Avara Blog - Avara Law, LLC | Global Tax, Estate Planning & Business Planning Solutions

The U.S. Expat's Tax Trap: FBAR

Thu, 03 Jul 2025 12:56:00 GMT

Report of Foreign Bank and Financial Accounts, commonly known as FBAR, has been around for over 50 years now and is no longer obscure for those with foreign financial accounts who file U.S. tax returns each year. But their finer points still trap unwary taxpayers. In fact, FBAR’s apparent simplicity is almost deceitful, as innocent mistakes on FBAR mistakes can lead to disastrous results.

Report of Foreign Bank and Financial Accounts (“FBAR”)

In 1970, Congress passed the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (“BSA”). The BSA authorizes the Department of the Treasury to impose reporting and other obligations on financial institutions and businesses to detect and prevent money laundering.

1. Not an Income Tax Reporting

As mentioned above, the governing law for FBAR is the Bank Secrecy Act. The BSA is a key anti-money laundering (AML) statute in the U.S. law, but is a separate legal framework from the Internal Revenue Code (IRC). The IRC provides detailed tax rules on income, deductions, and credits as well as related procedures, tax calculations, penalties and available tax reliefs.

The BSA is administered by Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. As such, FBAR is reported to FinCEN, rather than the IRS.

2. The USD 10,000 Aggregate Trap

FBAR reporting threshold is the combined value of all foreign (non-US) accounts, not individual accounts. A single day above USD 10,000 across multiple accounts triggers filing requirements.

For example, if you have USD 5,000 in a foreign savings account + USD 5,000 in a foreign investment account + USD 1 in another foreign account on any given day during the year, all three accounts must be reported on that year’s FBAR.

Small accounts are not exempt. Fleeting balance spikes (from temporary deposits, transfers, etc) must be included when reviewing for filing requirements.

3. Signature Authority Surprises

If you have control over a foreign account, you still need to report even if you don’t own it. I once met with a corporate officer who was a signatory on multiple corporate accounts outside the U.S. This officer was a U.S. expat and had to file multiple years of missed FBARs.

Executives, trustees or Power of Attorney holders often overlook this. It is not just the direct ownership that counts towards the FBAR requirements.

However, a trust beneficiary is not required to report the trust's foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust: (1) is a United States person and (2) files an FBAR disclosing the trust's foreign financial accounts.

4. Minor Child Responsible for FBAR, Too

Minor children usually do not have to file their own income tax return. However, a minor child whose foreign bank or financial accounts exceed the filing threshold, that child is responsible for his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child.

5. Joint Accounts & Spousal Reporting

Joint accounts with a non-U.S. citizen spouse still require FBAR filing by the U.S. person, if filing requirements are met. Unless certain conditions are met, both spouses who are U.S. persons must file separate FBARs and report the entire value of the jointly owned accounts.

6. Cryptocurrency Confusion

The current FBAR regulations do not define a foreign account holding virtual currency (cryptocurrency) as a type of reportable account. But foreign exchange accounts may be included in the current reporting requirements. Furthermore, FinCEN has announced that it intends to propose to amend the regulations to include virtual currency as a type of reportable account.

7. FBAR & FATCA, hand-in-hand?

FATCA stands for the Foreign Account Tax Compliance Act . It's a U.S. federal law enacted in 2010. FATCA requires non-U.S. financial institutions (like banks, investment funds, certain insurance companies, etc.) worldwide to identify U.S. account holders and report information to the IRS. It also requires U.S. taxpayers with specified foreign financials assets to report such assets on Form 8938, Statement of Specified Foreign Financial Assets.

FATCA (Form 8938) has higher filing thresholds but covers broader assets than FBAR. Some taxpayers file FBAR but overlook FATCA, not realizing they exceed Form 8938 thresholds. FATCA is part of an income tax return, and the initial penalty for noncompliance is $10,000, plus 40% underpayment penalties if taxes are owed on undisclosed specified foreign financial assets.

All accounts reported on FBAR also need to be reviewed for FATCA applicability, or vice versa.

8. “Willful” vs. “Non-Willful” Penalties

FBAR penalties vary. For non-willful FBAR violations, the maximum civil penalty is $10,000 per violation (per year) - which is adjusted for inflation. For willful FBAR violations, the maximum civil penalty is $100,000 (also adjusted to inflation) or 50% of the account balance, whichever is greater. Additionally, criminal penalties may be assessed up to $250,000 plus imprisonment up to five years.

For FBAR purposes, "willful" conduct encompasses both knowing and reckless violations. Willfulness in the civil FBAR context does not require actual knowledge of the filing requirement. Instead, it can be established through reckless disregard, constructive knowledge, or willful blindness. Evidence of willfulness can include actions such as failing to answer questions about foreign accounts on tax returns, omitting accounts from an FBAR, or ignoring clear instructions regarding the filing requirement.

Such stiff penalties have been argued in numerous cases, many of them ruled against taxpayers. In one of the recent cases - U.S. v. Schwarzbaum - the taxpayer is a wealthy U.S. citizen who held foreign bank accounts in Switzerland and Costa Rica but failed to report them to the IRS for tax years 2007-2009. The IRS assessed FBAR penalties totaling over $13million for willful failure of FBAR reporting. While the court found part of the penalties were excessive, the ruling was that most of the penalties were not grossly disproportionate given the willful failure of FBAR reporting.

** This article (the "Content") is provided for informational purposes only and does not constitute tax or legal advice. The author disclaims all liability for actions taken based on this content. While every effort is made to ensure accuracy, readers assume full responsibility for their use of this information. Please seek professional advice from a qualified attorney, accountant, or tax professional licensed in your jurisdiction**

Protecting your kids, no matter what : Standby Guardianship

Sun, 29 Jun 2025 03:14:00 GMT

Globally mobile families are experts at navigating visas, relocations, and cultural leaps - but quite often emergency planning is not on the top of the to-do list.

For mobile families, a car accident in Seoul, a medical emergency in Lisbon, or serious immigration issues like deportation or detention disrupt the lives of all family members, especially minor children.

Essential estate planning with standby guardianship can provide a critical shield to protect global families. Standby guardianship is a great device to legally empower global parents’ chosen network to act immediately - sometimes across time zones and jurisdictions - so the family’s resilience travels together with them. This blog provides an overview of standby guardianship, and why it matters for families.

A Quick Note : we’re passionate about sharing information, but please remember that this blog post is for general knowledge only. It's not a substitute for professional legal or tax advice. Laws vary by state - for your specific jurisdiction or specific situation, always consult with a qualified attorney.

What is Standby Guardianship ?

A Standby Guardianship is a legal mechanism that allows minor children’s parents to designate a caregiver for the minor children in the event of the parents’ incapacity or unavailability. Such caregiver is called a guardian.

Parents do not lose their parental rights by appointing a standby guardian. Parental consent is required, and a parent may revoke their consent to the standby guardianship at any time.

Through standby guardianship, parents can appoint a guardian to care for their minor children during certain crises, such as serious illness, accidents, mental or physical incapacity, or adverse immigration proceedings.

Standby guardianship is available in a number of states in the U.S. A 2018 review of statutes across the U.S. showed that approximately 29 states, the District of Columbia, and the U.S. Virgin Islands have made statutory provisions for standby guardianships, according to Children’s Bureau, a federal agency within the U.S. Department of Health and Human Services (HHS).

Elements of Standby Guardianship

The Standby Guardian can step in to make critical decisions regarding your children's education, healthcare, and overall welfare during your absence. Key elements of an effective Standby Guardianship include:

Clear triggering events (e.g., death, mental incapacity, illness or injury, adverse immigration actions like detention or deportation)
Detailed procedures for how the guardianship is activated
Specific powers granted to the Standby Guardian
Duration of the guardianship and conditions for termination
Provisions for communication between parents and children during separation
Instructions regarding maintaining the children's cultural identity and language

Standby guardianship is typically established in one of two ways:

(1) Petition filing by the nominating parent(s), followed by a court hearing before a triggering event; or,

(2) Parents’ written designation, signed by two witnesses, followed by affirmation through a petition and a court hearing.

The standby guardian is authorized to assume responsibility for the child immediately upon being notified of the occurrence of a triggering event.

It's important to note that Standby Guardianship laws vary by state, with some states having specific statutory provisions while others rely on court-created mechanisms.

Contingency Planning for Emergencies

Developing comprehensive contingency plans is essential for global parents, including undocumented parents in the U.S.:

Emergency Response Plan : Create a detailed plan outlining immediate steps to be taken in an emergency, including contact information for your attorney, designated guardians, and other key individuals.
Documentation Preparation : Compile and organize important documents related to both parents and children, including names (don’t assume children know how to spell their parents’ names), birth certificates, social security cards, school records, medical records, and insurance information. Keep these documents in a secure but accessible location.
Financial Arrangements : Establish ways for accessing funds in an emergency, such as authorized users on bank accounts or prepaid legal service plans.
Communication Plan : Develop a plan for maintaining communication with children in the event of separation, including contact information for relatives in the home country and resources for facilitating international communication.
Psychological Support : Arrange for counseling or support services for minor children to help them cope with potential separation and understand the situation in an age-appropriate manner.

