BLOG
Avoiding probate: How to do it (and why)
Few estate planning subjects are as misunderstood as probate. But circumventing the probate process is usually a good idea, and several tools are available to help you do just that.
Why should you avoid it?
Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs.
Depending on applicable state law, probate can be expensive and time consuming. Not only can probate reduce the amount of your estate due to executor and attorney fees, it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.
Is probate ever desirable? Sometimes. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.
How do you avoid it?
There are several tools you can use to avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)
The right strategy depends on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, you should be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and IRAs, and other retirement plans.
For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind, though, that while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.
What if your estate is more complicated?
For larger, more complicated estates, a revocable trust (sometimes called a living trust) is generally the most effective tool for avoiding probate. A revocable trust involves some setup costs, but it allows you to manage the disposition of all your wealth in one document while retaining control and reserving the right to modify your plan. It also provides a variety of tax-planning opportunities.
To avoid probate, it’s critical to transfer title to all your assets, now and in the future, to the trust. Also, placing life insurance policies in an irrevocable life insurance trust can provide significant tax benefits.
The big picture
Avoiding probate is just part of estate planning. We can help you develop a strategy that minimizes probate while reducing taxes and achieving your other estate planning goals.
© 2023
Yes, you still need an estate plan even if you’re single, without children
There’s a common misconception that only married couples with children need estate plans. In fact, estate planning may be even more important for single people without children. Why? Because for married couples, the law makes certain assumptions about who should make financial or medical decisions on their behalf should they become incapacitated and who should inherit their property if they die.
Who’ll inherit your assets?
It’s critical for single people to execute a will that specifies how, and to whom, their assets should be distributed when they die. Although certain types of assets can pass to your intended recipient(s) through beneficiary designations, absent a will, many types of assets will pass through the laws of intestate succession.
Those laws vary from state to state, but generally, they provide for assets to go to the deceased’s spouse or children. For example, the law might provide that if someone dies intestate, half of the estate goes to his or her spouse and half goes to the children. If you’re single with no children, however, these laws set out rules for distributing your assets to your closest relatives, such as your parents or siblings. Or, if you have no living relatives, your assets may go to the state.
By preparing a will, you can ensure that your assets are distributed according to your wishes, whether to family, friends or charitable organizations.
Who’ll make financial decisions on your behalf?
It’s a good idea to sign a durable power of attorney. This document appoints someone you trust to manage your investments, pay your bills, file your tax returns, and otherwise make financial decisions should you become incapacitated.
Although the law varies from state to state, typically, without a power of attorney, a court would have to appoint someone to make these decisions on your behalf. Not only will you have no say in who the court appoints, but the process can be costly and time-consuming.
Who’ll make medical decisions on your behalf?
You should prepare a living will, a health care directive (also known as a medical power of attorney), or both to ensure that your wishes regarding medical care — particularly resuscitation and other extreme lifesaving measures — are carried out in the event you’re incapacitated. These documents can also appoint someone you trust to make medical decisions that aren’t expressly addressed.
Absent such instructions, the laws in some states allow a spouse, children, or other “surrogates” to make these decisions. In the absence of a suitable surrogate, or in states without such laws, medical decisions are generally left to the judgment of health care professionals or court-appointed guardians.
Contact your FMD advisor if you fall into the category of being single without children. We can help draft an estate plan that’s best suited for you.
© 2023
Should your business add a PTO buying feature to its cafeteria plan?
With the pandemic behind us and a red-hot summer in full swing, many of your company’s employees may be finally rediscovering the uninhibited joys of vacation.
Your workers might be having so much fun, in fact, that they might highly value being able to buy even more paid time off (PTO) as an employee benefit. Such a perk could also catch the attention of job candidates. Well, it’s all possible if your business sponsors a cafeteria plan (sometimes referred to as a Section 125 plan).
Compliance requirements
A “PTO buying” feature under a cafeteria plan allows employees to prospectively elect, during the annual open enrollment period before the beginning of each plan year, to buy additional PTO beyond that which they’d otherwise receive from their employer. These purchases typically occur via salary reductions or flex credits.
The rules for PTO buying under a cafeteria plan are complex, but let’s review a couple of the most critical compliance requirements. First, the PTO buying feature must not defer compensation from one plan year to the next. This means that PTO bought under the cafeteria plan generally must be used, cashed out, or forfeited by the end of the plan year. Employees can’t carry over the PTO for use in a later plan year.
If you opt to permit employees to cash out unused PTO at the end of the plan year, you’ll need to clearly inform them that these dollars will be included in their taxable income. Employers can also choose to set up the plan feature so that employees simply forfeit unused PTO when the plan year ends. However, before going this route, you should check into whether your state’s laws restrict such forfeitures.
Second, something called the “ordering rule” applies. The IRS refers to additional PTO bought through a cafeteria plan as “elective” PTO. The ordering rule requires employees to use nonelective PTO before elective PTO. Thus, they can use their purchased PTO only after exhausting all PTO earned under normal compensation.
The practical consequence of the ordering rule is that employees must expend all their PTO — whether elective or nonelective — to prevent a cash-out or forfeiture of any elective PTO at the end of the plan year. Thus, a PTO buying feature under a cafeteria plan may not be a good fit for businesses with PTO policies that allow employees to carry over unused nonelective PTO to future years. And, again, a buying feature might conflict with state laws that prohibit forfeiture of unused PTO.
An appealing benefit
Being able to buy additional PTO may not only be an appealing way to give employees more “beach time,” but also (and on a more serious note) a means of giving staff members more flexibility to care for their mental health. However, as mentioned, the rules involved are complex, so you’ll need to design and manage this cafeteria-plan feature carefully. Contact FMD for further information and assistance.
© 2023
How can an estate plan be kept vital after death?
When a loved one passes away, you might think that the options for his or her estate plan have also been laid to rest. But that isn’t necessarily the case. Indeed, there may be postmortem tactics the deceased’s executor (or personal representative), spouse or beneficiaries can employ to help keep his or her estate plan on track.
