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Addressing guns in an estate plan requires special knowledge
When it comes to estate planning, not all assets are created equal. If you own one or more guns, careful planning is required to avoid running afoul of complex federal and state laws. Without proper planning, there’s a risk that the government will confiscate your guns or that the executor of your estate, your trustees or your beneficiaries will inadvertently commit a felony.
Follow federal, state and local laws
Guns are unique among personal property because federal and state laws prohibit certain persons from possessing firearms. For example, under the federal Gun Control Act, “prohibited persons” include convicted felons, fugitives, unlawful drug users or addicts, mentally incompetent persons, illegal or nonimmigrant aliens, persons dishonorably discharged from the armed forces, persons who have renounced their U.S. citizenship, and persons convicted of certain crimes involving domestic violence or subject to certain domestic violence restraining orders.
Other persons may be prohibited from receiving firearms under state or local laws. These restrictions apply not only to your beneficiaries, but also to executors or trustees who come into possession of firearms.
Under federal law, certain firearms — such as short-barreled rifles, shotguns and fully automatic machine guns — must be registered (with the Bureau of Alcohol, Tobacco, Firearms and Explosives) to a transferee by the transferor. And additional steps must be taken when transporting these firearms across state lines. For other types of firearms, states may require registration and may impose mandatory background checks, permits and other requirements for firearms transported across state lines.
Consider a gun trust
Given the complexity of federal and state gun laws, and the stiff penalties for violating them, it’s critical to consult knowledgeable advisors when providing for guns in your estate plan. You might also consider creating a gun trust — with a trustee who has expertise on gun laws, safety and storage protocols, and transfer requirements — to facilitate the process.
© 2023
State of Michigan Exempts Delivery and Installation Charges from MI Sales Tax
The State of Michigan has passed new laws (Public Acts 20 and 21) that exempt delivery and installation charges from Michigan sales tax. Sales after April 25, 2023, can exclude sales tax on delivery and installation charges if those items are separately stated on the invoice. The State will also be retroactively canceling sales tax on delivery and installation charges for any tax not currently paid to the State.
Click here to access the State of Michigan's guidelines regarding these laws and how they will impact your business. Reach out to the FMD team with any questions you might have.
Businesses, be prepared to champion the advantages of an HSA
With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.
Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.
The basics
An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).
In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.
Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.
3 major advantages
There are three major advantages to an HSA to clearly communicate to employees:
1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.
2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.
3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.
An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.
Explain the upsides
Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact FMD for help evaluating the concept and assessing the costs of health care benefits.
© 2023
Avoiding challenges to your estate plan
A primary goal of estate planning is to ensure that your wishes are carried out after you’re gone. So, it’s important to design your estate plan to withstand potential will contests or other challenges down the road.
The most common grounds for contesting a will are undue influence or lack of testamentary capacity. Other grounds include fraud and invalid execution.
There are no guarantees that your plan will be implemented without challenge, but you can minimize the possibility by taking these actions:
Dot every “i” and cross every “t.” The last thing you want is for someone to contest your will on grounds that it wasn’t executed properly. So be sure to follow applicable state law to the letter. Typically, that means signing your will in front of two witnesses and having your signature notarized. Be aware that the law varies from state to state, and an increasing number of states are permitting electronic wills.
Treat your heirs fairly. One of the most effective ways to avoid a challenge is to ensure that no one has anything to complain about. But satisfying all your family members is easier said than done.
For one thing, treating people equally won’t necessarily be perceived as fair. Suppose, for example, that you have a financially independent 30-year-old child from a previous marriage and a 20-year-old child from your current marriage. If you divide your wealth between them equally, the 20-year-old — who likely needs more financial help — may view your plan as unfair.
Demonstrate your competence if you’re concerned about a challenge. There are many techniques you can use to demonstrate your testamentary capacity and lack of undue influence. Examples include:
Have a medical practitioner conduct a mental examination or attest to your competence at or near the time you execute your will.
Choose witnesses you expect to be available and willing to attest to your testamentary capacity and freedom from undue influence years or even decades down the road.
