Can a Trustee Be Held Personally Liable? 16 Apr 2018, 9:43 pm

If you are ever appointed a trustee, you will have a fiduciary duty to act on behalf of the beneficiaries. If you breach that duty, you may find yourself in court.

Being a trustee is not an easy job. Trustees must follow the terms of the trust and are accountable to the beneficiaries for their actions. They may be held personally liable if they:

• Are found to be self-dealing, or using trust assets for their own benefit
• Cause damage to a third party to the same extent as if the property was their own
• Become subject to criminal changes for blatant disregard of the law.

Basic Principles of a Trustee

If you become a trustee, the following principles can help avoid allegations of wrongdoing that could result in personal liability:

• Manage the trust according to its terms
• 
Keep in mind you have a duty of loyalty to the beneficiaries
• 
Choose wisely if you are permitted to seek help from outside professionals
• Provide and retain good accounting records
• 
Keep the beneficiaries up-to-date on activities
• 
Exercise reasonable care and skill
• 
Ensure trust property is titled correctly
• 
Act impartially among beneficiaries
• Work closely with a co-trustee if there is one.

The key to successfully administering a trust is generally to avoid worrying about what could happen if you do something wrong and focus on the best interests of the beneficiaries.

Consider all the Facts

Even then, there can be some liability if a trustee winds up unable to pay trust debts with trust assets or fails to take reasonable care to avoid a decision that causes a loss for the trust. Before making decisions, a trustee should take into account all the facts and consider whether to seek advice from lawyers, accountants, investment advisers or other specialists.

After obtaining advice, however, trustees must make decisions on their own and in good faith. They are not permitted to delegate their decision-making power unless authorized by the trust.

Trustees should not commit to any ongoing action that could effectively limit future discretion. If necessary, a trustee can apply to the courts for directions concerning any trust property, the management or administration of trust property or the exercise of any power or discretion. With court approval for a course of action, they can protect themselves from liability.

If you have questions about setting up a trust or if you have been appointed as a trustee and have questions, consult with one of our firm’s estate planning attorneys.

Choosing a Business Entity Form for your New Company 8 Mar 2018, 4:36 pm

Business Entity Formation

Business entities can take many different forms – sole proprietorships, partnerships, limited liability companies (LLC), and corporations are the most common ones. Although they are simple and have the most flexibility and least regulation, sole proprietorships and partnerships fail to protect the company’s assets and the owners’ assets, and they fail to take advantage of many of the tax advantages of other types of entities. Additionally, entities such as LLCs and corporations tend to present a more professional image and allow for greater future growth.

Corporations

There are a few different types of corporations: non-profit corporations, C corporations, and S corporations. Non-profit corporations must qualify as such under the restrictions of Federal law as stated in the Internal Revenue Code, one of the most important of which is that they must be formed for a charitable, educational, or other purpose as defined there.

When incorporating a for-profit company, the default form with the IRS is a C corporation. Companies must elect with the IRS to be treated as an S (small business) corporation for tax purposes, should they wish to do so, and if they meet certain criteria, such as having no more than 100 shareholders, not having shareholders that are partnerships, corporations or non-resident aliens, and having only one class of stock.

C corporations are taxed on their profits, and the shareholders are taxed on the dividends they earn (if declared and distributed), which can result in “double taxation.” S corporations have their income or loss pass through to the shareholders, who report that on their personal tax returns and pay tax at their individual income tax rates. Certain pass-through entities and owners may be eligible for favorable tax treatment under the 2017 Tax Cuts & Jobs Act.

LLCs

LLCs are similar to corporations in that they provide a shield to personal liability, and they also enjoy the benefits of pass through taxation, including the possible favorable tax treatment under the 2017 Tax Cuts & Jobs Act. Some have even argued that they provide an even better shield to personal liability than corporations.

Additionally, when compared to S corporations, LLCs have fewer restrictions relating to the number and types of owners, and in Texas and many other states, there are less administrative requirements. Also, the form and structure of LLC management is more flexible when compared to corporations.

Comparisons and Considerations

Corporations and LLCs create a legal “person,” (separate entity with rights like a person) that insulate owners’ legal liability for the debts and actions of the company. In Texas, and in most other states, both corporations and LLCs can be owned and managed by just one person.

Importantly, however, in order to ensure the limitation of personal liability, all must follow certain financial, accounting, recordkeeping and operational formalities.