Practical Steps for Implementing Estate Plan (and Standby Guardianship)

(1) Document Preparation and Execution

Proper preparation and execution of your estate planning documents are essential for their validity:

Consultation : Schedule a confidential consultation with an attorney. Check if pro bono legal services are available in your community.
Information Gathering : Compile a comprehensive inventory of your assets, liabilities, and important family information.
Document Drafting : Work with your attorney to draft documents tailored to your specific circumstances and concerns.
Proper Execution : Ensure all documents are executed in accordance with state law requirements, including appropriate witnesses and notarization.
Translation : Consider having key documents translated into your native language to ensure full understanding.
Regular Review : Review and update your estate plan regularly, particularly after significant life events or changes in immigration law.

(2) Building a Support Network

Creating a network of trusted individuals and resources is vital:

Trusted Advisors : Identify individuals who can provide guidance and support, including legal, financial, and emotional assistance.
Community Organizations : Connect with immigrant advocacy groups, cultural organizations, and religious institutions that can provide resources and support.
Educational Resources : Seek out educational materials and workshops on estate planning for immigrant families to enhance your understanding of the process.
Professional Network : Develop relationships with professionals who understand your unique circumstances, including attorneys, financial advisors, and social workers.

Standby Guardianship in Maryland

(Source : People's Law Library Contributors; Updated by Web Services Librarian )

Maryland law provides a form that can be used to designate a standby guardian but does not require a specific format. Parents can complete the Parental Designation and Consent to Beginning the Standby Guardianship (Designation Form) provided by the Maryland Judiciary.

The Designation Form includes the following information:

Identity of the parents
Identity of children for whom a standby guardian is being appointed
Identity and contact information for the individual designated as the standby guardian
The designated powers and duties of the standby guardian
- The Standby Guardian can be designated as one, or both, of the following:
- Guardian of the Property - makes financial decisions (e.g., paying bills or costs to cover the child(ren)'s personal needs, applying for benefits, paying taxes).
- Guardian of Person - makes non-financial decisions (e.g., housing, medical care, education, clothing, food, and everyday needs).
When the standby guardian's authority becomes effective (sometimes called a "Triggering Event").
How long the standby guardianship lasts.
- The Designation Form indicates that the standby guardianship lasts for 180 days. If necessary, the guardian can petition the court for appointment as guardian to extend beyond 180 days.

Non-English versions of the form can be downloaded from the Standby Guardianship Project .

Parents can consent to the designation of the standby guardian together or, if the parents are no longer together, separately. A Consent to Designation of Standby Guardian is included as part of the Designation Form and should be completed if the parents are no longer together. The filing parent may be unable to obtain consent from the other parent (or any other party with parental rights). In that case, the individual should be identified on the form, and the reason for non-consent should be indicated.

Closing

Remember that estate planning is not a one-time event but an ongoing process that should be reviewed and updated regularly to reflect changes in your family circumstances, financial situation, and the legal landscape.

By taking proactive steps now, you can gain peace of mind knowing that you have done everything possible to protect your children and preserve your family's legacy.

Helpful Resources

Standby Guardianship - Child Welfare Information Gateway (Federal agency) https://www.childwelfare.gov/resources/standby-guardianship/

Maryland - General information on Standby Guardianship People's Law Library Contributors; Updated by Web Services Librarian )

District of Columbia - Standby Guardianship Tip Sheet

7th-Inning Tax Stretch: Entertainment Expenses That Make the Cut

Mon, 26 May 2025 22:57:00 GMT

This Sunday at Nationals Park, amidst the excitement and cheers for the home team, I found myself explaining entertainment deductions to a friend over the seventh-inning stretch. While the Tax Cuts and Jobs Act of 2017 significantly changed the deductibility of entertainment expenses, my scorecard shows there are still ways business owners can turn a day at the ballpark into a tax-saving opportunity. Let’s break down the tax deduction rules of entertainment expenses.

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, significantly altered the deductibility of entertainment expenses for businesses. Effective January 1, 2018, common forms of directly related and associated entertainment that are no longer deductible include expenses incurred for golf, football games, and similar business-building activities with clients or prospects.

But certain exceptions survived the curtailment of entertainment expense deductions under TCJA. Let’s review the rules to make the best out of summer outings with clients, employees, and business associates.

What are the requirements for deductibility?

Despite the general non-deductibility rule for entertainment, the tax code Section 274(e) provides specific exceptions. Under this section, businesses can continue to deduct:

entertainment, amusement, and recreation expenses a business treats as compensation to employees and that are included as wages for income tax withholding purposes;
expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
expenses for goods, services, and facilities you or a business makes available to the general public;
expenses for entertainment goods, services, and facilities that a business sells to customers; and
expenses paid on behalf of nonemployees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

Tax strategies businesses could consider

With the exceptions discussed above, businesses could consider the following to optimize tax deductibility:

Renting a taxpayer’s residence to corporate functions such as business meetings, staff retreats, or employee events (summer picnics, etc).

In considering this strategy, make sure there is a business purpose (“ordinary and necessary”) other than pure entertainment. Document that business activities took place - consider taking photos and making social media posts on them. A fair rental value should be used for the deduction as the IRS has taken the position that an S corporation cannot deduct a rental payment to one of its shareholder more than the residence’s fair rental value - as shown in Roy v. Comm’r T.C. Memo 1998-125.

Also note that, if it’s the rental of one’s residence, the tax code has a special tax exemption for the rental income on that residence if the rental was less than 15 days during the calendar year. This is known as the “Augusta rule” which is under Internal Revenue Code 280A(g). The property does not need to be a principal residence. As long as it meets other deductibility requirements, the business can claim a deduction for the rental expense, while the property owner does not need to recognize income on the rental receipts when total rental days were less than 15 days a year.
Taking employees on an employee party trip.

Tax law allows deductions when the business provides entertainment and entertainment facilities that primarily benefit rank-and-file employees - again, as long as the expenses satisfy other deductibility requirements and are adequately documented.
Partying with employees.

Tax law allows recreational expenses for employees such as holiday parties or summer picnics - 100% - however, be mindful that there is additional scrutiny when determining whether the expenses were personal or business-related if such expenses involve the business owner and the owner’s family members.
Making the owner’s vacation home a deductible entertainment facility.

Extra caution is needed when claiming a deduction for the expenses incurred to use a business owner’s vacation property for business purposes, as any expenses tainted with “entertainment” will be disallowed. However, deduction is allowed when properly structured to meet the exceptions under the tax code.

In Ireland v. Comm’r, 89 T. C. 978 (1987), Court noted that the presence of family members, without direct business reasons, suggested the property was used for entertainment, rendering the related expenses disallowed for deduction. In Ireland , the taxpayer was a stockbroker who used his 3-acre beachfront vacation property for business meetings with investment advisors, clients and other partners of his firm. However, family members of the business associates occasionally accompanied them. While Court noted that the business meetings held in the property would not constitute entertainment, the ultimate ruling was that the presence of family members tainted the business use (no matter how small) and made the property use nondeductible entertainment use. So, careful planning, tax-deductible use and proper documentation of such use is the key when claiming a deduction for using the owner’s vacation property for business.
Creating an employee entertainment facility.

Expenditure for recreational, social, or similar activity primarily to benefit employees is allowed 100% as it is specifically excepted from the disallowance rule for entertainment expenses. The catch is that the expenses must be primarily for the benefit of employees of the taxpayer other than officers, shareholders, or other highly compensated employees.
Deducting the entertainment facility, because the facility use creates compensation to users.

Businesses can deduct any part of the entertainment expenses that were included in taxable compensation to the users/employees as wages to the employee which would be subject to payroll taxes and withholdings.

Meeting the Ordinary and Necessary Standard

The IRS further explains what can be treated as tax-deductible “ordinary and necessary” expenses to entertain a client, customer, or employee if the expense meets the directly-related test or the associated test .

Directly-Related Test

Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, it is not directly related.

If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related. The following situations are examples of entertainment in a clear business setting:

• Business meal with a supplier at a local restaurant;

• Entertainment at a convention where business goodwill is created through the display or discussion of business products; or

• Entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained.

Expenses generally are not considered directly related when entertainment occurs where, because of substantial distractions, there is little or no possibility of engaging in the active conduct of business. Examples are:

• A meeting or discussion at a nightclub, theater, or sporting event;

• A meeting or discussion during what is essentially a social gathering, such as a cocktail party; or

• A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts.

Associated Test

Even if your expenses do not meet the directly-related test, they may meet the associated test. To meet this test, you must show that the entertainment:

• Has a clear business purpose. The purpose may be to get new business or to encourage the continuation of an existing business relationship.

• Directly precedes or follows a substantial business discussion.

• You must show that you actively engaged in a discussion or meeting to get income or some other specific business benefit.

• Entertainment that is held on the same day as the business discussion is considered held directly before or after the business discussion.

Required Documentation

Businesses are required to document all the elements of the business entertainment expense in a timely manner. Such documentation must include the information required in an account book, diary, or similar record. Records of the entertainment must show:

• the person entertained and their connection with the businesss;

• the business purpose;

• the date, time, and place; and

• the cost of the expense.

In addition, the IRS guidelines require receipts for all expenses of $75 or more. Each receipt should include the date, place, person entertained, type of entertainment, business purpose, and business relationship.

The current tax rules have strict deduction limits on entertainment expenses for businesses. While my Sunday at Nationals Park didn’t include any deductible hot dogs (just plenty of water and tax strategy), it proves that with proper documentation and legitimate business purposes, we can still find opportunities in the post-TCJA playbook.

Feel free to contact us to make sure your next client outings both enjoyable and tax-optimized.

