EisnerAmper Blog

Personal Wealth Advisors: The Longview

Next Year’s New Limitation on IRA Rollovers: Is it Time to Act Now?

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April 10, 2014

By Richard Lichtig, CPA

Lichtig_RichBeginning in 2015, there will be a significant change in the rules for so-called IRA “rollovers” (transactions that allow you to withdraw cash from one IRA, and redeposit it in another IRA within sixty days, without paying any current tax). The IRS recently announced that, beginning on January 1, 2015, you will be limited to one tax-free IRA rollover in each twelve-month period, regardless of how many IRA accounts you own.

It is important to note that this new ruling has NO impact on trustee-to-trustee transfers of IRA funds, which are not considered “rollovers,” are not reported to the IRS, and are not subject to the one-per-year limit.

The good news: Besides unlimited trustee transfers of IRA funds and accounts, you will still be able to make one tax-free IRA-to-IRA rollover once every twelve months (beginning on the date you receive the IRA distribution, not on the date you roll it back into another IRA).

The bad news: Beginning next year, you will not be able to make an IRA-to-IRA rollover if you’ve already made a rollover, involving any of your IRAs, in the preceding twelve months. In addition, those now-taxable IRA withdrawals may potentially be subject to a 10% early withdrawal penalty as well as a 6% excess contribution tax.

Also note that (a) rollovers between Roth IRAs are subject to the same rules as those for traditional IRAs and (b) rollovers from employer retirement plans to IRA accounts aren't counted for purposes of these rules.

A recent IRS announcement indicates that the Service intends to make this change by revising its Publication 590 and existing proposed regulations.

The change in IRS policy may have a specific impact on clients who have structured their portfolio into a series of IRAs, or for those individuals who occasionally rely on IRA assets as a source of short-term funds. Please do not hesitate to contact your personal wealth advisor to discuss how these proposed regulations could affect your financial and tax plans. 

It’s Not Too Late to Minimize 2013 Tax Liabilities for Certain Trusts

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February 3, 2014

Michaelson_PeterBy Peter Michaelson, CPA

Yes, the 2013 calendar year has already ended, ushering in several tax law changes – such as the 3.8% Medicare surcharge - that could increase your tax liabilities. The good news is that it is still not too late for you to minimize your 2013 tax liabilities. The bad news is that these trust-planning strategies must be implemented before March 6.

Some of you will recall that the section 663(b) election, also known as the “65-day rule,” enables you to treat certain trust distributions as having occurred in the prior year. In other words, a trust can make an election within the first 65 days of the year (for 2014: before Tuesday, March 6) to distribute net income and have it “count” as a distribution for the previous tax year.

While this planning tool has been used to maximize tax savings for trusts and beneficiaries since 1997, it takes on added significance this year in light of the new 3.8% tax on net investment income. As we’ve mentioned to you before, that new Medicare surcharge – along with the maximum 39.6% tax rate – are assessed on trust taxable income over $11,950.

In order to produce the most effective tax planning, trustees should have already examined their trust’s income for 2013, particularly in light of the income tax brackets of the beneficiaries. For example, it may make sense to elect section 663(b) in order to supplement the 2013 income distributions to beneficiaries in lower income tax brackets. Not only will the beneficiaries pay income tax at a rate less than the trust’s 39.6%, but those distributions could also reduce the trust’s distributable net income in order to avoid the Medicare surcharge at the trust level.

In some instances, trustees may also realize significant tax savings by considering the distribution of capital assets, in kind, to those beneficiaries in a lower tax bracket. For example, a beneficiary may recognize his or her capital gains at a relatively modest 15% rate (or, in some instances, at 0% tax). Those same assets, when sold by the trust, would result in taxation at a 23.8% rate (20% capital gain rate plus 3.8% Medicare surcharge).
Please note this election does not apply to grantor trusts.   Also note the trust document may not provide for this strategy hence the trustee should consult legal counsel.

Of course, it goes without saying that, besides taxes, trustees need to keep other considerations in mind when making distributions from a trust. If you have any questions about trust-planning strategies in general, or the 65-day rule in particular, please don’t hesitate to contact me, or your EisnerAmper tax advisor, before March 6.