Videotape the execution of your will. This provides an opportunity to explain the reasoning for any atypical aspects of your estate plan and will help refute claims of undue influence or lack of testamentary capacity.
Consider a no contest clause. Most, but not all, states permit the use of no contest clauses. In a nutshell, it will essentially disinherit any beneficiary who challenges your will or trust.
For this strategy to be effective, you must leave heirs an inheritance that’s large enough that forfeiting it would be a disincentive to bringing a challenge. An heir who receives nothing has nothing to lose by challenging your plan.
Use a living trust. By avoiding probate, a revocable living trust can discourage heirs from challenging your estate plan. That’s because without the court hearing afforded by probate, they’d have to file a lawsuit to challenge your plan.
If your estate plan does anything unusual, it’s critical to communicate the reasons to your family. Indeed, explaining your motives can go a long way toward avoiding misunderstandings or disputes. They may not like it, but it’ll be more difficult for them to contest your will on grounds of undue influence or lack of testamentary capacity if your reasoning is well documented. Contact FMD’s estate planning experts for additional details.
© 2023
Strengthen strategic planning with competitive intelligence
Business owners and their leadership teams are rightly urged to engage in regular strategic planning to move their companies, thoughtfully and consciously, in a positive direction.
However, no matter how sound a set of strategic objectives might be, it’s always important to bear in mind that your competitors have plans of their own. That’s why you should consider integrating competitive intelligence into your strategic planning efforts.
What to look for
The term “competitive intelligence” generally refers to the process of legally and ethically gathering and analyzing information about competitors to better anticipate market trends, analyze industry developments and compare business practices. It can help you collect valuable data and analytics about each competitor’s:
Financial performance,
Products and services,
Market position,
Focus or business direction (or related changes),
Growth or expansion plans,
Mergers and acquisitions activity, and
Joint ventures or strategic alliances.
You should also be looking for signs of weakness in competing companies. Have they closed offices or facilities? Do they seem to be desperately looking for employees? Are they embroiled in one or more legal disputes?
How to do it
Putting competitive intelligence into practice may conjure dramatic images of ethically dubious cloak-and-dagger corporate espionage. But there are a multitude of perfectly above-board ways to collect the massive amount of data often available about other businesses.
For starters, simply chatting with customers and prospects, bankers and insurance reps, professional advisors, and other business contacts at trade shows, conferences and other networking events can help keep you in the know.
Back in the office, you can designate an employee (or several) to scan major daily newspapers, community news sources, and trade and other business publications for pertinent stories about your competition and industry. In addition, make sure you’re on the mailing lists for competitors’ brochures, catalogs, press releases, annual plans and other print collateral.
And, of course, there’s the internet. Obviously, you or someone on your team needs to be very familiar with your biggest competitors’ websites and blogs. What are they focused on? What changes are they making — or failing to make?
If competing companies are active on social media, follow those accounts and take note of major announcements, sales and so forth. You may also want to join online discussion groups or forums related to your industry where you might pick up news or clues about competitors.
Additionally, explore harnessing the powerful search engines and resources offered by various third-party providers. For example, Dun & Bradstreet provides industry, market and company-specific intelligence and analytics about both public and private businesses. Meanwhile, the U.S. Securities and Exchange Commission provides free public access to the filings of public companies via its EDGAR database.
Many ways
As you can see, there are many ways to gather competitive intelligence legally and ethically. And what you learn can strengthen your existing strategic planning or even inspire you to go in a new and better direction. Contact us for help integrating relevant financial data and projections into your strategic objectives.
© 2023
Have you planned for long-term health care expenses?
No matter how diligently you prepare, your estate plan can quickly be derailed if you or a loved one requires long-term home health care or an extended stay at an assisted living facility or nursing home. Long-term care (LTC) expenses aren’t covered by traditional health insurance policies or Medicare. So it’s important to have a plan to finance these costs, either by setting aside some of your savings or purchasing insurance. Let’s take a closer look at three options.
1) LTC insurance
An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, transferring (getting in and out of a bed or chair) and maintaining continence.
LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. To qualify, a policy must:
Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.