Make a QTIP trust election
A qualified terminable interest property (QTIP) trust can be a great way to use the marital deduction to minimize estate tax at the first spouse’s death and limit the surviving spouse’s access to the trust principal. For the transfer of property to the trust to qualify for the deduction, a QTIP trust election must be made on an estate tax return.
QTIP trust assets ultimately are subject to tax as part of the surviving spouse’s estate. In some cases, including more assets in the estate of the first spouse to die can minimize the overall estate tax. In such a situation, the deceased spouse’s executor may decide not to make the QTIP trust election or to make a partial QTIP trust election.
Use a qualified disclaimer
A qualified disclaimer is an irrevocable refusal to accept an interest in property from a will or living trust. Under the right circumstances, a qualified disclaimer can be used to redirect property to other beneficiaries in a tax-efficient manner.
To qualify, a disclaimer must be in writing and delivered to the appropriate representative. The disclaimant has no power to determine who’ll receive the property. Rather, it must pass to the transferor’s spouse or to someone other than the disclaimant, according to the terms of the underlying document making the transfer — such as a will, a living or testamentary trust, or a beneficiary form.
Take advantage of exemption portability
Portability helps minimize federal gift and estate taxes by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. For 2023, the exemption is $12.92 million.
Bear in mind that portability isn’t automatically available. It requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return. Unfortunately, many estates fail to make the election because they’re not liable for estate tax and, therefore, aren’t required to file a return. These estates should consider filing an estate tax return for the sole purpose of electing portability. The benefits can be significant.
Keep on track
Following the death of a loved one, there may be steps that can be taken to keep his or her estate plan on the right track toward accomplishing his or her goals. To help ensure your loved one’s plan isn’t derailed, discuss your options with FMD.
© 2023
Consider adverse media screening to vet vendors, customers and others
Whether you know it or not, if your business has ever applied for a commercial loan, you’ve likely been subject to “adverse media screening.” Under this commonly used practice, a prospective borrower is “screened against” various media sources to determine whether the person or entity has been a party to any suspicious, unethical, or illegal activities.
Well, two can play that game. Many companies now use adverse media screening to evaluate key vendors, business partners (such as in joint ventures), or major customers that will demand a substantial amount of time and resources. Vetting such parties can help you uncover issues — such as accusations of fraud or litigation for nonpayment — that could make you think twice about getting involved with them.
4 steps to safe screening
Given the vast amount of online data and the potential legal risks in play, conducting adverse media screening requires a careful, methodical approach. Consider taking these four steps:
1. Develop a formal policy. To ensure that adverse media screening meets your needs without triggering legal exposure, draft a formal policy governing its usage. Among other things, the policy should:
Identify the sources you intend to access,
Clarify what actions are off-limits, and
State how you plan to use any negative information discovered.
Ask your attorney to review the policy before rolling it out.
2. Create clear categories. Adverse media screening can cover a broad range of activities. So, create various categories to consistently classify potential red flags. Examples might include civil proceedings, criminal misconduct, environmental violations, regulatory scrutiny, and financial crimes. Doing so will help focus your due diligence efforts and make it easier to analyze information sources.
3. Verify everything. To generate traffic, some news outlets do little to verify the accuracy of their stories. Rely only on information providers with high ethical standards and established histories of accurate reporting. This is particularly important when using social media. For any accusation or story, always look for corroboration and verification from multiple reputable sources.
4. Automate the process, if necessary. Rather than relying on employees to manually research and gather information, you can procure software that uses artificial intelligence to scan the internet and analyze massive amounts of data. This may entail a substantial investment, so it’s not something to consider until and unless the volume of adverse media screening you’ll be doing grows to a certain point.
An enhancement, not a replacement
To be clear, adverse media screening is a potential enhancement to the due diligence process that every business should use when scrutinizing vendors, partners, and big customers. It shouldn’t replace fundamental steps like checking credit reports and following up on references. FMD can help you assess the costs vs. benefits of allocating resources to this practice.
© 2023
Strong billing processes are critical to healthy cash flow
Once a business is up and running, one fundamental aspect of operations that’s easy to take for granted is billing. Often, a system of various processes is put in place and leadership might consider occasional billing mistakes to be part of the “cost of doing business.”
However, to keep your company financially fit, it’s imperative to regularly check in on your billing processes to ensure they’re as efficient, effective, and accurate as possible.
Resolve mistakes quickly
Many billing problems originate from a gradual deterioration in the quality of products or services. You may be giving customers an excuse not to pay their bills if products are showing up late or damaged — or not at all. The same goes for services that aren’t provided in a timely, satisfactory, or professional manner.
When it comes to billing processes, common mistakes include invoicing a customer for an incorrect amount or failing to apply promised discounts or special offers. Be sure to listen to customer complaints and track errors so you can identify trends and implement effective solutions.
In addition, regularly verify account information to make sure invoices and statements are accurate and going to the right people. Set clear standards and expectations with customers — both verbally and in writing — about your policies regarding pricing, payment terms, credit, and delivery times.
On the flip side, work closely with your managers and supervisors to ensure employees are well-trained to enforce billing policies. Staff members should prioritize quick resolutions to billing mistakes and disputes. They should also ask customers to pay any portion of a bill not in question. Once the matter is resolved, the customer should be politely asked to pay off the remainder immediately.
Tighten up timeliness
For invoice-based businesses, regularly sending out bills late can negatively impact collections. Familiarize yourself with current industry norms before setting payment schedules.
Traditionally, such schedules tend to be based on 30-, 45- or 60-day cycles. But times may have changed — particularly now that so much billing is done electronically. What’s more, many companies permit their most important or largest customers to set their own customized payment schedules. If this is the case for you, be sure to adjust your cash flow expectations and projections to recognize these variances.
