Trust - KSDT CPA

4 ways to make an incentive trust more effective

ediaz — Mon, 13 May 2024 01:09:47 +0000

Estate planning isn’t just about sharing wealth with the younger generation. For many people, it’s equally important to share one’s values and to encourage their children or other heirs to lead responsible, productive and fulfilling lives. One tool for achieving this goal is an incentive trust, which conditions distributions on certain behaviors or achievements that you wish to inspire.

Incentive trusts can be effective, but they should be planned and drafted carefully to avoid unintended consequences. Let’s examine four tips for designing a more effective incentive trust.

1. Focus on the positives

Avoid negative reinforcement, such as conditioning distributions on the avoidance of undesirable or self-destructive behavior. This sort of “ruling from the grave” is likely to be counterproductive. Not only can it lead to resentment on the part of your heirs, but it may backfire by encouraging them to conceal their conduct and avoid seeking help. Trusts that emphasize positive behaviors, such as going to college or securing gainful employment, can be more effective.

2. Be flexible

Leading a worthy life means different things to different people. Rather than dictating specific behaviors, it’s better to establish the trust with enough flexibility to allow your loved ones to shape their own lives.

For example, some people attempt to encourage gainful employment by tying trust distributions to an heir’s earnings. But this can punish equally responsible heirs who wish to be stay-at-home parents or whose chosen careers may require them to start with low-paying, entry-level jobs or unpaid internships. A well-designed incentive trust should accommodate nonfinancial measures of success.

3. Consider a principle trust

Drafting an incentive trust can be a challenge. Rewarding positive behavior requires a complex set of rules that condition trust distributions on certain achievements or milestones, such as gainful employment, earning a college degree or reaching a certain level of earnings. But it’s nearly impossible to anticipate every contingency.

One way to avoid unintended consequences is to establish a principle trust. Rather than imposing a complex, rigid set of rules for distributing trust funds, a principle trust guides the trustee’s decisions by setting forth the principles and values you hope to encourage and providing the trustee with discretion to evaluate each heir on a case-by-case basis. Bear in mind that for this strategy to work, the trustee must be someone you trust to carry out your wishes.

4. Provide a safety net

An incentive trust need not be an all-or-nothing proposition. If your trust beneficiaries are unable to satisfy the requirements you set forth in your incentive trust, consider offering sufficient funds to provide for their basic needs and base additional distributions on the behaviors you wish to encourage.

According to Warren Buffett, the ideal inheritance is “enough money so that they feel they could do anything, but not so much that they could do nothing.” A carefully designed incentive trust can help you achieve this goal. If you have questions regarding the use of an incentive trust, please contact us.

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Key Deadlines and Guidelines for Filing Your 2023 Gift Tax Returns

ediaz — Thu, 21 Mar 2024 15:08:26 +0000

Gift Tax Compliance in 2023: What You Need to Know

As the calendar pages turn, it’s crucial to remember not just the traditional tax deadlines but also those pertaining to gift taxes—a segment of tax planning that can often go overlooked. For individuals who have generously shared their wealth with family members in 2023, it’s time to mark your calendars: April 15 is not only the cut-off for filing your income tax return but also for submitting any due gift tax returns.

The April 15 Deadline: A Double-Edged Sword

This date serves a dual purpose: it’s the final day for both settling your 2023 income taxes and submitting gift tax returns for wealth transfers made in the previous year. If this deadline seems too tight, there’s relief in the form of an extension, pushing your gift tax return due date to October 15, provided you apply in time.

Understanding When to File

Navigating the need for a gift tax return (Form 709) begins with understanding the thresholds set by the IRS. For 2023, gifts exceeding $17,000 per individual necessitate filing a return, a figure that adjusts to $18,000 for 2024. This includes specific provisions for gifts to a non-citizen spouse, with exclusions of $175,000 for 2023 and $185,000 for 2024.

Certain transfers, like those to trusts for a beneficiary’s future benefit or gift-splitting between spouses, demand a return regardless of amount. However, crossing these thresholds doesn’t automatically imply a tax liability. Taxes are only a concern if your lifetime gifts surpass the substantial exemption cap, set at $12.92 million for 2023 and increasing to $13.61 million in 2024.

Exemptions from Filing

Not all generous acts trigger the need for a return. Exclusions include:

Direct payments for someone’s education or medical bills,
Gifts within the annual exclusion limits,
Outright gifts to a U.S. citizen spouse, and
Charitable donations, unless coupled with other reportable transfers.

In situations involving less tangible assets, like art or family business interests, proactively filing a return might be wise. This step can cap the IRS’s window to question asset valuations to three years post-filing.

Beyond Gifts: Reporting Non-Gift Transactions

Interestingly, Form 709 may also serve to document transactions not traditionally viewed as gifts, such as sales of assets to family members. This documentation can be a strategic move to prevent future IRS disputes over asset values.

Seeking Expert Guidance

The labyrinth of estate and gift tax regulations underscores the value of professional advice. For those uncertain about their filing obligations or seeking to navigate the complexities of gift tax planning, seeking expert assistance is a prudent step.

Let Us Assist You

As you prepare for this tax season, remember the dual deadlines of April 15 and consider whether you’ve engaged in any transactions that might necessitate a gift tax return. For those who’ve embarked on significant wealth transfers last year, now is the time to assess your obligations. Don’t hesitate to reach out for guidance on ensuring compliance and optimizing your tax strategy.

The post Key Deadlines and Guidelines for Filing Your 2023 Gift Tax Returns first appeared on KSDT CPA.

4 good reasons to turn down an inheritance

ediaz — Tue, 05 Mar 2024 21:56:06 +0000

Most people are happy to receive an inheritance. But there may be situations when you might not want one. You can use a qualified disclaimer to refuse a bequest from a loved one. Doing so will cause the asset to bypass your estate and go to the next beneficiary in line. Let’s take a closer look at four reasons why you might decide to take this action:

1. Gift and estate tax savings. This is often cited as the main incentive for using a qualified disclaimer. But make sure you understand the issue. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to nonspouse beneficiaries, such as your children and grandchildren, may be covered by the gift and estate tax exemption.

The exemption shelters a generous $13.61 million in assets for 2024. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $27.22 million in 2024 to their heirs, free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, you ensure that the exemption won’t be further eroded by the inherited amount. Assuming you don’t need the money, shifting the funds to the younger generation without them ever touching your hands can save gift and estate taxes for the family as a whole.

2. Generation-skipping transfer (GST) tax. Disclaimers may also be useful in planning for the GST tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $13.61 million for 2024.

If GST tax liability is a concern, you may want to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from the GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

3. Family businesses. A disclaimer may also be used as a means for passing a family-owned business to the younger generation. By disclaiming an interest in the business, you can position stock ownership to your family’s benefit.

4. Charitable deductions. In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance. But using a disclaimer can provide a deduction because the assets will pass directly to the charity.

Be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received. In any case, before making a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, turn to us with any questions.

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Steer clear of the Trust Fund Recovery Penalty

KSDT Marketing — Tue, 07 Jul 2020 17:42:49 +0000

If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are some answers to questions about the penalty so you can safely stay clear of it.

Which actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally excepted from responsibility, can be subject to this penalty under certain circumstances. In addition, in some cases, responsibility has been extended to family members close to the business, and to attorneys and accountants.

IRS says responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. Although a taxpayer held liable can sue other responsible people for contribution, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.

Here’s how broadly the net can be cast: You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.

Avoiding the penalty

You should never allow any failure to withhold and any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld must also be paid over to the government. Contact us for information about the penalty and making tax payments.

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