Author Archive

For Tax Compliance and Planning, Collaboration is Key

Posted by Melissa Olszak, CFP®, CFA®

8 Tips to Ensure High Net Worth Investors Get the Most Out of This Tax Season

It’s that time of year again when high net worth clients and their advisors are getting inundated with 1099s, K-1s, estimates and other tax documents. Although this inundation of data is not new, there are many changes with the 2018 filing versus the 2017 filing, making this year one of the more challenging years for CPAs to meet deadlines–and also not miss tax filing requirements or opportunities for their clients.  

Many CPAs have software that organize and track a list of 1099s and K-1s, and prepare a checklist for the following year. That being said, this software is only as good as projecting the information from the previous year, so it is important to watch for a few items that are new or not recurring to ensure there are no opportunities being lost during the filing process.

Here are 8 tips to help CPAs and high net worth clients reduce the chance of missed items or opportunities.

  1. New Bank Accounts or Investments. When working with a wealth management advisor, the advisor will likely have a good inventory of any new or closed accounts and any new direct or limited partnership investments.
  2. Purchase or Sale of a Home or Refinance of a Mortgage. It’s best practice to collect a closing binder of the sale or purchase and share it with your CPA, as this documentation should contain the majority of information needed such as legal owner, deductible expenses versus capital expenses, and financing documents if there is a mortgage. Aside from the closing binder, the other information your CPA will need is any additional basis records if the home was sold to determine any gain (or loss if the property was an investment property).
  3. Purchase of a Fuel-Efficient Vehicle. There are certain tax benefits when it comes to purchasing new, fuel-efficient vehicles, but there are also required rules and records that must be provided to your CPA in order for you to benefit. Your wealth advisor also may be aware of such a purchase and can help track down the required information.
  4. Low Basis, Concentrated Positions. Some clients and families have large positions in stock that either came from the family being one of the original founders or investors, or that may have simply been passed down through generations. In either case, when positions are held for a long time, the custodians who hold them may not have accurate basis information. Given this scenario, it’s important to pay attention to any sales of securities to ensure your CPA has accurate basis to be able to determine any gain or loss, and that there’s time to go back and build a basis history. These scenarios may be something your wealth advisor can also help sort through.
  5. Tax-Deferred Accounts. Although the IRS has certain reporting that gets generated on tax deferred accounts, it’s important to provide information on any tax-deferred account transactions such as rollovers, required minimum distributions or charitable donations, to be sure they are not missed and are properly reported. 
  6. Loans. There often is not any automatic reporting for family and friend loans, so it’s important to not lose track of these types of loans and share copies of the promissory notes and any interest and principal payments with your CPA. Your CPA may also be able to spot if a reasonable interest rate is being used, such as the Applicable Federal Rate (AFR) for related party loans, to reduce any gift exposure.
  7. Charitable Donations. With many other deductions (state income tax and real estate taxes) being reduced, charitable donations may be more valuable to clients. Therefore, ensuring proper records are obtained is critical to not missing out. These records include receipts for any cash gifts over $250, and appraisals for in-kind property donations. Your wealth manager can work with you to establish the best strategy for giving (such as through a donor advised fund to take advantage of fewer receipts to track while also being able to donate low basis securities and controlling the timing of the deduction and ultimate charitable contribution).
  8. Gifts. Whether your CPA or estate attorney files your tax return, it’s critical to look back over the year and provide information on any gifts made, which could include outright cash gifts or more complex giving such as the funding of a Grantor Retained Annuity Trust (GRAT), a QTIP Trust or forgiveness of a loan. By providing this information, your CPA or attorney can advise on the filing requirement and impact on remaining lifetime and generation-skipping exemptions.

The list above can be overwhelming, but if you, your CPA and your wealth advisor work together to compile the list of data and any new investments or transactions that occurred, it can become much more manageable and reduce missed filing requirements and opportunities. 