It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium tax deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.
2) Hybrid insurance
Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have advantages over standalone LTC policies.
For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.
3) Employer-provided plans
Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.
Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.
Think long term
Given the potential magnitude of LTC expenses, the earlier you begin planning, the better. The FMD team can help you review your options and analyze the relative benefits and risks.
© 2023
5 valuation terms that every business owner should know
As a business owner, you’ll likely need to have your company appraised at some point. An appraisal is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. You can even use a business valuation to help kickstart or support strategic planning.
A good way to prepare for the appraisal process, or just maintain a clear big-picture view of your company, is to learn some basic valuation terminology. Here are five terms you should know:
1. Fair market value. This is a term you may associate with selling a car, but it applies to businesses — and their respective assets — as well. In a valuation context, “fair market value” has a long definition:
The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
2. Fair value. Often confused with fair market value, fair value is a separate term — defined by state law and/or legal precedent — that may be used when valuing business interests in shareholder disputes or marital dissolution cases. Typically, a valuator uses fair market value as the starting point for fair value, but certain adjustments are made in the interest of fairness to the parties.
For example, dissenting shareholder litigation often involves minority shareholders who are “squeezed out” by a merger or other transaction. Unlike the “hypothetical, willing” participants contemplated under the definition of fair market value, dissenting shareholders are neither hypothetical nor willing. The fair value standard helps prevent controlling shareholders from taking advantage of minority shareholders by forcing them to accept a discounted price.
3. Going concern value. This valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a company that’s expected to continue operating in the future. The intangible elements of going concern often include factors such as having a trained workforce; an operational plant; and the necessary licenses, systems and procedures in place to continue operating.
4. Valuation premium. Sometimes, because of certain factors, an appraiser must increase the estimate of a company’s value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a “premium.” For example, a control premium might apply to a business interest that possesses the requisite power to direct the management and policies of the subject company.
5. Valuation discount. In some cases, it’s appropriate for an appraiser to reduce the value estimate of a business based on specified circumstances. The reduction amount is commonly referred to as a “discount.” For instance, a discount for lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect that interest’s inability to be converted to cash quickly and at minimal cost.
© 2023
Breathe new life into a trust by decanting it
Building flexibility into your estate plan using various strategies is generally advised. The reason is that life circumstances change over time, specifically evolving tax laws and family situations. One technique that provides flexibility is to provide your trustee with the ability to decant a trust.
Define “decanting”
One definition of decanting is to pour wine or another liquid from one vessel into another. In the estate planning world, it means “pouring” assets from one trust into another with modified terms. The rationale underlying decanting is that, if a trustee has discretionary power to distribute trust assets among the beneficiaries, it follows that he or she has the power to distribute those assets to another trust.
Depending on the trust’s language and the provisions of applicable state law, decanting may allow the trustee to:
Correct errors or clarify trust language,
Move the trust to a state with more favorable tax or asset protection laws,
Take advantage of new tax laws,
Remove beneficiaries,
Change the number of trustees or alter their powers,
Add or enhance spendthrift language to protect the trust assets from creditors’ claims, or
Move funds to a special needs trust for a disabled beneficiary.
Unlike assets transferred at death, assets that are transferred to a trust don’t receive a stepped-up basis, so they can subject the beneficiaries to capital gains tax on any appreciation in value. One potential solution is to use decanting.
Decanting can authorize the trustee to confer a general power of appointment over the assets to the trust’s grantor. This would cause the assets to be included in the grantor’s estate and, therefore, to be eligible for a stepped-up basis.
Follow your state’s laws
Many states have decanting statutes, and in some states, decanting is authorized by common law. Either way, it’s critical to understand your state’s requirements. For example, in some states, the trustee must notify the beneficiaries or even obtain their consent to decanting.
Even if decanting is permitted, there may be limitations on its uses. Some states, for example, prohibit the use of decanting to eliminate beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t authorize decanting, or if its decanting laws don’t allow you to accomplish your objectives, it may be possible to move the trust to a state whose laws meet your needs.