As mentioned, today’s technology is driving how most businesses handle billing. An automated system can generate invoices when work is complete, flag problem accounts, and generate useful financial reports.
If you haven’t already, consider sending invoices electronically and enabling customers to pay online. Doing so can greatly speed up payment. Like any software, however, you’ll need to reassess it from time to time to determine whether you need an upgrade.
Control what you can
There are so many aspects to doing business that are unpredictable — the global, national, and local economies; customer tastes and demands; and disruptive competitors. That’s why it’s so important for business owners to be proactive about the things they can control. FMD will help you assess the efficacy of your billing processes and identify ways to improve cash flow.
© 2023
The time to make health care decisions is when you’re healthy
When it comes to estate planning, your ultimate goal likely is to provide for your family after your death. To achieve this goal, consider placing assets in an irrevocable trust to protect against creditors and drafting a will to clearly state who gets what.
But estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones during your life. In this regard, it’s important to have a plan in place for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it’ll be too late.
2 documents, 2 purposes
To ensure that your health care wishes are carried out and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).
Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.
For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide healthcare providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.
Living will
A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.
Living wills often contain a do not resuscitate order, which instructs medical personnel to not perform CPR in the event of cardiac arrest.
HCPA
An HCPA authorizes a surrogate — your spouse, child, or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.
An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.
Put your plan into action
No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and healthcare providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where they are. Also, keep in mind that healthcare providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically. Contact FMD with questions.
© 2023
IRS Reminds Employers of New Electronic Filing Requirements for Forms W-2, W-2c
The IRS reminds employers that the new lower threshold for required electronic filing of information returns applies to tax year 2023 Forms W-2, Wage and Tax Statement, because they are required to be filed by January 31, 2024.
In T.D. 9972 (TAXDAY, 2023/02/22, I.1), the required electronic filing threshold for certain information returns (including the 1099 series forms and most Forms W-2) was reduced from 250 returns to 10 returns. This new lower threshold is effective for information returns required to be filed in calendar years beginning with 2024. Employers determine whether they must file their information returns electronically by adding the number of information returns and the number of Forms W-2 they must file in a calendar year. If the total is 10 or more, they must file the returns electronically.
Corrected information returns, like Form W-2c, should be treated separately and are not included in this calculation. The employer must file Form W-2c which corrects the original Form W-2 in the same way that the original Form W-2 was filed, electronically or on paper.
Further information on Forms W-2 and W-2c can be found at: About Form W-2 and About Form W-2c.
IRS provides transitional relief for RMDs and inherited IRAs
The IRS has issued new guidance providing transitional relief related to recent legislative changes to the age at which taxpayers must begin taking required minimum distributions (RMDs) from retirement accounts. The guidance in IRS Notice 2023-54 also extends relief already granted to taxpayers covered by the so-called “10-year rule” for inherited IRAs and other defined contribution plans.
The need for RMD relief
In late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act brought numerous changes to the retirement and estate planning landscape. Among other things, it generally raised the age at which retirement account holders must begin to take their RMDs. The required beginning date (RBD) for traditional IRAs and other qualified plans was raised from age 70½ to 72.
Three years later, in December 2022, the SECURE 2.0 Act increased the RBD age for RMDs further. This year the age increased to 73, and it’s scheduled to climb to 75 in 2033.
The RBD is defined as April 1 of the calendar year following the year in which an individual reaches the applicable age. Therefore, an IRA owner who was born in 1951 will have an RBD of April 1, 2025, rather than April 1, 2024. The first distribution made to the IRA owner that will be treated as a taxable RMD will be a distribution made for 2024.
While the delayed onset of RMDs is largely welcome news from an income tax perspective, it has caused some confusion among retirees and necessitated updates to plan administrators’ automatic payment systems. For example, retirees who were born in 1951 and turn 72 this year may have initiated distributions this year because they were under the impression that they needed to start taking RMDs by April 1, 2024.
Administrators and other payors also voiced concerns that the updates could take some time to implement. As a result, they said, plan participants and IRA owners who would’ve been required to start receiving RMDs for calendar year 2023 before SECURE 2.0 (that is, those who reach age 72 in 2023) and who receive distributions in 2023 might have had those distributions mischaracterized as RMDs. This is significant because RMDs aren’t eligible for a tax-free rollover to an eligible retirement plan, so the distributions would be includible in gross income for tax purposes.
The IRS response
To address these concerns, the IRS is extending the 60-day deadline for rollovers of distributions that were mischaracterized as RMDs due to the change in the RBD from age 72 to age 73. The deadline for rolling over such distributions made between January 1, 2023, and July 31, 2023, is now September 30, 2023.
For example, if a plan participant born in 1951 received a single-sum distribution in January 2023, and part of it was treated as ineligible for a rollover because it was mischaracterized as an RMD, the plan participant will have until the end of September to roll over that portion of the distribution. If the deadline passes without the distribution being rolled over, the distribution will then be considered taxable income.
The rollover also applies to mischaracterized IRA distributions made to an IRA owner (or surviving spouse). It applies even if the owner or surviving spouse rolled over a distribution within the previous 12 months, although the subsequent rollover will preclude the owner or spouse from doing another rollover in the next 12 months. (The individual could still make a direct trustee-to-trustee transfer.)
Plan administrators and payors receive some relief, too. They won’t be penalized for failing to treat any distribution made between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse) as an eligible rollover distribution if the distribution would’ve been an RMD before SECURE 2.0’s change to the RBD.
The 10-year rule conundrum
Prior to the enactment of the original SECURE Act, beneficiaries of inherited IRAs could “stretch” the RMDs on the accounts over their entire life expectancies. The stretch period could run for decades for younger heirs, allowing them to take smaller distributions and defer taxes while the accounts grew. These heirs then had the option to pass their IRAs to later generations, potentially deferring tax payments even longer.