Creating or Revising Your Estate Plan

Posted by Melissa Olszak, CFP®, CFA®

Know How to Spot What’s Missing from Your Estate Plan and What Can be Improved

Maybe you’re thinking for the first time about what your estate plan should look like. Maybe you’re revisiting your estate plan for the second or third time.

Either way, your ultimate goal should be to have an estate plan that aligns with your long-term objectives. While we don’t recommend going it alone, there are a handful of factors you should be sure to consider as you craft or re-craft your estate plan.

Naming the Executors, Agents and Trustees of Your Estate

Depending on the type of estate plan you have, you will need to choose a trusted person to act on your behalf if you are not able. For instance, with a Health Care Proxy, you are choosing someone to make medical decisions on your behalf. For a Durable Power of Attorney, you are asking someone to make financial decisions (while you are living) on your behalf. For your Will and Trust, you are asking someone to handle the disposition of your estate according to your wishes.

Given the significance of each of these roles, one of the important decisions you will make is choosing someone (or often a combination of people) who are sophisticated and savvy to handle the complexity of estates, taxes and finances, but who also know your values and will respect them.

Once you’ve made the decision on who to name (whether that be a trusted family or friend or a trusted attorney), it is as important to understand what the back-up rules will be if that person is unable to serve – i.e. who can appoint a successor, who can remove a trustee, what occurs with further vacancies.  

Walking through a few scenarios with your attorney as the documents are drafted will help flush out your objectives.

At Lake Street, we often advise that clients choose both a trustee family/friend along with a trusted advisor (attorney, CPA, etc.) and also provide future beneficiaries with appointment and removal powers in case adjustments need to be made in the future.   

Managing Your Assets: Do You Leaving Them Outright or in Trust?

Another important consideration for your estate plan is how you want to leave assets to your beneficiaries – whether that be a surviving spouse, your children, further descendants, friends and/or charity. This decision is often influenced by the size of the assets. The larger the assets, it generally is more beneficial to leave them in trust versus outright, since there is typically a higher level of asset protection.

Although court decisions are often unpredictable, trust assets that are not self-settled (i.e. funded with one’s own assets) typically will have language built into them to provide some level of protection from the beneficiary’s creditors (such as divorce, accidents, business, etc.). Once the assets are distributed from the trust and fully in the control of the beneficiary, that asset protection is lost.  

With the right trustee in place who understands your values, the beneficiaries can still be supported in a way you would like without having to distribute the assets to them (for instance a trust can purchase a home for a beneficiary).

Keeping assets in trust does come with costs, however, including trustee and legal fees, accounting fees and investment management fees, so these costs need to be considered relative to the total assets that will be retained or distributed.

How to Build Flexibility into your Estate Plan

To err is human; therefore, It is not uncommon to make a decision and look back years later wondering what you were thinking. This scenario happens as life evolves with family and friends, but can also happen as a result of tax and legal changes at the Federal and State level. Given that it is impossible to predict the future, it can be helpful to build flexibility into your estate plan.  

For instance, with Irrevocable Trusts, which are trusts that by design cannot have the dispositive provisions changed, it is helpful to consider whether there may be any administrative changes that may be needed in the future to adjust for trustee changes and/or legal and tax changes. When you consider the potential changes that may occur in the life of your spouse (if you predecease him/her, for example) or a child/grandchild, you may want to provide them with the flexibility to change your plan if it makes sense. One way to do so is to provide them with a power of appointment over the assets in trust for their benefit. It is important to do this with your attorney, as there are tax differences between the types of powers of appointment you can provide – general or limited.  

That being said, one example is that you could provide your spouse with the ability to change the plan to change the amounts left to children, spouses of children and charity. Say, for instance, there is a child with special needs in your family. This situation may require a modification of the estate plan to account for how it is best that the child receive the trust assets.

This same example could apply to your children – i.e. giving them the ability to redirect assets in a trust for them to include their spouse rather than potentially defaulting to a trust for only their children.

