Did your spouse’s estate make a portability election? If not, there may still be time.

Portability helps minimize federal gift and estate tax by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. Currently, the exemption is $12.92 million, but it’s scheduled to return to an inflation-adjusted $5 million on January 1, 2026.

Unfortunately, portability isn’t automatically available; it requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return (Form 706). And many executors fail to make the election because the estate isn’t liable for estate tax and, therefore, isn’t required to file a return.

The numbers don’t lie

When there’s a surviving spouse, estates that aren’t required to file an estate tax return should consider filing one for the sole purpose of electing portability. The benefits can be significant, as the following example illustrates:

Bob and Carol are married. Bob dies in 2023, with an estate valued at $3.92 million, so his unused exemption is $9 million. His estate doesn’t owe estate tax, so it doesn’t file an estate tax return.

Carol dies in 2026, with an estate valued at $15 million. For this example, let’s say the exemption amount in 2026 is $6 million. Because the exemption has dropped to $6 million, her federal estate tax liability is $3.6 million [40% x ($15 million – $6 million)].

Had Bob’s estate elected portability, Carol could have added his $9 million unused exemption to her own for a total exemption of $15 million, reducing the estate tax liability on her estate to zero. Note that, by electing portability, Bob’s estate would have locked in the unused exemption amount in the year of his death, which wouldn’t be affected by the reduction in the exemption amount in 2026.

Take action before time expires

If your spouse died within the last several years and you anticipate that your estate will owe estate tax, consider having your spouse’s estate file an estate tax return to elect portability. Ordinarily, an estate tax return is due within nine months after death (15 months with an extension), but a return solely for purposes of making a portability election can usually be filed up to five years after death. Contact your trusted FMD advisor with any questions regarding portability.

© 2023

Cost containment: An important health care benefits objective for businesses

As the Fed continues to battle with inflation, and with fears of a recession not quite going away, companies have been keeping a close eye on the costs of their health insurance and pharmacy coverage.

If you’re facing higher costs for health care benefits this year, it probably doesn’t come as a big surprise. According to the National Survey of Employer-Sponsored Health Plans, issued by HR consultant Mercer in 2022, U.S. employers anticipated a 5.6% rise in medical plan costs in 2023. The actual percentage may turn out to be even higher, which is why cost containment should be one of the primary objectives of your benefits strategy.

Really get to know your workforce

To succeed at cost containment, you’ve got to establish and maintain a deep familiarity with two things: 1) your workforce, and 2) the healthcare benefits marketplace.

Starting with the first point, the optimal plan design depends on the size, demographics, and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding their health care benefits. Determine which offerings are truly valued and which ones aren’t.

If you haven’t already, explore the feasibility of a wellness program to promote healthier diet and lifestyle choices. Invest in employee education so your plan participants can make more cost-effective healthcare decisions. Many companies in recent years have turned to high-deductible health plans coupled with Health Savings Accounts to shift some of the cost burden to employees.

As you study your plan design, keep in mind that good data matters. Business owners can apply analytics to just about everything these days — including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then adjust your plan design appropriately to close these costly gaps.

Consider expert assistance

Now let’s turn to the second critical thing that business owners and their leadership teams need to know about: the health care benefits marketplace. As you’re no doubt aware, it’s hardly a one-stop convenience store. Many companies engage a consultant to provide an independent return-on-investment analysis of an existing benefits package and suggest some cost-effective adjustments. Doing so will entail some expense, but an external expert’s perspective could help you save money in the long run.

Another service a consultant may be able to provide is an audit of medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Regarding pharmacy benefits, as the old saying goes, “Everything is negotiable.” The next time your pharmacy coverage contract comes up for renewal, explore whether your existing vendor can give you a better deal and, if not, whether one of its competitors is a better fit.

It’s doable … really

Cost containment for health care benefits may seem like a Sisyphean task — that is, one both laborious and futile. But it’s not: Many businesses find ways to lower costs by streamlining benefits to eliminate wasteful spending and better-fit employees’ needs. The FMD Team can help you identify and analyze each and every cost associated with your benefits package.

© 2023

To avoid confusion after your death, have only an original, signed will

The need for a will as a key component of your estate plan may seem obvious, but you’d be surprised by the number of people — even affluent individuals — who don’t have one. In the case of the legendary “Queen of Soul” Aretha Franklin, she had more than one, which after her death led to confusion, pain and, ultimately, a court trial among her surviving family members.

Indeed, a Michigan court recently ruled that a separate, handwritten will dated 2014, found in between couch cushions superseded a different document, dated 2010, that was found around the same time.

In any case, when it comes to your last will and testament, you should only have an original, signed document. This should be the case even if a revocable trust — sometimes called a “living trust” — is part of your estate plan.