To accelerate tax collection, the SECURE Act eliminated the rules permitting stretch RMDs for many heirs (referred to as designated beneficiaries, as opposed to eligible designated beneficiaries, or EDBs). For IRA owners or defined contribution plan participants who died in 2020 or later, the law generally requires that the entire balance of the account be distributed within 10 years of death. The rule applies regardless of whether the deceased dies before, on or after the RBD for RMDs from the plan. (EDBs may continue to stretch payments over their life expectancies or, if the deceased died before the RBD, may elect the 10-year rule treatment.)
According to proposed IRS regulations released in February 2022, designated beneficiaries who inherit an IRA or defined contribution plan before the deceased’s RBD can satisfy the 10-year rule by taking the entire sum before the end of the calendar year that includes the 10-year anniversary of the death. Notably, though, if the deceased dies on or after the RBD, designated beneficiaries would be required to take taxable annual RMDs (based on their life expectancies) in years one through nine, receiving the remaining balance in year 10. They can’t wait until the end of 10 years and take the entire account as a lump-sum distribution. The annual RMD rule would provide designated beneficiaries less tax-planning flexibility and could push them into higher tax brackets during those years, especially if they’re working.
The 10-year rule and the proposed regs left many designated beneficiaries who recently inherited IRAs or defined contribution plans bewildered as to when they needed to begin taking RMDs. For example, the IRS heard from heirs of deceased family members who died in 2020. These heirs hadn’t taken RMDs in 2021 and were unsure whether they were required to take them in 2022.
In recognition of the lingering questions, the IRS previously waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD. The latest guidance extends that relief by excusing 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.
The relief means covered individuals needn’t worry about being hit with excise tax equal to 25% of the amounts that should’ve been distributed but weren’t (or 10% if the failure to take the RMD is corrected in a timely manner). And plans won’t be penalized for failing to make an RMD in 2023 that would be required under the proposed regs.
Final regs are pending
The IRS also announced in the guidance that final regs related to RMDs will apply for calendar years no sooner than 2024. Previously, the agency had said final regs would apply no earlier than 2023. We’ll let you know when the IRS publishes the final regs and how they may affect you. Contact FMDwith any questions.
© 2023
How to address your frequent flyer miles in your estate plan
If you’re a frequent traveler, you may have accumulated hundreds of thousands or even millions of frequent flyer miles. The value of these miles may be significant, so it’s important to determine whether you can include them in your estate plan and share them with your loved ones.
Learn your options
Your ability to transfer miles at death (or any other time) is governed by your contract with the airline, which requires you to accept a long list of terms and conditions when you join its frequent flyer program. Most programs make it clear that miles aren’t your property and that you’re not entitled to transfer them during your lifetime or at death. But many programs provide that the airline may transfer miles to authorized persons at their discretion.
For example, American Airlines’ rules state that miles are nontransferable, but that, in the event of death, the airline “in its sole discretion, may credit accrued mileage to persons specifically identified in court approved divorce decrees and wills upon receipt of documentation satisfactory to American Airlines and upon payment of any applicable fees.” Anecdotal evidence indicates that American routinely grants these requests and often waives the fees.
Read the fine print
There are no guarantees, but you can maximize the chances that an airline will honor your wishes by including a provision in your will, leaving your frequent flyer miles to one or more beneficiaries. It may be beneficial to put on your reading glasses and read the fine print of your frequent flyer mile programs. Your attorney can answer questions on how to address your miles (or other odd assets, such as a firearms collection) in your estate plan.
© 2023
You’ve been asked to serve as executor, now what?
If you’ve been asked to serve as executor of the estate of a friend or family member, be sure you understand the responsibilities and potential risks before you agree. Keep in mind that you’re not required to accept the appointment, but once you do it’s more difficult to extricate yourself should you change your mind.
Here are some questions to consider before accepting the offer:
What’s your relationship to the individual? If he or she is a close family member, consider not accepting the appointment if you think your grief after his or her death will make it difficult to function effectively in the executor role.
Are you willing and able to take on the duties of an executor? Generally, an executor is responsible for arranging probate, identifying and taking custody of the deceased’s assets, making investment decisions, filing tax returns, handling creditors’ claims, paying the estate’s expenses, and distributing assets according to the will. Although you can seek help from professionals — such as attorneys, accountants, and investment managers — it’s still a lot of work, sometimes for little or no compensation. Ask if there’s an executor’s fee and whether the estate has set aside funds to pay for professional advisors.
What’s your location? If you live far away from the place where the assets and beneficiaries are located, the job will be more difficult, time-consuming, and expensive.
Do you have a good relationship with the beneficiaries? If not, accepting the appointment may put you in a difficult position, especially if you’re also a beneficiary and the other beneficiaries view that as a conflict of interest.
Will the estate pay your expenses? Even if you receive no fee or commission for serving as executor, be sure the estate will pay, or reimburse you, for any out-of-pocket costs.
Finally, some individuals appoint co-executors. For example, they may select one person who knows the family and understands its dynamics and an independent executor with the requisite expertise. So, be sure you know if you’ll be serving as executor solo or with a partner. Having a co-executor may come as a relief or it may add more complications. Contact your FMD advisor for additional information.
© 2023
Hiring family members can offer tax advantages (but be careful)
Summertime can mean hiring time for many types of businesses. With legions of working-age kids and college students out of school, and some spouses of business owners looking for part-time or seasonal work, companies may have a much deeper hiring pool to dive into this time of year.
If you’re considering hiring your children or spouse, there could be some tax advantages in play. However, you’ll need to be careful about following the IRS rules.
Employing your kids
Children who work for the business of a parent are subject to income tax withholding regardless of age. If the company is a partnership or corporation, children’s wages are also subject to Social Security and Medicare taxes (commonly known as FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes — unless each partner is a parent of the child.
However, substantial savings are possible for a business that’s a sole proprietorship or a partnership in which each partner is a parent of the child-employee. In such cases:
Children under age 18 aren’t subject to FICA or FUTA taxes, and
Children who are 18 to 20 years old are subject to FICA taxes but not FUTA taxes.