While there is no “right” answer, it is important to think through your objectives and determine whether to add in the flexibility, and also discuss with your attorney as there are also often tax implications to consider as well.

Putting Your New or Revised Estate Plan Into Action

Once you think through your estate plan, it is equally as important to implement it by signing the estate documents and thinking through whether any assets should now be shifted to take advantage of your new plan. This action could simply involve retitling assets from your personal name to your new Revocable Trust to move assets outside of probate (which will save time and money if something happens to you), or it could involve more advanced wealth transfer strategies such as shifting assets to an Irrevocable Trust via a lifetime gift.  

At Lake Street, our goal is to understand your objectives and work with you and your other advisors to help implement a customized plan that best meets your needs. Estate plans can be complicated, and the more people you have working on your team, the better!

Don’t Feel Taxed this Holiday Season

Posted by Melissa Olszak, CFP®, CFA®

4 Financial Planning Opportunities to Consider Before 2018

As we roll back the clocks and look forward to the holiday season, it’s important to give some thought to year-end financial planning to be sure that any opportunities that expire at year-end are addressed in time to execute them before toasting the New Year.

Here are 4 financial planning items to consider as we approach 2018:

 

  1. Year-End Giving

You may be considering giving financially, either to a charitable cause or to family and friends. Monetary giving is always a great way to give back or make an impact; however, each method of giving carries different considerations.

If you’re considering giving appreciated securities instead of cash, keep in mind they should be long-term to get the deduction at fair market value rather than at cost.

It may not make sense to make the donation in 2017 if you have already hit the adjusted gross income (AGI) limit for donations and have carryovers from prior years that should be used.

It may also not make sense to make the donation in 2017 if you expect to be in a higher tax bracket next year, as waiting a year may provide you with a larger deduction.

 

  1. Deductions

Outside of any deductions for charitable giving, there are other deductions you should consider taking before year-end, rather than in the New Year. These include expenses you can take as itemized deductions, such as:

When making the decision to take deductions, it’s important to understand whether you expect to be in a lower tax bracket this year or next, and whether you will be subject to the alternative minimum tax (AMT). If you will be subject to the AMT, you may not get the benefit of the deduction. Therefore, frontloading it won’t help.

The tax system and phase-outs on deductions is complex, and if you’re unsure how deductions can work for you, it may make sense to have your accountant run a current-year projection with (and without) certain deductions. This projection will also help catch any expiring carryforwards about which you may not have been aware.

 

  1. Investment items

Before the end of the year, it’s a good idea to review your investments to see what opportunities exist. A few to keep in mind are the following:

If you’re unsure whether the securities you are considering are different enough, you should consult with your accountant.

Similarly, if you are planning to purchase, it may be beneficial to purchase after the ex-dividend date to avoid possibly being taxed at ordinary rates on an immediate distribution.

 

  1. Required Distributions

There are a handful of entities that have required minimum distributions (RMDs), and typically the RMD is measured on a tax year. Here are a few examples you’ll want to consider:

Since many of the above items have several steps involved for execution after a decision is made, it is best to start early. Hopefully by starting early, you’ll be able to enjoy the holiday season and not be feeling taxed by the chase for final deductions, write-offs or other requirements in the final week of the year!

Securing Your Family Legacy

Posted by Melissa Olszak, CFP®, CFA®

A Smart Approach to Passing on the Family Foundation

There are always stark differences between parents and their children. These differences are what make your children unique individuals; however, when you don’t see eye to eye, it can create some turmoil.

Passing along a family foundation to the next generation doesn’t always go smoothly, which may be because the priorities of the second generation can be different from those you have fostered over the years, or because your children simply aren’t interested in being involved in the foundation.

While there are potential roadblocks to passing along a family foundation to the next generation, there are ways around them that can keep your foundation intact and flourishing into the future.