It is always important to consider the costs and benefits, advantages and disadvantages from legal and tax/accounting perspectives. Thus you should talk with your attorney AND your accountant to discuss your unique situation, possible future scenarios, and other considerations before rushing into formation without proper advice.

Discounted Pricing for Business Formation!

From now until March 31, 2018, we will offer anyone who mentions this blog post a special price for our legal services related to forming a business entity. During that time, we will take 25% ($300) off the normal price of forming a corporation or LLC, making the price only $900, plus the filing fee owed to the Texas Secretary of State.
Included for this price is the drafting and filing of the Certificate of Formation, as well as the drafting of bylaws (corporation), company agreement (LLC), organizational minutes or unanimous consent, and templates for future years annual minutes or unanimous consents.

Additionally, we include a company records binder, company seal, and pre-printed stock (corp) or membership (LLC) certificates. If you prefer a different entity, we are also offering special pricing on partnerships (general, limited, and LLP).

Contact us today!

Seven Reasons to Update Your Will 7 Feb 2018, 9:43 pm

Even if you have a valid will, you may need to draft a new one for a variety of reasons. A will is an essential part of planning for the future. But don’t think creating a will is a one-time proposition.

Some Reasons You May Need to Draft a New Will Are:

1. Deaths – If individuals named (such as beneficiaries, guardians, trustees or executors) have died or they become incapacitated, a will should be reviewed to ensure changes are not needed.

2. Assets – Revisions may be needed if the value of assets has increased or decreased significantly, or they are no longer owned. For example, if you specifically leave your home to one of your children, and later sell it, you may want to change the distribution of your other assets.

3. Marriage – Wedding bells usually signal the need to review a will. Which assets should pass to your spouse? Are step-children involved? If this is not spelled out in a will, the state will decide. Without a will, in a community property state, like Texas, a spouse automatically inherits his or her half of all community property. In most other states, a spouse may receive one-third to one-half of the estate, absent any other directions in a will.

Also, keep in mind that an unmarried couple living together may want to leave assets to each other but in order to make an inheritance happen, it must generally be spelled out in a will.

4. Divorce – In Texas, a divorce automatically revokes those provisions of a will concerning an ex-spouse. As a result, if you get divorced, it’s best to have a new will drafted. For instance, you might have your former spouse removed as a primary beneficiary. In addition, you may want to change the beneficiary of your life insurance, 401(k), pension or any existing IRAs. Consider the use of a trust if children from a previous marriage are involved.

You may also want to change your will if one of your children gets divorced.

5. Births – Once parents have children, you may want to consider updating your will to include the names of children. Also, you want to name guardians to care for the children in the event the parents die prematurely. (However, the naming of guardians is not binding on the probate court.) Grandparents might wish to draft a new will concerning the distribution of assets after children are born. Again, the use of a trust may be recommended.

6. Retirement – This event may also trigger the need to make changes to an existing will. For example, many retirees sell their homes and move to other states. But state laws can vary widely. Furthermore, individuals may consider a power of attorney that enables someone else to act on their behalf medically or financially in the event of incapacity.

7. Tax law revisions – The Internal Revenue Code is regularly changed. In fact, the estate tax rules have undergone significant changes in recent years and more changes could occur. A will should be reviewed to take advantage of maximum tax benefits that exist today so it may have to be updated if tax laws change.

Note: In some cases, a will might be amended with a “codicil.” However, in many cases, it is best to draft a new will.  Consult with one of our firm’s estate planning attorneys if you have any questions on how to proceed.

While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.

February Special: Save $100 on Will Preparation

Contact Us

Where to Store an Original Will

Before it’s too late,
 people should let 
someone know
 where their original
 will is stored. If one 
can’t be found after 
a person dies, a
court may decide it 
was destroyed.

It’s a good idea to keep the original in a safe deposit box or a fire-resistant and high-heat rated home safe. A copy should be kept in other important papers at home, and other copies may be shared with named executors or other trusted individuals. Some states require that safe deposit boxes be sealed after the renter dies, but in Texas, a safe deposit box can be opened to remove a will to be filed with the Court.

Other options include:

• Have your attorney and/or your accountant retain the original will.
• Record an original will in the office of the county Clerk.
• Have your executor keep the will.
• Store the will at home. Of course, it could be lost, destroyed or discovered by an interested party who could deliberately destroy, conceal, or alter it.

