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Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

No parking: Unused compensation reductions can’t go to health FSA

Among the many lasting effects of the pandemic is that some businesses are allowing employees to continue working from home — even now that the most acute phases of the public health crisis seem to be over in some places. This decision is raising some interesting questions about fringe benefits.

For example, in IRS Information Letter 2022-0002, the tax agency recently answered an inquiry involving a qualified transportation plan participant whose employer now lets him work from home permanently. To avoid losing dollars he’d previously set aside for parking, the participant asked whether he could transfer unused compensation reductions to his health Flexible Spending Account (FSA), which his employer offered through its qualified cafeteria plan.

No cash refunds

The letter explains that, under an employer’s qualified transportation plan, unused compensation reduction amounts can be carried over to subsequent plan periods and used for future commuting expenses. Caveat: employees can’t receive benefits that exceed the maximum excludable amount in any month.

However, cash refunds aren’t permitted — even to employees whose compensation reduction amounts exceed their need for qualified transportation fringe benefits. Furthermore, the U.S. Code prohibits cafeteria plans from offering qualified transportation fringe benefits. And IRS rules don’t allow unused compensation reduction amounts under a qualified transportation plan to be transferred to a health FSA offered though a cafeteria plan.

The letter also notes that COVID-19-related relief for FSAs gives employers the discretion to amend their cafeteria plans to permit midyear health FSA election changes for plan years ending in 2021.

Note: IRS Information Letters provide general statements of well-defined law without applying them to a specific set of facts. They’re provided by the IRS in response to requests for general information by taxpayers or members of Congress.

Limited flexibility

The qualified transportation rules for fringe benefits have largely proven themselves flexible enough to handle most situations arising from the pandemic.

Many companies permit benefit election changes at least monthly, and plans can allow current participants to carry over unused balances indefinitely. Compensation reductions set aside for one qualified transportation benefit, such as parking, can even be used for a different transportation benefit, such as public transit — again, so long as the plan permits it, and the maximum monthly benefit isn’t exceeded.

However, as the inquisitive participant in the IRS information letter learned, the flexibility of fringe benefit rules has its limits. Because some financial loss could occur due to changing circumstances, businesses should clearly articulate this risk to employees when offering compensation reduction elections.

Complexities to consider

The right fringe benefits can help your business attract and retain good employees. But, as you can see, there are many complexities to consider. Let us help you weigh the risks vs. advantages of any fringe benefits you’re currently offering or considering.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Understanding the terms of health care directives

Estate planning experts usually cite the need to include advance health care directives in a comprehensive estate plan. But there may be different legal names given to those directives, depending on one’s jurisdiction.

In any event, regardless of what they’re called in the state where you reside, it’s important to create these documents and keep your family in the loop. Let’s take a closer look at a few health care directives.

Health care power of attorney

Comparable to a durable power of attorney that gives an “agent” authority to handle your financial affairs if you’re incapacitated, a health care power of attorney (or medical power of attorney) enables another person to make health care decisions for you. This is also called a health care proxy in some states.

Choosing an agent is critical. You probably can’t anticipate every situation that might arise — virtually no one can — in which it’s likely that someone will have to make decisions concerning your health. Therefore, the agent should be a person who knows you well and understands your general outlook. Frequently, this is a family member, close friend or trusted professional. Remember to designate a successor in the event your first choice is unable to do the job.

Living wills

A living will is a legal document that establishes criteria for prolonging or ending medical treatment. It indicates the types of medical treatment you want, or do not want, in the event you suffer from a terminal illness or are incapacitated.

This document doesn’t take effect unless you’re incapacitated. Typically, a physician must certify that you’re suffering from a terminal illness or that you’re permanently unconscious. Address common end-of-life decisions in your living will. This may require consultations with a physician.

The requirements for living wills vary from state to state. Have an attorney who’s experienced in these matters prepare your living will based on the prevailing laws.

DNRs and DNIs

Despite the common perception, it’s not a legal requirement for you to have an advance directive or living will on file to implement a “do not resuscitate” (DNR) or “do not intubate” (DNI) order. To establish a DNR or DNI order, discuss your preferences with your physician and have him or her prepare the paperwork. The order is then placed in your medical file.