The Importance of Preserving the Family Foundation – How it Relates To Your Legacy

A family foundation is one that is funded by members of a family and run by a board comprised of at least one of those family members. Outside of certain tax, legal and investment incentives, the key benefits of a foundation are the ability to control donations and to have a significant impact on the causes and initiatives that matter most to the family.

Family foundations also offer the ability to establish a legacy for a family and provide the family with a means to foster continued family relationships, while also passing on family values and knowledge. This approach works well if the family remains involved and passionate from generation to generation. But without the right setup to stand strong against disputes or disagreements, there runs the risk of the foundation falling apart.

Here is what you need to know to begin the conversation with your children and grandchildren, and prepare your foundation for the future.

  1. Involve younger generations early and openly.

If you want your children and grandchildren to be involved in the foundation into the future, it’s important to prepare them early. This preparation should include informing them about the core missions of the foundation, and educating them about why the foundation’s initiatives are meaningful. Having this dialog early on allows time for discussion and a sharing of ideas or concerns, which helps diffuse any potential disagreements or conflicts going forward.

Especially if you have young adults who would become involved, it is always good practice to prepare them for the act of a philanthropic lifestyle or at a minimum expose them to that lifestyle to see if they share the same passion for it. (At the same time, you get the benefit of exposing them to a world of investments, and tax and legal requirements, which can be a great learning opportunity for younger generations). Regardless of whether they become a board member or officer, they can always be charitable if they understand the benefit of giving.

  1. Establish roles and involvement.

If you’re actively running your family foundation, you’re making the decisions as to how the funds are used today. When making efforts to prepare the next generation, there are two important elements to consider:

 

  1. Be open-minded.

One of the many reasons the infamous Rockefeller Brothers Fund has remained so successful over so many generations is the family has been open-minded about, among other things, looking outside the family for board members, and about the ideas and initiatives of new or existing members.

Non-family appointees can be considered if there are individuals you trust highly and who have been heavily involved in family affairs over the years. They may also be considered if the family members are not as financially sophisticated and want a professional to help them with the investment, tax and legal requirements of managing a family foundation.

Avoiding Conflict Among Family Members

Because there can be differing ideas between you and your descendants, it’s important to be flexible and allow everyone’s opinions to be out on the table. There are some primary issues that can arise when discussing passing on the family foundation, but these issues don’t have to spell trouble for the foundation.

It is always wise to work with a financial advisor to help you sort through these situations, as they can provide clarity and act as a mediator to work through these conversations and decisions. Here are some possible scenarios:

You believe you know best as to the direction and activity of the foundation and are unable to agree with a younger generation taking things in a new direction.

In this scenario, your advisor might suggest you spend the foundation’s resources in your lifetime so you can see the impact you feel strongly about while you are still alive. However, if the goal is to pass on a family legacy, it is a good idea to sit down with your heirs and talk things through. If you’re able to be open and understand their motivations for the foundation’s future, you may discover they are not much different from yours, or you may discover that while they are different, they are still something you feel comfortable with the foundation supporting.

The younger generation is busy or lives far away and has difficulty putting in the time to get involved.

In this scenario, you could design the trustee provisions such that a child or further descendant could temporarily resign from serving for the foundation and re-engage in the future when they can devote more time to managing the charitable initiatives. Another option is to use technology to help support remote meetings, which allows family members living in different places to still connect regularly while reducing a travel burden. You could also design the foundation so each child could have discretion over a certain amount of the annual distributions, and therefore could support local community initiatives that are important to them and that foster their continued engagement.

Your family has experienced a loss, a rift, or another significant change that has caused some upheaval on the foundation board.

In this scenario, your financial advisor would likely tell you to find an individual (it could be someone in the family or a professional wealth counsellor), who could act as a neutral party to help keep things on an even track through difficult times and help guide the family foundation back to a healthy organization and something family members can take pride in fostering for future generations.