Living trust vs. a will

True, revocable trusts are designed to avoid probate and distribute your wealth quickly and efficiently according to your wishes. But even if you have a well-crafted revocable trust, a will serves several important purposes, including:

Appointing an executor or personal representative you trust to oversee your estate, rather than leaving the decision to a court,

Naming a guardian of your choosing, rather than a court-appointed guardian, for your minor children, and

Ensuring that assets not held in the trust are distributed among your heirs according to your wishes rather than a formula prescribed by state law.

The last point is important because for a revocable trust to be effective, assets must be titled in the name of the trust. It’s not unusual for people to acquire new assets and put off transferring them to their trusts or they simply forget to do so. To ensure that these assets are distributed according to your wishes rather than a formula mandated by state law, consider having a “pour-over” will. It can facilitate the transfer of assets titled in your name to your revocable trust.

Although assets that pass through a pour-over will must go through probate, that result is preferable to not having a will. Without a will, the assets would be distributed according to your state’s intestate succession laws rather than the provisions of your estate plan.

Reason for an original will

Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will.

It’s possible to overcome this presumption — for example, if all interested parties agree that a signed copy reflects your wishes, they may be able to convince a court to admit it. But to avoid costly, time-consuming legal headaches, it’s best to ensure that your family members can locate your original will when they need it.

Please don’t hesitate to contact FMD if you have questions about your will or overall estate plan.

© 2023

The IRS warns businesses about ERTC scams

The airwaves and internet are inundated these days with advertisements claiming that businesses are missing out on the lucrative Employee Retention Tax Credit (ERTC). While some employers do indeed remain eligible if they meet certain criteria, the IRS continues to caution businesses about third-party scams related to the credit.

While there’s nothing wrong with claiming credits you’re entitled to, those who claim the ERTC improperly could find themselves in hot water with the IRS and face cash-flow problems as a result. Here’s what you need to know to reduce your risks.

ERTC in a nutshell

The ERTC is a refundable tax credit intended for businesses that 1) continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or 2) suffered significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers could receive credits worth up to $26,000 per retained employee. The credit may still be available on an amended tax return.

The requirements are strict, though. Specifically, you must have:

• Sustained a full or partial suspension of operations due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,

• Experienced a significant decline in gross receipts during 2020 or in the first three quarters of 2021, or

• Qualified as a recovery startup business — which can claim the credit for up to $50,000 total per quarter without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021. (Qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three tax years preceding the quarter for which they are claiming the ERTC.)

In addition, a business can’t claim the ERTC on wages that it reported as payroll costs when it applied for Paycheck Protection Program (PPP) loan forgiveness or it used to claim certain other tax credits. Also, a business must reduce the wage deductions claimed on its federal income tax return by the amount of credits.

Prevalence of scams

The potentially high value of the ERTC, combined with the fact that employers can file claims for it on amended returns until April 15, 2025, has led to a cottage industry of fraudulent promoters offering to help businesses claim the credit. These fraudsters wield inaccurate information and inflated promises to generate business from innocent clients. In return, they reap excessive upfront fees in the thousands of dollars or commissions as high as 25% of the refund received.

The IRS has called the amount of misleading marketing around the credit “staggering.” For example, in recent guidance, the tax agency explained that contrary to the advice given by some promoters, supply chain disruptions generally don’t qualify an employer for the credit unless the disruptions were due to a government order. It’s not enough that an employer suspended operations because of disruptions — the credit applies only if the employer had to suspend operations because a government order caused the supplier to suspend its operations.

ERTC fraud has grown so serious that the IRS has included it in its annual “Dirty Dozen” list of the worst tax scams in the country. In Utah, for example, the U.S. Department of Justice has charged two promoters, who did business as “1099 Tax Pros,” with participating in a fraudulent tax scheme by preparing and submitting more than 1,000 forms to the IRS. They claimed more than $11 million in false ERTCs and COVID-related sick and family leave wage credits for their clients.

Fraudsters have been able to monopolize on the general confusion and uncertainty around the ERTC. A recent congressional hearing found that some of the problems can be traced back to the entirely paper application process created for the credit. This has contributed to a backlog of nearly 500,000 unprocessed claims, out of more than 2.5 million claims that have been submitted.

Although it’s unclear how much progress the IRS has made on the backlog, the agency has announced that it has entered a new phase of intensified scrutiny of ERTC claims. It’s stepping up its compliance work and establishing additional procedures to deal with fraud in the program. The IRS already has increased its audit and criminal investigation work on ERTC claims, focusing on both the promoters and the businesses filing dubious claims.

If you fell into the trap and are among those businesses, you could end up on the hook for repayment of the credit, along with penalties and interest, on top of the fees you paid the promoter. That could make a substantial dent in your cash flow.