Blogging from Heckerling -- The New Estate Plan, Selective Gifts, Income and Net Investment Income Tax (“NIIT”) Reduction

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Blog Post 4 of 4

Meola_JackBy Jack Meola, CPA 

The good old days resulted in recommendations of gifting or transferring of assets to trusts for the benefit of the younger generation. The new planning requires restraint and a rethinking of the prior advice.  You ask why this has come about.

As part of the 2010 Health Care legislation, there were two surtaxes enacted on the income of trusts, estates, and affluent individuals, commencing in the year 2013. The first surtax is a 0.9% surtax on individuals who have compensation income of over $200,000 ($250,000 on married joint returns). The second surtax is a 3.8% surtax imposed on the net investment income (“NII”) of certain trusts, estates and affluent individuals (those with income over $200,000; $250,000 on married joint returns). These thresholds are not indexed for inflation. Final regulations that interpreted the law were published on December 2, 2013 and the form to file has 19 pages of instructions.

Our higher net income individuals who are subject to the 3.8% NIIT are beginning to ask us how they can reduce the surtax. There are basically two ways to reduce the surtax: (1) get adjusted gross income (“AGI”) below the threshold amount, and/or (2) reduce the amount of NII while still maintaining the same lifestyle to which one is accustomed.

There are basically two ways to reduce the amount of net investment income. The first is to convert NII into income that is not NII. If you can control your income it may be worthwhile to generate income that substantially exceeds the thresholds and then keep your income lower in the subsequent year. Also income is exempt from taxation under general tax rules; it is also exempt from the 3.8% NIIT. So a review of a client’s portfolio is prudent.

The second method is where an individual makes gifts to family or to charities, shifting the NII to family members and charities who do not incur the 3.8% surtax.  You can also shift the NII to charities by donating appreciated stock and real estate to the charity.

Consideration of the following techniques are appropriate for converting NII income such as interest, dividends and capital gains from traditional investment accounts into qualified retirement plans (contributions to nondeductible IRAs, larger contributions to qualified plans and making Roth IRA conversions).  The reasons these techniques need to be considered are that the later distributions from retirement plans are not includible in NII. Additionally, there is the ability to make up the deficiency in cash flow by increasing the distributions from a Roth IRA which are not subject to income tax or the NII.

One way that wealthy individuals can reduce their modified AGI for the charitable gifts that they make is to shift their net investment income to charities and to charitable vehicles rather than simply claim a charitable income tax deduction for gifts that were made from their income. The three vehicles that stand out to accomplish this are donor advised funds, private foundations and charitable lead trusts.

NII can be shifted to family members who are in lower income tax brackets by making gifts of assets that generate NII (interest, dividends and capital gains) to these family members or to trusts that will distribute all such income. The trusts hit their highest income tax bracket for 2013 at $11,950; in the year 2014, that amount is just $12,150.

For 2013, there is time to make distributions from a trust under the 65-day rule. A distribution made within 65 days of the end of the prior tax-year-end can be elected to be treated as a distribution on the last day of the trust’s tax-year-end.

Blogging from Heckerling -- Let’s Get It Right the First Time. Avoiding Conflicts with Trusts Established to Benefit Same-Sex Couples

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Blog Post 3 of 4

By Barbara Taibi, CPA, PFS

Talibi_BarbaraMany same-sex couples living in states that recognize their marriage believe that, after “Windsor,” their marriages are now no different than any opposite-sex marriage. This is simply not true.  Until all 50 states recognize same-sex marriages, there are many issues that need to be carefully considered in trust and estate planning.

Consider the following situation highlighted at the Heckerling Institute on Estate Planning:
Steven and Bill are a same-sex couple married and living in California (a recognition state).  Steven’s mother, a Florida resident, passed away several years ago.  There is a GST exempt trust set up by Steven’s grandmother that would pay out in trust to Steven and his two sisters upon their mother’s death.  This trust is a Florida Trust (non-recognition state).

If the trustee is directed to pay income and principal to Steven, his spouse and his dependents but the trust failed to clearly define “spouse” and “dependent,” will Bill be considered a “spouse” and entitled to payments?  What if Steven is not the biological father of the children they are raising – will they be excluded as beneficiaries?  To avoid this potential problem, we need to be sure our client trust documents have clearly defined terms.  Spouse and marriage must clearly include same-sex spouses, domestic partners, civil unions etc.  The trust must also make clear that the laws of the state in which the beneficiaries are domiciled is not relevant in defining spouse and marriage, thereby allowing the beneficiary to move to non-recognition state without issue. Children/descendants must include non-biological children born to a person’s domestic partner or same-sex spouse during the marriage.  Formal adoptions should always be used by same-sex couples.