Consult with one of our firm’s estate planning attorneys if you have any other questions about wills or estate planning.

A Trust to Help Fund the Payment of Estate Taxes 22 Jan 2018, 9:17 pm

Consider this dilemma faced by a high-net worth individual: He doesn’t want his heirs to be burdened with estate taxes so he takes out a life insurance policy to cover the tax bill. But then the proceeds of the insurance policy wind up as part of his estate — only to be included for estate tax purposes. In this case, the individual might solve the problem by setting up an irrevocable life insurance trust (ILIT).

What Are ILITs and How Are They Used?

There are many estates that are subject to estate taxes, either the federal estate tax, or an estate or inheritance tax levied by the state. Consult with your tax adviser to determine your potential tax liability. If estate taxes are expected, you should consider the use of an irrevocable life insurance trust.   

The reason: The proceeds of a life insurance policy that an irrevocable trust holds are exempt from estate tax. (The trust is subject to its own income tax, which is a factor to consider.)

Generally, life insurance proceeds are included in the gross Estate for estate tax purposes. The estate must pay the tax on the life insurance proceeds if they are subject to estate taxes. However, if the life insurance is held in an ILIT, then the proceeds escape estate taxation.

Many people want life insurance so their estates can use the proceeds to pay for estate taxes. It doesn’t make sense to subject the proceeds to estate taxes, and then have less money to pay the total estate tax bill.

An ILIT might makes sense but there are many rules to follow and you should not attempt to create an ILIT without legal counsel. A comprehensive review of your estate and assets is necessary to determine whether an ILIT is the correct estate planning tool in your situation.

How to Create an ILIT

There are a couple ways to create an ILIT. Either an individual already has life insurance and wants to transfer the life insurance into an ILIT, or the ILIT trustee purchases the life insurance.The proper type of life insurance for the use in an ILIT can be determined with the help of an insurance professional.

Be aware that with a transfer of a current life insurance policy to an ILIT, there is a “look back” period. That means if death occurs within the look back period, the proceeds are subject to estate tax.

The grantor (also know as the settlor, donor, trustor or creator) must select the trustee of the ILIT. The trustee has important tasks to consider when managing the trust, most importantly, not to let a lapse occur in the life insurance policy. The grantor must make a “present interest” gift to the trustee to pay premiums on the life insurance. The trustee must then notify the beneficiaries of their present right to withdraw the trust proceeds. This is known as “Crummey Powers.”

More specifically, in 2018, the grantor can make an annual gift of $15,000 or less per beneficiary to the trustee for the premiums of the life insurance (up from $14,000 in 2017). Any annual gift above the $15,000 per beneficiary amount would be included in the grantor’s lifetime gift amount exemption. The trustee then writes a “Crummey Letter” to the beneficiaries informing them of their right to withdraw the gift amount. If the beneficiaries opt not to withdraw the money, the trustee can use it to pay the premium on the life insurance.

Possible Concerns

1. A grantor must consider the cost of creating the ILIT as well as the administrative
expenses of maintaining the trust.
2. Be aware that an irrevocable trust is just that — irrevocable. The grantor cannot alter the terms of the ILIT after its execution. The life insurance policy must stay in the trust. The policy may lapse or there may be a surrender value, but the grantor cannot change the terms. So, if at a later date, the grantor wants to have different beneficiaries, this will be impossible with an ILIT.
3. The grantor cannot borrow against the policy.

To sum up, the primary role of an ILIT is to help fund the payment of estate taxes with the use of life insurance proceeds that are not considered part of the creator’s estate.

The trust receives the life insurance proceeds free of estate taxes. To receive this favorable tax treatment, the trust must be irrevocable — meaning that its terms can’t be changed once it is set up. If you want more information about how an irrevocable life insurance trust could work in your situation, consult with one of our firm’s estate planning attorneys.

Would a Revocable Trust be Beneficial to You? 9 Dec 2017, 7:48 pm

When developing an estate plan, a revocable trust can provide benefits that, in some cases, significantly outweigh the cost of setting one up. A revocable trust offers great flexibility, can save money by avoiding probate, provides privacy about your finances and it is still easy to amend when needed.

A trust is a written arrangement under which one person, called a trustee, holds legal title to property for a beneficiary. You can be the trustee of your own living trust and keep total control over the assets in the trust.

