Barnes Lipscomb & Stewart PLLC

Don’t Get Stuck in a Nannygate Tax Situation

Even if you are not a high profile politician being considered for public office, you should know that the so-called “nanny tax” refers to any household employee, including caregivers and housekeepers.

Remember Zoë Baird? She was on track to be the first female U.S. attorney general in 1993, when it was revealed that she had failed to pay the “nanny tax” for her household employee. She wasn’t the first person whose career was sidetracked by this issue, and she’s also not the last.

Kiplinger’s recent article, “Paying Taxes for a Hired Caregiver,” says that now we have Congressman Mick Mulvaney, who was President Donald Trump’s choice to run the Office of Management and Budget (OMB). Congressman Mulvaney admitted that he failed to pay five years’ worth of taxes for the woman he and his wife hired in 2000 to help take care of their triplets.

 There was also Andrew Puzder. Once he was nominated as Labor Secretary, he disclosed that he hadn’t paid the required taxes due for a household employee who was illegally in the U.S. Both men stated in their confirmation hearings that they’d paid the back taxes they owed the government.

Remember that the nanny tax isn’t just for Mary Poppins, a whimsical movie role played by Julie Andrews who had charge of a banker’s kids. The so-called nanny tax covers any household employee, like a housekeeper, landscaper, or—of particular interest to us here—the caregiver for your spouse or elderly parent. If the caregiver is provided through an agency or is self-employed, you don’t have to be concerned. However, if you hired the individual yourself and control the type of work that is done, you’re most likely considered to be an employer in the eyes of the IRS.

If you hired the caregiver and control his or her work and if you paid more than $2,000 last year, the nanny tax applies. When you file your tax return, you are required to include a Schedule H and pay the 15.3% Social Security and Medicare tax on the wages you paid. The tax is supposed to be split evenly between you and your employee, but whether you withheld the tax from your employee’s wages during the year or not, you’re responsible to pay the full amount when you file your return.

There’s more: if you paid more than $1,000 to any household employees during any calendar quarter in either 2015 or 2016, you also owe the federal unemployment tax and depending on your state, you may owe state unemployment tax.

Provide your employee with a W-2 that shows wages paid and any withholding taxes (these were due at the end of January) and make sure to send a copy to the Social Security Administration.

After all, you never know when the inspiration to enter public office may strike, and you wouldn’t want this detail to derail providing service to your community!

Reference: Kiplinger’s (March 2017) “Paying Taxes for a Hired Caregiver”

Think of Your Will as a Tribute and an Act of Caring

Think of your will as a love letter that will tell how you want to care for your family and friends when you are gone. It is not just a way to direct how you want your assets to be distributed.

Estate planning can make people uncomfortable,  since it forces us to contemplate our own death as well as the idea that after we are gone, the world will continue. But it is recommended that you pivot your thinking and consider a will as a message to those who you leave behind. It shows that you thought enough about them to spare them from the stress and expenses that result when there is no will. It can also give you peace of mind, knowing that you’ve taken care of the hard details and made the necessary choices.

Some of the elements of final planning are described below.

In the article, “A Will Can Be a Beautiful Thing,” Kiplinger’s advises that the initial step in estate planning is creating a will. A recent survey found that 64% percent of American adults don't have a will. They either decided they didn't need one or they have just kept putting it off. A will instructs who you want to inherit your assets. It’s also used to let parents name a guardian to care for their minor children. Without a will, all of your estate may wind up in probate court. One option of an estate plan is a living trust. A trust transfers assets from the trust to beneficiaries without having to go through the probate process.

Here are a few other reminders about estate plans:

Spell Out Your Decisions on End-of-Life Care. Tell loved ones your wishes in the event that you are unable to make medical decisions for yourself. This includes life support, sustenance and pain treatment,  as well as organ donation. A living will also contains a health care declaration with a power of attorney designating the agent you name to ensure that your medical instructions are executed.

Check Your Beneficiaries. Fill out each of the beneficiary designations for your bank accounts, brokerage accounts and life insurance policies. You should specify both your primary and contingent beneficiaries.

Document Your Funeral Wishes.  Specify whether you want to be buried or cremated. You can also list favorite music or scriptures for your end-of-life celebration or funeral. You should also note if you’re a veteran and whether you have funds put aside for funeral expenses.

Important Papers and Information. Keep real estate and car deeds, wills, trusts, insurance policies, retirement benefits, 401(k), and IRA documents in a safe location.  However, make sure to tell the executor of your estate where these items are kept.