New year, new tax, new form – Tax on “Covered Gifts and Bequests” and Form 708 U.S. Return of Gifts or Bequests from Covered Expatriates (form not yet released)

Thu, 16 Jan 2025 18:15:00 GMT

Our 10-year wait is over. The IRS just finalized Section 2801 regulations from the proposed rules published in September of 2015. Currently, we are still waiting for the IRS to release the new Form 708 U.S. Return of Gifts or Bequests from Covered Expatriates .

What is the section 2801 tax on Gifts or Bequests from Covered Expatriates?

In 2008, Congress passed the HEART Act which included a new federal tax on certain gifts and inheritances a U.S. citizen or resident (“U.S. person”) received from “covered expatriates.” “Covered expatriates” are individuals who have relinquished their U.S. citizenship or long-term permanent residency in the U.S. who met annual net income tax thresholds for 5 years before expatriation, net worth $2 million or more, or failed to certify U.S. tax obligations on Form 8854 as required. See more details on “covered expatriates” on the IRS website.

The section 2801 tax is imposed when a U.S. person receives certain gifts or bequests from “covered expatriates.” While the law imposing this tax was enacted nearly 17 years ago, the IRS released the final regulations on January 14, 2025 .

Who is subject to the section 2801 tax, how is the tax calculated?

This new tax on gifts or bequests from certain former U.S. citizens or former green card holders (“covered expatriates”) applies at the maximum estate and gift tax rate (currently 40%). Recipients are only allowed an annual exemption equal to the gift tax annual exclusion ($19,000 for 2025) to reduce the taxable amount of applicable gifts or bequests.

The section 2801 tax mechanism does not offer an exemption like a lifetime exemption for the estate or gift tax for U.S. domestic taxpayers ($13.99 million for 2025). The section 2801 tax calculation itself is simple: 40% of the excess of the covered gift/bequest value over the annual gift tax exclusion.

Example. Mom relinquishes her U.S. citizenship and now lives in a foreign country. In 2025, Mom gifts $519,000 to her daughter, who is a U.S. citizen. Mom’s daughter’s section 2801 tax liability is $200,000 (40% of the excess of $519,000 over $19,000).

Note, this section 2801 tax is imposed on the gift recipient, not the donor, unlike the U.S. domestic gift tax as filed and paid on Form 709.

What assets are “covered gifts” and “covered bequests,” subject to the section 2801 tax ?

Section 2801 tax applies to existing and all non-U.S. situs assets acquired by the covered expatriate, including assets acquired after the expatriation event.

A “covered gift” or a “covered bequest” is any asset acquired by a U.S. citizen or resident directly or indirectly by gift from a “covered expatriate” or by reason of death of a “covered expatriate.”

Exceptions to the section 2801 tax

There are some exceptions to the section 2801 tax, including:

· Taxable Gifts and Bequests, if reported by a covered expatriate on a timely filed U.S. gift or estate tax return as applicable, with any gift or estate tax due timely paid.

· Disclaimers and Charitable Donations: A qualified disclaimer made by a covered expatriate. Charitable donations that would qualify for the estate or gift tax charitable deduction also are exceptions and do not constitute covered gifts or bequests.

· Transfers to a spouse. A gift or bequest to a covered expatriate’s spouse who is a U.S. citizen or resident. Also a gift or bequest in trust qualifying for the estate or gift tax marital deduction as a qualified terminable interest property (“QTIP”) trust or a qualified domestic trust (“QDOT”).

* but a spouse who is a resident but not a U.S. citizen is subject to a lower annual gift limit (rather than unlimited), which is $100,000 adjusted for inflation. The limit for 2025 is $190,000. Section 2801 will be applied for such gifts (in excess of the lower limit) to a resident spouse who is not a US citizen. Check out the blog on gifting to a non-U.S. citizen spouse.

How about gifts or bequests from a “covered expatriate” to a trust?

In the case of a trust, the critical first step is to know whether the trust is a U.S. trust or a foreign trust. The determination will be discussed in a separate blog. Depending on such classification, the section 2801 tax is applied differently.

U.S. domestic trust : if a covered expatriate’s assets are transferred by a gift or bequest to a U.S. domestic trust, the trust is subject to the section 2801 tax in the same manner as an U.S. citizen recipient.

Foreign trust : a foreign trust that receives a covered gift or covered bequest is not liable for the payment of the section 2801 tax, unless it elects to be treated as domestic trust (“electing foreign trust”). Each U.S. beneficiary is liable for payment of Inheritance Tax upon receipt, either directly or indirectly, of any distribution from the foreign trust, attributable to a covered gift or covered bequest made to the foreign trust.

Any effects of estate and gift tax treaties on the section 2801 tax?

The final regulations note that neither the statutory language nor the legislative history of section 2801 indicates Congressional intent concerning the effect of existing estate and gift treaties on the section 2801 tax. The effect of a particular treaty on the application of section 2801 to a gift or bequest by a covered expatriate in a treaty country must be evaluated on a case-by-case basis when a particular transfer falls within the reach of both section 2801 and an estate or gift tax treaty.

The U.S. currently has estate and gift tax treaties with Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom and estate tax-only treaties with Finland, Greece, Ireland, Italy, the Netherlands, South Africa, and Switzerland. There are also estate tax provisions in the U.S.-Canada income tax treaty.

Plan carefully before expatriation, and before immigration (to the U.S.)

Since the lifetime exemption for gifts and estate tax for a U.S. person is significantly high ($13.99 million for 2025), tax-free gifting prior to expatriation should be evaluated. There are other strategies, such as optimizing annual gift exclusion, utilizing gifting through discounts and marital and charitable deductions, using irrevocable life insurance trusts (ILITs), etc.

Conversely, foreign persons who plan to become a U.S. citizen or resident also should evaluate the impact of the 2801 tax.

Inherited IRA Strategies for 2025 and Beyond

Fri, 10 Jan 2025 18:05:00 GMT

If you have inherited (or may someday inherit) an individual retirement account (IRA), the 2025 changes may significantly impact your tax planning.

The SECURE 2.0 Act has significantly impacted the rules surrounding inherited IRAs. Now more than ever, it's essential to review your distribution strategy and explore potential tax-saving opportunities. This blog provides some key updates you need to make informed decisions and potentially reduce your tax liability on inherited IRA distributions.

RMD requirements . Starting in 2025, annual required minimum distributions (RMDs) are mandatory for most inherited IRAs. Failure to comply may result in penalties of up to 25 percent, reducible to 10 percent if corrected promptly.

10-year rule enforcement. Non-spousal beneficiaries must fully deplete inherited IRAs within 10 years of the original owner’s death, with annual RMDs generally required.

What Are Required Minimum Distributions (RMDs)?

Required minimum distributions, often referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans after you reach age 73 (75 for those who reach age 73 after December 31, 2032), or in some cases, after you retire. You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal penalty.

The RMD rules are calculated to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The purpose of the RMD rules is to ensure that people don't just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime.

Inherited IRAs and Retirement Plans

Your RMDs from your IRA or plan will cease after your death, but your beneficiary(ies) will have to take RMDs eventually. How much they are required to take and when they are required to them depend on whether they are eligible designated beneficiaries (EDBs) and whether you die before or after you began your own RMDs.

Generally speaking, EDBs may spread RMDs over their own life expectancy, while non-EDBs are typically required to liquidate the account within 10 years. A spouse who is the sole beneficiary may generally roll over an inherited IRA or plan account into an IRA in the spouse's own name or treat the account as his or her own, allowing the spouse to delay taking additional RMDs until he or she reaches RMD age.

As with required lifetime distributions, proper planning for required post-death distributions is essential. You should consult an estate planning attorney and/or a tax professional.

Note: The SECURE and SECURE 2.0 Acts dramatically changed the RMD rules for IRA assets inherited by most non-spouse beneficiaries. If your existing estate plan was set up based on the previous law on RMDs, and your assets include IRAs, you should consult with an attorney to review to avoid any unexpected tax surprises and to ensure your plan still works.

SECURE Act Change : 10-Year Rule

Before the SECURE Act of 2019 and the SECURE 2.0 Act of 2022, beneficiaries of inherited IRAs could “stretch” IRA distributions over their life expectancy, which has drastically changed by the two SECURE Acts. This old strategy no longer is available.

Most beneficiaries now are required to liquidate (empty) the inherited IRA by the end of the 10th year after the original account owner’s death to avoid penalties. This is known as the 10-year rule. Moreover, many beneficiaries of inherited IRAs are also required to take RMDs each year and liquidate them by the 10th year of the death. For example, if the decedent had already begun taking RMDs, an RMD may be required every year in the 10-year window. The only exception is the surviving spouse.

Categories of Beneficiaries :

Under the SECURE Acts, options for distribution requirements will differ by each category of beneficiaries.

Surviving spouses (Spousal beneficiaries) can assume ownership of the IRA or withdraw from it as a beneficiary. Roth IRAs offer additional flexibility, allowing for tax-free growth without RMDs.
"eligible designated beneficiaries" (EDBs) : EDBs are (1) Spouse or minor child of the deceased account holder; (2) disabled or chronically ill individual, or (3) individual who is not more than 10 years younger than the IRA owner or plan participant - typically siblings, friends or other individual beneficiaries close in age to the account owner.

EDBs generally benefit from more flexibility in how they withdraw funds from an inherited IRA - they can either take distributions over the longer of their own life expectancy and the employee’s remaining life expectancy or follow the 10-year rule if the account owner died before that owner’s required beginning date.

