EisnerAmper Blog

Personal Wealth Advisors: The Longview

Family Offices Favor Direct Investments and Smaller Hedge Fund Managers

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December 17, 2014


By Elana Margulies

Margulie_ElanaFamily offices favor direct investments over funds of hedge funds, along with a preference for smaller hedge fund managers on the premise they are more nimble. At EisnerAmper’s Sixth Annual Private Wealth & Family Office Summit which took place November 12 in New York City’s historic Morgan Library & Museum, panelists shared this investment consensus on the discussion titled “Investment Trends for Families.”

Timothy Speiss, partner-in-charge of the firm’s Private Wealth Advisory Services (PWA) group, moderated the panel headlined by Richard Slocum, Chief Investment Officer of the Johnson Company and Joseph Kusnan, General Partner of The Hudson + East Partnership, both family offices located in New York City.

Mr. Slocum further specified with regards to hedge fund strategies, he preferred European credit over equities due to the slow growth the continent is experiencing; a trend he expects to continue going forward. Further, he suggested banks can short balance sheets in Europe. Additionally, biotechnology is currently his favorite sector focus.

Mr. Kusnan specified that The Hudson + East Partnership employs a bottoms-up model and takes an opportunistic approach to investing.

Before Mr. Slocum joined The Johnson Family in September 2011 where he was tasked to develop an asset allocation plan, he spent six years at The Robert Wood Johnson Foundation, most recently as Director of Portfolio Management.  Mr. Kusnan was formerly with a large Connecticut-based family office as well as MSD Capital, Michael Dell’s family office.

Impact of SCOTUS Decision Not to Take Up Seven Same-Sex Marriage Cases

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October 7, 2014

By Kenneth Weissenberg, CPA, J.D.

Weissenberg_KenBy denying certiorari to the seven marriage equality cases before it, the Supreme Court of the United States (SCOTUS) allowed Courts of Appeals rulings to stand, making such marriages legal (or soon to be legal) in eleven more states. The court’s action allows same-sex marriages to be recognized in Wisconsin, Indiana, Utah, Virginia, Oklahoma, and subsequently in all the states within the Fourth, Seventh, and Tenth circuits including Colorado, Kansas, North Carolina, South Carolina, West Virginia and Wyoming where the unconstitutionality of discriminatory marriage laws is the controlling precedent. The eleven new same-sex marriage recognition states bring the nationwide total to 30, plus the District of Columbia.

The move toward a super majority of states seems to be of value to SCOTUS, which appears to be leaning toward allowing consensus to control. It seems likely that SCOTUS will only take up a same-sex equality case should one of the remaining district courts of appeal rule that a same-sex marriage ban is constitutional. In the absence of such a conflicting ruling, it is now unlikely SCOTUS will grant certiorari. This does mean a spotlight will be on the Fifth, Eighth, and Eleventh circuits which have not yet come down with a same sex marriage ruling.

As to the immediate effect of the SCOTUS denial of cert, same-sex married couples residing in the eleven states cited above may consider themselves legally married for all state and federal purposes. These couples might therefore consider reviewing their past year’s tax returns with a view toward amending their filings based on their changed status. They should begin to plan to file joint returns for 2014 where federal and state law requires them to do so. What’s more, various federal programs, including some from the Veterans Administration, have benefits that same sex couples may now qualify for that were governed by the rules concerning same-sex marriage recognition at the state level.

Residents of the eleven states now recognizing same-sex marriage are urged to contact their tax advisors and their trust and estate attorneys.

U.S. Taxpayers Abroad – A New, Kinder, Gentler IRS Initiative

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June 12, 2014

By Richard Lichtig, CPA

Lichtig_RichIRS Commissioner John Koskinen announced an initiative that is expected to allow United States taxpayers who have undisclosed accounts outside the country, and who aren’t willfully evading U.S. taxes, to become compliant with U.S. laws and face reduced penalties.  Although the initiative was announced earlier this month, the IRS expects to come out with all of the rules and conditions some time towards the end of June or in July.

Taxpayers who might benefit include U.S. citizens and persons holding permanent residency status (green card holders) who have lived outside the U.S. for most of their lives.  The IRS reasoned that many such taxpayers have only recently realized that they have to file U.S. tax returns and disclose the existence of offshore accounts.

The new procedures will be an expansion – and not a replacement – of the existing Offshore Voluntary Disclosure Program (OVDP).  Earlier OVDPs were set in place in 2009 and modified in 2011 and 2012.  These OVDPs, which are also available to persons living in the U.S., have brought more than 43,000 people into compliance and have collected in excess of $6 billion in taxes, penalties, and interest for the U.S. government.

Though roundly applauded by taxpayers and professionals alike, the timing of the announcement has many people wondering what to do with 2013 tax filings as taxpayers who live abroad generally have until June 16 to file their 2013 tax returns and June 30 to file 2013 Reports of Foreign Bank and Financial Accounts (FBARs).  The new announcement causes a few quandaries for taxpayers who would qualify for more lenient treatment but who are currently in the OVDP (and previously came forward to minimize their exposure to taxes, penalties, and interest) and for those who have already paid onerous assessments, not to mention significant professional fees.

Watch for more details as this story continues to unfold.

Timing for U.K. Film Credits is Just in Time for Return of 24

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May 7, 2014

Waxman_EvanBy Evan R. Waxman, CPA, MST, PFS

With a host of new cast members, story lines, and a re-formatted program, tremendous hype surrounds Fox’s Emmy-winning action thriller 24 and its production in the United Kingdom. Kiefer Sutherland reprises his role as Jack Bauer to prevent a global disaster on European soil.  Notably for those of us in the tax and finance worlds, Jack’s return is perfectly timed to take advantage of a U.K. film tax relief program.

The British government has approved enhancements to the U.K. film-tax-relief program which took effect on April 1.  Key changes included lower minimum film budgets and a reduction of the minimum U.K. spending requirement from 25% to 10%.  The tax break is worth 25% on the first $32.7 million (£20 million) of qualified spending and is 20% on all additional spending.  The potential for a flat 25% credit is currently being discussed to accommodate larger budget productions for 2015.  Additional changes intended to stimulate the U.K. film industry make it easier for filming production to pass the cultural test, the necessary step to determine the amount of incentives that a film or TV production is entitled to receive.

Given the high costs to produce a full season of 24, the “U.K. film/tax relief” provides much needed financial flexibility for the show’s executive brass.

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.

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