 50% bonus depreciation through 2014 (through 2015 for certain transportation and other property).  Legislation introduced in Congress in 2015 would extend bonus depreciation through 2016 or, alternatively, make bonus depreciation permanent.

“Repair” Regulations

A potentially beneficial provision in final, so-called “repair” regulations is the de minimis safe harbor.  The safe harbor enables taxpayers to routinely deduct certain items whose cost is below the specified threshold.  The de minimis safe harbor is an annual election, not an accounting method, so it can be made and changed from year to year.  The current threshold is set at: $5,000 for taxpayers with an applicable financial statement (taxpayers with an AS should have a written policy in place by the beginning of the year that specifies the amount deductible under the safe harbor); and $500 for taxpayers without an AS.

Domestic Production Activities Reduction

One incentive that is definitely available for 2015 is the Code Sec. 199 domestic production activities deduction.  This deduction is over 10 years old, but the number of taxpayers claiming the potentially valuable deduction is smaller than the other incentives.  In 2015, the IRS issued guidance that fleshes out the types of activities that may qualify for the deduction.  The types of activities are many and varied.  Our office can review your business activities and help you ascertain if the deduction may be worthwhile.

Vehicle Depreciation Limits

The IRS released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015.  The IRS also increased the 2014 first-year limitations by $8,000 to reflect passage of the Tax Increase Prevention Act of 2014, which retroactively extended bonus depreciation for 2014 late last year. It is uncertain whether anticipated 2015 extenders legislation will make the same retroactive adjustment for 2015.

Other Business Extenders

Many other beneficial tax provisions for businesses are up for consideration in extenders legislation for 2015 and beyond.  These include the research tax credit; small business stock; S corp built-in gains; New Markets Tax Credit; Work Opportunity Tax Credit; employer wage credit for activated military reservists; Subpart F provisions; enhanced deduction for contributions of food inventory, empowerment zones; Indian employee credit; low-income credits for subsidized new buildings and military housing; treatment of regulated investment companies (RIBS); and basis reduction of S corporation stock after donations of property.

Small Business Health Care Tax Credit

Small employers with no more than 25 full-time equivalent employees may qualify for a special tax credit to help offset the cost of health insurance for their employees.  The employer must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement.

Filing/Reporting Changes

Due to changes in the tax laws and other events, some deadlines will be changing starting in 2016; with others starting for 2016 returns filed in 2017.  As a result, planning at year-end 2015 might start factoring in some of these deadlines when setting out schedules and strategies at the start of 2016.  Notably, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, partnerships will be subject to an earlier March 15 deadline and C corporations generally will move to an April 15th deadline starting for 2016 tax year returns.  Extensions-to-file are also adjusted.  The FBAR deadline for reporting a financial interest or signature authority over a foreign financial account also will move, from June 30 to April 15.

Individual Returns

A Washington, D.C. holiday, Emancipation Day, will shift the filing and payment deadline for 2015 individual returns from April 15, 2016 to April 18, 2016.

Estate Tax Uniform Basis Reporting

The IRS delayed new uniform basis reporting requirements for estate tax property until February 29, 2016.  The delay was provided to give the IRS time to issue guidance to executors, beneficiaries, and others on how to comply with the new reporting requirements.

Year-end tax planning can appear to be a daunting task, but our office is ready to work with you.  Please contact our office.  Together, we can create a customized tax strategy tailored to you.

Georgia Education Expense Tax Credit – 2016 Pre-Registration

Mary 1

GEORGIA EDUCATION EXPENSE TAX CREDIT

APPLY NOW FOR 2016 PRE-REGISTRATION

This tax credit is for contributions made to Georgia Student Scholarship Organizations.  These organizations provide scholarships for students to attend primary and secondary private schools.  The contribution is deductible on your individual federal income tax return as a charitable contribution, and a dollar for dollar tax credit is allowed to offset your Georgia income tax.

Maximum Tax Credit Allowed
Individual Taxpayer – Single:  $1,000
Individual Taxpayer – Married filing joint:  $2,500
S corporation shareholders, LLC members and partners in partnerships: $10,000, limited to 6% of pass through taxable income
Approval Process
Taxpayers must apply for pre-approval in order to participate in this program.  Once the annual credit cap is met, no additional applications are approved.