Planning for Married People. Each member of the couple should have their own will, since it is not likely that you will both pass away at the same time. If you have a separate will for each spouse, you can take into consideration circumstances like children from a prior marriage, charitable causes that you want to support that your spouse may not value as much as you do and your personal effects.

Your will can be another way that you show your loved ones how much they mean to you, and that you want to protect them, even after death.

Reference: Kiplinger’s (April 2017) “A Will Can Be a Beautiful Thing”

Legislation to Lighten Estate Tax Didn’t Pass in the Past, May be Reintroduced Again

The proposed legislation would, according to the Representative from Maryland, make it easier for family business owners to transfer their business to the next generation.

A different approach to estate taxes comes from a House Republican, who proposes that taxpayers make annual payments for a certain number of years during their lifetime, instead of having their estate pay estate taxes when they die. He plans to reintroduce the bill, if tax reform measures fail to include elimination of the estate tax.

Representative Andy Harris (R-Md.) has again proposed the American Solution for Simplifying the Estate Tax (ASSET) Act. Introduced in previous Congresses, the act would enable taxpayers to pay a percentage of their modified adjusted gross income annually for a certain number of years to avoid estate taxes at death. Harris introduced versions of the ASSET Act in 2014 and 2015.

Bloomberg’s article, “Maryland Rep Has Backup Estate Plan, If Tax Reform Fizzles,” says that if enough Republicans want the tax reform to be revenue-neutral, they’ll need to find significant revenue increases to offset President Trump’s proposed tax cuts.

Trump proposed a repeal of the estate tax during his campaign.  It is also included in his tax plan  and in the House GOP’s tax reform framework.

In the 2015 version of Harris’ bill, taxpayers could elect to make annual payments of 1% of their modified adjusted gross income for a minimum seven-year period, in lieu of existing estate and generation-skipping transfer taxes. However, the Joint Committee on Taxation said that the 2015 bill would cost the government money. Thus, the new legislation will include changes to make it revenue-neutral. Harris commented that he’s considering increasing either the annual payment amount or the seven-year payment window.

The bill does not appear to be gaining much traction with the American Farm Bureau Federation. Another group, The Family Business Coalition, says that its immediate priority is to pass full repeal of the estate tax but that, failing a complete repeal, this bill would be a huge improvement. A member of the pro-estate tax group Patriotic Millionaires, who says he is not a spokesperson for the group, says that “….any tax that allows taxpayers to pay a percentage of AGI rather than of wealth is going to enable a great deal of game playing and evasion.”

Reference: Bloomberg (May 8, 2017) “Maryland Rep Has Backup Estate Plan If Tax Reform Fizzles”

Great Grades and Great Planning Equally Needed for a College Education

The cost of higher education is growing so rapidly, that students and families are finding it a huge financial challenge. Succeed by starting savings and planning as early as possible.

Here’s a scary number: the cost of a college education is growing faster than inflation. Tuition increased by approximately 9% from 2012 to 2017. Figuring out how to pay for college requires advance planning and becoming extremely knowledgeable about loans, grants, scholarships and other available kinds of assistance.

Higher education costs are out-pacing inflation by an average of 4%. From 2012 to 2017, tuition has risen by about 9% across the board. With these escalating expenses, some families are having a tough time deciding the best way to pay for college.

The Michigan State University Extension recently posted an article, “Planning and paying for higher education,” that says applying for financial aid is usually the first step people will take to help with the expense.

There are four basic types of aid that can be received:

• work study;
• grants;
• loans (federal and private); and

Aid is requested by completing the Free Application for Federal Student Aid (FAFSA form). This is filed between October and February prior to the student’s fall and spring classes to see what financial aid he or she is eligible to receive based on need. Student resources, parent’s resources (if the student is considered a dependent) and academic status (full-time, part-time) are factored into the equation.

Once the FAFSA form is filled out, the Expected Family Contribution (EFC) is created. The EFC isn’t the amount of money the family will have to pay for college and it’s not the amount of federal student aid the student will receive. It’s a number used by the school to calculate the amount of federal student aid the student is eligible to receive. The school sends financial aid award letters in the spring, which will help in calculating what will be required to defray the cost of school for a year.

When a student and parent have time, they should look into available college saving tools, such as 529 educational savings plans. Withdrawals from these plans aren’t taxable, the earnings are tax deferred, the contributions are considered gifts and the funds can be transferred between siblings without an effect on American Opportunity, HOPE, and Lifetime Learning Education Tax Credits. A Coverdell Educational Savings Account is another option to assist with college expenses. It’s similar to a Roth IRA, but can only be used for education.