Putting directives into action

Advance directives must be put in writing. Each state has different forms and requirements for creating these legal documents. Depending on where you live, you may need to have certain forms signed by a witness or notarized. If you’re unsure of the requirements or the process, contact an attorney for assistance.

Review your advance directives with your physician and your health care agent to be sure you’ve accurately filled out the forms. Then let all the interested parties — including your attorney, physician, power of attorney agent and family members — know where the documents are located and how to access them.

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FMD’s estate planning team will work with you and your legal and financial advisers to design plans that align with your goals and objectives. When it comes to estate planning and wealth preservation, every one of our clients receives the quality of service and personal attention that are the hallmarks of FMD. To learn more about how we can help address your estate planning and wealth preservation needs, contact us today.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Businesses looking for outside investors need a sturdy pitch deck

Is your business ready to seek funding from outside investors? Perhaps you’re a start-up that needs money to launch as robustly as possible. Or maybe your company has been operating for a while and you want to pivot in a new direction or just take it to the next level.

Whatever the case may be, seeking outside investment isn’t as cut and dried as applying for a commercial loan. You need to wow investors with your vision, financials and business plan.

To do so, many businesses today put together a “pitch deck.” This is a digital presentation that provides a succinct, compelling description of the company, its solution to a market need, and the benefits of the investment opportunity. Here are some useful guidelines:

Keep it brief, between 10 to 12 short slides. You want to make a positive impression and whet investors’ interest without taking up too much of their time. You can follow up with additional details later.

Be concise but comprehensive. State your company’s mission (why it exists), vision (where it wants to go) and value proposition (what your product or service does for customers). Also declare upfront how much money you’d like to raise.

Identify the problem you’re solving. Explain the gap in the market that you’re addressing. Discuss it realistically and with minimal jargon, so investors can quickly grasp the challenge and intuitively agree with you.

Describe your target market. Include the market’s size, composition and forecasted growth. Resist the temptation to define the market as “everyone,” because this tends to come across as unrealistic.

Outline your business plan. That is, how will your business make money? What will you charge customers for your solution? Are you a premium provider or is this a budget-minded product or service?

Summarize your marketing and sales plans. Describe the marketing tactics you’ll employ to garner attention and interact with your customer base. Then identify your optimal sales channels and methods. If you already have a strong social media following, note that as well.

Sell your leadership team. Who are you and your fellow owners/executives? What are your educational and business backgrounds? Perhaps above everything else, investors will demand that a trustworthy crew is steering the ship.

Provide a snapshot of your financials, both past and future. But don’t just copy and paste your financial statements onto a few slides. Use aesthetically pleasing charts, graphs and other visuals to show historical results (if available), as well as forecasted sales and income for the next several years. Your profit projections should realistically flow from historical performance or at least appear feasible given expected economic and market conditions.

Identify your competitors. What other companies are addressing the problem that your product or service solves? Differentiate yourself from those businesses and explain why customers will choose your solution over theirs.

Describe how you’ll use the funds. Show investors how their investment will allow you to fulfill your stated business objectives. Be as specific as possible about where the money will go.

Ask for help. As you undertake the steps above — and before you meet with investors — contact our firm. We can help you develop a pitch deck with accurate, pertinent financial data that will capture investors’ interest and help you get the funding your business needs.

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Opening up to SLAT opportunities

Estate tax planning can become complicated when multiple parties are involved. For example, you may be concerned about providing assets to a surviving spouse of a second marriage, while also providing for your children from your first marriage. Of course, you also want to take advantage of favorable estate tax provisions in the law.

Fortunately, there’s a relatively simple way to meet your objectives with few dire tax consequences. It’s commonly called a spousal lifetime access trust (SLAT).

A SLAT in action

Essentially, a SLAT is an irrevocable trust established by a grantor spouse for the benefit of the other spouse — called the beneficiary spouse — plus other family members, such as children and grandchildren. The beneficiary spouse is granted limited access to the trust’s funds. As a result, the assets generally are protected from the reach of the beneficiary spouse’s creditors. This ensures that the remainder beneficiaries — namely, the children and grandchildren — will have a nest egg to rely on.

