Craig Backus, Author at Benenati Law Firm, P.C.

Proposed Tax Legislation

Craig Backus — Mon, 11 Oct 2021 17:33:19 +0000

You may have seen the proposed tax legislation released on September 13, 2021. We are providing this information to keep you informed about the issues surrounding this legislation and the effects it may have on your estate plan.

The proposal addresses, in part, income tax, estate, and gift taxes. We intend to provide information about the estate and gift tax changes we deem most relevant to our clients; specifically, those individuals and married couples with a net worth over $6M and $12M, respectively.

First, the current $11.7M (almost $24.0M for a married couple) lifetime estate and gift tax exemption would be reduced by half on January 1, 2022. To benefit from the current high exemption, any new planning would have to be in place before that date.

Second, Grantor Trust planning is at risk. Traditionally, Grantor Trusts are trusts where the creator of the trust is obligated to pay the income tax, which opens the door for creative planning. These trusts include Spousal Lifetime Trusts (SLATs), 678 Trusts (BDTs), Defective Grantor Trusts (DGTs), and Irrevocable Life Insurance Trusts (ILITs). Under the current proposal, if legislative changes to the Grantor Trusts pass, it will be effective as of that date. This leaves very little time to put these protections in place before this potential date. If you already have an existing Grantor Trust in place before this potential date, you will be grandfathered in.

We are watching the proceedings and will keep you informed. If you feel you need to make changes to your estate plan to take advantage of any of these planning tools before they are gone, please call the office and set a time to discuss your current plan. Please keep in mind that all meetings and calls are billed at our hourly rate.

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Information for Landlords and Tenants

Craig Backus — Tue, 28 Apr 2020 22:21:37 +0000

The shelter in place order has created confusion for many. If you are a landlord or tenant, you may have questions particular to your situation. Hopefully, the following information will be helpful to you.

Landlords: You are in uncharted territory and I’m sure you want to be empathetic to your ten-ants, however, it is important to protect your rights. If a tenant is unable to pay rent, address the situation directly with them and consider providing options for delayed payment. Please ensure agreements are in writing and signed by all parties. If you are unable to come to terms with your tenant, you could attempt to enforce your rights under the lease, but keep in mind that enforce-ments may be more difficult with the governmental stance on the necessity of the shelter in place orders. If it is a commercial rental, direct the tenant to their bank to obtain information on a loan under the CARES Act. There are several loans available to businesses of all sizes, the most popular of which is the Payroll Protection Plan (PPP), to seek credit thru their banker.*

For commercial tenants: If needed, you can ask for a waiver or forgiveness of rent. Keep in mind that it is highly unlikely this will be granted. If your landlord is not amenable to modified terms, or is unwilling to negotiate, should you elect to not pay rent, you should send a written notification of the decision with an explanation of the impact of the COVID-19 virus and shelter orders on your ability to meet the original rental terms.

For individuals: If you own your home, many of the mortgage lenders are offering deferral pro-grams for mortgage payments, as are many utility providers. That same premise may apply if you are currently renting a residence. Many landlords, if they are able, are offering rent deferral options. Also, check with your insurance carrier as many are offering discounts and refunds.

The best thing to do in all situations is to communicate.

*As of today, the funds for the PPP have been fully committed. Efforts are being made by legis-lators to gain additional funding. We recommend that any business who has not received funds to contact their banker with a request for information on how to access loan proceeds in the event additional funding becomes available.

Disclaimer: This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC. This information is not intended to create or provide an attorney-client relationship. Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

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SECURE Act – IMPORTANT LEGISLATIVE UPDATE

Craig Backus — Tue, 28 Apr 2020 22:19:00 +0000

The SECURE Act was passed in late 2019 and affects IRAs and 401(k)s (included in this description are other qualified retirement plans) as of January 1, 2020. Many of our clients have asked how this could affect their planning. As expected, the law is not simple and there is not one universal approach. This article outlines our thoughts and general recommendations regarding the impact of the SECURE Act on planning for our clients.