Trusts generally fall within two categories:
1. Living trusts created during the lifetime of individuals. Living trusts, also know as “inter vivos trusts,” include:
-Revocable Trusts that you (the grantor or settlor) create and control during your lifetime. You can revoke or amend the trust as long as you live.
-Irrevocable Trusts, in which the grantor relinquishes the right to amend or cancel the trust at a later date.

2. Testamentary trusts created upon the death of an individual through an instrument such as a will.

Here are three of the potential benefits of setting up a revocable trust.

Benefit #1:

You gain more flexibility when you plan for your estate. The trust allows you the flexibility to add or remove assets during your lifetime. You can also make changes to income beneficiaries and remainder beneficiaries or cancel the trust altogether. Nevertheless, extreme care should be taken before creating, amending or canceling a trust to ensure it is handled properly. Discuss it with your estate planning attorney.

Benefit #2:

A revocable trust avoids probate and limits the costs that your estate and heirs will generally have to pay. Probate is the court proceeding in which the executor named in the last will and testament petitions the court to declare the document as valid and allows the executor to collect and distribute assets according to the terms set out in the will.

This process can be very time consuming. If an estate winds up in probate, in some cases, months or even years may pass before the assets are fully dispersed. In addition, the court can place restrictions on how the executor can distribute assets. For example, if the estate contains real property, such as a home, the executor may have to obtain court permission to sell it.

With a revocable trust, the trustee can more efficiently distribute the assets. Moreover, the cost savings can be significant because the trust avoids all the paperwork, court intervention, hearings and legal filings that make up the probate process. These savings sometimes offset the initial costs of setting up the trust.

In addition, because probate of a revocable trust is generally unnecessary, the trustee can keep the terms of the trust private rather than having it become a part of the public court record. In other words, there will be no public disclosure of the trust assets and what your heirs will receive. However, if you name the revocable trust in your will — known as a “pour over will” — the court many require a copy of the trust for the court file.

Benefit #3:

The trust can be used as a beneficiary for certain assets that are distributed outside of a will. These are assets that do not require probate, such as retirement accounts, life insurance and certain brokerage accounts with a payment upon death beneficiary (along with joint accounts). With care and proper advice, an individual can name the trust the beneficiary for some of these assets. When the assets are distributed to the trust, the trustee then disperses them according to the terms of the trust.
Note: There may be tax consequences at the time of the transfer of some assets.

Discuss with our estate planning attorneys whether a revocable trust would be beneficial in your estate plan. Using one can streamline the estate process and make it less expensive to collect and distribute assets.

Choosing the Right Legal Form for Your Business 13 Nov 2017, 9:21 pm

Choosing the appropriate legal form for a business is one of the first issues most entrepreneurs face. It is an important decision at the formation stage and also as a business grows.

Sole proprietorships are generally the easiest. Corporations offer some different advantages, but often with additional complexity.

This article addresses some of the pros and cons of different types of legal structures for businesses. Even if your enterprise has been in existence for a while, it may be time to review your options. There can be many complexities in determining the best legal structure and a qualified attorney may be of value when evaluating your choices.

Legal Form Considerations:

At a minimum, consider the following issues when evaluating the business structure decision:

• Number of owners
• Personal liability of owners
• Tax treatment
• Control and management
• Capital contributions

Here is a chart that provides some of the basic information to consider:

At Barnett & Leuty, P.C., we assist businesses of all sizes as they develop, grow and succeed. We represent not only the businesses themselves, but also the owners, managers and professionals who run the businesses. Contact us if you have questions about choosing the right legal form for your business.

Estate Planning for Singles- Current Rules May Dictate Changes 12 Oct 2017, 6:37 pm

Legislation enacted a few years ago made permanent changes to the federal estate and gift tax rules affecting estate planning for single individuals. Specifically, here are the significant estate changes in the American Taxpayer Relief Act:

• The 2017 federal estate tax exemption is $5.49 million for estates of individuals who die in 2017 (up from $5.45 million in 2016). A 40% tax rate applies to the value of an estate in excess of the $5.49 million exemption.
• The federal gift tax exemption is also set at $5.49 million for 2017 (up from $5.45 million in 2016). Gifts in excess of the $5.49 million exemption will be taxed at 40%.

This is all good news, but your estate plan may need an update to take advantage.