Beware of tax implications
One of the risks associated with decanting is uncertainty over its tax implications. Let’s say a beneficiary’s interest is reduced. Has he or she made a taxable gift? Does it depend on whether the beneficiary has consented to the decanting? If the trust language authorizes decanting, must the trust be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for the marital deduction? Does distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?
Decanting can breathe new life into an irrevocable trust. The FMD Team is pleased to help you better understand the pros and cons of decanting a trust.
© 2023
How businesses can use stress testing to improve risk management
If you’ve been following the news lately, you’ve surely heard or read about the sudden rise in concern about the banking industry. Although the story is still unfolding, an important lesson for business owners is already clear: You’ve got to be constantly on guard against the many risks to your company’s financial solvency.
One way that banks are advised to guard against catastrophic failure is to regularly perform “stress testing.” Doing so entails using various analytical techniques to determine whether and how the institution would be affected by specified financial developments or events.
But this advice isn’t necessarily restricted to banks. Businesses can use stress testing as well to get a better sense of how they should respond to a given threat.
Identify major risks
To get started on a basic stress-testing initiative, you’ll generally need to identify four types of risk to your company:
Operational risks, which cover the day-to-day workings of the business and can include dealing with the impact of a disaster arising from natural causes, human error or intentional wrongdoing,
Financial risks, which involve how the company manages its finances and protects itself from fraud,
Compliance risks, which relate to issues that might attract the attention of government regulators, and
Strategic risks, which refer to the business’s grasp of its own market as well as its ability to respond to changes in customer preferences.
When examining threats in each category, be as specific as possible. No detail or technicality is too small to factor into your assessment.
Meet with your team
Once you’ve identified the pertinent risks in each category, meet with your leadership team and professional advisors to improve your collective understanding of each threat. Even more important, discuss the anticipated financial impact of the identified risks and your company’s ability to absorb or adjust to the projected negative effects.
The ultimate objective is to develop a game plan to mitigate every identified risk. For example, if your business operates in an area prone to natural disasters, such as earthquakes or wildfires, you obviously need an evacuation and disaster recovery plan in place.
But other situations aren’t so obvious. For instance, if your company relies heavily on a key person, you should develop a viable succession plan and consider buying insurance in case that person unexpectedly dies or becomes disabled.
Focus on continuous improvement
Risk management is a continuous improvement process. New threats may emerge, old ones may fade — and even the best-laid plans tend go awry when left untended. Meet with your leadership team at least annually to conduct stress testing and assess the most current threats to your company. Contact us for help gathering and organizing relevant financial data and developing accurate projections.
© 2023
Keep an eye out for executive fraud
Occupational fraud can be defined as crimes committed by employees against the organizations that they work for. Perhaps its most dangerous variation is executive fraud — that is, wrongdoings by those in the C-Suite. Senior-level execs are in a prime position to not only inflict substantial amounts of financial damage, but also severely impair the reputation of the business in question.
While your leadership team is likely made up of trustworthy colleagues, it’s still a good idea to keep an eye out for executive fraud and set up defenses against wrongdoing.
3 points of the triangle
Forensic accountants use a paradigm called “the fraud triangle” to explain why occupational fraud occurs. It has three points:
1. Pressure. Executives may feel they need to maintain a lavish lifestyle that involves things such as multiple real estate properties, expensive cars and exotic vacations. The resulting pressure can drive some individuals to overextend their personal finances until debts become insurmountable. Executives may also feel they have to pump up sales numbers or falsify financial statements to shore up their professional performance.
2. Opportunity. As mentioned, these individuals often have the access and authority to commit fraud without getting caught immediately. This is particularly true when the company doesn’t implement or enforce strong internal controls.
3. Rationalization. Dishonest execs may think “everybody does it” or that they “deserve” more than they legitimately earn. Substance abuse or a gambling problem can also impair judgment.
Beyond internal controls
There’s no doubt that internal controls are imperative to preventing and detecting any occupational fraud. However, to best prevent executive fraud, you may need to take extra steps.
At many businesses, senior managers have the authority to override internal controls. So, for starters, establish strict policies regarding when it’s permissible to do so. If an executive believes an override of internal controls is necessary, require a second opinion and thorough documentation.