According to the SLAT terms, lifetime distributions are made to the beneficiary spouse to meet his or her needs. Preferably, if other funds are available to the beneficiary spouse outside of the trust, those funds are used first instead of making regular distributions to the spouse. Otherwise, distributions from the SLAT to the beneficiary spouse will reduce the trust’s effectiveness over time.

Favorable tax provisions

One of the primary attractions of a SLAT is that it’s designed to minimize federal tax liabilities. First, the transfer of assets is treated as a taxable gift, but it can be sheltered from gift tax by a combination of the annual gift tax exclusion ($16,000 for 2022) and the gift and estate tax exemption ($12.06 million for 2022). However, be aware that use of the exemption during the grantor spouse’s lifetime reduces the available estate tax shelter at death.

Second, assets transferred by the grantor spouse to a SLAT are removed from his or her taxable estate. Thus, estate taxes aren’t a concern, thereby allowing the remaining estate tax exemption to be used for other assets.

Third, a SLAT is considered to be a “grantor trust” for income tax purposes. In other words, when a grantor spouse establishes a SLAT for the benefit of the beneficiary spouse, the trust’s taxable income is reported on the grantor’s personal tax return, but the trust entity pays zero tax. This may be advantageous because the assets can compound inside the trust without any income tax erosion. On the death of the grantor spouse, the trust is required to pay income tax.

Other planning considerations

As mentioned above, the transfer of assets to a SLAT is a gift, so the grantor must file a federal gift tax return. Finally, don’t forget that a SLAT is an irrevocable trust. Thus, once the grantor spouse transfers assets to the trust, he or she can’t get them back.

If you’re considering using a SLAT, contact us for additional details.

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Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Congress eyes further retirement savings enhancements

In 2019, the bipartisan Setting Every Community Up for Retirement Enhancement Act (SECURE Act) — the first significant legislation related to retirement savings since 2006 — became law. Now Congress appears ready to build on that law to further increase Americans’ retirement security.

The U.S. House of Representatives passed the Securing a Strong Retirement Act by a 414-5 vote. Also known as SECURE 2.0, the bill contains numerous provisions that — if enacted — would affect both individuals and employers, including in the following areas.

Catch-up contributions

Currently, qualified individuals age 50 or older can make catch-up contributions, on top of the standard contribution limits, to certain retirement accounts — an extra $6,500 for 401(k) plan accounts and $3,000 for SIMPLE plans. Beginning in 2024, SECURE 2.0 would boost those figures for individuals age 62 to 64 to $10,000 for 401(k)s and $5,000 for SIMPLE plans (indexed for inflation). In addition, the $1,000 annual catch-up for IRAs, which hasn’t changed in years, would be indexed going forward.

The bill also would change the taxation of catch-up contributions, reducing the upfront tax savings for those who max out their annual contributions. Such contributions would be treated as post-tax Roth contributions starting in 2023. Under existing law, you can choose whether to make catch-up contributions on a pre- or post-tax basis. SECURE 2.0 would also allow you to determine whether your employer’s matching contributions should be treated as pre- or post-tax. Currently, these contributions can be pre-tax only.

RMDs

The SECURE Act eased the rules for required minimum distributions (RMDs) from traditional IRAs and other qualified plans. It generally raised the age at which you must begin to take your RMDs — and pay taxes on them — from 70½ to 72.

SECURE 2.0 would increase the age over the course of a decade. As of 2023, RMDs wouldn’t be mandated until age 73, going up to age 74 in 2030 and age 75 in 2033. This would give you more time to grow your retirement savings tax-free, bearing in mind that delayed RMDs may translate to larger withdrawal requirements down the road.

The bill would relax the penalty for failing to take full RMDs, too. Currently, the failure results in a 50% excise tax of the amount that should have been withdrawn. SECURE 2.0 would reduce the tax to 25% beginning in 2023. If corrected in a “timely” manner, the penalty would further drop to 10%.

QCDs

Some taxpayers use qualified charitable distributions (QCDs) to satisfy both their RMD requirements and their philanthropic inclinations. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after age 70½. You can’t claim a charitable deduction for this donation, but the distribution is removed from taxable income.