The SECURE Act eliminates the ability to stretch the distributions from an IRA or 401(k) over the life expectancy of a non-spouse beneficiary and replaces that life expectancy stretch with a requirement that the beneficiary must take full distribution of an IRA or 401(k) by the tenth (10th) anniversary of the participant’s death (“10 Year Rule”). There are exceptions to the 10 Year Rule for special situations, which will not be discussed here. For purposes of this article, we will assume it is your desire to leave your IRA and 401(k) assets to your children.

Under the new SECURE Act, there are 3 options for naming children as beneficiaries of your IRA and 401(k):

Option 1: Individual is Named as Beneficiary

Option 2: Conduit Trust is Named as Beneficiary

Option 3: Accumulation Trust is Named as Beneficiary

Please review the summary below with respect to each option.

Option 1: Individual is Named as Beneficiary:

Update Beneficiary Designation Language “BDL” to name individual as beneficiary
No trust is involved, therefore no trust protections apply
10 Year Rule applies, meaning the beneficiary has the following options: o take lump sum immediately – income tax liability accrues immediately
- take distributions over time –income tax liability can be spread out over time
- take no distribution at all until 10th anniversary of participant’s death – income tax liability accrues in year 10 (Note: higher potential for increase in overall tax rate for that year.)

Option 2: Conduit Trust Named as Beneficiary:

Update “BDL” to name trust as beneficiary
Trust protections apply so long as funds retained in trust (up to the 10-year period)
10 Year Rule Applies, meaning at the end of the 10-year period, the trust must distribute the entire value of the IRA to the trust beneficiary. For example, if the balance of the IRA in year 10 is $400,000, that $400,000 is distributed directly to your child, no matter what age your child is at that time, trust protections do not apply to the $400,000 distribution, and your child bears the income tax liability.
The conduit trusts are allowed to have non-natural persons as beneficiaries (i.e., charities).
No changes to your estate planning documents are needed if you desire the results outlined herein.

Option 3: Accumulation Trust Named as Beneficiary:

Update “BDL” to name trust as beneficiary
Trust protections apply so long as funds are retained in trust (there is no requirement to distribute from trust within 10-year period)
10 Year Rule applies, meaning the Trustee has the following options: o take lump sum immediately – income tax liability accrues immediately to the trust
- take distributions over time – income tax liability can be spread out over time to the trust
- take no distribution at all until 10th anniversary of participant’s death – income tax liability accrues in year 10 to the trust

The difference with the Accumulation Trust is that the Trustee can elect to retain the distributions in trust (i.e., not make those distributions to the beneficiary), then trust protections remain in place with respect to such funds, but the trust bears the income tax liability (usually at a higher income tax bracket than your child). However, the Trustee can elect to distribute some or all of such distribution to your child, which permit the distributed amount to be taxed on your child’s income tax return at your child’s income tax rate, but the trust protections are lost with respect to the distributed amount.

Allows the Trustee to allocate the income tax burden between the trust and your child in the most tax-advantageous way.
The accumulation trust cannot name any non-natural persons as beneficiaries (i.e., charities). If a non-natural person is named as a beneficiary, then the 10 Year Rule referenced above is reduced to a 5 Year Rule.
You must implement changes to your estate planning documents if you desire the results outlined herein.

Prior to the SECURE Act (and in most situations), planning for our clients implemented Option 2: Conduit Trust as Beneficiary for the benefit of their children. While this option remains viable, in our opinion, it is no longer the best option because it does not permit the Trustee to retain distributed IRA and 401(k) funds beyond the 10 Year Rule thus such funds lose all trust protections by year 10. Post-enactment of the SECURE Act, it is our general recommendation to clients that Option 3: Accumulation Trust as Beneficiary be utilized for the benefit of their children as it permits the Trustee to retain distributed IRA and 401(k) funds beyond the 10 Year Rule, thus extending the trust protections over those funds for a longer period of time.