As you can see, substantial tax savings may be in the offing depending on your child’s age. Avoiding FICA or FUTA taxes, or both, means more money in your pocket and that of your child.
It’s also worth noting that children generally are taxed at lower rates than their parents. Moreover, a child’s income can be offset partially or completely by the child’s standard deduction ($13,850 for single taxpayers in 2023). If your child earns less than the standard deduction, income is tax-free for the child on top of being deductible for the business.
Hiring your spouse
When your spouse goes to work for your business, that individual’s wages are subject to income tax withholding and FICA taxes — but not FUTA taxes. Employers generally must pay 6% of an employee’s first $7,000 in earnings as the FUTA tax, subject to tax credits for state unemployment taxes paid. Thus, you’ll save the money you’d otherwise spend for a nonspouse employee’s FUTA taxes.
It’s important that your spouse is treated and compensated as an employee. When spouses run a business together, and they share in profits and losses, the IRS may deem them partners — even in the absence of a formal partnership agreement.
You also may reap some savings from hiring your spouse if you’re a sole proprietor and have a Health Reimbursement Arrangement (HRA). Your family can receive tax-free reimbursement from the business for medical expenses, and the business can deduct the reimbursements — reducing your income and self-employment taxes. HRA reimbursements aren’t subject to FICA taxes and the plan itself is a tax-free fringe benefit for your spouse. Do note, however, that this strategy isn’t available if you have other employees.
Handling it properly
Whether you decide to hire a child or spouse, or both, you’ll need to step carefully. Assign them actual job duties, pay them a reasonable amount, and keep thorough employment records (including timesheets as well as IRS Forms W-4 and I-9). Essentially, treat them as you would any other employee. The FMD team can help you handle the situation properly.
© 2023
Virtual currency lands in the IRS’s crosshairs
While the value of virtual currency continues to fluctuate, the IRS’s interest in it has only increased. In 2021, for example, the agency launched Operation Hidden Treasure to root out taxpayers who don’t report income from cryptocurrency transactions on their federal income tax returns.
Moreover, the Inflation Reduction Act, enacted in 2022, allocated $80 billion to the IRS, with much of it designated for enforcement activities. However, the Fiscal Responsibility Act, enacted in May 2023, will claw back $21.39 billion of that amount by the end of 2025. The IRS’s strategic operating plan for 2023 through 2031 lays out the agency’s intention to ramp up enforcement related to digital assets. If you buy, sell or otherwise engage in transactions involving virtual currency, you need to stay up to date with the latest tax developments.
Terminology
The IRS defines a “virtual asset” as any virtual representation of value that’s recorded on a cryptographically secured distributed ledger or similar technology. The term includes:
Convertible virtual currency (meaning it has an equivalent value in real currency or acts as a substitute for real currency) such as Bitcoin,
Stablecoins (a type of currency whose value is tied to the value of another asset, such as the U.S. dollar), and
Non-fungible tokens (NFTs).
According to the IRS, cryptocurrency is an example of a convertible virtual currency that can be used as a payment for goods and services, digitally traded between users, and exchanged for or into real currencies or digital assets. Cryptocurrency uses cryptography to secure transactions that are digitally recorded on a distributed ledger (for example, blockchain).
Taxation of transactions
For federal tax purposes, digital assets are treated as property. Thus, transactions involving virtual currency are subject to the same general tax rules that apply to property transactions, such as purchases and sales of stock or real estate.
Several types of virtual currency transactions can trigger reporting obligations, including:
Sales. If you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. The gain or loss equals the difference between your adjusted tax basis in the currency and the amount you receive for it. You should report the amount you receive on your federal income tax return in U.S. dollars (see below for more information on reporting obligations).
Your basis is the amount you spent to acquire the virtual currency, including fees, commissions, and other costs. Your adjusted basis is your basis increased by certain expenditures and reduced by certain deductions or credits.
Property exchanges. If you exchange virtual currency that you hold as a capital asset for other property (including goods or other digital assets), you must recognize a capital gain or loss. The gain or loss is the difference between the fair market value (FMV) of the property you receive and your adjusted tax basis in the virtual currency. If, as part of an arm’s length transaction, you transfer a digital asset and receive other property in exchange, your tax basis in the property you receive is its FMV at the time of the exchange.
Payment for services. If you receive virtual currency for performing services — regardless of whether you perform the services as an employee or an independent contractor — you recognize the FMV of the currency when received as ordinary income. The FMV will also be your tax basis in that asset.
On the flip side, if you pay for a service using virtual currency that you hold as a capital asset, you’ve exchanged a capital asset for the service and will have a capital gain or loss. In addition, the FMV of virtual currency that’s paid as wages, at the date of receipt, is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax. It also must be reported on Form W-2, “Wage and Tax Statement.”
Reporting obligations
You may have noticed a new line on your individual federal income tax return in recent years. The 2022 version asks:
“At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
If you answer “yes,” you must report all related income, whether as income, a capital gain or loss, or otherwise (for example, as a gift).
The Infrastructure Investment and Jobs Act (IIJA), enacted in late 2021, created additional new reporting requirements for digital asset transactions. These provisions were enacted with an eye toward generating additional tax revenues to help fund infrastructure projects. The requirements provide the IRS with more information to work from and establish more potential compliance tripwires for taxpayers who engage in virtual currency transactions.
The IIJA expanded the definition of brokers that are required to report their customers’ gains and losses on the sale of securities during the tax year to the IRS on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions.” The form generally requires a description of each sale, the cost basis, the acquisition date and price, the sale date and price, and the resulting short- or long-term gain or loss.
Under the IIJA, operators of trading platforms for digital assets, such as cryptocurrency exchanges, are subject to the same reporting requirements as traditional securities brokers. The effective date remains to be seen, though, as the IRS hasn’t yet issued final regulations with instructions. After the new rules take effect, cryptocurrency platforms will need to collect Form W-9, “Request for Taxpayer Identification Number and Certification,” from their customers.