Beyond that, mandate anti-fraud training for everyone. Sometimes executives are allowed to opt out of such training; this sends the wrong message to both the execs themselves and everyone else.
Also, set up reporting measures. An anonymous hotline enables rank-and-file workers to share concerns and suspicions about fraud without risking their jobs. Ensure the hotline’s integrity by providing only those who need to know, such as fraud investigators, access to the tips. In fact, to ensure a fair and unbiased investigation of any tip that comes in, consider engaging an external fraud expert to investigate every legitimate-seeming allegation.
In cases of verified executive fraud, don’t shirk your responsibility to prosecute. Many businesses are tempted to sidestep civil litigation or criminal prosecution for fear of bad publicity. But allowing executives to commit fraud with little to no real-world ramifications may only increase the likelihood that it happens again.
Transparency is key
In closing, we’d be remiss not to mention the importance of an empowered audit team. Whether your company uses internal or external auditors, or a combination of both, give them unfettered access to financial records and other pertinent information. If the audit team encounters a roadblock, they need to know whom to contact and how to proceed. Contact us for help preventing fraud at your business, whether from executives or anyone else.
© 2023
Should you move your trust to another state?
There are several reasons why you may want to move a trust to a more favorable jurisdiction. For instance, to avoid or reduce state income tax on the trust’s accumulated ordinary income or capital gains. However, before doing so, it’s critical to understand the risks.
Revocable trust vs. irrevocable trust
Many people retire to states with more favorable tax laws. But just because you move to a state with no income or estate taxes doesn’t mean your trusts move with you. Indeed, for individual income tax purposes, you’re generally taxed by your state of domicile. The state to which a trust pays taxes, however, depends on its situs.
Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for a revocable trust. In fact, it’s possible to change situs for a revocable trust by simply modifying it. Or, if that’s not an option, you can revoke the trust and establish a new one in the desired jurisdiction.
If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved. Some trusts expressly authorize the trustee or beneficiaries to move the trust from one jurisdiction to another.
If the trust document doesn’t designate a situs or establish procedures for changing it, then the trust’s situs depends on several factors. These include applicable state law, where the trust is administered, the trustee’s state of residence, the domicile of the person who created the trust, the location of the beneficiaries and the location of real property held by the trust.
Identifying the risks
Moving a trust presents potential risks for the unwary. For example:
If you move a trust from a state that permits perpetual trusts to one that doesn’t, you may inadvertently limit the trust’s duration.
Some states tax all income derived from a source within the state. If your trust holds real estate or interests in a business located in such a state, that state may tax the income regardless of the trust’s situs.
In some cases, conflicting state laws may cause the same income to be taxed in more than one state.
Also consider other taxes that may have an impact, such as intangibles tax, property tax, and tax on dividends and interest.
Making the right move
Depending on your circumstances, moving a trust may offer tax savings and other benefits. Keep in mind, however, that the laws governing trusts are complex and vary considerably from state to state. FMD’s Estate Planning and Wealth Preservation Team can help you determine whether moving a trust is the right move for you.
© 2023
Plan carefully to avoid GST tax surprises
If you want to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the generation-skipping transfer (GST) tax. Designed to ensure that wealth is taxed at each generational level, the GST tax is among the harshest and most complex in the tax code. It’s also among the most misunderstood.
ABCs of the GST tax
To ensure that wealth is taxed at each generational level, the GST tax applies at a flat, 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. The tax applies to transfers to “skip persons,” including your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you.
There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.
Allocation rules
Even though the GST tax enjoys an inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption ($12.92 million for 2023), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.
The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely solely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST taxes. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.
3 types of GST tax triggers
Three types of transfers may trigger GST taxes:
“Direct skips” — transfers directly to a skip person that are subject to federal gift and estate tax,
Taxable distributions — distributions from a trust to a skip person, or
Taxable terminations — for example, if you establish a trust for your children, a taxable termination occurs when the last child beneficiary dies and the trust assets pass to your grandchildren.