If you are lucky enough to have relatives who are willing and able to help with the cost of college, there are several options. Family members can gift or pay tuition directly to the college or university, without incurring any gift tax liability. They can also make contributions to a 529 account. An estate planning attorney will be able to help family members, so that their generosity aligns with their estate plan.

Reference: Michigan State University Extension (May 1, 2017) “Planning and paying for higher education”

For A Comfortable Retirement, Start Planning Early

For a healthy nest egg that will provide you with an enjoyable, worry-free retirement, you’ll need to start saving and investing now. It takes time and smart planning.

Working hard on building your retirement nest egg right now? That’s excellent! Here are five key elements of successfully growing wealth from Nasdaq’s recent post, “5 Considerations to Help You Retire Wealthy.”

1. Decrease your risk. If you lose 10% of your savings when you're younger, it’s a tough bounce. But if you lose 10% of the $1 million you saved for retirement at 65, it may be devastating. It is important to know your timeline and the level of risk you can stand.
2. Build a firm foundation. Be certain that your retirement's financial needs are addressed and secure them long before you retire. Create a practical budget and a plan that includes a structured way of drawing income from certain assets, implementing cash flow on others, dealing with inflation and taxes and thinking about asset protection in the event either you or your spouse require long-term care.
3. Hedge your risk with diversification. There's no reason not to take some risk, but you should protect against losses so you don't lose your hat. May sure that you don't go with just one investment or asset class. It is better to maintain a diversified portfolio and to consider risk-management options.
4. Be realistic. You can retire wealthy by saving your money and avoiding costly mistakes. Shift your focus slowly and strategically from accumulation to preservation, as you get nearer to retirement.
5. Seek out experts. Talk with those who have experience in taxes, estate planning and financial planning. This isn’t a do-it-yourself proposition.

Wealth doesn’t build itself, even over many decades. If your goal is to enjoy a luxurious lifestyle in retirement, you’ll need to invest time and effort, with discipline, the help of legal and financial professionals and a willingness to delay immediate gratification.

An estate planning attorney will be able to provide good guidance, while creating a plan to protect you and your loved ones before and during retirement.

Reference: Nasdaq (April 21, 2017) “5 Considerations to Help You Retire Wealthy”

How Trusts Work for Families with Minor Children

This is the worst case scenario that no one wants to think about, but if both you and your spouse should die before your children turn 18, a trust is a way to provide for your children.

Minors (children under the age of 18) who inherit assets, must have a guardian appointed to oversee the use of those assets, as explained by Trust Advisor in a recent article “Should You Create Trusts for Your Children?”.

In most instances, the guardians must be bonded and must file a formal accounting with the court each year with a petition for approval. All of these costs are taken from the child’s assets.

There is another option: instruct that a trust be created for each minor child in your will at the death of both parents. In the will, you can state that the trustee doesn’t need to post a bond or to file an accounting with the court every year.

 Setting up a trust for a minor child is usually easier and less expensive than leaving the assets outright to a minor child and having a guardian appointed. Many estate planning attorneys recommend that even if you think your children will be over 18 when both spouses die, consider keeping the assets in a trust for the children to protect them from themselves.  It is advised to wait until they reach a specific age, when they would be best ready to handle the assets. For some, this might be age 30 or 35, or older. Other parents set up the trust to continue for their entire lives to protect the assets in the trust from future claims of the child’s creditors, or in the event that he or she goes through a divorce. Assets that continue to be held in the trust, can’t be touched by a child’s current or future creditors.

Trusts can have a considerable flexibility. For instance, the trustee can be given the authority to make liberal distributions to the child for any reason the trust creator wants or for no reason at all. At a certain specific age, the child can also become a co-trustee of his or her own trust and be given the power to remove and replace the co-trustee making the distribution decisions. That can give the child significant control over his or her own trust.

A qualified estate planning attorney will be able to discuss what certain types of trusts can and cannot do, and whether or not a trust is appropriate for your family. It is important to note that a trust that works for your neighbors, may not be the right fit for you. Trusts are not “one size fits all” planning tools.

Reference: Trust Advisor (March 28, 2017) “Should You Create Trusts for Your Children?”

When Bitcoin and Digital Assets are Part of the Estate

Because they are relatively new, dealing with digital currency and other digital assets requires a little extra care in estate planning.

