Why YOU should have a BDIT

Ian 1As a business owner, does anything sound better than having your business protected from creditors and having it grow completely outside of your estate while still having full control over it? The Beneficiary Defective Inheritor’s Trust (the “BDIT”) technique allows all of that. Essentially, a trust beneficiary, the business owner, YOU, can grow your business in a trust established for you by someone else.

The biggest advantage of this strategy is that the BDIT will be for the benefit of the business owner and will be completely discretionary, so there will be no problem getting money out of the company if needed. Some other benefits of this trust are that the beneficiary/business owner has significant control over the trust property and it is a grantor trust with respect to the beneficiary, so that will further remove assets from the beneficiary’s estate while the assets grow tax free. One other advantage is that a BDIT is more flexible than a defective grantor trust as far as changing beneficiaries of the trust, so it might be a good option if a parent is not sure if their child can handle a business or a similar situation.

The mechanics of the BDIT are as follows:

  1. A Parent (or other third party, hereinafter the “Parent”) forms the trust (in a favorable jurisdiction for asset protection) for the benefit of the business owner;
  2.  The Parent contributes $5,000 cash to the trust and allocates $5,000 of GST exemption to it;
  3.  The Parent grants the beneficiary a Crummey power of withdrawal over the $5,000 for 30 days and it lapses;
  4.  The Parent retains no powers that could trigger the grantor trust rules for the Parent;
  5.  The Parent grants full discretion over distributions of income and principal to a third-party trustee;
  6.  The child is granted the power to remove and replace the independent trustee with another independent trustee;
  7.  The Parent grants a broad special power of appointment to the child, exercisable during life or at death;
  8.  The beneficiary will be the Investment Trustee and control all managerial decisions; and
  9.  A formula clause will be used to shift any unintended gifted assets to a non-GST tax exempt BDIT.

However, because the BDIT is a very complex strategy, it must be documented, implemented, and administered very carefully.  If all the proper procedures are followed, this transaction is legitimate despite the IRS not liking it.  Anyone with a growing business should look into a BDIT

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.

Hoffman & Associates Announces its Newest Partner, Kim Hoipkemier

hoffmankimcolorHoffman & Associates is proud to announce that Kim Hoipkemier has become a partner of the firm effective January 1, 2015.  Kim joined H&A in 2011 bringing with her extensive experience in estate planning and representation of high end clients.  She currently specializes in the areas of wills, trusts, estate administration and probate.

“Kim has become engaged in our practice in a relatively short period of time and helps define our compelling brand to clients, vendors and other professionals”, commented Mike Hoffman, founding and managing partner.  “Kim has built a solid foundation in estate planning and her contributions make us a better firm.”

Mrs. Hoipkemier is a magna cum laude undergrad from the University of Georgia and a cum laude graduate from the University of Georgia School of  Law.  She is a member of the Fiduciary Law Section of the State Bar of Georgia and a member of the Wills Clinic through the State Bar of Georgia Young Lawyers Division.

About Hoffman & Associates

Hoffman & Associates is a boutique law firm established in 1991 specializing in estate planning and probate and tax and business law. Expertise in these areas comes from a dedicated staff of both attorneys and CPAs delivering personalized service and sound financial guidance.   Hoffman & Associates prides itself in having a standalone tax practice and attorneys licensed in Georgia, Florida, North Carolina and Tennessee.

Donald Sterling and the L.A. Clippers: There’s Even More to the Story

Kim NewDonald Sterling was the controlling owner of the L.A. Clippers who made racially insensitive comments that went viral earlier this year.  After a hefty fine from the NBA, a lifetime ban, and a threat to force him to sell his controlling interest, Mr. Sterling, at age 80, still refused to sell his ownership interest in the team.  However, it was not the NBA that forced the sale of the team, it was his wife, Rochelle Sterling (“Shelly”), and the interplay of their estate plan that forced the sale and turned this scenario akin to a made-for-TV movie.

The Sterlings, California residents, created a lifetime revocable trust and funded it with all of their assets, including a controlling stake in the Clippers.  Both of the Sterlings were Co-Trustees and primary beneficiaries.  The revocable trust is the core document of an estate plan in many states, including California.  It controls assets during a person’s lifetime and manages the disposition of those assets at death without the need for the probate process.  As Co-Trustees, Donald and Shelly made decisions jointly with regard to their assets.

About the same time as the racial comments came to light, Shelly had Donald evaluated by two doctors for a determination of his mental capacity.  The doctors concluded Donald indeed suffered from diminished cognitive ability and was exhibiting signs of Alzheimer’s disease.  Pursuant to the Sterling’s revocable trust agreement, Donald could no longer serve as Co-Trustee with such diminished capacity, leaving Shelly as the sole Trustee with sole power to administer the trust’s assets.