Even if you’re eligible for the credit, you could run into trouble if you failed to reduce your wage deductions accordingly or claimed it on wages that you also used to claim other credits. As the IRS has noted, promoters may leave out key details, unleashing a “domino effect of tax problems” for unsuspecting businesses.

Moreover, providing your business and tax documents to an unscrupulous promoter could put you at risk of identity theft.

Red flags to watch for

The IRS has identified several warning signs of illegitimate promoters, including:

• Unsolicited phone calls, text messages, direct mail, or ads highlighting an “easy application process” or a short eligibility checklist (the rules for eligibility and computation of credit amounts are actually quite complicated),

• Statements that the promoter can determine your ERTC eligibility within minutes,

• Hefty upfront fees,

• Fees based on a percentage of the refund amount claimed,

• Preparers who refuse to sign the amended tax return filed to claim a refund of the credit,

• Aggressive claims from the promoter that you qualify before you’ve discussed your individual tax situation (the credit isn’t available to all employers), or

• Refusal to provide detailed documentation of how your credit was calculated.

The IRS also warns that some ERTC “mills” are sending out fake letters from nonexistent government entities such as the “Department of Employee Retention Credit.” The letters are designed to look like official IRS or government correspondence and typically include urgent language pushing immediate action.

Protect yourself

Taking several simple steps can help you cut your risk of being victimized by scammers. First, if you think you may qualify for the credit, work with a trusted professional — one who isn’t proactively soliciting ERTC work. Those who are aggressively marketing the credit (and in some cases, only the credit) are more interested in making money themselves and are unlikely to prioritize or protect your best interests.

You also should request a detailed worksheet that explains how you’re eligible for the credit. The worksheet should “show the math” for the credit amount as well.

If you’re claiming you suspended business due to a government order, ensure that you have legitimate documentation of the order. Don’t accept a generic document about a government order from a third party. Rather, you should acquire a copy of the actual government order and review it to confirm that it applies to your business.

Proceed with caution

No taxpayer ever wants to leave money on the IRS’s table, but skepticism is warranted whenever something seems too good to be true. If you believe your business might be eligible for the ERTC, we can help you verify eligibility, compute your credit, and file your refund claim. FMD can also help you determine how to proceed if you claimed the ERTC improperly.

© 2023

5 tips for more easily obtaining cyber insurance

Every business should dedicate time and resources to cybersecurity. Hackers are out there, in many cases far across the globe, and they’re on the prowl for vulnerable companies. These criminals typically strike at random — doing damage to not only a business’s ability to operate but also its reputation.

One way to protect yourself, at least financially, is to invest in cyber insurance. This type of coverage is designed to mitigate losses from a variety of incidents — including data breaches, business interruption and network damage. If you decide to buy a policy, here are five tips to help make the application process a little easier:

1. Be detail-oriented when filling out the paperwork. Insurers usually ask an applicant to complete a questionnaire to help them understand the risks facing the company in question. Answering the questionnaire fully and accurately may call for input from your leadership team, IT department, and even third parties such as your cloud service provider. Take your time and be as thorough as possible. Missed questions or incomplete answers could result in denial of coverage or a longer-than-necessary approval time.

2. Establish (or fortify) a comprehensive cybersecurity program. Your business has a better chance of obtaining optimal coverage if you have a formal program that includes documented policies for best practices such as:

• Installing software updates and patches,

• Encrypting data,

• Using multifactor authentication, and

• Educating employees about ongoing cyber threats.

Before applying for coverage, either establish such a program if you don’t have one or strengthen the one in place. Be sure to generate clear documentation about the program and all its features that you can show insurers.

3. Create and document a disaster recovery plan. An effective cybersecurity program can’t focus only on preventing negative incidents. It must also include a disaster recovery plan specifically focused on cyber threats, so everyone knows what to do if something bad happens.

If your company has yet to create such a plan, establish and implement one before applying for cyber insurance. Put it in writing so you can share it with insurers. Review your disaster recovery plan at least annually to ensure it’s up to date.

4. Prepare to be tested. Some insurers may want to test your company’s cyber defenses with a “penetration test.” This is a simulated cyberattack on your systems designed to uncover weak points that hackers could exploit. Before applying for cyber insurance, conduct a thorough assessment of your networks and, if necessary, train or upskill your employees to follow protocols and be wary of “phishing” schemes and other threats.

5. Consider a third-party assessment. To better uncover weaknesses that could result in a denial of coverage or unreasonably high premiums, you may want to engage a third-party consultant to assess your cybersecurity program, as well as your equipment, network, and users. Doing so can be beneficial before applying for cyber insurance because some IT security firms maintain relationships with insurers and can help streamline the application process.

Like most types of coverage, cyber insurance is a risk-management measure worth exploring with your leadership team and professional advisors. Contact FMD for help determining whether buying a policy is the right move and, if so, for assistance analyzing the costs involved and developing a budget.

© 2023

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