Minor children have until age 31 to deplete the account, with the 10-year rule beginning at age 21.
Designated beneficiaries (not an “eligible designated beneficiaries”): designated beneficiaries must follow the 10-year rule.
Beneficiaries that are not individuals should follow the 5-year rule (as if the account owner died before 2020). They must empty account by the 5th year following the year of the account holder’s death, but no withdrawals are required before the end of that 5th year.

IRA distributions are taxable, so this new 10-year rule impacts the tax planning for inherited IRAs for the beneficiaries. ROTH distributions are not taxable, but the impact of the 10-year rule should be considered and incorporated in your estate plan. For more information on beneficiaries, visit the IRS page for Retirement topics - Beneficiary .

Planning & Strategies

Strategic withdrawals can help you avoid higher tax brackets. For example, spreading withdrawals evenly over 10 years can minimize tax impact. Timing withdrawals based on expected tax rate changes can also optimize savings. Beneficiaries also should plan how to manage inherited IRA funds over a shorter timeframe, with tax consideration, personal financial goals or needs.

If your existing estate plan was established before the SECURE Acts and includes IRAs, you should review the existing plan. Since most beneficiaries now have to withdraw the entire balance within a 10-year period, the impact on tax and inheritance should be revisited to ensure the estate plan still works as you intend. Also, if a trust is the beneficiary of an IRA, the default period for liquidation is 5 years, unless the trust is considered a see-through trust.

IRS to-do’s when marital status changed

Tue, 07 Jan 2025 18:04:00 GMT

***The IRS publishes useful tax tips and notes for the general public. The following is from the IRS Tax Tip 2025-02: Essential tax tips for marriage status changes. As always, please keep in mind the contents on this blog site are not legal, tax, or financial advice. ***

Essential tax tips for marriage status changes

A taxpayer’s filing status generally depends on their being married or unmarried on the last day of the year – which means that a taxpayer's marital status as of December 31, 2024, determines their tax filing options for all of 2024.

For filing purposes, the IRS generally considers taxpayers as married if they are separated but not legally separated or divorced at the end of the year. Marriage status can determine filing requirements, standard deductions, eligibility for certain credits and tax. For exact qualifications and exceptions on filing statuses, review Publication 504, Divorced or Separated Individuals .

Here are a few things taxpayers should do if their marital status changed in 2024.

Report a name change

Report any name changes to the Social Security Administration. The name on a person's tax return must match what’s on file at the SSA. If the name doesn't match, it could delay any tax refund. To update information, go to the SSA’s website and look for “ Change name with Social Security .” Name changes can also be processed by calling the SSA at 800-772-1213 or by visiting a local SSA office.

Update address

Notify the U.S. Postal Service, any employers and the IRS of an address change. Taxpayers have several options to notify the IRS of an address change .

Check withholding

A change in marital status may also affect how much tax should be withheld from the taxpayer’s paycheck. To avoid a surprise at tax time, the taxpayer should use the IRS Tax Withholding Estimator to calculate their withholding and then use that estimate to complete a new Form W-4, Employee’s Withholding Certificate , to give to their employer. Taxpayers can also use Form W-4 to tell an employer not to withhold any federal income tax. To qualify for this exempt status, the taxpayer must have had no tax liability for the previous year and must expect to have no tax liability for the current year.

Review filing status

Taxpayers who were newly married in 2024 will want to review their filing status options. They can choose to file their federal income taxes jointly or separately each year, so it’s a good idea to figure the tax both ways to find out which makes the most sense. Taxpayers should remember that if a couple is married as of December 31, the law says they're married for the whole year for tax purposes.

Closing notes

It’s hard to believe the holiday season is over, with the tax season 2025 fast approaching. Contact me today if you have any questions or comments on this article, tax, estate/trusts/wills, or business.

Is Your Small Business Ready for the New Crypto Reporting Rules?

Mon, 06 Jan 2025 18:36:00 GMT

***DISCLAIMER: This information is for general knowledge and discussion purposes only and does not constitute legal, accounting, tax, or financial advice.***

On December 13, 2023, the Financial Accounting Standards Board (FASB) issued a new standard for crypto assets held by entities, Accounting Standards Update (ASU) 2023-08—INTANGIBLES—GOODWILL AND OTHER—CRYPTO ASSETS .

Why new accounting standards?

Under the previous standards, crypto assets held by entities were reported like certain other intangible assets which are measured at historical costs minus impairment. But the old measurement did not reflect good information for crypto assets because crypto assets were highly volatile, did not have intrinsic values, and fair market values would reflect more accurate and timely picture of the financial position of an entity holding crypto assets. In response to these issues, FASB has developed the new standards for crypto asset reporting.

The FASB ASU 2023-08 addresses the accounting for and disclosure of crypto assets. Entities with crypto assets are required to measure crypto assets at fair value each reporting period, with changes in fair value recognized in net income.

The FASB ASU 2023-08 2023-08 apply to assets that meet all of the following criteria:

Meet the definition of intangible assets as defined in the Codification
Do not provide the asset holder with enforceable rights to or claims on underlying

goods, services, or other assets
Are created or reside on a distributed ledger based on blockchain or similar

technology
Are secured through cryptography
Are fungible
Are not created or issued by the reporting entity or its related parties.

When should an entity adopt the new standards?

For all entities, the ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

What issues remain concerning the new standards and crypto asset reporting?

While these new standards are a meaningful step forward, challenges for crypto asset reporting remain. The volatile nature of crypto assets presents ongoing valuation challenges. Furthermore, the evolving regulatory landscape may require further adjustments to the accounting guidance in the future.

What action plans should a small business with crypto assets should consider?

Small businesses with crypto holdings should:

(1) Plan for transition : review accounting policies and prepare when and how to implement the new fair value measurement and disclosure requirements accordingly.

(2) Comply : once the timing for implementation is determined, ensure to adjust the accounting policies and procedures for compliance.

(3) Recognize book-tax difference : the new standard will create a new book-tax difference item. It is crucial to work with a tax and accounting professional with adequate knowledge.

New Year, New Estate Plan: A Fresh Start for Your Legacy

Sun, 05 Jan 2025 19:00:00 GMT

2025 is the year of the blue snake according to the Chinese zodiac. The snake stands for wisdom, transformation, and healing. Snakes shed their skin, renewed and reborn each time they transform to the next phase. This transformation process takes time for snakes, but they do this for the better. The process of estate planning is very similar to this.

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives.

The starting point of your estate planning specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs.

For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
An advance directive (or advance medical directive): The three main types of advance medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single

Unmarried couples

Married couples

For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. For decedents dying in 2011 and later years, the executor of a deceased spouse's estate can transfer any unused estate tax exclusion amount to the surviving spouse without such planning - this is known as portability.

You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die's estate tax exclusion, and a credit shelter trust created at the first spouse's death may still be advantageous for several reasons:

Portability may be lost if the surviving spouse remarries and is later widowed again
The trust can protect any appreciation of assets from estate tax at the second spouse's death
The trust can provide protection of assets from the reach of the surviving spouse's creditors
Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouses

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $190,000 annual exclusion, for 2025 ($185,000 for 2024), is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time.

You may also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement

If you're in your 30s, you may be feeling comfortable. You've accumulated some wealth and you start thinking about retirement.

Here's where estate planning overlaps with retirement planning.

It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death.

You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years.

Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried

Depending on the size of your estate, you may need to be concerned about estate taxes.

For 2025, $13,990,000 ($13,610,000 for 2024) is effectively excluded from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40%.

Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations). For 2025, the GST tax exemption is also $13,990,000 ($13,610,000 for 2024), and the top tax rate is 40%.

The Tax Cuts and Jobs Act (“TCJA”), signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half. (Note: It is unknown at this time whether Congress will make some or all of the TCJA changes permanent or extended to avoid the applicable sunset provisions.)

Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill

Contact us

We are here to help you navigate through your estate planning, no matter where you are at in your life. It is never too early or late to think about your estate planning. Estate planning is more about how you want to live your life fully, rather than just how you want your assets to be distributed or used after you die. Contact us today if you want to discuss further.

Tax Home: A Cornerstone of Global Tax Compliance

Mon, 18 Nov 2024 19:10:00 GMT

When you are a global taxpayer, it is crucial to understand what a tax home is for you. Knowing your tax home is the first step for tax strategies and compliance. This article focuses on an individual’s tax home in the income tax context.

Tax residency

Many countries and localities have income tax. If you are a tax resident of a place that has income tax, you are subject to such income tax. In the U.S., states and localities have different tax schemes and rates, so the tax residency has a significant impact on one’s tax planning and tax burden/responsibilities. There are two tests for tax residency: (1) the domicile test; (2) the statutory residency test. If one meets conditions under either test in a state, that state will be the person’s tax home.

Domicile Test - What is Domicile and how does it work?

The concept of "Leave and Land" emphasizes the importance of a clean break from your previous tax home. This means a clear and convincing demonstration of your intent to abandon your old residence and establish a new one. Whether it's retirement, a significant lifestyle change, or health-related reasons, the key is to avoid appearing like a typical "snowbird" who merely spends part of the year in a different location. Beware of the "creeping domicile" phenomenon, where unintentional actions or prolonged stays can undermine your efforts to establish a new tax home.

Important things for the domicile test are:

· Home – where is your primary residence?

· Workplace – what is the place of your primary business/work and income source?