Singles With an Estate of Less than $5.49 Million

If your estate is worth less than $5.49 million and you die in 2017, everything you own can be left to relatives and loved ones without any federal estate tax bill.

However, you still may need to be aware of implications to your estate. Let’s say you had estate planning documents drawn up years ago that directed the executor of your estate to make enough charitable donations to get the value of an estate below the exemption amounts that applied in previous years. These amounts were much smaller than $5.49 million (for example, $2 million for 2008 and $3.5 million for 2009). If this is your situation, the bigger $5.49 million exemption gives you the opportunity to leave more to relatives and loved ones (and less to charity) without any federal estate tax.

Singles With an Estate of More than $5.49 Million

You might want to change your estate planning documents to direct the executor to give away more to IRS-approved charities in order to get your taxable estate below the $5.49 million threshold.

Put another way, up to $5.49 million can be left to relatives and loved ones without any federal estate tax hit if you die in 2017. If you leave more, there will be a federal estate tax bill to pay. But the taxable value of your estate is reduced by donations that the executor of your estate is directed to make to IRS-approved charities. Of course, increasing such donations means less for relatives and loved ones.

Consult with your estate planning attorney for other steps you can take to reduce your taxable estate. Here are three options:
1. Make annual gifts of up to $14,000 to relatives and loved ones. Thanks to the annual federal gift tax exclusion, such gifts will reduce the taxable value of your estate but they will not reduce your $5.49 million federal estate tax exemption or your $5.49 million lifetime federal gift tax exemption. For example, say you have two adult children and two grandchildren. You could give them each $14,000 this year for a total of $56,000 (4 times $14,000). Then, you could do the same thing again next year. Your taxable estate would be reduced by $112,000 (2 times $56,000) with no adverse federal estate or gift tax effects.

2. Pay college tuition expenses (not room and board) or medical bills for relatives and loved ones. You can give away unlimited amounts for these purposes without reducing your $5.49 million federal estate tax exemption or your $5.49 million lifetime federal gift tax exemption — as long as you make the payments directly to the college or medical service provider.

3. Give away appreciating assets to relatives and loved ones while you are still alive. Thanks to the generous federal gift tax exemption, you can give away up to $5.49 million worth of appreciating assets right now without triggering any federal gift tax hit. This can be on top of cash gifts to relatives and loved ones that take advantage of the $14,000 annual exclusion and on top of cash gifts to directly pay college tuition or medical expenses for relatives and loved ones.

Important: if you make gifts that chip away or use up your $5.49 million federal gift tax exemption, your $5.49 million federal estate tax exemption will be reduced dollar-for-dollar. But that is okay if you are giving away appreciating assets — because the future appreciation will be kept out of your taxable estate.

Finally: Your estate planning attorney can help optimize your estate plan under the current rules. Be sure to consider any state estate tax rules that are applicable when making changes to reflect the federal estate tax rules. Your estate planning attorney can advise you on that, too.

Nursing Home Fraud: Studies Expose a Little-Known Risk 21 Sep 2017, 6:37 pm

Holidays bring friends and families together. But sadly, they also bring an increase in the frequency of financial frauds against elderly people, according to the Metlife Study of Elder Financial Abuse. Nursing home fraud is a little known risk that is frequently unreported.

For example, during the holidays, an unscrupulous caretaker might play off an elderly person’s sentimentality and persuade him or her to gift jewelry and other personal assets. Or thieves outside the elder’s inner circle might count on family members to be distracted — and less diligent about financial oversight — during the frenetic holiday season.

Estimated Nursing Home Fraud Losses

Although it peaks at year end, elder financial abuse occurs throughout the year. Americans age 60 and older lost an estimated $2.9 billion to financial exploitation, according to the Metlife study. This estimate exposes just the tip of the iceberg, however. It covers only reported financial abuse cases involving senior citizens.

For each case of financial exploitation that authorities prosecute, the New York State Elder Abuse Prevalence Study estimates that another 44 financial exploitations go unreported. That’s why elder financial abuse has been dubbed “The Crime of the 21st century.”

The Trusted Thief

Most stories about elder financial exploitation focus on family or friends who abuse their roles as caretakers and guardians. News agencies also report numerous incidents of Medicare or Medicaid fraud that cost taxpayers millions of dollars each year. These high profile financial scams overshadow another costly scam perpetrated by trusted professionals — nursing home fraud.