The annual cap for the 2015 credits was reached on January 1, 2015.  It is expected that the 2016 cap on the credits will be reached on January 1, 2016.  Therefore, it is important to apply early in order to take advantage of this program.  Many of the Student Scholarship Organizations are currently accepting “pre-registration” for the 2016 credits.

Please call our office at 404-255-7400 for additional information regarding this program.

 

Planning for Farming and Agriculture

Farming & Agriculture

 

 

 

WealthCounsel Quarterly Q2 2015_ Planning for Farming and Agriculture

Can You Afford $91,000 a Year for a Nursing Home?

CassandraGenworth, an insurance company that sells long-term care insurance, recently concluded their annual report surveying over 15,000 assisted living facilities, nursing homes and other long-term providers across the country.  The report found that the median cost for a private nursing home room has risen from $87,600 in 2014 to just over $91,000 per year.  While costs vary widely from state to state, the cost of care in a nursing home has risen at twice the rate of U.S. inflation in the past 5 years.[1]

Much of the aging population believes that Medicare will cover these expenses.  Not so.  “Medicare does not pay the largest part of long-term care services or personal care – such as help with bathing, or for supervision often called custodial care.”[2]   Medicare will pay for a “short stay” if the stay is following a hospital stay of at least three days, the individual is admitted to a Medicare-certified nursing facility and the individual requires “skilled care,” as in physical therapy or nursing services (up to 100 days, although Medicare will only pay 100% for the first 20 days, then the individual must pay a co-pay, currently $157.50 per day).[3]  Medicare will not cover long-term care when an individual is suffering from memory impairment or a degenerative disease that impairs the individual’s ability to care for themselves, i.e. bathe, get in and out of bed, etc.  Medicare will pay for hospice care, only if one is expected to live less than 6 months—if you have a prospect of a year, you’re on your own.  The bottom line is Medicare is not going to cover long-term care in a facility, nor will they cover around-the-clock care at home.

So where do you turn?  Long-term care insurance.  The difficulty with this is the expensive premiums if you wait too long.  The policies can cost upwards of $3,000 per year but max out at a total benefit of $164,000 with a daily benefit allowance of $150 for 3 years.[4]  This can help offset the Medicare premium following a hospital stay.

In the event long-term care insurance maxes out, the final option in long-term care is Medicaid.  It’s estimated that Medicaid pays for more than half of long-term care throughout the country.[5]  However, you must be eligible for Medicaid in order to qualify for assistance, which, in addition to other requirements, has a “resource limit” of $2,000 (although homes are exempt from this calculation).[6]  This has led to many elderly individuals depleting hundreds of thousands of dollars in a few short years in order to cover the expense.  Then, when they are down to their last $2,000, Medicaid will assist them.  These now impoverished individuals have no means for additional necessities aside from what the government offers through social security, disability, Medicaid, food stamps and other state government programs.  Additionally, Medicaid will seek reimbursement from the individual’s estate after their death, including their home, in some instances.

This is one of the many reasons proper, and early, estate planning is so crucial. With proper planning, an aging client can align assets in the event of an illness or hospitalization ensuring that:

(1)    They will have someone they trust making decisions for them, their previously designated health care agent;

(2)    They will have the proper long-term care insurance to assist in covering the cost of long-term care, in the event it’s necessary; and

(3)    They will have safeguards in place so that if they require Medicaid assistance, depleting all of their resources is not required.

However, in order for the estate plan to be effective, it must be structured early and prior to the onset of illness.  Each family has different goals which they hope to accomplish.  We can work with you to set up the most effective estate plan to accomplish you and your family’s goals.

IRS Warns of Latest Tax Scams

Hoffman12Please be aware that a few of our Hoffman & Associates clients were recently contacted by scammers threatening arrest and demanding payment for apparent taxes owed. Thankfully these clients contacted our office right away and were not adversely affected by these criminals posing as IRS agents. My own home answering machine recently contained a message threatening me with arrest if I did not contact them immediately to arrange payment.  The statement below is from the IRS and nicely summarizes the latest IRS scams and provides information on what you should do if contacted.  Please do not hesitate to contact us with any questions or concerns at 404-255-7400.