As a reminder, under current law, trust protections include, but are not limited to, the following:

Creditor Protection – trust assets are protected from your child’s creditors, meaning if your child is sued for liability, trust assets cannot be reached to satisfy that claim for liability

Segregation from Marriage – trust assets are segregated from marital assets, thus offer far greater protection in case of divorce.

3. Management – Management of trust assets by the Trustee so that another person has decision making authority with respect to those assets until your child reaches the age specified in your estate planning documents, when he or she can become his/her own Trustee

4. Income Tax Flexibility – The Trustee has the power (but is not required) to make distributions of income to your child, as the beneficiary of the trust, in order to take advantage of a child’s lower income tax bracket. As a trust reaches the maximum income tax bracket at $15,000 of income, this allows an opportunity to reduce overall income tax liability by distributing income out of the trust to your child and then that distributed income is taxed at your child’s individual income tax rate. The Trustee can consider other factors to determine whether the reduced income tax liability outweighs the benefits of holding income inside the trust. This is a case by case determination to be made by the Trustee. Example of factors: child has creditor issues, child is not good with money, child is in an unstable marriage.

In the event you determine Option 3: Accumulation Trust as Beneficiary meets your planning goals, we have developed an amendment that can be tailored to your estate plan that will update such plan to align with what we perceive as the most flexible beneficiary designation option available under the SECURE Act. Our fee for such amendment is $345.

This article is intended to be informative but cannot adequately address each client’s unique situation. If you would like a meeting or teleconference to discuss the impact the SECURE Act has on your estate plan, we are happy to coordinate that with you. Time for such a meeting or teleconference will be billed at our normal hourly rates and will be billed in addition to any fee charged for amending your planning.

Please let us know if we can be of any assistance to you in this regard.

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Protecting The Business Owner

Craig Backus — Tue, 28 Apr 2020 21:45:12 +0000

Most business owners form an entity through which the business is operated. Any of the following may have been formed when the company was started: a corporation, a limited partnership, or a limited liability company (LLC). One of the reasons to form an entity is to protect you, the business owner, in your individual capacity, from any liabilities of the business.

However, even with the protection of an entity, an owner must remain diligent. In a recent New Hampshire case, the court ruled that an individual member (owner) of an LLC could be liable if the owner participated in the action that caused the harm, even if it was on behalf of the LLC. For example, if the owner had knowledge of lead paint and did not do anything to correct the problem, then the owner could be liable. But more importantly, the Court found that merely being a member (owner), without some other overt act, is not enough to make the member (owner) liable for the operations of the business in the entity.

It is important to note that protection provided by the entity may not be absolute and any owner should be aware of how their business is operated.

Disclaimer:

This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC. This information is not intended to create or provide an attorney-client relationship. Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

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Asset Protection

Craig Backus — Tue, 28 Apr 2020 21:43:43 +0000

In today’s economic environment, people have become more and more concerned about liabilities, asset protection, and securing their future. Many of our clients are concerned that market conditions could cause them to experience economic or financial turmoil that is not within their control. For example, one of my clients did not seem to have any significant financial issues and was paying all of their business’ bills on time. However, when their line of credit was suddenly cancelled due to economic conditions, the cancellation almost caused them to have to close their business. I have been receiving more calls about how to structure asset ownership and how to protect from things going wrong, whether it be lawsuits, debt obligations, or their customers failing to pay, causing them in turn not to be able to pay their bills. There are many methods to structure the ownership and investment of your assets, and the structure of your business, which will offer you greater protection and more security should everything in your life suddenly go wrong. .

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CHOICE OF ENTITY AND STRUCTURE OF SALE

Craig Backus — Tue, 28 Apr 2020 21:42:12 +0000

The purpose of forming an entity and setting in place an agreement between parties is to protect your client’s business and family assets. There are many variables and many options available when forming an entity. However, to properly represent your client, it is necessary to fully understand the intentions of the parties involved and to ensure that the parties are aware of the rules and consequences set forth by the agreements. Remember that an agreement sets out terms for not only forming the business, but management of the business and its profits or losses, all the way to transferring or ending the business at some point.