Nursing home administrators commit an estimated 6% of financial exploitations, according to the Metlife study. But frauds committed by legitimate businesses — including nursing homes — tend to result in a higher average loss per incident than losses from friends, family members or strangers. In fact, nursing homes and other businesses caused 39% of the total losses from senior financial abuse.

Examples of nursing home frauds committed by bookkeepers, office managers and other nursing home administrators include:
• Diverted Social Security checks
• Forged or coerced signatures
• Checks written for cash or the administrator’s personal expenses
• Misappropriated nursing home account refunds
• Identity theft
• Improper use of conservatorship

One prosecuted case involves a business office coordinator of a convalescent and rehabilitation center in Mississippi. The individual pled guilty to 29 counts of exploitation of a vulnerable person and one count of conspiracy. She allegedly stole more than $100,000 from residents’ trust funds.

Protecting Your Loved One Against Nursing Home Fraud

You might wonder how a crime like this happens — and just how prevalent it is. One USA Today investigation reports that more than 100 cases involving thefts from nursing home trust funds have occurred in the United States since 2010.

So, what can you do to help parents, grandparents and other loved ones living in a nursing home from getting swindled?

Do your homework. When you’re selecting a rehabilitation or nursing facility, ask questions about the internal controls they’ve implemented to prevent and detect elder financial abuse:
• Does the facility conduct credit and criminal background checks on all employees (not just doctors, nurses and other caregivers)?
• Does the facility have a written statement of residents’ rights?
• Has the facility ever caught an employee stealing — and how was it handled?
• Does the facility have formal policies and procedures in place to investigate fraud allegations?

Involve family members in financial matters. Many residents start in their facility’s assisted-living wing and move to rehab or convalescent wings as their needs change. Residents have the right to handle their personal finances — and people in assist-living arrangements often do. But it’s a good idea for high-functioning seniors to fill trusted family members in on their finances, including account numbers, names of advisors and personal balance sheets. They also might assign power of attorney to someone who’s trusted, unbiased and financially secure themselves.

As a senior’s cognitive abilities start to decline, family members may invoke financial power of attorney or be granted guardianship. Most facilities don’t mandate control over their residents’ finances. Relatives can retain control, although it can be time consuming to manage another person’s income and expenses.

If the nursing home handles a loved one’s finances, watch for these warning signs:
• Sudden changes in account balances, banks or professional advisors
• Unusual purchases or gifts to caregivers
• Unauthorized ATM withdrawals
• Unfamiliar signatures on checks or legal documents
• Unexplained disappearances of valuable possessions
• Unpaid bills, despite adequate financial resources
• Deteriorated credit scores

If you notice any of these red flags, notify the nursing home and your attorney immediately.

Listen to your loved ones. Above all, if an elderly relative reports financial exploitation, take him or her seriously. It’s easy to dismiss a complaint as part of a faltering mental condition, especially if the senior appears to be otherwise well cared-for. But the costs of elder financial abuse go beyond monetary losses and may include feelings of insecurity or loss of self-worth — especially if no one listens to them.

The good news is that if a nursing home administrator is convicted of stealing your loved one’s assets, the facility’s insurance will reimburse your economic losses. If a senior takes valuable assets — such as cameras, furniture or jewelry — into a nursing home, list and photograph the items to help support insurance claims if the possessions are lost or stolen.

Tax Responsibilities After Someone Dies 8 Aug 2017, 7:00 pm

The death of a loved one is always difficult but it can be even more challenging if you are the one who must handle all the resulting tax responsibilities.

There are a couple different ways you can assume the required duties:

• You may be named as the executor of the decedent’s estate under his or her will.
• In the absence of a will, you could be appointed as the administrator by the probate court.

Either way, the duties are essentially the same, so for purposes of this article, we’ll call the person with the responsibility the executor.

What must be done? The executor is charged with the task of finding the estate’s assets, paying off its debts, and distributing whatever is left to the rightful heirs and beneficiaries. The executor is also required to file the necessary tax returns and pay any taxes due. If you are the executor and fail to do this, the IRS can come after you personally for tax underpayments, plus penalties and interest. So you need to understand what is involved and get the proper assistance from your attorney.