When embarking on the process of securing your foundation for the future, the most important thing to keep in mind is to remain true to your values, whether that is to support certain types of charities or simply to use the family foundation as a means of furthering family continuity and legacy. There are distinct reasons why your family has chosen to set up a foundation, and those reasons should govern your decision-making and your approach to others’ ideas.

Again, working with a financial firm like Lake Street that is skilled in high net worth family office advisement will ensure you can work through the multitude of scenarios that could occur, to secure your family’s legacy for decades to come.

Equifax Data Was Breached–Now What?

Posted by Melissa Olszak, CFP®, CFA®

What You Need to Know–and Do–to Keep Your Information Safe

Even in a world where information is more accessible than ever before, it remains shocking and can feel quite violating to learn personal data at a major organization was breached.

The recent data breach at Equifax, which may have affected as many as 143 million US consumers, was a quick study in how vulnerable our information is, and how easy that fact can be to forget.

Even if you were not a victim of the breach, you likely have questions about protecting your information. Here are some actions you can take today to help keep your personal information safe.

  1. Establish Online Logins

If you have any accounts, such as a credit card or cell phone plan, that currently do not have online account access attached to them, you should create that online access immediately. Having password-protected online access for each of your accounts helps prevent someone else from setting up an account on your behalf with your stolen information.

  1. Set Up Dual Verification

Most online accounts offer added security features such as dual verification, which requires you to provide a second form of identification to log in, such as a code texted to your cell phone. You should also take advantage of other security features like alerts or notifications for any questionable activity.

  1. Monitor, Monitor, Monitor

You can never be too vigilant about the activity happening on your various credit or bank card accounts. The more often you review your statements and activity, the sooner you will notice if something is amiss. While many card companies send alerts when suspicious behavior occurs, don’t rely on those notifications to take the place of your own assessment of your card activity.

You should enroll in a credit monitoring service, such as those offered by any of the credit bureaus (Experian, Equifax, TransUnion) or other providers, such as LifeLock. Look for a plan that has ongoing credit monitoring across the three credit bureaus, provides alerts when changes are made, and offers resolution assistance in the event of identity theft.

  1. Be Inventive with Security Questions and Passwords

We all know how easy it is to forget our passwords, and therefore how tempting it is to create something easily remembered, such as “password.” But the first rule of password security is to use letter and character configurations that are unique and hard to guess. The same rule applies to security questions. Consider providing an answer that doesn’t match the question to ensure no one could guess it. Hacker technology is advanced, and the more security you put in place on your end, the harder you make it for them.

  1. Enact a Security Freeze

In response to the breach, Equifax has made known to its customers the option of placing a security freeze on their file with all 3 credit agencies to prevent misuse. This is a measure you could consider if you believe you have been the victim of identity theft. Security freezes are an effective way of preventing an identity thief from opening new accounts in your name.

To place a freeze, you must contact each of the 3 credit bureaus. Enacting a security freeze typically requires you to provide your name, address, date of birth, social security number and other personal information. Fees vary based on where you live, but are commonly between $5 and $10. It is also important to understand the instances in which you may need to lift/remove a security freeze, and how to accomplish this with each credit bureau.

  1. Implement a Fraud Alert

A fraud alert will notify existing and potential creditors who access your credit file that you are a victim of identity theft. It requires anyone accessing your credit report to contact you before authorizing any requests or modifications to your credit line.

A fraud alert will only remain on your credit file for 90 days.

  1. Implement an Extended Fraud Alert

Like a fraud alert, an extended fraud alert requires creditors accessing your credit report to personally contact you before authorizing any requests to open or modify a credit line. Unlike a fraud alert, an extended alert lasts in perpetuity.

With this type of alert, you will be entitled to 2 free credits reports from each of the 3 credit bureaus, and your name will be deleted from prescreened credit and insurance offers for 5 years.

  1. Take Action Against Fraudulent Activity

If you believe you are the victim of identity theft, you should immediately contact https://www.identitytheft.gov to submit an identity theft report. To request a security freeze or contact the 3 credit bureaus, use the information and links below.