Shelly negotiated the sale of the Clippers to former Microsoft CEO Steve Ballmer for $2 billion, despite the protests from Donald.  Donald sued to enjoin the sale and sought damages from Shelly and the NBA.  He argued that he had the proper capacity to remain Trustee, and that Shelly failed to follow the proper protocol in his medical evaluation; therefore, she was not sole Trustee and did not have authority to sell the Clippers

The dispute went to Probate Court in California where the Judge heard arguments as to whether Donald was properly removed as Co-Trustee based on his mental capacity and whether Shelly had authority to sell the Clippers under the terms of the Trust agreement.  In late July, the Probate Court Judge ruled entirely in favor of Shelly and held the sale of the Clippers could proceed even if Donald appealed the ruling.  The Judge dismissed the claim that the capacity argument was merely a scheme by Shelly to sell the Clippers.

This case received a lot of attention for Donald Sterling’s racially charged comments, but the case also deserves a lot of attention for highlighting the issues of incapacity and estate planning.  As the population ages, reports of dementia, Alzheimer’s disease and other forms of diminished mental capacity are on the rise.  Planning for someone else to manage your personal and financial affairs in the event of such illnesses or accident is a crucial part of an effective estate plan.  Who you choose to act on your behalf and how it is determined that you are “incapacitated” are equally important.  Although the events surrounding the sale of the Clippers were not as Donald and Shelly likely anticipated when creating their Revocable Trust, the Trust functioned exactly how it was intended.  Upon the death or incapacity of either Donald or Shelly, the survivor or remaining Trustee would serve as sole Trustee and continue to manage their joint assets, no court intervention needed.

A General Durable Power of Attorney and a Healthcare Power of Attorney or Directive are two key documents that plan for incapacity.  Without these in place, a time-consuming and costly court action will be required to name a Guardian or Conservator to manage the affairs of someone who is incapacitated.

Talk to your estate planning attorney about getting these documents in place for your family.  If you already have Powers of Attorney, give them a quick review, and make sure they still express your wishes and appropriately plan for the determination of incapacity.

 

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.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Even Young People Need Estate Planning

Kim 1“If I don’t have any assets, and I would want everything to go back to my parents anyway, why in the world do I need a Will at 20?”

As they pack their bags and stock up on under-bed boxes for college, the last thing on your college-age kids’ mind is an estate plan.  Even as they don the graduation cap and gown, an estate plan doesn’t even make a blip on their radar.  Perhaps the checklist for adulthood is replete with tasks more important than a Will, but a simple, even bare-bones estate plan should absolutely make the list.

Here’s a possible scenario:  your adult child has an accident and is hospitalized while in college.  You arrive at the hospital only to discover you are not entitled to see his medical records.  If he is unconscious and cannot give you verbal authorization, you’re in the dark, and may not even be able to participate in his health care decisions. Most parents are shocked when they hear this.

The good news is Health Care Powers of Attorney are simple, straightforward and standardized forms giving you the peace of mind you need to make informed decisions based on access to their full medical records.  Click on the following link to access the Georgia Advanced Directive for Healthcare.

After you get the Healthcare Directive in place, consider talking to your child about a Will.  The significance of such a document is often overlooked by a young adult.  Without a Will, a person’s assets will pass according to the State’s instruction.  While this may not be terrible, a parent who has transferred assets to their children may not want those assets back if such transfers were part of a larger estate plan.  In addition, young adults may have more financial assets than they think.  Custodial accounts constitute a significant sum of assets held by young adults.  Finally, consider a digital assets power in both a Will and a General Durable Power of Attorney for your young adults.  Vast amounts of information and access to accounts and other assets are now stored in the cloud.  Getting access to these digital files can be more difficult than you think without an explicit grant of power from your child in a written document.

When your kids come home for Thanksgiving with laundry that weighs more than your turkey dinner, have the conversation about getting these simple documents in place.  We are here to answer any questions you, or your young adult, may have.

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.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Hoffman & Associates Promotes Estate Planning Awareness Week, October 20-26, 2014

Hoffman & Associates announced today that they are joining their colleagues at WealthCounsel in a public relations campaign to showcase National Estate Planning Awareness Week, October 20-26, 2014.

According to a 2014 industry trends survey of estate planners conducted by WealthCounsel, one of the most common reasons clients engage in estate planning is to spare their family members and heirs the chaos and conflict that often occurs after their death.  Another common reason that consumers engage in planning is to protect their children from mismanaging their inheritance, or to shield their children’s inheritance from creditors.