Don’t Fall for New Tax Scam Tricks by IRS Posers

Though the tax season is over, tax scammers work year-round. The IRS advises you to stay alert to protect yourself against new ways criminals pose as the IRS to trick you out of your money or personal information. These scams first tried to sting older Americans, newly arrived immigrants and those who speak English as a second language. The crooks have expanded their net, and now try to swindle virtually anyone. Here are several tips from the IRS to help you avoid being a victim of these scams:

  • Scams use scare tactics.  These aggressive and sophisticated scams try to scare people into making a false tax payment that ends up with the criminal. Many phone scams use threats to try to intimidate you so you will pay them your money. They often threaten arrest or deportation, or that they will revoke your license if you don’t pay. They may also leave “urgent” callback requests, sometimes through “robo-calls,” via phone or email. The emails will often contain a fake IRS document with a phone number or an email address for you to reply.
  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legit. They may use online resources to get your name, address and other details about your life to make the call sound official.
  • Scams use phishing email and regular mail.  Scammers copy official IRS letterhead to use in email or regular mail they send to victims. In another new variation, schemers provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. All in an attempt to make the scheme look official.
  • Scams cost victims over $20 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 600,000 contacts since October 2013. TIGTA is also aware of nearly 4,000 victims who have collectively reported over $20 million in financial losses as a result of tax scams.

The real IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
  • Demand that you pay taxes and not allow you to question or appeal the amount that you owe.
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.
  • Ask for credit or debit card numbers over the phone.
  • Threaten to bring in police or other agencies to arrest you for not paying.

If you don’t owe taxes or have no reason to think that you do:

  • Do not provide any information to the caller. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.
  • You should also report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe taxes:

  • Call the IRS at 800-829-1040. IRS workers can help you if you do owe taxes.

Stay alert to scams that use the IRS as a lure. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

IRS YouTube Videos:

Single Member LLCs for Asset Protection

IAN M. FISHERAt Hoffman & Associates, we advise many of our clients to form limited liability companies, known as LLCs, to hold and protect their assets. In general, an owner of an LLC interest, or a “member” of the LLC, will not be responsible for any debts of the LLC, which is a win-win situation for the client. Further, if the member gets sued for something related to the LLC, such as the actions of an employee of the LLC or product liability from a product produced by the LLC, the member’s personal property will be shielded from the person suing the LLC.

Additionally, if a member is sued for something unrelated to the LLC, the member’s LLC interest will be somewhat shielded from that judgment creditor. Often the remedy for a judgment creditor against a member of an LLC is what is known as a “charging order,” which means they cannot take ownership of the LLC, but will be entitled to any LLC distributions to that Member.

However, in a few limited instances, a court will look through the LLC to get to a Member’s assets, known as “piercing the veil” of the LLC. Generally, this is done in the case of an LLC with only one member, which is the situation numerous clients find themselves in – they do not have a partner to add or do not want to add a partner to their business. Even with this risk, many clients will want to own the whole LLC themselves, which is a very simple structure, since all of the LLC’s taxes would pass through to that single member.

Often, states are more likely to pierce the veil or not limit the remedy to a charging order in the case of single-member LLCs, or SMLLCs. In fact, only a handful of states limit action against a member of a SMLLC to a charging order. Delaware, Nevada and Wyoming are the popular states that offer this statutory protection. If a client is focused on asset protection and does not want an additional LLC member, forming the LLC in one of these three states is the best course of action.

Even in a state that limits a remedy to a charging order, a court can still pierce the veil of a SMLLC if the LLC member does not respect the structure of the LLC. In a recent Wyoming case, Greenhunter Energy, Inc. v. Western, 2014 WY 144, (WY S.C., Nov. 7, 2014), the Wyoming Supreme Court completely disregarded a SMLLC because the Member did not treat the LLC like a separate operating entity. There were numerous problems in this case, but they are easily avoidable with a proper Operating Agreement and by respecting the LLC as a separate entity.

Some clients desire more anonymity. Delaware, Nevada, and Wyoming all require a manager’s name to be filed with the state, which becomes an easily accessible public record. If a client also desires anonymity, one option would be to form an LLC in a state that does not require a manager’s name to be listed (such as Georgia) and have that LLC serve as the manager of the SMLLC.

Although the SMLLC can be ineffective if not formed and used properly, as shown in the Greenhunter Energy case, it can be a great tool for those clients who have asset protection goals, even if they do not want to bring a partner into their business. If this is you or someone you know, please contact Hoffman & Associates to discuss a single-member LLC to protect your assets.