The duties may include:

Make Sure the Decedent’s Final 1040 Form is Filed

The decedent’s final tax return covers the period from January 1st through the date of death. The return is due on the normal date (generally April 15 of the following year). If the decedent was unmarried, the final 1040 is prepared in the usual fashion. When there is a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive as of year end. The final joint return includes the decedent’s income and deductions up to the time of death, plus the surviving spouse’s income and deductions for the entire year.

The Handling of Medical Expenses

If large uninsured medical expenses were accrued but not paid before death, the executor must make an important choice about how they are treated for tax purposes. Along with any medical expenses paid before death, these accrued expenses can generally be deducted on the decedent’s final 1040 to the extent they exceed 7.5% or 10% of adjusted gross income (AGI). This is an exception to the general rule that expenses must be paid in cash before they can be deducted. Final medical expenses can easily exceed 7.5% or 10% of AGI, especially if death occurs early in the year before much income is earned.
Important Note: If the decedent was age 65 or older in 2016, the  7.5% figure applies for his or her 2016 tax return. As of 2017, the 10% applies regardless of age.

Alternatively, an executor can choose to deduct the accrued medical expenses on the decedent’s federal estate tax return. Of course, this is the wrong choice if no federal estate tax is owed. However, when estate tax is due, deducting accrued medical expenses on the estate tax return is usually the tax-smart option. Why? Because the estate tax rate is 40% while the decedent’s final income tax rate could be as low as 10%. Plus, the full amount of the accrued medical expenses can be deducted on the estate tax return (not just the excess over 10% or 7.5% of AGI).

In addition to the final tax return and the medical expenses, here are the rest of the tax-related duties:

File the Estate’s Income Tax Returns

Immediately after death, the decedent’s estate may take over ownership of some or all of the decedent’s assets. If so, the estate will be taxed on its income under complicated IRS guidelines applicable to trusts.

Important distinctions: We are talking about income taxes for the estate, not the final income taxes of the decedent. And the federal estate tax is an entirely different subject.

Small estates (with gross income under $600) aren’t required to file income tax returns. If you are in charge of an estate that must file, get professional help to assist you with this onerous chore because the tax law is very complex.

File the Estate’s Estate Tax Return

The federal estate tax return is filed on Form 706. Assuming the decedent did not make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the estate is worth over $5.49 million (up from $5.45 million in 2016). By sizable gifts, we mean in excess of $14,000 to a single recipient for 2017 (and 2016). If sizable gifts were made, the excess over the $14,000 threshold is added back to the estate to see if the annual limit in effect for that year is surpassed.

Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate tax purposes — even if the money goes directly to policy beneficiaries. In fact, life insurance proceeds are the most common cause of unexpected estate tax bills.

One other very important point: Assets inherited by a surviving spouse are not included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is called the unlimited marital deduction privilege and it’s the most common reason why many large estates don’t owe any federal estate tax.

If you are the executor of a substantial estate, consult with your tax adviser even if you think no estate tax is actually due. If you’re correct, the cost to confirm your conclusion will be minimal. If you’re wrong, filing Form 706 is generally a complicated matter and you may need professional assistance. Also, an experienced estate advisor may be able to find perfectly legal ways to substantially reduce the tax bite or even make it disappear.

More Miscellaneous Details

• If an estate must file income tax or estate tax returns, a federal employer identification number (EIN) must be obtained from the IRS.
• You should open a checking account in the name of the estate with some funds transferred from the decedent’s accounts.
  The bank will ask for the estate’s EIN. Use the new account to accept deposits from income earned by the estate and to pay expenses – such as outstanding bills, funeral and medical expenses, and, of course, taxes.
• State income tax returns and perhaps a state estate tax return will have to be filed.

An important planning step you can take right now, is to check the beneficiary designations for your bank accounts, brokerage firm accounts, tax-favored retirement accounts, company benefit plans, life insurance policies, annuities and 529 college accounts. Many people fail to take these simple steps, and the consequences can be dire. For more information, see: An Important Estate Planning Step to Take Now.

Valuation of Business Assets in Divorce 10 Jul 2017, 9:07 pm

Sometimes estranged spouses can remain fair, rational and civil during divorce proceedings. But in other cases, a divorce can turn ugly. When the couple’s assets involve a business interest, the situation can be extremely complex.

Husbands and wives may become emotional and vindictive, hiding assets and withholding information. These behaviors can compromise the accuracy of asset appraisals and property allocations. But financial experts who specialize in divorce are accustomed to overcoming various roadblocks during discovery.