As noted above, the GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — currently allows you to transfer up to $17,000 per year to any number of skip persons without triggering GST tax or using up any of your GST tax exemption. Note, however, that transfers in trust qualify for the exclusion only if certain requirements are met.
Plan carefully
If your estate plan calls for making substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to allocate your GST tax exemption carefully. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.
© 2023
ACA penalties will rise in 2024
Recently, the IRS announced 2024 indexing adjustments to the applicable dollar amount used to calculate employer-shared responsibility penalties under the Affordable Care Act (ACA).
Although next year might seem a long way off, it’s best to get an early start on determining whether your business is an applicable large employer (ALE) under the ACA. If so, you should also check to see whether the health care coverage you intend to offer next year will meet the criteria that will exempt you from a penalty.
The magic number
For ACA purposes, an employer’s size is determined in any given year by its number of employees in the previous year. Generally, if your company has 50 or more full-time employees or full-time equivalents on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone who provides, on average, at least 30 hours of service per week.
Under the ACA, an ALE may incur a penalty if it doesn’t offer minimum essential coverage that’s affordable and/or fails to provide minimum value to its full-time employees and their dependents. The penalty in question is typically triggered when at least one full-time employee receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).
Next year’s penalties
The adjusted penalty amounts per full-time employee for failures occurring in the 2024 calendar year will be:
$2,970, a $90 increase from 2023, under Section 4980H(a), “Large employers not offering health coverage,” and
$4,460, a $140 increase from 2023, under Sec. 4980H(b), “Large employers offering coverage with employees who qualify for premium tax credits or cost-sharing reductions.”
The IRS uses Letter 226-J to inform ALEs of their potential liability for an employer shared responsibility penalty. A response form — Form 14764 (“ESRP Response”) — is included with Letter 226-J so that an ALE can inform the IRS whether it agrees with the proposed penalty. A response is generally due within 30 days. Be on the lookout for this letter so that you’re prepared to promptly review and respond if the IRS contacts you.
Questions and ideas
Careful compliance with the ACA remains critical for companies that qualify as ALEs. Growing small businesses should be particularly wary as they become midsize ones. Our firm can answer any questions you may have about your obligations as well as suggest ways to better manage the costs of health care benefits.
© 2023
U.S. Supreme Court rules against the IRS on critical FBAR issue
The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what’s generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.
Reporting requirement
The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.
According to related regulations, individuals with fewer than 25 accounts in a given year must provide details about each. Filers with 25 or more accounts aren’t required to list each or provide specific details; they need only provide the number of accounts and certain other basic information. FBARs generally are due on April 15, with an automatic extension to Oct. 15 if the April deadline isn’t met.
Under the BSA, a willful violation of the requirement is subject to a civil penalty up to the greater of $100,000 or 50% of the balance of the account at issue. A provision prescribes a penalty of up to $10,000 for a non-willful violation of the filing requirement (with an exception for reasonable cause). Criminal penalties also may be imposed.
Violations at issue
The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.
The IRS deemed his FBARs deficient because they didn’t include all of the relevant accounts. Bittner then filed corrected reports with information for each of his accounts. Although the IRS didn’t contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.
Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.
High court’s ruling
The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.
For example, the Court noted that Congress had explicitly authorized per-account penalties for some willful violations. When Congress includes particular language in one section of a statute but omits that language from another, it explained, the Court normally understands the difference in language as conveying a difference in meaning. In other words, Congress obviously knew how to tie penalties to account-level information if that was its intent.
The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet. These references, the Court said, suggested to the public that the failure to file a report represents a single violation that exposes a non-willful violator to a single $10,000 penalty. (Note: The Supreme Court emphasized that such guidance wasn’t “controlling” or decisive, but only informed its analysis.)
Implications for taxpayers
The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single violation.
As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.
It’s important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness aren’t subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.
Questions remain
The Supreme Court’s ruling in Bittner should bring relief to taxpayers who’ve non-willfully violated the BSA’s filing requirement, but it didn’t clear all uncertainty around FBAR penalties. For example, the Court didn’t address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.