· Time – how much time/ how often do you stay in different locations? This is not a bright line 183-day test. Quality of the time spent is just as important.

· Family – Where are your family members?

· “Near and Dear” – what connections do you have to a place, such as family, friends, and communities (including pets!)?

· And other things like:

a. Mailing address

b. Homestead tax credit/exemption

c. Safe deposit box

d. Vehicle registration

e. Voter registration

f. Library card

g. Driver’s license

h. Citations in important legal documents like wills or trusts

These factors are weighed in together and help determine one’s domicile for tax and legal purposes.

Statutory Residency Test - What is it and how does it work?

While your domicile may be one place, but in the U.S., a state could still consider you as a tax resident of that state if you meet a statutory test to be considered a tax resident. Generally, the statutory residency test is based on (1) 183 days – the number of days could be different depending on the state - and (2) the permanent place of abode.

The day count could be evidenced by credit card statements/records, ATM use, personal diary, electronic calendar, flight records, EZ pass, phone records – cell phone logs, records from apps, travel itineraries, etc. The permanent place of abode could be evidenced by proof of ownership, maintenance, registration for government/business services, personal items, access to the property, and so on.

Here a few things that can help in establishing a new place as your domicile :

Obtain a Driver’s License and Register Cars and Boats in the New State.
Buy or Lease Property.
Spend More than 183 Days Per Year in the New State.
Register to Vote in the New State.
File a Declaration of Domicile (if applicable) and get a local library card.
Move Bank Accounts and Safe Deposit Boxes to the New State.
Declare a Change of Address.
Use the New State as a Home Base.
Change Legal Documents to Reflect Residency in the New State.
File Tax Returns in the New State.
Develop Local Affiliations.
If it exists, apply for a Homestead Exemption in the New State.

(Please note the above are just examples, it is important to consult with a good advisor especially if your situation is unique!)

Still have questions about your tax residency and domicile? Contact us today for personalized advice.

Family Business Structures for Asset Protection

Mon, 27 May 2024 18:18:00 GMT

Do you have a family business and want to start planning for a succession plan? Structuring your family business as a Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) could be a good option for you.

A properly formed and maintained FLP or FLLC can facilitate the transfer of your business to the next generation, protect assets from potential creditors, and minimize income, gift, and estate taxes.

An FLP can also provide valuable tools to keep your business in the family ownership by effectively restricting ownership transfers to non-family members.

A Family Limited Partnership (FLP) / Limited Liability Company (FLLC)

An FLP is a special form of limited partnership where members of a family serve as general and limited partners. An FLLC is a corporate entity owned by family members who may or may not serve as managers.

With an FLP, general partners run the business. Limited partners have no vote and no say about day-to-day operations, but, they have limited liability; they aren't liable for the debts of the FLP in excess of their contributed capital.

With an FLLC, all of the family members, even if they serve as managers, have limited liability (as with any corporate entity).

Note: The rest of this discussion will refer to an FLP; however, the underlying principles apply to FLLCs as well.

With a typical limited partnership, a general partner who has experience teams up with limited partners who have capital. In the family context, however, the senior generation typically starts out as both the general and the limited partners. They then gift the limited partnership interests to the younger generation. The general partners can gift as much as 99% of the business to the limited partners, keeping as little as 1%. This can be an ideal solution if you want to transfer ownership of your business to your children, but also want to keep control until they can gain experience and become competent enough to manage the business on their own.

Asset Protection

An FLP can provide some measure of asset protection for the limited partners. It generally takes a court order (called a charging order) for a creditor to reach a limited partnership interest, and even this only requires the FLP to pay income to the creditor instead of the partner until the debt is paid. In this case, the creditor does not become a substitute partner. He or she must wait until the general partner decides to distribute income (which may be a very long time). In addition, FLP assets are likewise protected from loss due to divorce. The general partner, however, does not receive the same protection and is personally responsible for the debts and liabilities of the FLP.

Income Tax Considerations

An FLP is a pass-through entity for income tax purposes. This means that the IRS does not recognize an FLP as a taxpayer (as it does for a corporation), and income of the FLP passes through to the partners. So, you can shift business income and future appreciation of the business assets to other members of your family who may be in a lower tax bracket. The family as a whole can enjoy tax savings. From 2018 to 2025, subject to various limits, an individual taxpayer can deduct 20% of domestic qualified business income (excludes compensation) from a FLP.

Tip: The partners must report the income earned by the FLP on their personal income tax returns and are responsible for payment of any tax owed. Income is allocated to each partner based on his or her share of the contributed capital (i.e., pro-rata share).

Gift and Estate Tax Considerations

One of the most powerful advantages of an FLP is that it can help minimize federal gift and estate taxes. This is accomplished in three ways:

1. Leveraging the annual gift tax exclusion and gift and estate tax applicable exclusion amount:

Gifts of interests in an FLP are subject to federal gift tax (and possibly state gift tax). However, you can minimize or eliminate your actual gift tax liability by transferring FLP interests in increments that are free from gift tax under the annual gift tax exclusion ($18,000 per recipient in 2024). Further, every taxpayer has a federal gift and estate tax applicable exclusion amount equal to the basic exclusion amount of $13,610,000 (in 2024) plus any deceased spousal unused exclusion amount, so transfers that do not fall under the annual gift tax exclusion will be free from gift tax to the extent of your available applicable exclusion amount. Both the annual exclusion and the basic exclusion amount are indexed for inflation and may increase in future years.

2. Potential benefits from valuation discounts:

You may be able to discount the value of the FLP interests given away. That's because the limited partners have very restricted rights, such as: (a) the inability to transfer an interest, (b) the inability to withdraw from the FLP, and (c) the inability to participate in management. These restrictions can result in a business value that is significantly less than the value of the underlying assets. These discounts can be considerable, potentially between 20% and 40$. The discounts available include the minority interest (lack of control) discount and the lack of marketability discount.

3. Removing future appreciation from your estate:

Business assets generally appreciate (increase in value) over time. Distributing your assets among family members (through the FLP) freezes the current value and keeps any growth in value out of your estate later. You may have to pay gift tax now, but it will be less than if tax is calculated on a higher future value.

Flexibility and Availability for International Family

An FLP or FLLC provides a better flexibility than an S corporation, a very popular business structure for a family business. If your family business involves a non-U.S. person family member as an owner, an S corporation is not an option because an S corporation shareholder must be either a U.S. citizen or resident.

Moreover, an FLP or FLLC could have different classes of ownership holdings (stocks) that provide a much wider range of ownership levels. An S corporation cannot have more than one class of stock.

FLPs must comply with state law and IRS requirements

An FLP is subject to more restrictive rules than other forms of business entities. Care must be taken to create a valid FLP in the eyes of the state and the IRS. An FLP will be recognized only if it is formed for a valid business purpose. The FLP form will be disregarded if the IRS or the state finds that it was formed solely to avoid taxes.

Some specific purposes for creating an FLP include:

To adopt a family succession plan
To simplify annual gifting by the senior generation
To minimize income, gift, and estate taxes
To protect assets from potential creditors
To protect assets from waste by heirs
To consolidate assets into a single entity
To keep the business in the family
To decrease estate and probate costs

Additionally, an FLP may own a closely held business (other than a corporation that has made an election to be taxed as an "S" corporation), real estate, marketable securities, or almost any other investment asset. Homes, cottages, or other personal use assets are normally not suitable for an FLP.

Tips for forming and maintaining a valid FLP:

Have one or more substantial nontax purposes for creating the FLP, such as asset protection
Keep good records
Create the FLP while you're still in good health
Observe all legal formalities when creating the FLP and while operating the business
Hire an independent appraiser to value assets going into the FLP
Transfer legal title of assets going into the FLP
Put only business assets into the FLP — don't put any personal assets into the FLP
If you do put personal assets into the FLP, such as your home, pay fair market rent for their use
Don't commingle FLP assets and personal assets — keep them separate
Never use FLP assets for personal purposes
Keep enough assets outside the FLP to pay for personal expenses
Distribute income to partners pro rata

Happily Ever After, Beyond Borders: Tax Planning for International Couples

Fri, 10 May 2024 18:27:00 GMT

This line of Lysander from A Midsummer Night’s Dream tells is the timeless truth of love: “The course of true love never did run smooth.”

For every couple getting married, true love will lead to a strong marriage if the couple is prepared for the realities of money matters. For an international couple, the money talk should start with cross-border tax and estate planning because of added complexities.

The U.S. taxation is a far-reaching tax system that is imposed on all “U.S. person” taxpayer. A “U.S. person” is a tax term for an individual who becomes subject to the U.S. tax based by meeting certain tests or elections. Most commonly, someone becomes a U.S. person if she meets the substantial presence test or the greencard test. It’s also possible for someone to be a U.S. person by making an election. There are many income tax implications when a non U.S. citizen becomes a U.S. person, and some basic information on them are discussed in my previous blog Immigration to the U.S. – Tax Planning .

A non-U.S. citizen can become a U.S. person by meeting the Substantial Presence test (essentially, by physically being in the U.S. for so many days). If a non-U.S. citizen is in the U.S. for at least 31 days during the current year and 183 days in the 3-year period including the current year and the 2 preceding years, that person becomes a U.S. person subject to the U.S. tax. The 183 day count is weighted over the 3-year period.