The IIJA also amended existing anti-money laundering laws to treat digital assets as cash for purposes of those laws. As a result, beginning in 2023, businesses must report to the IRS when they receive more than $10,000 in digital assets in one transaction or multiple related transactions.
Such transactions should be reported on IRS Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business.” To complete the form, a business will need to gather the name, address, and taxpayer identification number, among other information, from the payer. Failure to comply may lead to significant civil and criminal penalties.
Enforcement tool
One way the IRS may uncover digital assets is through the use of a “John Doe summons.” The U.S. Department of Justice notes that “because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS.” By asking a court to serve a John Doe summons on a crypto dealer or exchange, the IRS can find out information about a person’s account.
In one recent case, an individual challenged the IRS’s use of a summons to obtain his account information from a virtual currency exchange. He argued it was unconstitutional. A U.S. District Court disagreed and ruled that the IRS’s actions “fall squarely” within its powers to pursue unpaid taxes. (Harper, DC NH, 5/26/23)
An evolving area
With its new infusion of enforcement funding, the IRS’s focus on virtual currency transactions is likely to intensify. FMD helps you stay in compliance with the applicable rules and requirements.
© 2023
In financial planning, forecasts and projections aren’t the same
Businesses are rightly encouraged to regularly generate professionally prepared financial statements. Doing so is important for both understanding your own financial position and providing accurate, comprehensive information to stakeholders such as investors, lenders, and advisors.
However, keep in mind that financial statements are historical records. They depict the state of the company at a given point in time — not where it will likely be in the future. For the latter purpose, you need to create either a forecast or a projection. But aren’t those two things the same? Not exactly.
Defining the terms
The American Institute of Certified Public Accountants (AICPA) addresses the distinction under its AICPA Attestation Standards Section 301, Financial Forecasts and Projections. The organization differentiates the two terms as follows:
Forecast. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.
Projection. Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, “What would happen if…?”
Making the distinction
Indeed, the terms “forecast” and “projection” are sometimes used interchangeably. However, as the AICPA’s definitions make clear, there’s a noteworthy distinction. That is, a forecast represents expected results based on the expected course of action. These are the most common type of prospective reports for companies with steady historical performance that plan to maintain the status quo.
On the flip side, a projection estimates the company’s expected results based on various hypothetical situations. These statements are typically used when management is uncertain whether performance targets will be met. Thus, they may be more appropriate for start-ups, fast-growing or transforming companies, or businesses evaluating long-term results where customer demand or market conditions will likely change.
Rolling along
Regardless of whether you opt for a forecast or projection, the report will generally be organized using the same format as your financial statements — with an income statement, balance sheet, and cash flow statement. Most prospective statements conclude with a summary of key assumptions underlying the numbers. Such assumptions should be driven by your company’s historical financial statements, along with a detailed sales budget for the year.
Instead of relying on static forecasts or projections — which can quickly become outdated in an unpredictable marketplace — some companies now use rolling 12-month versions that are adaptable and look beyond year-end. Doing so enables you to better identify and respond to weaknesses in your assumptions, as well as unexpected changes to your situation.
For example, a business that suddenly experiences a shortage of materials could experience an unexpected drop in sales until conditions improve. If the company maintains a rolling forecast, it should be able to revise its financial plans more effectively for such a temporary disruption.
Getting in the ballpark
Bear in mind that few forecasts or projections are completely accurate. The future really is that hard to predict. However, a carefully created and timely forecast or projection can “put you in the ballpark” of what’s to come and help your business succeed at financial planning. FDM can assist you in generating properly prepared financial statements as well as useful forecasts and projections.
© 2023
Prepare for an uncertain federal gift and estate tax exemption amount with a SLAT
For 2023, the federal gift and estate tax exemption amount stands at $12.92 million ($25.84 million for married couples). But without action from Congress, on January 1, 2026, it’s scheduled to drop to only $5 million ($10 million for married couples). Based on current estimates, those figures are expected to be adjusted for inflation to a little over $6 million and $12 million, respectively.
If you expect your estate’s worth to exceed those estimated 2026 exemption amounts, consider implementing planning techniques today that may help reduce or avoid gift and estate tax liability down the road. One such technique is a spousal lifetime access trust (SLAT). Under the right circumstances, a SLAT allows you to remove significant wealth from your estate tax-free while providing a safety net in the event your needs change in the future.
SLAT basics
A SLAT is an irrevocable trust that permits the trustee to make distributions to your spouse, during his or her lifetime, if a need arises. Typically, SLATs are designed to benefit your children or other heirs, while paying income to your spouse during his or her lifetime.
You can make completed gifts to the trust, removing those assets from your estate. But you continue to have indirect access to the trust by virtue of your spouse’s status as a beneficiary. Usually, this is accomplished by appointing an independent trustee with full discretion to make distributions to your spouse.
Beware of potential pitfalls
SLATs must be planned and drafted carefully to avoid unwanted consequences. For example, to avoid inclusion of trust assets in your spouse’s estate, your gifts to the trust must be made with your separate property. This may require additional planning, especially if you live in a community property state. And after the trust is funded, it’s critical to ensure that the trust assets aren’t commingled with community property or marital assets.
It’s important to keep in mind that a SLAT’s benefits depend on indirect access to the trust through your spouse, so your marriage must be strong for this strategy to work. There’s also a risk that you’ll lose the safety net provided by a SLAT if your spouse predeceases you. One way to hedge your bets is to set up two SLATs: one created by you with your spouse as a beneficiary and one created by your spouse naming you as a beneficiary.
If you and your spouse each establish a SLAT, you’ll need to plan carefully to avoid the reciprocal trust doctrine. Under that doctrine, if the IRS concludes that the two trusts are interrelated and place you and your spouse in about the same economic position as if you had each created a trust for your own benefit, it may undo the arrangement. To avoid this outcome, the trusts’ terms should be varied so that they’re not substantially identical.