This program addresses some of the options for formation and transfer of a business, but also cautions that one way may work for one party and not for another. There is no standard fit and the agreement should be tailored to the needs of the parties involved.

Laws vary from state to state, so when forming companies and setting forth agreements, it is imperative that you consult state laws while drafting the agreement to make sure that all issues comply. This applies to not only the state where the company is formed but the particular state where the company will operate.

As always, this information is not intended as legal advice but as a generic overview of the options available to all parties involved in the formation of a company or an agreement relating to that company.

Consider the full details of the previously published article using the link below:

Choice_of_Entity_2013 Download

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Understanding the Basics of Beneficiary-Grantor Trusts

Craig Backus — Tue, 28 Apr 2020 21:32:38 +0000

As published in Texas Lawyer, November 2010. Written by Pete Benenati and Shannon G. Guthrie. Many Americans, especially the wealthy, seek to abide by the Internal Revenue Code while also reducing taxes. One tool estate-planning lawyers have in their arsenal is the beneficiary-grantor trust. For purposes of this article, we will assume that some form of estate tax will apply, even though current tax laws provide that there is no estate tax for tax year 2010. The gift tax remains applicable for the tax year 2010. Understanding a beneficiary-grantor trust requires some general background about income tax and estate planning rules. Income tax may result when an individual sells an asset for more than his basis — basis generally being what he or someone else paid for it, with some adjustments. A trust is a taxpayer and is subject to income taxes earned on its assets (including capital gains). Finally, if an individual gives away an asset but keeps its benefit, it will be included in his estate for transfer-tax purposes. Given those rules, can an individual sell an asset to a trust of which he is the beneficiary and not recognize gain — i.e., not be subject to income tax on the profit? He can, and lawyers should know how to help him do so. A grantor is simply the creator of a trust. The grantor-trust rules, found at Internal Revenue Code §§671-678, sometimes tax a trust beneficiary on the trust income. In a beneficiary-grantor trust an individual (the grantor) creates a trust for another individual’s benefit (the beneficiary). For example, parents create a trust for their child, permitting distributions for the child’s health, education, maintenance and support. The child is the primary beneficiary and also serves as trustee of the trust. The parents make a gift to the trust of no more than $5,000. The lawyer structures the trust so the child has the right to withdraw the $5,000 when the parents contribute that money and also so the child knows about the right of withdrawal. Quite often, the child never exercises this withdrawal power. Because the child has given up a right to remove available funds, the $5,000 stays in the trust, where it is held and managed for the child’s benefit. The child, who is also the trustee, gets to decide not only how to invest the $5,000 but how to make distributions under the standard of health, education, maintenance and support. The child-trustee also has the power, exercisable in his will, to dispose of the remaining trust assets to a class of individuals and entities that can include family members and charities but not himself, his estate, his creditors or his estate’s creditors. By giving up the right to remove the $5,000 yet continuing to control the disposition of the assets left inside the trust, the child becomes the taxpayer for income generated by the $5,000 and, as a result, includes all items of income and deductions on his personal income tax return. But the child doesn’t really own the trust assets. As a result and under current Texas law, the trust’s assets are not subject to the claims of the child’s creditors. It is almost the perfect trust: It is for the child’s benefit, the child is in control as trustee, but the assets are protected from the child’s creditors and are not part of the child’s estate for estate tax purposes. Further, because the child is treated as the owner of the trust for income tax purposes, if he lends money or sells assets to the trust, he does so without income tax consequences, because the trust and the lender or seller are the same person. Yet, again, the child remains the beneficiary of the trust. This strategy is quite useful where the child owns an interest in an entity that is expected to increase substantially in value. Usually, the child wants to protect the increased value from his creditors — including the government, should a death tax apply — but also receive the benefit of the asset. The child sells

Disclaimer:

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Trademarks – An Important Asset

Craig Backus — Tue, 28 Apr 2020 21:31:37 +0000

Your business may use a word, phrase or logo to provide instant recognition and set your company apart from your competitors. It is important to protect these assets with a trademark in order to secure a long-term competitive advantage and protect against unfair competition. Without a trademark, a competitor can use your company name or logo and, if they trademark it, prevent your use of one of your most important assets. Protecting your company can be a simple process. Call the Benenati Law Firm for more information.