© 2023
Enacting a spendthrift trust can be beneficial to your loved ones
Are you concerned that some of your beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money? You don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. Instead, consider using a spendthrift trust that can provide protection, regardless of how long you live.
As with other trusts, a spendthrift trust may incorporate various tax benefits, but that’s not its primary focus. Indeed, this trust type can help you provide for an heir while protecting assets from his or her potentially imprudent actions.
Spendthrift trust in action
Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.
The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a foolhardy business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.
Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or “as needed” based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.
Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, he or she has full control over that amount. The money can be spent without restriction.
Role of the trustee
Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, and how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.
Although it’s not illegal to name yourself as trustee, this is generally not recommended. More often than not, the trustee will be an attorney, financial planner, investment advisor or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.
Other key considerations
There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You must also establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).
Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to assist you when considering a spendthrift trust.
© 2023
Have you recently reviewed your life insurance needs?
Once upon a time, life insurance played a much larger part in an estate plan than it does now. Why? Families would use life insurance payouts to pay estate taxes. But with the federal gift and estate tax exemption at $12.92 million for 2023, far fewer families currently are affected by estate tax.
However, life insurance remains a powerful tool for providing for your loved ones in the event of your untimely death. The amount of life insurance that’s right for you depends on your personal circumstances, so it’s critical to review your life insurance needs regularly in light of changing circumstances.
Reasons to reevaluate
Consider reevaluating your insurance coverage if you’re:
Getting married,
Getting divorced,
Having children,
Approaching retirement, or
Facing health issues.
The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you pass away.
The events listed above can change the equation, so it’s a good idea to revisit your life insurance needs as you reach these milestones. For example, if you get married and have kids, your current and future obligations are likely to increase significantly for expenses related to childcare, mortgage, car payments and college tuition.
As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.
On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.
Periodic reassessment a must
There are many factors that affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically and especially when your life circumstances change. We can help you determine whether you have an adequate amount of life insurance coverage.
© 2023
Supreme Court: Overtime rules still apply to highly compensated employees
If you were told someone earns more than $200,000 annually, you might assume the person is a salaried employee who’s ineligible for overtime pay. However, as demonstrated in the recent U.S. Supreme Court case of Helix Energy Solutions Group, Inc. v. Hewitt, this isn’t always a safe assumption.
The FLSA rules
Under the Fair Labor Standards Act (FLSA), hourly “nonexempt” wage earners generally must receive overtime pay for hours worked beyond 40 hours per workweek. A workweek doesn’t need to be a calendar week — for example, a Wednesday to Tuesday workweek would qualify.
To be exempt from overtime (and minimum wage) regulations, most employees need to be paid at least $684 per week or $35,568 annually. This is known as the salary level test. An exempt employee must also pass the job duties test, the conditions for which vary by position. For instance, to qualify for the executive exemption, the job duties test stipulates that:
The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise,
The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalents, and
The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other employment status change must be given particular weight.
Case details
In the aforementioned Supreme Court case, the employee involved was a “tool-pusher” whose duties included supervising other offshore oil rig workers. He was paid a daily rate ranging from $963 to $1,341 per day, resulting in earnings of more than $200,000 annually. Under the compensation scheme, the daily rate increased each consecutive day worked.
The employee filed suit claiming his employer violated the FLSA’s overtime provisions. In response, the company argued that he was exempt from overtime pay as a “bona fide executive.”
To qualify for such an exemption, an employee must meet the salary level and job duties tests as mentioned above. But the employee also needs to satisfy the salary basis test. Under FLSA regulations, a bona fide executive may satisfy the salary basis test if the person is a highly compensated employee (HCE) — that is, one who earns at least $107,432 or more per year (or $100,000 per year before January 1, 2020).
The Court’s decision
The Supreme Court held in a 6-3 ruling that an HCE who’s paid at a daily rate is not considered to be paid a salary. Therefore, the employee in question wasn’t exempt from receiving overtime pay.