But it isn’t fair for certain cases like international students, professors, diplomats, or professional athletes, because their stay in the U.S. is normally temporary. So the tax law allows such individuals to not count all the days of their temporary presence in the U.S. This is what is called an “Exempt Individual.” For this day counting, an “Exempt Individual” can exclude her days of presence in the U.S. for the substantial presence test purposes. An “Exempt Individual” is someone in certain immigration or visa categories like “A” or “G” visas (foreign government-related), "J" or "Q" visas (teacher or trainee), "F," "J," "M," or "Q" visas (student), or professional athletes competing in charitable sports events. It is important to note that the “Exempt Individual” must file Form 8843 in order to claim the exempt individual status.

When a U.S. citizen is married to a foreign citizen who is qualified for an exempt individual, the marital status often changes the immigration and visa status, also affecting the filing status. For example, a non-U.S. citizen was on year 2 of his study in the U.S., and was qualified for an “Exempt individual.” But he marries a U.S. citizen and decides to file tax return jointly with his new U.S. citizen wife, he won’t be able to claim the “Exempt Individual” status. If he chooses to file jointly, he would suddenly be subject to the U.S. worldwide taxation, along with the U.S. international reporting scheme. Similarly, If a U.S. citizen living outside the U.S. marries a foreign citizen, joint filing is allowed only in certain circumstances.

This topic of the U.S. tax implications for a non-U.S. citizen whose tax residency is in a transient status (nonresident alien to/from U.S. person) is complex. But one thing is clear: foreign nationals should think carefully about their worldwide tax situation BEFORE becoming a U.S. tax resident. An international couple should review worldwide income, assets and businesses, tax obligations to countries other than the U.S. (“foreign tax”), and any impact of tax treaties.

A “gift” means a transfer of property to another without compensation. The U.S. tax system views a married couple as one economic unit. Based on this concept, the U.S. gift and estate tax scheme allows an unlimited amount of transfers between spouses, free of tax. This is called the unlimited marital deduction. However, the unlimited marital deduction does not apply to transfers (gifts) to a non-U.S. citizen spouse. The amount of non-taxable gift to a non-U.S. citizen spouse is limited to $100,000, which gets adjusted for inflation annually. The threshold amounts are $175,000 for 2023 and $185,000 for 2024.

In the U.S. gift taxation, a “donor” refers to someone who gives a gift; A “donee” someone who receives a gift. Just like the U.S. income tax, the basic rule in the U.S. gift tax is that all worldwide gifts are subject to tax, if the donor is a U.S. person. However, everyone can gift up to $10,000 per year tax-free. This is what is known as the annual “gift tax exclusion” amount. This gift tax exclusion amount is adjusted to inflation each year – for 2024, it is $18,000; for 2023, $17,000. If the donor spouse is a nonresident and non-U.S. citizen and the donor spouse is a U.S. citizen, the donor spouse is only subject to gift tax on the gifts of U.S. sited real or tangible personal property. Thus, a donor spouse (nonresident/non-U.S. citizen) can make unlimited gifts of non-U.S. sited property to the U.S. citizen donee spouse.

It's important to note that gifts between spouses can be easily overlooked. Here is an example: a U.S. citizen (a U.S. expat living in Poland) and a Polish citizen are getting married. A generous grandmother of the U.S. citizen gifts $1 million cash to the U.S. citizen spouse for the couple’s first home purchase in Poland. The couple purchases a home with the grandmother’s gift, and titles the home jointly under both spouses’ names. The U.S. citizen spouse just gifted the undivided 50% interest in home to the Polish spouse.

As mentioned above, for “nonresident alien” spouses, the gift tax generally only applies to real property and tangible personal property located in the U. S. Therefore, the nonresident, before becoming a U.S. resident, should complete all nontaxable gift transfers (outright or in trust) and thereby exclude those assets from his or her U.S. taxable gifts.

Love truly transcends borders. For an international couple with U.S. tax implications, proactive and well thought-out tax planning not only saves money and tax headaches, but also sets a stronger foundation for a secure and prosperous future together. Navigating the intricacies of U.S. tax law as an international couple can feel overwhelming.

Contact us today with any comments or questions about this blog. Feel free to schedule a complimentary initial consultation with me to start navigating through the U.S. tax consequences, implications, and strategies.

#internationaltax #taxplanning #ustax

Caring For Aging Family: Good Planning for Smooth Managing

Tue, 26 Mar 2024 18:48:00 GMT

For the middle aged Americans, the reality is challenging with the increasing needs of care for their aging parents and family members.

Worse, more than half of American in their 40s are the sandwich generation according to Pew Research Center . The “sandwich generation” is the term for middle-aged adults (in their 40s and 50s) who are caring for both older parents and their own children. As America’s aging population is growing rapidly, so is the “sandwich generation” on the rise.

Aging is an inevitable phase for all of us. Good planning makes it easier and better prepared when the time comes to deal with caring for aging family members. Most importantly, good planning takes care of the caretakers themselves.

Mom & dad, let’s talk.

The first step to take is talking to the parents. Easier said than done, this can be challenging for adult children to initiate, because up until now, parents have been the caretakers for their children in most families. Know that this conversation will be an ongoing talk rather than a single occasion. Don’t give up if parents are unwilling to talk on the first try. Continue the efforts until they begin to talk.

Find out what their needs and wishes are. In some cases, however, they may be unwilling or unable to talk about their future. This can happen for a number of reasons, including:

Incapacity
Fear of becoming dependent
Resentment toward you for interfering
Reluctance to burden you with their problems

If such is the case with your parents, you may need to do as much planning as you can without them. If their safety or health is in danger, however, you may need to step in as caregiver. The bottom line is that you need to have a plan.

It’s usually helpful to make a list of topics for discussion. Examples of discussion points are below:

Living arrangements: Can they still live alone, or is it time to explore other options?
Everyday Insurance needs: is the current insurance enough? Health insurance, property insurance, car insurance, pet insurance, etc.
Long-term care and life insurance: Do they have it? If not, should they buy it?
Current financials: how much are current income and expenses? What are liquid assets for emergencies?
Financial planning: what income and expenses will change in near future? What are the assets to be used for future financial needs? Are there asset protection measures?
Estate planning: Do they have all of the necessary documents (e.g., advance medical directive, power of attorney, wills, trusts)?
Medical care decisions: What are their wishes, and who will carry them out?
Expectations: What do you expect from your parents, and what do they expect from you?

Preparing a personal data record

Once the lines of communication open up, the next step is to prepare a personal data record. This document lists information that a caretaker might need in case parents become incapacitated or die. Here’s some information that should be included:

Financial information: Bank accounts, investment accounts, real estate holdings
Legal information: Wills, power of attorneys, health-care directives, trust documents
Funeral and burial plans: Prepayment information, final wishes
Medical information: Health-care providers, medication, medical history
Insurance information: Policy numbers, company names
Advisor information: Names and phone numbers of any professional service providers
Location of other important records: Keys to safe-deposit boxes, real estate deeds Be sure to write down the location of documents and any relevant account numbers.

It’s a good idea to make copies of all of the documents gathered and keep them in a safe place, in both digital format and paper. This is especially important if you live far away, because you’ll want the information readily available in the event of an emergency.

Where will your parents live?

If your parents are like many older folks, where they live will depend on how healthy they are. As your parents grow older, their health may deteriorate so much that they can no longer live on their own. At this point, you may need to find them in-home health care or health care within a retirement community or nursing home. Or, you may insist that they come to live with you.

If money is an issue, moving in with you may be the best (or only) option, but you’ll want to give this decision serious thought. This decision will impact your entire family, so talk about it as a family first. A lot of help is out there, including friends and extended family. Don’t be afraid to ask.

Evaluating your parents’ abilities

If you’re concerned about your parents’ mental or physical capabilities, ask their doctor(s) to recommend a facility for a geriatric assessment. These assessments can be done at hospitals or clinics. The evaluation determines your parents’ capabilities for day-to-day activities (e.g., cooking, housework, personal hygiene, taking medications, making phone calls). The facility can then refer you and your parents to organizations that provide support.

If you can’t be there to care for your parents, or if you just need some guidance to oversee your parents’ care, a geriatric care manager (GCM) can also help. Typically, GCMs are nurses or social workers with experience in geriatric care. They can assess your parents’ ability to live on their own, coordinate round-the-clock care if necessary, or recommend home health care and other agencies that can help your parents remain independent.

Get support and advice. Don’t try to care for your parents alone. Many local and national caregiver support groups and community services are available to help you cope with caring for your aging parents. If you don’t know where to find help, contact your state’s department of eldercare services.

States use different names for such departments. For example, Maryland has Department of Aging . Or, call (800) 677-1116 to reach the Eldercare Locator , an information and referral service sponsored by the federal government that can direct you to resources available nationally or in your area. If you are a caregiver for those with Alzheimer’s and dementia, helpful resources are available at Alzheimer’s Association website .

Some of the services available in your community may include:

Caregiver support groups and training
Adult day care
Respite care
Guidelines on how to choose a nursing home
Free or low-cost legal advice (e.g. local pro bono law centers, law school clinics)

Once you’ve gathered all of the necessary information, you may find some gaps. Perhaps your mother doesn’t have a health-care directive, or her will is outdated. You may wish to consult an attorney or other financial professional whose advice both you and your parents can trust.

Reach out to us if you have any comments or questions.