One Ohio Court of Appeals case illustrates some of the games people play in divorce court. In the end, neither spouse was satisfied with the trial court decision, so both made claims on appeal. Here are some of the valuation-related claims and how the expert witness managed to reliably value the business, despite having limited access to the company’s financial records, management and facilities.

Access Denied, Claim Denied

When Arun and Mona Chattree decided to call it quits after 48 years of marriage, their most significant marital asset was Arun’s 100 percent interest in Community Behavioral Health Center (CBHC), a mental health service company that was licensed in Ohio. During divorce proceedings, Arun refused to allow Mona’s expert to visit CBHC’s office or interview management.

The court ordered Arun to give Mona $5,000 to retain an appraisal expert to determine the value of CBHC, but he dragged his feet for six months. He also continuously delayed sending the expert court-ordered financial records, causing Mona’s expert to miss his original deposition date and submit his final report after the trial had begun.

One of Arun’s claims on appeal was that the court should exclude from evidence the appraisal testimony and report prepared by Mona’s expert. The appeals court denied this claim, because his failure to appear at deposition and untimely report resulted directly from Arun’s misconduct and repeated failures to comply with lower court orders.

Both spouses appealed the lower court ruling that CBHC was worth $1.5 million on December 31, 2008 on a controlling, nonmarketable basis. Arun argued the business had no value, given its liabilities and limited assets. Mona argued for her expert’s original appraisal setting the value at more than $1.9 million.

Mona’s expert used the capitalization of earnings method, relying solely on tax returns and audited financial statements from 2005 to 2008. His $1.9 million value included:

• A 10 percent discount for lack of marketability
• A normalizing adjustment for nonrecurring pension plan costs
• A normalizing adjustment for the cash surrender value of officer life insurance policies, a nonoperating asset valued at approximately $600,000
• A loan to its shareholder (Arun) for roughly $400,000 (see right-hand box on factoring in holder loans).

Consistent with Ohio legal precedent, no adjustment to the value of the business was made for goodwill. In Ohio, personal and enterprise goodwill in professional practice are generally marital property. Other states may handle goodwill differently, however.Arun claimed the valuator’s methodology was unreliable “due to his unfamiliarity with CBHC and its business structure.” Specifically, Arun contended that Mona’s expert didn’t understand Medicare and Medicaid regulations, the financing requirements for CBHC’s pension plan, and the transferability of the company’s license. (Chattree v. Chattree (2014-Ohio-489, 2/13/14)

Reliable Given the Limitations

Along these lines, the expert’s report contained the following disclosure:
Due to limited access to information and management, [my] analysis was not subject to the development or reporting standards set forth in the American Institute of Certified Public Accountants Statement of Standards for Valuation Services No. 1 (AICPA) nor the valuation standards as promulgated by the National Association of Certified Valuation Analysts (NACVA).
Additional information that could have impacted his conclusion — but Arun withheld from the expert — included:

• Access to management or the opportunity to interview management
• Details about certain balance sheet and income statement accounts
• Corporate governance documents
• An organizational chart
• Budgets and forecasts
• Other relevant information, such as significant contractual relationships and details of previous ownership transactions.

The valuator’s lack of knowledge about the day-to-day operations of CBHC stemmed primarily from Arun’s refusal to consent to a site visit or a management interview. The court refused to reward Arun for such conduct, so it ruled that the expert’s testimony and appraisal report, despite its limitations, were “reliable and based on application of his disciplines, practices, and knowledge of the facts of this case.” In the eyes of the court, the expert did the best he could with limited financial information.

In addition, the Ohio Court of Appeals reversed the lower court’s pension plan adjustment, which was based on an apparent misinterpretation of the expert’s original testimony. The appellate court ruled that the lower court erred in valuing the business at $1.5 million and remanded the case to the trial court to determine whether the appraised value of $1.9 million was appropriate.

Play by the Rules: In divorce cases that involve private business interests, it may be tempting for controlling shareholders to downplay assets, income, strengths and growth opportunities — and play up expenses, liabilities, weaknesses and threats — to alter the appraised value of the company. But as the case described above demonstrates, many valuation-related issues are left to the court’s discretion, and judges don’t look favorably upon spouses who hide assets, withhold information or otherwise defy court orders.

It’s best to consult with an attorney with questions about your situation.