We also need to think about existing documents where the language used does not come to our attention until there is a problem. (Steven’s sisters are suing for a bigger share since they do not believe his family qualifies).  It is very possible that in our case the grandmother was very aware of her grandson’s same-sex marriage but never asked about it by attorney.  The trust could be so old that the possibility that her grandson would ever be allowed to marry may never have crossed the mind of attorney or donor.  If a trust is ambiguous as to spouse and descendant, the courts will look to donor intent.  Was the donor aware and accepting of the beneficiary’s same-sex relationship?  Did the donor have a good relationship with the spouse? Did the donor treat all grandchildren the same?  If still unclear, state law may step in and define family under “public policy” in the state the proceeding is brought.  If that is Florida, the courts may take a much narrower view of the definitions in question.

It is important we are aware of the family situation of all our same-sex couples and inheritances they are expecting or currently benefitting from and that we make them aware of possible problems in the language to hopefully avoid a lot of family problems down the road.

Blogging from Heckerling - Portability

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January 17, 2014

Blog Post 2 of 4

By Karen Goldberg, CPA

Continuing with our reports from the Heckerling Conference held during January, 2014

Goldberg, KarenThomas W. Abendroth of Schiff Hardin LLP spoke about portability, the estate tax provision that allows a surviving spouse to inherit his or her predeceased spouse’s unused estate tax exclusion (“DSUE”).  He reminded us that the surviving spouse can only use the unused exclusion of her last deceased spouse.  This means that if she remarries and her second spouse predeceases, she is only entitled to the second spouse’s DSUE.   Nevertheless, a surviving spouse who outlives multiple spouses can use the DSUE of each of those deceased spouses: She just needs to make lifetime gifts using the DSUE of her most recently deceased spouse before her next spouse predeceases.  Interestingly, the surviving spouse will be deemed to use the DSUE before her own gift tax exclusion. 

Mr. Abendroth discussed the advantages of both portability and a credit shelter trust.  Portability affords the following benefits: (1) simplicity, as it allows a married couple to leave property to each other without losing the estate tax exclusion of the first spouse to die; (2) additional basis step-up because the assets passing to the surviving spouse receive another step-up at the surviving spouse’s death; and (3) avoiding the complications associated with funding a credit shelter trust with a residence or retirement plan.  In contrast, a credit shelter trust offers the following advantages: (1) shelters future appreciation in trust assets from estate tax in the surviving spouse’s estate; (2) allows the predeceasing spouse to use his GST exemption, as that exemption is not portable; (3) the DSUE amount of the first predeceased spouse won’t be lost if the surviving spouse remarries and her second spouse dies; (4) trust assets are insulated from creditors; and (5) funding the credit shelter trust with difficult-to-value assets reduces the audit risk with respect to those assets at the second death. 

Mr. Abendroth indicated that portability is more attractive for couples whose assets are unlikely to exceed twice the estate tax exclusion.   However, if they reside in a state with a low state estate tax exclusion, such as New York ($1 million) or New Jersey ($675,000), he suggested that the couple may want to fund a credit shelter trust using the state estate tax exclusion amount on the first spouse’s death to save state estate tax.  Furthermore, where a couple has assets above or near the threshold for incurring estate tax and the first spouse to die leaves unused exclusion, portability can be used to preserve the unused exclusion for the surviving spouse.  This often happens when a couple fails to retitle assets or the nature and size of their assets don’t allow them to do so, and they can’t fully fund the credit shelter trust upon the first spouse’s death.  Other than these certainties, whether to use portability depends upon the unique facts and circumstances of each client, and should be considered as another planning tool.

Blogging from Heckerling - Estate Planning

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January 16, 2014

Blog Post 1 of 4

Marie Arrigo, CPA

Arrigo_MarieThis week, the 48th Annual Heckerling Institute on Estate Planning convened in Orlando, Florida. Heckerling is the largest and most prestigious estate planning conference in the country; this year’s Institute has drawn more than 3,000 attendees.