The bill would make this option more attractive. It would annually index the $100,000 limit for inflation. It also would allow you to make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). Both provisions would take effect in the taxable year following enactment of the law.

Automatic enrollment

The House bill would require employers to automatically enroll all newly eligible employees in their 401(k) plans at a deduction rate of at least 3% (but no more than 10%) of the employee’s pay, increasing it by 1% each year until the employee is contributing 10%. Employees could opt out or change their contribution rates.

Annuities

Annuities can help reduce the risk that retirees run out of money during their lifetimes. The SECURE Act encouraged reluctant employers to offer annuities by immunizing them from breach of fiduciary duty liability if they choose an annuity provider that meets certain requirements.

But an actuarial test in the regulations for RMDs has interfered with the availability of annuities. For example, the test commonly prohibits annuities with guaranteed annual increases of only 1% to 2%, return of premium death benefits and period-certain guarantees. Without such guarantees, though, many individuals are hesitant to choose an annuity option in a defined contribution plan or IRA. SECURE 2.0 would specify that these guarantees are allowed. The changes would take effect upon enactment of the law.

Matching contributions on student loan payments

SECURE 2.0 recognizes that many employees are unable to contribute to their retirement accounts because of student loan payment responsibilities. Such employees miss out on matching contributions from their employers.

The bill would allow employers to contribute to certain retirement plans for employees who are making qualified student loan payments. If enacted, this would take effect for contributions made for plan years beginning after 2022.

Part-time employee eligibility

The SECURE Act generally requires employers to allow part-time employees who work at least 500 hours for three consecutive years to participate in their 401(k) plans. Under SECURE 2.0, part-time employees would need to work at least 500 hours for only two consecutive years to be eligible for their employer’s 401(k) plan. The provision would be effective for plan years beginning after 2022.

Small business tax credits

SECURE 2.0 would create or enhance some tax credits for small businesses for tax years after 2022. For example, the SECURE Act increased the potential amount of the credit for retirement plan startup costs by capping it at $5,000 (up from $500). The three-year credit currently is available for 50% of “qualified startup costs” for employers with no more than 100 employees.

The new bill hikes the credit to 100% of qualified costs for employers with up to 50 employees. It provides an additional credit, too, except for defined benefit plans. The additional amount generally is a percentage of the amount the employer contributes on behalf of employees, up to $1,000 per employee. The full additional credit is limited to employers with 50 or fewer employees, gradually phasing out for employers with 51 to 100 employees.

Next steps

While the odds for passage of some form of retirement savings reform seem high in light of the bipartisan support for the SECURE Act and the new House bill, it remains to be seen what form it’ll take. The Senate is working its own bill, and the two would need to be reconciled before it reaches President Biden’s desk. The final legislation could add to, revise or remove the provisions described above. We’ll keep you up to date.

Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

Careful planning required for beneficiaries to borrow from a trust

Intrafamily loans allow you to provide financial assistance to loved ones — often at favorable terms — while potentially reducing gift and estate taxes. But what about families that lack the liquid assets to make such loans? Are there other options if they have a trust?

One lesser-known possibility is for trust beneficiaries to borrow money from a trust. This strategy requires careful planning, however, because the trustee must consider his or her fiduciary duty to the trust and its other beneficiaries in approving and structuring such a loan.

Benefits of intrafamily loans

An intrafamily loan can be a great way to help out your children or other family members financially while also transferring significant amounts of wealth, free of gift and estate tax. Why not simply make an outright gift? Actually, a gift is the better option, so long as your unused exemption is enough to cover it and you don’t need the funds or the interest income. But if transfer taxes are an issue or you’re not prepared to part with the money just yet, a loan can be an attractive alternative.

Generally, to pass muster with the IRS, the interest rate on an intrafamily loan must be at least the applicable federal rate for the month in which the loan is made. Otherwise, the IRS may view the loan as a disguised distribution, which can result in a variety of unpleasant tax complications. The loan should also be documented by a promissory note and otherwise treated as an arm’s-length transaction.