My grandmother and long term care

Wed, 13 Mar 2024 18:58:00 GMT

My daughter, My grandmother, and Me

My grandmother was a strong woman. When her husband was killed during the Korean War, she was only 27, and had to raise three children. Back in the days, working women were frowned upon. Women were deprived of education that could equip them for professional work – it was only for men. No childcare was available in South Korea, a war-torn Asian country where she had to raise three children alone. But she survived the war, saved money enough to send her oldest child to college, and lived comfortably later in her life. Yet, after she fell unconscious one day, her adult children had no choice but to move her to a hospice facility far away from her home. She spent 4 months in that facility, away from everyone and everything she loved. She died alone, and I only got to see her loving face at her funeral.

I often think about my grandmother in my line of work. Planning for life events like serious illness, hospice care, or death is not easy for a family because it’s hard to start a conversation about it. But if my grandmother had a chance to plan in advance, she could have spent the last 4 months of her life differently, and perhaps, at her deathbed, her children and grandchildren could have been there for her. Long-term care is so important for all of us.

This blog goes over some basics of long-term care. I hope that this blog encourages you to start the conversation of long term care planning.

1. What is long-term care?

Long-term care refers to the ongoing services and support needed by people who have chronic health conditions or disabilities. There are three levels of long-term care:

Skilled care: Generally round-the-clock care that’s given by professional health care providers such as nurses, therapists, or aides under a doctor’s supervision.

Intermediate care: Also provided by professional health care providers but on a less frequent basis than skilled care.
Custodial care: Personal care that’s often given by family caregivers, nurses’ aides, or home health workers who provide assistance with what are called “activities of daily living” such as bathing, eating, and dressing.

Long-term care is not just provided in nursing homes–in fact, the most common type of long-term care is home-based care. Long-term care services may also be provided in a variety of other settings, such as assisted living facilities and adult day care centers.

2. Why is it important to plan for long-term care?

No one expects to need long-term care, but it’s important to plan for it nonetheless. Here are two important reasons why:

The odds of needing long-term care are high:

Approximately 52% of people will need long-term care at some point during their lifetimes after reaching age 65*
Approximately 8% of people between ages 40 and 50 will have a disability that may require long-term care services*

*U.S. Department of Health and Human Services, Last modified: May 10, 2022

The cost of long-term care can be expensive:

For many, the cost of long-term care can be expensive, absorbing income and depleting savings. Some of the average costs in the United States for long-term care* include:

$7,809 per month, or $93,708 per year for a semi-private room in a nursing home
$9,034 per month, or $108,408 per year for a private room in a nursing home
$4,500 per month for an assisted living facility
$1,690 per month for services in an adult day health-care center

*Cost of Care Survey 2022, Genworth Financial, Inc., June 2, 2022

3. Doesn’t Medicare pay for long-term care?

Many people mistakenly believe that Medicare, the federal health insurance program for older Americans, will pay for long-term care. But Medicare provides only limited coverage for long-term care services such as skilled nursing care or physical therapy. And although Medicare provides some home health care benefits, it doesn’t cover custodial care, the type of care older individuals most often need.

Medicaid, which is often confused with Medicare, is the joint federal-state program that two-thirds of nursing home residents currently rely on to pay some of their long-term care expenses. But to qualify for Medicaid, you must have limited income and assets, and although Medicaid generally covers nursing home care, it provides only limited coverage for home health care in certain states.

4. Can’t I pay for care out of pocket?

The major advantage to using income, savings, investments, and assets (such as your home) to pay for long-term care is that you have the most control over where and how you receive care. But because the cost of long-term care is high, you may have trouble affording extended care if you need it.

5. Should I buy long-term care insurance?

Like other types of insurance, long-term care insurance protects you against a specific financial risk–in this case, the chance that long-term care will cost more than you can afford. In exchange for your premium payments, the insurance company promises to cover part of your future long-term care costs. Long-term care insurance can help you preserve your assets and guarantee that you’ll have access to a range of care options.

However, it can be expensive, so before you purchase a policy, make sure you can afford the premiums both now and in the future.

The cost of a long-term care policy depends primarily on your age (in general, the younger you are when you purchase a policy, the lower your premium will be), but it also depends on the benefits you choose. If you decide to purchase long-term care insurance, here are some of the key features to consider:

Benefit amount: The daily benefit amount is the maximum your policy will pay for your care each day, and generally ranges from $50 to $350 or more.
Benefit period: The length of time your policy will pay benefits (e.g., 2 years, 4 years, lifetime).
Elimination period: The number of days you must pay for your own care before the policy begins paying benefits (e.g., 20 days, 90 days).
Types of facilities included: Many policies cover care in a variety of settings including your own home, assisted living facilities, adult day care centers, and nursing homes.
Inflation protection: With inflation protection, your benefit will increase by a certain percentage each year. It’s an optional feature available at additional cost, but having it will enable your coverage to keep pace with rising prices.

Your insurance agent or a financial professional can help you compare long-term care insurance policies and answer any questions you may have.

If you have any comments, thoughts, or questions about long term care planning, please contact us.

#longtermcare #estateplanning #caringforfamily

Medicaid Planning Basics

Tue, 12 Mar 2024 20:05:00 GMT

Eligibility for Medicaid depends on your state’s asset and income-level requirements

Medicaid is a joint federal-state program that provides medical assistance to various low-income individuals, including those who are aged (i.e., 65 or older), disabled, or blind. It is the single largest payer of nursing home bills in America and is the last resort for people who have no other way to finance their long-term care. Although Medicaid eligibility rules vary from state to state, federal minimum standards and guidelines must be observed.

In addition to you meeting your state’s medical and functional criteria for nursing home care, your assets and monthly income must each fall below certain levels if you are to qualify for Medicaid. However, several assets (which may include your family home) and a certain amount of income may be exempt or not counted.

Medicaid planning can help you meet your state’s requirements

To determine whether you qualify for Medicaid, your state may count only the income and assets that are legally available to you for paying bills. That’s where Medicaid planning comes in. Over the years, a number of tools and strategies have arisen that might help you qualify for Medicaid sooner.
In general, Medicaid planning seeks to accomplish the following goals:

Exchanging countable assets for exempt assets to help you meet Medicaid eligibility requirements
Preserving assets for your loved ones
Providing for your healthy spouse (if you’re married)

Let’s look at these in turn.

You may be able to exchange countable assets for exempt assets

Countable assets are those that are not exempt by state law or otherwise made inaccessible to the state for Medicaid purposes. The total value of your countable assets (together with your countable income) will determine your eligibility for Medicaid. Under federal guidelines, each state compiles a list of exempt assets. Usually, this list includes such items as the family home (regardless of value), prepaid burial plots and contracts, one automobile, and term life insurance.

Through Medicaid planning, you may be able to rearrange your finances so that countable assets are exchanged for exempt assets or otherwise made inaccessible to the state. For example, you may be able to pay off the mortgage on your family home, make home improvements and repairs, pay off your debts, purchase a car for your healthy spouse, and prepay burial expenses.
For more information on this topic, contact an elder law attorney who is experienced with your state’s Medicaid laws.

Irrevocable trusts can help you leave something for your loved ones

Why not simply liquidate all of your assets to pay for your nursing home care? After all, Medicaid will eventually kick in (in most states) once you’ve exhausted your personal resources. The reason is simple: You want to assist your loved ones financially.

There are many ways to potentially preserve assets for your loved ones. One way is to use an irrevocable trust. (It’s irrevocable in the sense that you can’t later change its terms or decide to end it.) Property placed in an irrevocable trust will be excluded from your financial picture, for Medicaid purposes. If you name a proper beneficiary, the principal that you deposit into the trust (and possibly any income generated) will be sheltered from the state and can be preserved for your heirs. Typically, though, the trust must be in place and funded for a specific period of time for this strategy to be an effective Medicaid planning tool.
For information about Medicaid planning trusts, consult an experienced attorney.

If you’re married, an annuity can help you provide for your healthy spouse

Nursing homes are expensive. If you must go to one, will your spouse have enough money to live on? With a little planning, the answer is yes. Here’s how Medicaid affects a married couple. A couple’s assets are pooled together when the state is considering the eligibility of one spouse for Medicaid. The healthy spouse is entitled to keep a spousal resource allowance that generally amounts to one-half of the assets. This may not amount to much money over the long term.

A healthy spouse may want to use jointly owned, countable assets to buy a single premium immediate annuity to benefit himself or herself. Converting countable assets into an income stream is a plus because each spouse is entitled to keep all of his or her own income, in contrast to the pooling of assets. By purchasing an immediate annuity in this manner, the institutionalized spouse can more easily qualify for Medicaid, and the healthy spouse can enjoy a higher standard of living.
Be aware, however, that for annuities purchased on February 8, 2006 and thereafter (the date of enactment of the Deficit Reduction Act of 2005), the state must be named as the remainder beneficiary of the annuity after your spouse or a minor or disabled child.

Beware of certain Medicaid planning risks

Medicaid planning is not without certain risks and drawbacks. In particular, you should be aware of look-back periods, possible disqualification for Medicaid, and estate recoveries.
When you apply for Medicaid, the state has the right to review, or look back, at your finances (and those of your spouse) for a period of months before the date you applied for assistance. In general, a 60-month look-back period exists for transfers of countable assets for less than fair market value. Transfers of countable assets for less than fair market value made during the look-back period will usually result in a waiting period before you can start to collect Medicaid. So, for example, if you give your house to your kids the year before you enter a nursing home, you’ll be ineligible for Medicaid for quite some time. (A mathematical formula is used.)

