Monday, September 26, 2016

Life Insurance Policy Review

By Judy Fertel Layne

Do you have a life insurance policy with cash surrender value that you no longer need? Because of changes in the estate tax, changes in your family situation or other reasons, you may have a policy that you no longer need. If you no longer want or need the death benefit, you can cash in the policy and receive the cash surrender value for your current use. You will only have to pay tax on that part of the cash surrender value that exceeds the premiums you’ve paid into the policy. Now may be a good time to review your existing policies and consider whether you have adequate life insurance or even more life insurance than you feel you need.

For more information, please contact Judy Fertel Layne in our Troy, Mich. office at 248-433-7563.

Monday, September 19, 2016

Reviewing Estate Planning on a Regular Basis

By Elizabeth Brickfield

All of us avoid discussing or thinking about uncomfortable issues as we live our lives. Nowhere is this more evident than in the estate planning area. Estate planning is not merely about minimizing transfer (or income) taxes or deciding who receives which assets, it addresses such basic issues as who will raise my children, who do I want to make medical and financial decision for me when I cannot, including end of life decisions.

In our estate planning practice, we see the effects of failing to make these decisions, as well as failing to consider the ramification of the planning when advising clients (or making these decisions for ourselves). The most important aspects of decision making concern the selection of the individuals to whom we entrust the decision making and the ability of these individuals to carry out our intentions. These considerations include being candid with ourselves and our estate planners about our wishes and our beneficiaries’ and fiduciaries’ abilities to respect themselves and each other. Hoping that beneficiaries who had difficulties getting along with each other will change after the parents’ death will simply cause an estate plan to fail. Selecting the eldest child to be a fiduciary because of tradition may further resentment. Failing to explain why assets are being left to certain individuals or charities can lead to hurt feelings. Selecting a heavy handed fiduciary will only lead to the courtroom doors. Naming a health care fiduciary who disagrees with your wishes may cause wishes to be ignored.

Equally important, is to ensure that the carefully created documents are available and accessible when they are needed. With changing family arrangements, increase longevity, more mobile frames and fewer marriages, it is important that your plans be known to those who have been selected to carry them out. Nevada, for example, has a registry where health care directives can be filed, an additional safety net for placing documents where they can be readily found.

The most successful estate plans are based on communication and confidence. Communication with our loved ones about our wishes and concerns and confidence in the ability of those we have selected to carry them out.

For further information, please communicate with Elizabeth Brickfield in our Las Vegas, Nev. office at 702-550-4464.

Monday, September 12, 2016

Generating the Most Benefit from your Charitable Contributions

By Thomas D. Hammerschmidt

Many people support their favorite local charities or those that address medical research or treatment in a particular area, maybe as a result of an illness or death of an acquaintance or family member, for example, the ALS Association or the American Cancer Society.

However, many people also donate to charities that are less known to them, including in response to telephone or U.S. Mail solicitations, as part of their annual charitable giving “budget.”

There are a number of internet resources that allow people to research charities for information on the portion of contributions actually used for charitable purposes, as opposed to the payment of excessive salaries, administration costs or the services of outside fundraisers.

Check out the Nonprofit Explorer resource maintained by Pro Publica, for example, at https://projects.propublica.org/nonprofits, or the research tool at www.charitynavigator.org. You can also access your state’s Attorney General’s office to “vet” a charity before you donate.

For further information, please contact Thomas D. Hammerschmidt in our Ann Arbor, Mich. office at 734-623-1602.

Tuesday, September 6, 2016

Passive Activity Loss Limitations – Keep Records to Avoid Loss of Income Tax Deductions

By Les Raatz

Thirty years ago, Congress passed the Tax Reform Act of 1986. Within the Act, the Passive Activity Loss (PAL) rules limited the ability of taxpayers to take income tax loss deductions from business or rental real estate activity unless the taxpayer “materially participates” by satisfying certain tests based on hours worked in the activity. Depending on the activity, the annual required hours are 750, 500, or as low as 100. If the government disputes the taxpayer’s loss deduction, then it is up to the taxpayer to prove material participation, which may be difficult and time consuming if reconstructed years later. The regulations state:

“The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means.”

But the best method is keeping contemporaneous logs of work done.

There are many other PAL rules. Careful structuring of ownership and operations and in making tax elections may assist minimizing the PAL loss limitations, as well as avoiding the new 3.8% Net Investment Income Tax, which applies many of the same rules.

To learn more, please contact Les Raatz in our Phoenix, Ariz. office at 602-285-5022 or another member of the DW Tax Specialists.