Trust loans vs. distributions

If an intrafamily loan isn’t an option, it may be possible for a trust beneficiary to obtain a loan from the trust. You might wonder why a beneficiary would borrow from the trust rather than take a distribution. There are several situations in which a loan may be necessary or desirable, including:

The trust’s terms place conditions on distributions that aren’t currently satisfied,
The borrower seeks an amount that exceeds limits on distributions imposed by the trust (an income-only trust, for example),
The trust has multiple beneficiaries and the borrower seeks an amount that would be unfair to other beneficiaries if taken as a distribution, or
A loan is preferable for tax planning purposes.

Be sure to check whether trust loans are permissible. Many trust instruments explicitly authorize loans.

Handle with care

There’s a critical difference between intrafamily loans and trust loans: The trustee has a fiduciary duty to manage the trust in a prudent and impartial manner. If you lend money to family members from your personal assets, you’re generally permitted to structure the transaction as you see fit.

However, a trustee considering a loan request must act in the best interests of the trust and all of its beneficiaries. So, for example, a trustee who approves a loan to a current beneficiary who’s a bad credit risk is likely breaching his or her fiduciary duty to the remainder beneficiaries.

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Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

What estate planning strategies are available for non-U.S. citizens?

Are you, or is your spouse, a non-U.S. citizen? If so, several traditional estate planning techniques won’t be available to you. However, if you’re a U.S. resident, but not a citizen, the IRS will treat you similarly to a U.S. citizen.

If you’re considered a resident, you’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $12.06 million federal gift and estate tax exemption and the $16,000 per recipient annual exclusion in 2022. And you can double the annual exclusion to $32,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however.

Understanding residency

Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. A person acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.

Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.

Estate tax law for nonresident aliens

If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $16,000 annual exclusion (although you can’t split gifts with your spouse).

The bad news is that your estate tax exemption drops from $12.06 million to a miniscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property (such as cars, boats and artwork) located in the United States.

Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.

We can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure.

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Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

Power up your trust with Crummey powers

The unified gift and estate tax exemption is set at an inflation-adjusted $12.06 million for 2022, up from $11.7 million for 2021. This means that for many families, estate tax liability isn’t a factor. However, for others, the annual gift tax exclusion continues to be an important estate planning strategy — especially since future tax law changes could lower the gift and estate tax exemption. For this reason, using a Crummey trust in your estate plan remains an important estate planning strategy. Here’s why.

Using the annual exclusion

Under the annual gift tax exclusion, you can give gifts to each recipient, valued up to a specific limit, without incurring any gift tax. The limit for 2022 is $16,000 per recipient. (This amount is indexed for inflation, but only in $1,000 increments.)

Therefore, if you have, for example, three adult children and seven grandchildren, you can give each one $16,000 this year, for a total of $160,000, and pay zero gift tax. The exclusion is per donor, meaning that for a married couple the amount is doubled.

If you give outright gifts, however, you run the risk that the money or property could be squandered, especially if the recipient is young or irresponsible. Alternatively, you can transfer assets to a trust and name a child as a beneficiary. With this setup, the designated trustee manages the assets until the child reaches a specified age.

But there’s a catch. To qualify for the annual exclusion, a gift must be a transfer of a “present interest.” This is defined as an unrestricted right to the immediate use, possession or enjoyment of the property or the income from it. Without certain provisions in the trust language, a gift to the trust doesn’t qualify as a gift of a present interest. Instead, it’s treated as a gift of a “future interest” that’s not eligible for the annual gift tax exclusion.

Giving Crummey powers to a trust

This is where a Crummey trust can come to the rescue. It satisfies the rules for gifts of a present interest without requiring the trustee to distribute the assets to the beneficiary.

Typically, periodic contributions of assets to the trust are coordinated with an immediate power giving the beneficiary the right to withdraw the contribution for a limited time. However, the expectation of the donor is that the power won’t be exercised. (The trust document cannot expressly provide this.)

As a result, the beneficiary’s limited withdrawal right allows the gift to the trust to be treated as a gift of a present interest. Thus, it qualifies for the annual gift tax exclusion. Note that it’s the existence of the legal power — not the exercise of it — that determines the tax outcome.

Avoiding pitfalls

To pass muster with the IRS, the beneficiary must be given actual notice of the withdrawal right, along with a reasonable period to exercise it. Generally, at least 30 days is required. Contact us with additional questions regarding the use of a Crummey trust.

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