In its majority opinion, the Court reasoned that the HCE rule isn’t only a “simple income level” test for the purposes of exemption. It noted that the employer could have satisfied the exemption if the daily rate was a weekly guarantee that satisfied applicable regulations, or if compensation had been a straight weekly salary.
The Court wasn’t swayed by the company’s objection that paying a weekly guaranteed daily rate or straight weekly salary would have resulted in the employee receiving compensation for days he didn’t work. According to the Court, this only further showed that the employee wasn’t paid a salary and, thus, didn’t meet the requirements for the exemption from overtime pay.
Current and compliant
The business in this case joined many others that have been tripped up by the FLSA’s rules. If your company pays employees overtime, our firm can help you stay current and compliant with the latest applicable regulations.
Helix Energy Solutions Group, Inc. v. Hewitt, No. 21-984, February 22, 2023 (U.S. Supreme Court)
© 2023
To file or not to file a gift tax return, that is the question
If you made gifts last year you may be wondering if you need to file a gift tax return. The short answer: There are many situations when it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift tax. Let’s take a closer look at the reasons why.
What gifts are considered nontaxable?
The federal gift tax regime begins with the assumption that all transfers of property by gifts (including below-market sales or loans) are taxable. It then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:
Gifts of present interests within the annual exclusion amount ($17,000 per donee in 2023, up from $16,000 in 2022),
Direct payments of qualifying medical or educational expenses on behalf of an individual,
Gifts to political organizations and certain tax-exempt organizations,
Deductible charitable gifts,
Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements, and
Gifts to one’s noncitizen spouse within a special annual exclusion amount ($175,000 in 2023, up from $164,000 in 2022).
If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the federal gift and estate tax exemption ($12.92 million in 2023, up from $12.06 million in 2022).
Are there tax traps to be aware of?
If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:
Future interests. The $17,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $17,000 in 2023 ($16,000 in 2022).
Spousal gifts. As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported.
Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $34,000 for 2023 (up from $32,000 for 2022) to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.
The deadline to file Form 709 for 2022 is April 18. Please contact us if you’re unsure of whether you need to file a gift tax return this year.
© 2023
Provide your heirs the option of creating an inheritor’s trust
Even though it may not be top of mind when you’re developing or revising your estate plan, it’s important to consider how bequeathing assets to your family might affect them. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. Giving a loved one permission to create an inheritor’s trust can help avoid this outcome.
The trust in action
In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of his or her own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate, but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce.
Because the trust, rather than your family member, legally owns the inheritance, and because the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement, but it can provide a significant level of asset protection in the event of divorce.
With an inheritor’s trust, your heir can also realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust can also own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.
Talk to your heirs first
As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Turn to us to help determine whether an inheritor’s trust is right for your situation.
© 2023
Reading the tea leaves: Potential tax legislation in the new Congress
The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.
Retirement catch-ups at risk
The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.
The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.
Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.
Expiring tax provisions
Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.
A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.
But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:
Lower individual tax rates,
Enhancements to the Child Tax Credit (CTC),
Health insurance premium tax credit enhancements,
The New Markets Tax Credit,
The employer credit for paid family and medical leave,
The Work Opportunity Tax Credit,
The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
The increase in the standard deduction,
The suspension of the miscellaneous itemized deduction,
The suspension of the limit on itemized deductions,
The income exclusion for employer payments of student loans,
The suspension of the deduction for personal exemptions,
The limit on the deduction for qualified residence interest,
The suspension of the deduction for home equity interest,
The limit on the deduction for state and local taxes,
The qualified business income deduction,
The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
Empowerment zone tax incentives, and
The increase in the federal gift and estate tax exemption.
At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.
Expired tax provisions
Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.
Individuals also saw the end of several tax provisions at the end of 2021, including the:
CTC expansions created by the American Rescue Plan for some taxpayers,
Expanded child and dependent care credit,
Increased income exclusion for employer-provided dependent care assistance,
Treatment of mortgage insurance premiums as deductible mortgage interest,
Charitable contribution deduction for non-itemizers, and
Increased percentage limits for charitable contributions of cash.
It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.
The FairTax Act
Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.
The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.
Ear to the ground
Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.
© 2023