Whether you think bitcoins are the global currency of the future or a financial disaster, many Americans have bitcoins, and practically all Americans have digital assets of some kind. Estate planning today needs to address these assets, and an article in Coin Journal, “The 7 Steps of Estate Planning for Bitcoin and Other Digital Assets,” offers some useful tips.

1: Conduct an Inventory of What’s Already Owned. Make sure that you have a good idea of what you really have. People often forget about bitcoin in an old wallet, only to find it later.  It is also important to list all of the digital assets currently owned and to write down how each specific asset can be accessed in the future.

2: Separate Your Assets into Tiers. Divide up your digital assets into three tiers: (i) easily spendable; (ii) mid-range storage; and (iii) long-term cold storage. Don’t lock up all of your bitcoin, because you might want to spend it.

3: Create a Plan for Each Tier. After you set up the tiers, create a plan for each of them. Think about balancing security, ease-of-use and accessibility. In addition to seeing what’s already working, a digital assets owner should also consider options that have stronger security protections. Some of these are hardware wallets, multi-factor authentication and multi-signature addresses.

4: Determine Who Gets What. Here’s the actual estate planning–deciding who gets what. Remember that you need both a tech plan and a legal plan for digital assets. Give a percentage of each tier to specific people, so they can avoid the unpredictable price fluctuations that would result from leaving specific amounts of specific digital assets for each person. Be certain that your heirs can access the digital tokens. Therefore, you must give them access to critical information. Such information includes passwords or the location of a hardware wallet. In addition, speak with an estate planning attorney about state laws on leaving digital money to heirs.

5: Test the Plan. It’s critical to test the estate plan from the viewpoint of the owner of the assets and the heirs. Start with a very small value for the tests to limit losses, if something goes wrong. You should test every possible scenario of the plan’s outcome, not just the most likely outcomes.

6: Execute Your Plans. Move ahead and implement the plans. In addition, set up regular audits to make sure the funds are always accessible.

7: Protect The Plans. This includes storing plans in a location that is access controlled, tamper-evident, fire and water proof and with some degree of redundancy. Don’t store these assets in the family safe, since if something happens, you—and your heirs—could lose everything.

Reference: Coin Journal (April 21, 2017) “The 7 Steps of Estate Planning for Bitcoin and Other Digital Assets”

Steps Seniors Need to Take for Their Estate Plan and Their Loved Ones

Distributing assets is only one part of an estate plan’s purpose. The other is to provide clear direction to family members concerning aspects of aging, including illness and end-of-life decisions.

The word “estate” may bring to mind a large home on a sweeping piece of property, but it also refers to any person’s possessions—including regular homes, automobiles, investment accounts, jewelry, retirement accounts and any personal possessions. If you own anything, you have an estate and if you have an estate, you need an estate plan.

Newsmax’s recent article, “7 Tips for Seniors to Get Their Estate Plans in Order,” says that without proper estate planning, all of the decisions and arrangements for your property distribution after death will be made by a probate judge pursuant to state law—not according to your own wishes. This often results in stress and conflict among family members. The article shares some specific tips for seniors to get their estate plans in order:

1. Store personal and financial records in a safe place. Personal records are things like your name, date of birth, and Social Security number and employment records, as well as contact information for relatives and close friends. Financial records include banking and insurance information, liabilities, mortgages, deeds and estate planning documents.
2. Tell family or trusted friends that you have records. In an emergency or death, people must know the location of this information. Just give them the location, not all the details of the records. An estate planning lawyer can help.
3. Draft a will. This makes it much simpler to distribute the property in the estate and avoids strict oversight by the probate court. Detail how you want your assets distributed to family members, friends, or charities.
4. Talk to your attorney about a living trust. Trust property goes directly to the heirs after death and avoids probate. A trust is also more difficult to challenge in court than a will. It should be created by an experienced and knowledgeable trust and estate lawyer.  (In Texas avoiding probate may cost more than probate itself.  We rarely recommend a living trust to avoid probate.) 
5. Designate a power of attorney. You may become incapacitated and unable to make financial decisions on your own. A power-of-attorney authorizes a trusted person to oversee these affairs, which avoids having a court-appointed person managing your financial affairs.
6. Decisions and arrangements for incapacity and end-of-life care. An estate plan includes a healthcare directive, which details what kind of medical care and treatment you want if you are incapacitated. It also includes directions for your burial, if you wish to donate your body or organs and who you want to be in charge of these arrangements.