Several EisnerAmper professionals are attending this week's Institute and reporting on "hot" topics being discussed. This is the first of a series of blogs on the Institute.

On January 14, 2014, Paul S. Lee of Bernstein Global Wealth Management noted that there has been a fundamental paradigm shift in estate planning. The focus has shifted from reducing the transfer tax at all costs by having a client make lifetime gifts to taking into account the income tax implications of those transfers before implementing them.

More specifically, the old "tried and true" estate planning technique entailed having the client make gifts of appreciating assets to reduce the potential estate tax burden at his death.  Those transferred assets had a carryover basis in the hands of the recipient and were not eligible for a step-up in basis to fair market value at the client's death.   Because the estate tax rates were much higher than the income tax rates, the tax savings of making lifetime gifts outweighed any potential income tax savings from a "step-up" in basis that would be available if the client did not make any gifts. 

The landscape has changed drastically, and alters the practitioner's approach to estate planning. There are many factors that have changed the landscape, including the following:

  1. The American Taxpayer Relief Act of 2012 (ATRA) that increased the income and capital gains tax rates, set the estate, gift and GST tax top rate at 40%, and increased the gift, estate and GST exclusions and exemption to $5 million subject to annual indexing for inflation.
  2. The Health Care and Education Reconciliation Act of 2010, amending the Patient Protection and Health Care Act, that implemented a 3.8% Medicare surtax on net investment income starting in 2013.
  3. Many states have increased their income tax rates while at the same time a number of states have repealed their state estate and inheritance taxes.

As a result of the above, unlike in the past, the applicable federal and state income tax rates can be higher or close to the applicable federal and state estate tax rate. 

Therefore, effective estate planning will now require an analysis of the estate and income tax cost/savings of making a lifetime gift versus doing nothing.   In making this analysis, the following factors will need to be considered:

  1. Client's life expectancy,
  2. Client's spending habits and lifestyle,
  3. Client's charitable inclinations,
  4. Size of client's estate,
  5. Expected future performance of client's assets (income and appreciation),
  6. Income tax character of client's assets,
  7. Client's state of residence,
  8. Gift recipient's residence and marginal income tax bracket, and
  9. Expectation of future inflation and overall economic conditions.

In conclusion, because combined federal and state income tax rates can be higher or close to applicable federal and state estate tax rate, planning now requires an analysis of the income tax implications of any contemplated transfers.

Alert for Non-U.S. Persons, or their Advisors, Filing Income Tax Form W-8BEN: Bogus Form in Circulation

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Lichtig_RichJanuary 8, 2014

By Rich Lichtig, CPA 

We were recently asked to assist a non-resident alien (NRA) client with the completion of IRS Form W-8BEN – the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Upon examining the form sent to our client, we identified it as not being the official IRS form.

Briefly, this form is used to identify non-U.S. persons so the payor can properly report income and withhold taxes at the source. This payor, also known as a “withholding agent,” has responsibility for withholding the required tax and paying it over to the U.S. Internal Revenue Service (IRS).  Non-U.S. persons (whether individuals or entities, such as foreign corporations) may be subject to U.S. income tax at a flat 30% rate on certain kinds of income received from U.S. sources (or lower if a treaty applies).

If you are an NRA, an HR executive in a company that employs international employees, or you know or advise one or more NRAs, you should be aware that a bogus form exists. The official IRS form W-8BEN can be found here.

The most glaring difference between the bogus form and the real one is in Part II.  The bogus form asks for significant personal information – none of which is on the official form [e.g., the IRS doesn’t ask for the filer’s mother’s maiden name (misspelled on the bogus form as “median”), his or her passport number, or information related to their U.S. bank and investment accounts.]

The bogus form also asks the recipient to sign the form and fax it to the IRS.  Forms W-8BEN are returned to a filer’s financial institution; they are not filed (faxed or otherwise) with the IRS.

This is not an isolated incident – we are aware of another firm with an NRA client who also got the bogus form.  This other version contained an email address (in addition to the fax number) as an alternative way to transmit it. The IRS never asks taxpayers to email them information.

If you have any suspicion about a W-8BEN form, please consult your tax advisor immediately.

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