Contact FMD for more information.
© 2023
If your family owns a vacation home, address it carefully in your estate plan
For many people, the disposition of a family home is an emotionally charged estate planning issue. And emotions may run even higher with vacation homes, which often evoke even fonder memories. So, it’s important to address your vacation home carefully in your estate plan.
Keeping the peace
Before you do anything, talk with your loved ones about the vacation home. Simply dividing the home equally among your children or other family members may be an invitation to conflict and hurt feelings. Some may care more about keeping the home in the family than about any financial benefits it might provide. Others may prefer to sell the home and use the proceeds for other needs.
One solution is to leave the vacation home to the family members who want it and leave other assets to those who don’t. Alternatively, you can develop a buyout plan that establishes the terms under which family members who want to keep the home can buy the interests of those who want to sell. The plan should establish a reasonable price and payment terms, which might include payment in installments over several years.
You also may want to create a usage schedule for nonowners whom you wish to continue enjoying the vacation home. And to help alleviate the costs of keeping the vacation home in the family, consider setting aside assets that will generate income to pay for maintenance, repairs, property taxes and other expenses.
Transferring the home
After determining who will receive your vacation home, there are several traditional estate planning tools you can use to transfer it in a tax-efficient manner. It may make sense to transfer interests in the home to your children or other family members now, using tax-free gifts.
But if you’re not yet ready to give up ownership, consider a qualified personal residence trust (QPRT). With a QPRT, you transfer a qualifying vacation home to an irrevocable trust, retaining the right to occupy the home during the trust term. At the end of the term, the home is transferred to your beneficiaries, though it’s possible to continue occupying the home by paying them fair market rent. The transfer is a taxable gift of your beneficiaries’ remainder interest, which is only a fraction of the home’s current fair market value.
You must survive the trust term, and the vacation home must qualify as a “personal residence,” which means, among other things, that you use it for the greater of 14 days per year or more than 10% of the total number of days it’s rented out.
Discussing your intentions
These are only a few of the issues that may be involved in passing on a vacation home. Estate planning for a vacation home may be complicated but it doesn’t have to be. The key is to sit down with your family to discuss the options. Only then can you put together a plan that meets everyone’s needs. Contact us with questions about the most tax-efficient way to proceed.
© 2023
What should you consider when choosing a guardian?
What’s arguably the most common reason people put off estate planning? It’s naming a guardian for their minor children. No doubt this is a difficult decision for parents to make. However, if you and your spouse don’t name a guardian for your minor children and you both die unexpectedly, a court will name one.
First steps
Begin by developing a list of potential candidates. Immediate family members are obvious choices but don’t limit yourself. Extended family members, friends, teachers, and childcare providers may also be good choices.
After compiling your initial list of candidates:
Identify the values that are important to you and your spouse. These may include religious and moral beliefs, parenting philosophy, educational values, and social values. Bear in mind that you’re not likely to find a perfect match, so you’ll need to prioritize your values.
List the intangibles. It’s important to consider potential guardians’ intangible qualities, such as their personalities and whether they’d be a good “fit” for your children.
Take the potential guardian’s age into consideration. If your children are very young, a grandparent or other older person may not have the energy to keep up with them. Choosing a younger guardian also reduces the risk that your kids will go through the trauma of losing another loved one.
Be practical. Consider factors such as where potential guardians live, whether they have other children, and if their homes are large enough to accommodate your kids. Ideally, your estate will include sufficient assets to provide your children with everything they need. But if it doesn’t, will the guardian have the resources to support them properly?
Once you narrow your list to a primary choice and one or two alternates, discuss your plans with them. You can’t force someone to act as your children’s guardian, so it’s critical to talk with all candidates to make sure they understand what’s expected of them and are willing to take on the responsibilities. If your children are mature enough, you may want to get their input as well.
Reaching a final decision
Keep in mind that your choice of guardian isn’t binding. In appointing a guardian, a court’s sole concern is the child’s best interest. But it’ll generally defer to your wishes unless it deems the person you choose to be unfit. To help ensure that your nominee is accepted, write a letter explaining the reasons for your choice. Contact FMD with any questions.
© 2023
Avoid succession drama with a buy-sell agreement
Recently, the critically acclaimed television show “Succession” aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession plan.
While there are many aspects to succession planning, one way to put some clear steps in writing — particularly if your company has multiple owners — is to draft a buy-sell agreement.
Avoiding conflicts
A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced, or deciding to leave the company.
If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. In addition, it helps ensure that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it.
A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value.
By facilitating the orderly transition of a deceased, disabled or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer.
This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention.
Funding the agreement
There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares.
However, there are potential complications with both options. That’s why many companies turn to life insurance and disability buyout insurance as funding mechanisms. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. There are two main types of buy-sells funded by life insurance:
1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest.
2. Entity-purchase agreements. In this case, the business buys life insurance policies for each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company.
A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies.
Getting expert guidance
Creating, administering, and executing a buy-sell agreement calls for expert assistance. The FMD team can help you identify, gather and organize the relevant financial information involved.
© 2023
Why businesses may want to consider ESG in strategic planning
When engaging in strategic planning, business owners and their leadership teams must consider various factors. These commonly include the state of your industry, the national and local economies, the company’s financial position and cash flow, and opportunities in the marketplace.
However, in today’s world, where transparency is everything, another factor that may be important for some companies is a clearly defined approach to environmental, social, and governance (ESG) issues.
3 areas of focus
As a general concept, ESG (as it’s often called for short) focuses on three areas:
The environmental component considers your company’s impact on the environment, including the energy it uses, the waste it produces, and the resources it consumes.
The social element examines your business’s relationships with people, communities, and institutions. It includes fair labor practices; worker health and safety; diversity, equity, and inclusion; and your company’s impact on the people of the community or communities where it operates.