Reference: Newsmax (May 2, 2017) “7 Tips for Seniors to Get Their Estate Plans in Order”

Converting a Traditional IRA to a Roth May Benefit Your Heirs

Converting sooner than later, could yield a bigger account to your heirs; do the math first

Deciding whether or not to convert a traditional IRA to a Roth requires crunching the numbers. If your plan is to leave the IRA to an heir, you’ll want to work with an estate planning attorney to make sure that the decision has a positive outcome. The Roth IRA grows tax-free during your lifetime as well as the lifetime of your heir. The Vanguard Group conducted a study that demonstrated how converting a traditional IRA to a Roth can create a larger legacy but it’s not applicable to every situation.

Kiplinger’s article, “Roth Conversions May Be Boon for Heirs,” explains that the study was focused on Roth’s beyond retirement. The Vanguard's study considered a 65-year-old with a 40-year-old non-spouse beneficiary. The investor has a $100,000 traditional IRA and a $28,000 taxable account, with both earning the same 6% annual rate of return. Both the IRA owner and the heir are in the 28% tax bracket. The Vanguard study assumes the beneficiary inherits the accounts after 20 years.

If the investor keeps the traditional IRA and, upon reaching age 70, reinvests all required distributions in the taxable account, when the heir inherits, he will need to take annual RMDs (required minimum distributions) over his own life expectancy and reinvest the after-tax amounts into the taxable account. When the heir inherits the traditional IRA and taxable account, he receives $318,799. Ten years later, that increases to $536,850.

However, if the investor had converted the IRA to a Roth at age 65, the heir's total inheritance could be worth $21,000 more at inheritance. Ten years later, it could be worth up to nearly $66,000 more. With a Roth, the original owner isn’t subject to RMDs. If you use non-IRA dollars for the conversion tax bill, you can transfer more money. Vanguard’s research put the investor and her heir in the same tax bracket. By converting, you’re taking an asset with an embedded tax liability and prepaying that tax. Therefore, if the investor's tax rate is lower than the heir's, the conversion could be even more advantageous to the heir.

But the inverse is also true—if the heir is in a lower bracket, the advantage may be less or nothing.

Note that the conversion scenario assumes the IRA owner pays the conversion tax bill with funds in the taxable account and not from the IRA. That makes a difference, because if the tax had been paid with IRA money, the advantage of the conversion after 30 years would be sliced to about half.

By using outside funds to pay the tax bill, there’s more money in the tax shelter, giving its growth a serious boost and making it even a bigger bargain. Since Roth RMDs are tax-free, your heir will be able to invest 100% of the withdrawals, so the money can continue to grow tax-free.

Reference: Kiplinger (March 2017) “Roth Conversions May Be Boon for Heirs”

How Charitable Giving Works for Estate Plans Today

Philanthropically-minded families have long made charitable giving part of their estate plan. While the tax benefits were always a plus, giving was more about creating a legacy than getting a tax break.

As the discussion in Washington concerning repealing the federal estate tax heats up, some are wondering what the impact will be on charitable giving as part of estate plans. But according to an article in Financial Planning, “Charitable giving: It’s not just about taxes,” charitable giving has never been solely about tax planning. By donating highly appreciated assets or creating a charitable remainder trust or charitable lead trust, families are supporting institutions and causes that are important to them.

While planning a major gift in the past would be based in no small part on maximizing the income and estate tax benefits of the donation, today’s donors need to consider the effect of a major gift on their future financial security.

This change in focus should mean more comprehensive financial forecasting to help you in structuring large donations, and more complex gift structures may be required.

A donor may want to commit certain dollars now and in the future, but might want to make other commitments that are contingent on his or her future financial condition. He or she may pay some of a charitable pledge now, some at a later date, and the remainder based upon a future event. This gives the donor added financial security.

In some instances, a donor planning a large charitable gift, will want to consider his or her long-term care needs into the plan, and long-term care insurance can be purchased as part of the charitable planning to give the donor a safety net.

Some retiring baby boomers believe that charity is about making a difference—and often they want to be actively involved in that process. Talk with your attorney about the many ways you can tailor a donation to meet a wide range of personal objectives. This can also entail writing an agreement with the charity that specifies the way in which the donation will be used. You can also add milestones when more donations will be made, like when the charity attains specific program goals.

Aging boomers are advised to make sure that their charitable giving is realistic for their asset level and possible future costs of living, especially health care costs. Make sure that the gift you intend will not put you in a precarious financial position and discuss your giving goals with your estate planning attorney.

Reference: Financial Planning (April 11, 2017) “Charitable giving: It’s not just about taxes”