For more information regarding this or any other business law concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

 

The IRS is at it Again

michael w. hoffmanFamily Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) have long been used for a variety of purposes, including centralized asset management, creditor protection, efficient legacy planning, and implementing legitimate discounting and freezing techniques for estate planning purposes. Our estate and gift tax system relies on accurately determining the fair market value of the property being transferred. Fair market value is to be determined objectively considering hypothetical buyers and sellers. Appraisers must take into account valuation discounts for lack of control and lack of marketability. When property is transferred to descendants or trusts, the value of the particular property being transferred is what is reported for gift tax purposes, and then the property with all future appreciation is excluded from the grantor’s estate.

The IRS began a campaign of attacking FLPs back in 1997. Court decisions have generally rebuffed various tactics and positions taken by the IRS in the family limited partnership area.

The IRS publishes its priority guidance plan each year to emphasize areas of the tax law that the IRS may issue additional regulations. Additional regulations affecting valuations in an intra-family transfer context has been on the IRS’ priority guidance plan for the last 11 years. Now, it has been elevated to a proposal set forth in President Obama’s Administration’s 2013 Green Book. The IRS recently announced that it could issue proposed regulations as early as September, which would severely restrict valuation discounts for interests in FLPs and other family entities.

Articles are now appearing which are encouraging estate planners and clients to get ahead of these likely new rules. It is likely that the IRS position will be that any new rules will be effective upon the publication of the proposed regulations, even though they will not become “final” regulations until a much later date.

Earlier this summer, we sent messages to clients who are in the midst of their estate planning that they may want to expedite the process, before the IRS can issue proposed regulations which greatly curtail the legitimate discounting and freezing techniques that we’ve implemented with countless clients. One would think that only Congress can change the law with respect to re-defining the value of property for gift and estate tax purposes, but the Obama Administration has an historical edict of affecting change by more government regulation. The IRS, no doubt, is feeling very confident in their power to limit valuation discounts by way of their regulatory authority.

If you have put off further estate planning, time may be of the essence. If your planning should include the many benefits of FLPs and FLLCs, or if you have an FLP or FLLC and gifting may be appropriate, you may want to get with your advisor sooner, rather than later. If we can help, give us a call.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Revocable Living Trust

hoffmankimcolorAs Georgia based attorneys, we are very comfortable with the Will-based Estate plan.  Georgia probate courts are friendly and easy to work with, and Georgia law allows a Testator to waive the requirements of a bond, inventory and reporting to the court.  We cannot overlook the importance of a Revocable Living Trust, however, for those clients with out of state assets or where avoidance of probate is simply a desirable goal.

A Revocable Living Trust is, as its name implies, revocable or amendable at will by the Grantor, and living, which means it is funded and used during the lifetime of the Grantor as opposed to solely at death like a Will.  Generally, the Grantor funds the Living Trust with all of his or her assets, and the Grantor is generally the sole Trustee and the primary beneficiary of the Trust.  Though this all sounds somewhat circular, the Trust provides a very legitimate legal solution:  having the trust own all of your assets means you do not need a legal process to change title to those assets upon your passing.

For states like Florida, the Revocable Living Trust is a common estate planning document simply to avoid the probate process.  There, unlike Georgia, courts require the Personal Representative to post a bond, an inventory of the decedent’s assets must be provided to the court, and various accountings are also required to be filed.  The result is a generally a significantly more expensive and time-consuming probate process than in Georgia.   The Living Trust is not just for Florida residents though.  A Georgia resident owning a vacation condo in Florida will be subject to Florida’s probate process at death.  Thus, not only will the Estate be subject to Georgia probate proceedings, but it will need to file ancillary probate proceedings in Florida too.  This rule is applicable to ownership of assets in any other state, not just Florida, as each individual state has their own laws about transferring title at death.  Having a Living Trust own your out of state assets forecloses the necessity of multiple probate proceedings.

Another significant advantage to the Living Trust based Estate Plan is privacy.  Despite Georgia’s ‘friendly’ probate laws, the original Will must still be filed with the Court and it becomes public record.  This means anyone can review the terms of your Will at death.  In addition, all of your heirs at law are entitled to notice of the filing of the Will and a copy thereof.  For those that prefer their bequests remain private, or who perhaps have made an uneven distribution among their beneficiaries, the Living Trust may be a better choice.  A Living Trust can even help avoid a Will contest where certain heirs may be left out of an inheritance.