Also, you should know that Medicaid planning is more effective in some states than in others. In addition, federal law encourages states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. This means that your state may be able to place a lien on your property while you are alive, or seek reimbursement from your estate after you die.

It is important to start Medicaid planning with a trusted attorney before taking any action. If you have any questions about Medicaid, contact me today.

#medicaid #estateplanning

Estate Planning and Income Tax Basis

Thu, 08 Feb 2024 22:00:00 GMT

Income tax basis can be an important factor in deciding whether to make gifts during your lifetime or transfer property at your death. This is because the income tax basis for the person receiving the property depends on whether the transfer is by gift or at death. This, in turn, affects the amount of taxable gain subject to income tax when the person sells the property.

Income tax basis is the base figure used to determine whether a taxpayer has capital gain or loss on the sale of property for income tax purposes. When a taxpayer purchases property, the property’s basis is equal to the purchase price, subject to adjustments (resulting in “adjusted basis”). If you sell the property for more than your adjusted basis, you'll have a gain. Sell the property for less than your adjusted basis, and you'll have a loss.

For example, a taxpayer purchased stock for $25,000. Your basis in the stock is $25,000. If the taxpayer sells the stock for $27,000, it results in a gain of $2,000. If the taxpayer sells the stock for $20,000, it results in a loss of $5,000.

When a taxpayer receives a gift, the taxpayer generally takes the same basis in the property that the person who gave the property (the donor) had. (This is often referred to as a "carryover" or "transferred" basis.) The carryover basis is increased--but not above fair market value (FMV)--by any gift tax paid that is attributable to appreciation in value of the gift (appreciation is equal to the excess of FMV over the donor's basis in the gift immediately before the gift). However, for purpose of determining loss on a subsequent sale, the carryover basis cannot exceed the FMV of the property at the time of the gift.

For example, if a generous aunt gives stock valued at $1,000 to her nephew. She purchased the stock for $500. Assume the gift incurs no gift tax. The nephew’s basis in the stock, for purpose of determining gain on the sale of the stock, is $500. If the nephew sold the stock for $1,000, he would have gain of $500 ($1,000 received minus $500 basis).

Now assume that the stock is worth only $200 at the time of the gift, and the nephew sells it for $200. The nephew’s basis in the stock, for purpose of determining gain on the sale of the stock, is still $500; but his basis for purpose of determining loss is $200. In this scenario, the nephew would not pay tax on the sale of the stock. He would not recognize a loss either. In this case, for better tax results, the aunt could have sold the stock, recognized the loss of $300. Then she could have transferred the sales proceeds to her nephew as a gift.

When a taxpayer inherits property, the taxpayer generally receives an initial basis in property equal to the property's FMV. The FMV is established on the date of death or, sometimes, on an alternate valuation date six months after death. This is often referred to as a "stepped-up basis," since basis is typically stepped up to FMV. However, basis can also be "stepped down" to FMV.

For example, a taxpayer’s father leaves the taxpayer stock worth $100,000 at his death. The father purchased the stock for $10,000. The taxpayer’s basis in the stock is a stepped-up basis of $100,000. If the taxpayer later sells the stock for $100,000, the taxpayer would have no gain ($100,000 received minus $100,000 basis) .

Transfers within one year of death. If a taxpayer transfers appreciated property to a person within one year of the person’s (donee’s) death, and then the taxpayer (or his/her spouse) receives the property back at that person's (donee’s) death, the basis in the property is not stepped up or down to FMV. Instead, the basis in the property is equal to that person's basis immediately before death (which would be probably close to the basis in the hands of the taxpayer originally had before transferring to the deceased person/donee).

This rule is designed to prevent a taxpayer from obtaining a stepped-up basis by transferring appreciated property to a dying person who then transfers it back to the taxpayer (or taxpayer’s spouse) at death. However, the rule does not apply if the dying person lives for more than one year after the taxpayer transfers the property to him or her. Also, the rule does not apply if the property passes from the decedent to someone other than the taxpayer or spouse (e.g., to one of the taxpayer’s children). In those cases, a stepped-up basis would be available.

Income in respect of a decedent (IRD). There is no step up (or step down) in basis for IRD. IRD is certain income that was not properly includable in taxable income for the year of the decedent's death or a prior year. In other words, it is income that has not yet been taxed. Examples of IRD include installment payments and retirement accounts.

When a taxpayer inherits IRD, the taxpayer includes the IRD in income as the taxpayer receive payments, and take any related deductions. An income tax deduction may be available for any estate tax paid that's attributable to the IRD.

As discussed above, when someone makes a gift, the carry-over basis is increased (but not above FMV) by any gift tax paid that is attributable to appreciation in value of the gift. If the gift is also subject to GST tax, the carry-over basis is then increased (but not above FMV) by any GST tax paid that is attributable to appreciation in value of the gift.

Special rules can apply when property in a trust passes at the death of an individual.

As the following example shows, income tax basis can be important when deciding whether to make gifts now or transfer property at your death.

In addition to income tax basis, the following might also need to be considered:

Will making gifts reduce the taxpayer’s (donor’s) combined gift and estate taxes? For example, future appreciation on gifted property is removed from the donor’s gross estate for federal estate tax purposes. And gift tax paid on gifts made more than three years before the donor’s death is also removed from the donor’s gross estate.

Does the recipient need a gift now or can it wait? How long would a recipient have to wait until the donor’s death?
What are the marginal income tax rates of the donor and the recipient?
Does a taxpayer have other property or cash that he or she could give?
Can a taxpayer afford to make a gift now?

Wills: The Cornerstone of Your Estate Plan

Thu, 08 Feb 2024 21:13:00 GMT

If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you’re young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn’t have to be drafted by an attorney to be valid, seeking an attorney’s help can ensure that your will accomplishes what you intend.

1. Wills avoid intestacy

Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This “intestate’s will” distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state’s distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.
Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what’s left after your other gifts.

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children’s assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will “pours over” your estate to your living trust.

Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Although it doesn’t happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:
You lacked testamentary capacity when you signed the will

You were unduly influenced by another individual when you drew up the will
The will was forged or was otherwise improperly executed
The will was revoked

Will is an important part of your estate planning. Contact me today to schedule a call to discuss your estate planning.

#wills #estateplanning

To move or not to move : Pre immigration Tax Planning

Thu, 01 Feb 2024 22:08:00 GMT

As the global commerce moves across the globe faster than ever before, more people move between different countries, crossing borders. We also continue to see the unprecedented trend of digital nomads and global movements of people since the pandemic.

Often not discussed, but an important consideration in these movements is tax. When someone immigrates to the U.S., U.S. tax implications should be carefully looked into for planning. The U.S. international taxation is complex and proper tax planning is crucial in avoiding tax disadvantages and optimizing tax strategies before immigration to the U.S.

The first thing to remember is the U.S. tax residency may or may not be affected by the immigration status. Once someone becomes a U.S. tax resident (i.e. “U.S. person”), the U.S. tax system reaches to the worldwide income of that person. The worldwide assets of a U.S. person is also subject to various U.S. international tax reporting regimes. This is why tax should never be an afterthought in immigration planning.

There are mainly two ways for a non-U.S. citizen to be a U.S. tax resident:

Green card (Lawful permanent residency)
Substantial presence test

Under the substantial presence test, the U.S. day count is the deciding factor for the U.S. residency. Simply speaking, if a non-U.S. citizen is physically in the U.S., whether for personal or business reason, and the physical presence exceeds 183 days on a weighted basis for a three-year lookback period, that person is considered a U.S. person - establishing the U.S. tax residency.

The third way for a non-U.S. citizen to be a U.S. person is by making a first year election to be treated as a U.S. resident alien. This election must meet certain conditions and typically is made when the spouse of such a non-U.S. citizen is already a U.S. person subject to U.S. tax residency. The election is typically made in order to achieve optimal tax positions when a non U.S. person is married to a U.S. person.

As mentioned before, the U.S. international taxation is not only far-reaching but also has complex reporting requirements for both income tax reporting and information reporting. The key aspects for pre immigration consideration are:

Worldwide taxation of income
Anti-deferral tax regimes, consisting of Subpart F, Global Intangible Low Tax Income (GILTI), and Passive Foreign Investment Income (PFIC).
Reporting for certain foreign assets, including (but not limited to):
- FBAR (Foreign Bank Account Reporting) : reported to FinCEN, not the IRS
- FATCA (Specified Foreign Financial Assets)
- Controlled Foreign Corporation (Form 5471) : a foreign corporation of which more than 50% of the vote or value is owned by U.S. shareholders with 10%+ ownership.
- Passive Foreign Investment Company (Form 8621) : common example is foreign mutual funds.
- Foreign partnerships (Form 8865)
- Foreign branch (Form 8858) : including foreign disregarded entity or rental property activities, depending on various factors

Under the U.S. law, there are two mechanisms that help reduce tax burdens for international taxpayers.

Foreign Tax Relief - taxpayers could claim a credit for income taxes paid to foreign countries if the tax was paid on the same income subject to the U.S. tax. There could also be a deduction for certain foreign tax, or exclusion available for foreign earned income when eligibility is met.
Tax Treaties - The U.S. currently has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the U. S. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the U. S. are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. However, most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the U. S. from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

So, before you make the decision to move to the U.S., remember to think about tax postures for smart tax planning. It can save a lot in taxes and compliance costs with proper planning.

#internationaltax #taxplanning #ustax