The governance portion includes policies, practices, and procedures your business adopts to govern itself. Considerations include ethics, transparency, legal compliance, executive compensation, supply-chain management, data protection, and product quality and safety.
The idea is that, to be a good “corporate citizen,” it’s important to recognize the impact of your company’s activities on the environment, the people it employs, and those it interacts with. And it’s equally important to implement business practices that minimize potentially adverse effects.
Who’s watching
Not everyone agrees on the importance of ESG. However, as mentioned, businesses of certain types or in certain areas may find themselves under pressure from various parties to implement ESG initiatives.
For starters, some customers are increasingly considering ESG — particularly environmental impact and fair labor practices — when making buying decisions. Similarly, certain investors are making ESG performance a priority when deciding whether and how to invest their capital. These stakeholders may be interested in not only how your company handles ESG, but also how your suppliers and other business partners do as well.
Moreover, many governing authorities at the global, national, state, and local levels are prioritizing ESG. A business could incur costly fines and reputational damage for not complying with laws or regulations related to:
Environmental issues such as pollution and carbon emissions,
Social issues such as labor relations, worker health and product safety, and
Supply-chain issues such as human rights violations and the use of conflict minerals.
In addition, public entities may impose ESG standards that go beyond the legal requirements on certain projects. This can seriously impact businesses that rely heavily on government contracts.
Changes in the labor force may also have an impact. Generally, younger workers tend to consider a potential employer’s ESG practices when deciding where to work. And employees of all ages are increasingly more attuned to whether a company mindfully handles the many issues involved. In short, ESG may affect hiring and employee retention.
Something to think about
As you and your leadership team check in on this year’s strategic goals and develop new ones, you may want to assess whether and how ESG might affect your company. It’s something that many businesses are focused on — and you just might discover some ways to differentiate yourself from the competition.
© 2023
What’s in the Fiscal Responsibility Act?
President Biden has signed into law the new debt ceiling agreement that he reached with U.S. House of Representatives Speaker Kevin McCarthy (R-CA). The Fiscal Responsibility Act (FRA) suspends — as opposed to raising — the debt ceiling until 2025, after the next presidential election.
The FRA also makes a variety of changes related to domestic spending, although it falls far short of the cuts included in the Republican bill that the House passed in April 2023, with no changes to the GOP’s long-time targets of Social Security and Medicare. Nonetheless, the Congressional Budget Office (CBO) projects the law will reduce the federal deficit by about $1.5 trillion over 10 years.
The main provisions
The new law primarily tackles discretionary spending. The notable provisions address:
IRS funding. The Inflation Reduction Act (IRA), which was enacted in 2022, included an additional $80 billion in funding for the tax agency, with much of it designated for heightened enforcement activity against wealthy taxpayers. The FRA immediately rescinds $1.39 billion and pares back the funding by about $10 billion each year for 2024 and 2025. However, White House officials have indicated that they expect the funding cuts to make little difference in the IRS’s pending expansion plans because the agency planned to spend the original funding over several years. It may be able to spend some of the funds earmarked for later years earlier and then return to Congress to request more funding in the future.
Spending caps. One of the more contentious focuses of the negotiations was non-defense discretionary funding for programs such as scientific research, domestic law enforcement, forest management, environmental protection, air traffic control, and nutritional assistance for mothers. The final result is a virtual freeze on this spending, facilitated in part by the reduced funding for the IRS. The spending will drop by about $1 billion in the 2024 fiscal year, compared to this fiscal year, with a 1% increase slated for the 2025 fiscal year. This amounts to a cut, as inflation is expected to grow at a rate greater than 1%. The final non-defense figures are $704 billion for 2024 and $711 billion for 2025.
Defense and veterans affairs spending. The FRA provides Biden’s budgeted funding for the military and veterans affairs for 2024, adjusted for inflation. Total defense spending will grow to $886 billion in 2024 and $895 billion in 2025.
Student loan debt. The new law codifies Biden’s previous announcement that the moratorium on student loan payments precipitated by the COVID-19 pandemic won’t be extended beyond this summer. His plan to cancel student loan debt for many borrowers — to the tune of $430 billion — isn’t part of the law. (However, the plan is currently under review by the U.S. Supreme Court.)
Work requirements. Certain recipients of Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) benefits will face new work requirements, although Medicaid recipients won’t. Specifically, the FRA raises the top age at which adults without children living in their homes must work to receive SNAP assistance, from 49 to 54, phased in over three years. However, the law includes exemptions for the homeless, veterans and individuals age 24 or younger who were children in foster care. It also includes provisions that could increase the number of individuals who must satisfy work requirements to receive TANF benefits from their state programs. Yet, the CBO estimates that the various changes will actually result in more people receiving assistance.
COVID-19 clawback. Much of the remaining unspent COVID-19 relief funds, estimated to equal $30 billion to $70 billion, will be “clawed back.” Portions of that funding will be retained, though, including a certain amount for vaccines.
Permitting for energy projects. The FRA includes rules to make it easier for new energy projects, including fossil fuel projects, to obtain permit approval.
The leftovers
As noted, the original House debt ceiling bill was much more aggressive. Republicans sought larger spending cuts and tighter work requirements. They also aimed to repeal hundreds of billions in tax incentives in the IRA intended to increase the use of renewable energy and combat climate change.
On the other side of the aisle, Democrats hoped to raise taxes on corporations and taxpayers who earn more than $400,000. In addition, they wanted to institute measures to reduce Medicare spending on prescription drugs.
None of these priorities are included in the new law.
The bottom line
Experts have noted that the outcome of the latest debt ceiling challenge largely resembles the likely outcome of budget negotiations in a divided government, albeit with much more drama and more drastic potential implications for the global economy. Moreover, additional bills related to appropriations — what the parties have referred to as “agreed upon adjustments” — are expected in coming months, which could reduce the effects of some of the spending cuts.
© 2023