Revocable Living Trusts can also be significantly beneficial to a Grantor who becomes incapacitated.  Incapacity proceedings are becoming some of the most common probate court proceedings as people live longer but do not necessarily have all of their faculties.  When you form and fund a Living Trust, you name a successor Trustee to take over management of the Trust assets upon either your death or incapacity, again, entirely skipping the court process for doing so.  This provides a seamless, and immediate, transition of control from you to someone else in the event you can no longer manage your affairs.  And, it is a person of your choosing.  Your Trust document can even be very specific as to who and how you are determined to be incapacitated, thus giving you a great amount of control even where you would no longer have the ability to have such control.

The key to an effective Living Trust is fully funding the trust.  Funding the trust is legally transferring title to all of your assets to the Trustee of the Trust.  There are no tax consequences to such transfer as the trust is revocable, the IRS ‘looks through’ the trust and treats the assets as though they were still yours for income and transfer tax purposes.  Funding is accomplished by changing the title on bank accounts and investment accounts and recording deeds to real property.  Your attorney should go through specific funding instructions with you after a detailed analysis of your assets.

Finally,  a Living Trust will contain all of the testamentary decisions and dispositions of a Will, including trusts as needed for the surviving spouse and descendants, charitable bequests and other gifts you want made upon your passing.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Term Insurance or Permanent Insurance?

Hoffman19Many of our clients wrestle with the decision to purchase term insurance or permanent insurance.  The premiums for term insurance are cheap, particularly when you’re young, while permanent insurance generally provides a level premium with more certainty that a death benefit will be paid.

Term insurance seldom pays a death benefit.  The reasons for this are simple.  Most people live to, or close to their life expectancy.  By the time they have reached their life expectancy, the premiums on term insurance have increased to the point where the insurance is dropped, or the individual has reached an age or health condition that is deemed uninsurable by the insurance company.

For this reason, term life insurance is best for temporary needs such as support for a surviving family (particularly when you are young), funding a buy/sell arrangement for a closely held business, providing cash (key man insurance) for transition of business, and for the repayment of debts.

I often tell clients to load up on term insurance when they are young, partly because it’s so cheap, and partly because their financial “security” needs are so great when their families are young.  Of course, the premiums for term insurance are lower because it seldom pays a death benefit.  The only usual financial “winners” for term insurance are the insurance agent and the insurance company.

As we get older, financial obligations (except retirement) tend to decrease.  Many of us begin to look at permanent insurance as a permanent feature or category of assets that we are accumulating during our lifetime.  Most of us want to have a certain portion of our insurance that is ongoing.  The insurance can provide liquidity to our heirs, cash to pay estate taxes, a fund to provide for the maintenance of a second home, or a mechanism to equalize the estate where certain hard assets (such as farm, business or vacation home) is necessarily directed to one particular heir, while the other child receives cash.

Permanent insurance generally falls into three categories: whole life, universal life (including universal blends and indexed products) and variable life.  Whole life is the most expensive, while universal life is generally the most inexpensive permanent insurance policy.  Variable life has more stock market investment features inside an insurance policy wrapper.

Universal life is popular among our clients as it provides guaranteed lifetime coverage at the lowest level of permanent insurance premiums, and generally level premiums can be pre-paid or lowered by lump-sum or higher premiums in early years.  Generally, with universal life policies, guaranteed cash accumulation for retirement income or other purposes is not a significant objective.  The goal is to lock in a death benefit while keeping premiums as low as possible.

By far, our estate planning clients buy mostly universal life products.  While there are many varieties, studies show that the internal rate of return on universal life products is generally positive, where as the internal rate return on any term policy, if clients live to or close to their life expectancy, is significantly negative.  In other words, with term insurance, we have thrown our money away unless we die prematurely.

Most term insurance lapses before death.  This is fine if the reason for the insurance no longer exists.  However, many policy owners want to extend the coverage of their insurance while their health is still good, because they know that the risk of their health changing increases with age and health changes can happen suddenly.

Be aware that term policies can carry a conversion right.  This is important, even though it might marginally increase the premium cost, because a client might otherwise become higher risk or uninsurable prior to the expiration of the term policy and be unable to get other insurance.

Generally, our clients are rarely content to allow their insurance policies to lapse when they reach the end of the coverage period.  The older we get, the more we see the value of “investing” in insurance as one of our many buckets of asset categories that we are accumulating and tending to during life.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

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