Monday, August 29, 2016

Minimizing Income Taxes on Transfers During Life and Death

By Henry Grix

Fewer than 1% of Americans are now subject to federal gift, estate and generation-skipping transfer tax because those taxes do not apply unless the value transferred during life and at death exceeds an “exclusion amount” of $5.45 million per individual ($10.9 million for a married couple), adjusted annually for cost of living. Most individuals and couples can shift their focus from estate tax avoidance to strategies to minimize income taxes on lifetime gifts and transfers at death. Key issues include income tax basis and fiduciary income tax reporting.

  • The recipient of an asset given away during life takes over the donor’s basis in the asset for purposes of calculating capital gain on later sale, so a donor should select a high basis asset for any lifetime gift. At death, however, the cost basis in most assets (excluding certain assets like retirement plans or IRAs) is adjusted to the date of death value, and any built-in capital gain is avoided. A person who receives an asset from a decedent calculates gain on later sale based upon the date of death value of the asset. The executor needs to secure this information, and the recipient needs to retain it.
  • For married couples, the rules can become more complicated. For example, if a married couple owns community property (in Arizona, Nevada and Texas), community assets receive a 100% basis adjustment at the death of the first spouse, and, again, at the death the second spouse if any of the formerly community property remains. If a married couple lives in a common law state (like Florida, Kentucky, Michigan, Ohio or Tennessee) and owns property as tenants by the entirety, only 50% of the value is adjusted at the first death, although a second adjustment becomes available for 100% of what remains at the second death.
  • If a decedent directs transfers into continuing trusts for beneficiaries, the trustee needs to be alert to ways to minimize income taxes. Fiduciary income tax is assessed at the highest rate bracket after $12,400 of income, but appropriate distributions to beneficiaries can help avoid application of the highest rate.
To learn more, please contact Henry Grix in our Troy, Mich. office at 248-433-7548 or another member of the DW Trusts and Estates Team.

Monday, August 22, 2016

The End to Discounts for Transfers of Interests in Family Business Entities

By Henry C. T. (Tip) Richmond, III

One year ago in this space I advised that although talked about for years but never accomplished, the IRS was expected to issue new rules under Section 2704 of the Internal Revenue Code late this summer that would cause certain restrictions to be disregarded in determining the value of a transfer (during lifetime or at death) of an interest in a family-controlled business entity (e.g., an LLC, partnership or corporation). The ability to use restrictions to reduce the value of an interest in a family business for lack of marketability and/or control for gift, estate and generation-skipping transfer tax purposes has been a significant tool for estate planners for years. These regulations, if and when final, would limit, if not end, this highly effective strategy. The message to clients then was to make their gifts of interests in family-controlled business entities sooner rather than later.

Well, that eagerly awaited day has come! The IRS released proposed regulations on August 2nd. There is a 90 day comment period and a public hearing scheduled for December 1st of this year. The regulations are proposed to be effective 30 days after the date the Treasury Department publishes them as final in the Federal Register. In light of expected significant written comments and lively discussion at the December 1st hearing, most experts do not believe the regulations will become final until sometime in 2017.

A more detailed summary of the regulations will be found in a DW Client Alert that you are encouraged to forward to your clients and prospective clients who could be negatively impacted by these very significant changes in the transfer tax laws. Of course, lawyers in the tax and trusts and estates practice groups stand ready to assist you and your clients.

For more information, please contact Henry C. T. (Tip) Richmond, III in our Lexington, Ky. Office at 859-899-8712.

Monday, August 15, 2016

Reporting Foreign Bank Accounts

By William Elwood

The IRS has signaled its intention to tighten the thumb screws a bit further on the reporting of foreign bank accounts, in recently published Announcement 2016-27. Under the so-called FATCA (Foreign Account Tax Compliance Act) regulations, to avoid imposition of a 30% US withholding tax, the IRS generally requires complying foreign financial institutions to either register directly with the Treasury, but such institutions may alternatively register with their national authorities if their government has entered into an IGA (inter-governmental agreement) with the US. Because such agreements take time to negotiate, the IRS had rules in Notice 2013-43 that a jurisdiction that has signed, but not yet brought into force, an IGA could be treated as if it had brought the agreement into effect so long as that country was taking steps necessary to bring the IGA into force within a reasonable period of time. This allowed complying financial institutions in over 50 countries to register on the Treasury website and certify to withholding agents that withholding was not required because they were an applicable institution in a jurisdiction covered by an IGA.

Now, in the Announcement, the IRS has signaled impatience with the pace countries are implementing IGAs and held that a country that is treated as though its IGA were in effect and wishes to continue that treatment must provide the Treasury Department detailed additional information by the end of 2016 including why the country has not yet brought its IGA into force and must provide a step-by-step plan that it intends to follow in order to bring the IGA into force. Failure will result in “de-listing” and financial institutions within a de-listed country will face a choice of direct resignation with the Treasury or being subject to FATCA withholding.

For more information, please contact William Elwood in our Washington, D.C. office at 202-659-6972.