Estate planning is one of the most overlooked areas of personal financial management.  More than 120 million Americans do not have proper estate plans to protect themselves or their families in the event of sickness, accidents, or untimely death.  This costs many families wasted dollars and unnecessary hardship that can be minimized with proper planning.

In 2008, the founders of The Financial Awareness Foundation worked with Congress to pass a resolution proclaiming the third week in October as National Estate Planning Awareness Week.  The resolution noted that “Many Americans are unaware that lack of estate planning and financial illiteracy may cause their assets to be disposed of to unintended parties by default through the complex process of probate.”

“You will enjoy the peace of mind that comes with an estate plan that is flexible, that you can modify as your lifestyle changes or as external factors dictate,” said Mike Hoffman, managing partner at H&A.  According to Kim Hoipkemier of H&A “As a member of WealthCounselÒ, our firm has access to a state-of-the-art document drafting system, a network of experienced colleagues throughout the country with whom we can collaborate, and superior educational resources to help us stay on the leading edge of knowledge.”

In addition to WealthCounselÒ, Mike Hoffman is a member of the Georgia, American and Ohio Bar Associations, the American Association of Attorney-Certified Public Accountants, The American Institute of Certified Public Accountants, the Georgia Society of Certified Public Accountants, and founder and member of the Estate Planning and Financial section of the Georgia Society of CPAs.  Kim Hoipkemier is a member of the American and Georgia Bar Associations.

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.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Georgia Education Expense Tax Credit

Mary 1 APPLY NOW FOR 2015 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 2014 credits was reached on January 22, 2014.  It is expected that the demand for 2015 credits will even be greater.  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 2015 credits.

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

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

H&A Helps Clients “Step-Up”!

Brusco PhotoClients of Hoffman & Associates truly “step-up” as part of the firm’s ongoing Codicil Project.  This initiative is helping clients save a substantial amount of money in taxes by offering them the opportunity to amend their Wills and achieve a second “step- up” in basis on assets in the estate of the surviving spouse.  “Due to the changes in tax law brought about by the “Tax Relief Act of 2012″, many of our clients are now focused on income tax planning rather than on estate tax planning” states Rhiannon Brusco, Associate at H&A.  “By securing a “step-up” in basis, clients can save their beneficiaries significant money in capital gains taxes because assets are passed at their current fair market value and not at their value when initially acquired by the decedent.”  What does this mean in lay terms? Well, it means that the second home or rental property that mom and dad bought back in 1975 for $50,000 and left to their children in their Will, is now valued at $250,000.  Rather than paying taxes on the $200,000 appreciated value, the “codicil project” assures the children can sell the home using the stepped-up basis of $250,000 and only owe capital gains tax on gain over that higher basis. For more information about Hoffman & Associates, please visit our website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

The IRS Withdraws Proposed Reg Covering IRA Rollovers

Douglas McAlpineThe IRS has withdrawn proposed regulations covering IRA rollovers.  The change is significant because it supports a Tax Court interpretation of the rollover rules creating a possible “gotcha” for the unwary.  If you are considering doing a rollover where you actually withdraw the funds then deposit them into a new IRA within the 60 day window, you need to be aware of this change.  Custodian to custodian direct transfers are not affected.

Starting January 1, 2015, a non-custodial rollover is limited to one per year regardless of how many IRA accounts you have.  Previously, you could make one such rollover per year from each separate IRA.

The IRA rules are complicated and often unforgiving.  You should discuss any IRA transfers and withdrawals with your tax advisor before you make any changes to your IRA accounts.   Here is the excerpt from the Federal Tax Weekly, Issue 29,  July 17, 2014:

IRS Withdraws Proposed Reg To Reflect Bobrow’s One-Rollover-Per-Year Limit On IRAs

NPRM REG-209459-78

Reflecting the Tax Court’s decision in Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), the IRS has withdrawn Prop. Reg. §1.408-4(b)(4)(ii).  This withdrawal makes good on its announced intention earlier in Ann. 2014-15 to follow this pro-government decision.  In Bobrow, the Tax Court found that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained.

  • CCH Take Away. “The Bobrow decision affects only IRA to IRA rollovers,” Rob Kaplan, Ballard Spahr LLP, Philadelphia, told CCH.  Bobrow does not affect the ability of an IRA owner to transfer funds from one IRA trustee or custodian directly to another, because a transfer is not a rollover and is not subject to the one-rollover-per-year limit, Kaplan explained. Bobrow also does not apply to rollovers from a 401(k) plan to an IRA. For example, an individual can take a 401(k) distribution from a former employer, roll it over to an IRA and subsequently roll it over to a plan with a new employer without violating the one-rollover-per-year rule, Kaplan noted.