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Should I Form a Company For My Business?

Craig Backus — Tue, 28 Apr 2020 21:30:31 +0000

How many times have you heard, “you need to incorporate! You need to form a limited partnership (LP) or a limited liability company (LLC). It offers asset protection, and protection from creditors and lawsuits. It gives you better tax planning opportunities.” All of those statements are valid, however, a lot of people don’t know why.

Putting an entity around your business basically creates a wall between the business and your personal assets; if something happens inside the entity, it won’t put your personal assets at risk. There are exceptions to this statement, but in general, that is the effect. There is some work you must do to maintain that protection. Specifically, you need to respect the entity. An entity is a separate legal person; thus, it must be treated as such. Therefore, if you want to pull money out, you need to document it, whether as a loan, compensation, or a distribution. If you want to put money into an entity, do it either as a loan or a contribution. If you’re borrowing cash for less than a year, traditionally, it is okay to do it as a journal entry on the books. If it is longer than a year, you need to document it with a promissory note. The IRS wants to see that documentation for income tax purposes. Do not pay your personal expenses out of company assets unless you are willing and able to justify it as a business expense and can document it properly, otherwise, claim it as a personal disbursement to yourself. With corporations, there are also requirements to maintain annual minutes.

None of these issues alone traditionally cause problems, however, if a person decides not to respect the entity, all of these problems seem to exist. Any entity you own should be operated like any other prudent business investment. Maintaining proper liability protection for the entity is always recommended and failure to do so could be classified as failure to respect the entity. If you fail to respect the entity, then the liability of the entity could reach your personal assets, and your creditor’s attorney will argue: “Your Honor, he doesn’t respect the entity, why should we be subject to it?” This is not an easy argument to win, however, no one wants to be in a position of being on the opposite end of that argument.

Basic rules:

Form an entity – the form of the entity (corporation, LP or LLC) will depend on the particular circumstances of your business.
Respect the entity
Protect the entity

Disclaimer:

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Pete’s Posts

Craig Backus — Tue, 28 Apr 2020 21:28:30 +0000

March 2012

The IRS allows you to make a gift of $13,000 per year without gift tax consequences (subject to certain limitations). However, any gift in excess of that amount must be reported on a Form 709 (Gift Tax Return).

Recently, the IRS has started an initiative to enforce the laws regarding unreported gifts, especially gifts of real estate. To ensure taxpayers are abiding by the law, the IRS is reviewing local real property records to evaluate transfers of real estate. Texas is one of several states that has disclosed their property records to the IRS.

Gift tax audits are becoming more common. It only makes sense to avoid the penalties that could result from not reporting a gift, as well as the stress, work, and potential fees to attorneys and CPAs, that are associated with an audit. If you make gifts, I strongly suggest that you consider the requirement to report those gifts in accordance with federal law.

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March 2012

The IRS is aware that many businesses, in order to save payroll taxes, will classify a worker as an independent contractor. They have recently begun to look more closely at these classifications. Over the next three years, they will randomly select businesses to audit to determine if workers have been wrongly classified. The Department of Labor is also looking at these issues.

Do not make the mistake of enjoying a short term savings and end up with long term costs. If it is found that a worker should have been classified as an employee, as opposed to independent contractor, the costs can be significant in the form of back taxes, penalties and fines. If you need more information on whether a worker is an employee or independent contractor, the IRS provides guidance in the form of a 20 factor test. That test is accessible online at www.texasworkforce.org.

The government is looking for additional revenue, so do not take this issue lightly. Please call us if you need clarification of the rules or more information.

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