Equifax
1-800-685-1111

Experian
1-888-397-3742

TransUnion
1-888-909-8872

Liquidity Planning for the Family Business

Posted by Melissa Olszak, CFP®, CFA®

3 Key Considerations When Preparing to Sell the Family Business

If you’ve owned and managed a business for any number of years, stepping out of that role and selling the business to a third party can feel like walking into completely new territory, even for the savviest of business owners.

Entering into a liquidity event takes some preparation, not just to get used to the newness of the situation, but to ensure you’re taking the best course of action with your investment.

The Importance of an Exit Strategy

Why is this so important? A recent PricewaterhouseCoopers and Exit Planning Institute survey of former business owners found that 75% of owners regretted the decision a year later based on net proceeds. Because of this possibility, it’s important to begin exploring your exit options early, and to remember it’s not just about financials, but about the long-term impact on you, your family, and your objectives for the wealth you’ve created.

The Decision to Sell the Family Business – Reducing Risk

Whatever your reasons for selling the business, be it a lack of a next generation to operate the business or simply a higher selling value in the current market, how you go about the sale must be done carefully to reduce the risk of regrets.

Where previously you enjoyed a CFO or other professional to manage the wealth from the business, exiting the business causes sudden liquidity that many families do not know how to manage on their own.

Rather than risk missing opportunities prior to the sale (such as wealth transfer and tax savings opportunities) or risk making mistakes after the sale (such as poor investment, cash management and budgeting decisions), there are some specific steps to take to ensure that your liquidity event and future is managed in the most beneficial way for you and your family. You would not want to undermine the wealth generated by the hard work of building the family company.

1. Establish the Right Team of Advisors

When selling your business is on the horizon, one of the key items to do as early as possible is to establish the right team of advisors to help with the transition. This would include a business attorney to help navigate the key business decisions and negotiations, as well as personal advisors–such as a tax specialist, estate specialist, investment advisor, and possibly a family office–to help navigate the key decisions required before, during and after the sale. Establishing advisors helps ensure the wealth generated by your hard work is secured for future generations.

The job of the right team of advisors is to educate you on the various opportunities and decisions, and the trade-offs and outcomes of each. When you are selecting advisors, it’s important to understand whether any of them have any conflicts (i.e. how they are paid) to be sure the advice you are getting is objective and in you and your family’s best interest.

2. Establish an Estate Plan

If you have a sale on the horizon of a family business in which you have a concentrated investment, going through the process of implementing an estate plan will help you focus on, and clarify, your estate objectives–whether they are to support your descendants, give to charities, or a combination. You will also need to determine the best vehicles (trusts, foundations, other) to accomplish your objectives.

If this process is started with ample time before the sale, different wealth transfer opportunities will also be available to save taxes and help structure your estate plan so that it’s more beneficial to you and future generations. This area of planning can be technical and unfamiliar, so it should be started as early as possible to ensure the best results.

3. Learn Cash Management & Investment Management

If you have a large investment in your family business, but historically have not had excess liquidity to invest, selling the business will create a bit of a new world for you and your family–in terms of both having excess cash to spend and excess cash to invest. Planning for the sale in advance allows you to begin considering your investment strategy for the proceeds, and also begin considering what budget and spending can be supported by your investments, particularly if after the sale, you will no longer have a business salary or bonus to cover spending needs. Unfortunately, there are many stories (often with lottery winners), where large inflows of liquidity can lead to overspending and eventual erosion of wealth, so planning for this event in advance is critical.

With all of the steps above, it is important to keep the lines of communication open with your advisors and other family members during the decision-making and business sale process. By applying the same discipline used in owning and operating a successful family business, you should be able to diligently work toward preserving personal wealth before, during and after a sale. Educating yourself throughout the process will help you avoid regret, make better long-term decisions (estate, tax, investment and cash), and will benefit future generations.