Background

Generally, Code Sec. 408(d)(3)(A)(i) allows a tax-free rollover of an IRA if the funds distributed to the taxpayer are rolled over into an IRA for the taxpayer’s benefit within 60 days, subject to the one-rollover per-year limit of Code Sec. 408(d)(3)(B).  The Tax Court found in Bobrow that the one-year limitation under Code Sec. 408(d) (3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. A taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year, the court held.  After the Tax Court announced its decision, the IRS issued Ann. 2014-15, indicating it “anticipates that it will follow the interpretation of §408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation.”

  • Comment. At press time, the IRS has not yet issued new regs.  The IRS has indicated that it will not apply the Bobrow ruling before January 1, 2015, Kaplan told CCH.

Withdrawn reg

In 1981, the IRS issued a proposed reg that would have provided that the rollover limitation of Code Sec. 408(d)(3)(B) would be applied on an IRA-by-IRA basis. The proposed reg is contrary to the Tax Court’s decision in Bobrow. Under Bobrow, an individual cannot make an IRA-to-IRA rollover if the individual has made an IRA-to-IRA rollover involving any of the individual’s IRAs within the preceding one-year period. As a result, the IRS has withdrawn the proposed reg.

Publication 590

The taxpayers in Bobrow asked the Tax Court to reconsider its decision based on the IRS’s published guidance (Publication 590). The court denied the motion for reconsideration and reminded the taxpayers that the IRS’s published guidance is not binding precedent.

  • Comment. The IRS has apparently not yet updated its online version of Publication 590 to reflect Bobrow.

References: FED ¶49,620 ; TRC RETIRE: 66,702 

 

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

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Musings from the CEO – Summer 2014

Mike HoffmanI saw a headline the other day that declared “Why You Should Update Your Estate Plan”. Now, there is a topic that I could write a book about!

I have heard statistics that up to 80% of Americans either have no Will, or some attempt at a Last Will and Testament that is sorely inadequate. The basic core documents that everyone needs are a Will, a General Power of Attorney (that kicks-in upon disability or incapacity), and a Health Care Directive. Once these documents are in place, they need to be reviewed periodically. Obviously, tax laws and family circumstances change. Also, more and more people move because of job changes, they retire to another part of the country, or they move closer to their kids and grandchildren.

A little over two years ago, the $5,000,000 estate tax exemption became “permanent”. This does not mean that it won’t change, and in fact, it does change by going up a little bit each year. Going from $600,000 (the exemption in the ‘90’s) to $5,000,000 took most of us off the estate tax paying rolls and did change the focus of a lot of estate planners. We generally pay more attention to income tax matters than we did before. For instance, if a married couple has over $10,000,000 of exemption available, rather than trying to get everything out of their taxable estates, we would like for at least that much property to go to their heirs from their estates (after death), therefore, with a brand new income tax basis.

I read that one commentator expressed that an estate plan is not meant to be put in a time capsule and to be opened and dissected at death. An estate plan will change and evolve. There are many things that can be accomplished with a comprehensive estate plan. Not only are we saving estate taxes, income taxes, and probate costs, we are protecting assets, providing sound management of assets, and taking care of other responsibilities.

How are we leaving assets to our spouse and descendants? Can we be better stewards of our wealth by considering appropriate planning techniques, such as trusts?

It is important to periodically check the ownership and beneficiary designations of life insurance policies to make sure that these liquid assets will be handled appropriately. It is extremely important to review beneficiary designations on IRA accounts and other retirement plan assets. Not only do you want to make sure the assets go where you intend, but you want to maximize potential tax savings.

The ownership of all assets ought to be reviewed periodically. There are several types of joint ownership that have different consequences for estate planning and tax purposes. It is not just deeds for real property that should be checked, but it’s also important to understand how the titling of your investment accounts can affect the treatment of your assets at death.

If you own property in other jurisdictions, such as a house at the beach or in the mountains, this can complicate probate matters for the family. It is a relatively simple matter to use one of several techniques to remove that particular asset from your probate estate, potentially saving a great deal of time, money and aggravation for your spouse and descendants.

Most family/closely-held businesses do not have a succession plan or an exit strategy. This is particularly concerning when it is that family business that created the wealth. Will the business suffer a potential loss of value to the family when the patriarch or matriarch is no longer in the picture?

There are countless reasons why you should update your estate plan. First and foremost, make sure you have an estate plan. A failure to plan is a plan to fail.

 

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.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

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