March 26, 2020
If you’ve invented something during your lifetime and had it patented, your estate includes intellectual property (IP). The same goes for any copyrighted works. These assets can hold substantial value, and, thus, must be addressed by your estate plan. However, bear in mind that these assets are generally treated differently than other types of property.
4 categories of IP
IP generally falls into one of four categories: patents, copyrights, trademarks and trade secrets. Let’s focus on only patents and copyrights, which are protected by federal law in order to promote scientific and creative endeavors by providing inventors and artists with exclusive rights to benefit economically from their work for a certain period.
In a nutshell, patents protect inventions, and the two most common are utility and design patents. Under current law, utility patents protect an invention for 20 years from the patent application filing date. Design patents last 15 years from the patent issue date. For utility patents, it typically takes at least a year to a year and a half from the date of filing to the date of issue.
When it comes to copyrights, they protect the original expression of ideas that are fixed in a “tangible medium of expression,” typically in the form of written works, music, paintings, film and photographs. Unlike patents, which must be approved by the U.S. Patent and Trademark Office, copyright protection kicks in as soon as a work is fixed in a tangible medium.
Valuing and transferring IP
Valuing IP is a complex process. So, it’s best to obtain an appraisal from a professional with experience valuing this commodity.
After you know the IP’s value, it’s time to decide whether to transfer the IP to family members, colleagues, charities or others through lifetime gifts or through bequests after your death. The gift and estate tax consequences will affect your decision. But you also should consider your income needs, as well as who’s in the best position to monitor your IP rights and take advantage of their benefits.
If you’ll continue to depend on the IP for your livelihood, for example, hold on to it at least until you’re ready to retire or you no longer need the income. You also might want to retain ownership of the IP if you feel that your children or other transferees lack the desire or wherewithal to take advantage of its economic potential and monitor and protect it against infringers.
Whichever strategy you choose, it’s important to plan the transaction carefully to ensure your objectives are achieved. There’s a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator.
Revise your plan accordingly
If you own patents or copyrights, you probably have great interest in who’ll take possession of your work after you’re gone. Contact us with any questions on how to incorporate IP in your estate plan.
March 23, 2020
Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest.
On March 18, the Senate passed the House’s coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:
- Paid leave benefits to employees,
- Tax credits for employers and self-employed taxpayers, and
- FICA tax relief for employers.
Tax filing and payment extension
In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.
Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.
Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”
Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.
Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.
Any amount can be deferred
In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)
In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.
As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).
This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.
We’ll keep you updated. In the meantime, contact us with any questions you have about your situation.
March 19, 2020
You may have several different types of trusts in your estate plan. In general, to achieve the greatest tax savings, these trusts must be irrevocable, thus requiring you to give up control over the trust assets.
Even though you appoint a trustee to oversee distribution of the trust’s assets, you can go a step further by appointing a trust protector. This person will serve as an overseer of the trustee’s actions. Taking this step can also provide you peace of mind because the trust protector has the power to alter the trust in light of changing family situations or tax laws.
Essentially, a trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.
You can confer broad powers on a trust protector. Examples include the power to:
- Remove or replace a trustee,
- Appoint a successor trustee or successor trust protector,
- Amend the trust terms to correct administrative provisions, clarify ambiguous language or alter beneficiaries’ interests to comply with new laws or reflect changed circumstances, and
- Terminate the trust.
While it may be tempting to provide a protector with a broad range of powers, it’s important to note that this can hamper the trustee’s ability to manage the trust efficiently.
Trust protector in action
Trust protectors offer many benefits. For example, a protector with the power to remove and replace the trustee can do so if the trustee develops a conflict of interest or fails to manage the trust assets in the beneficiaries’ best interests.
A protector with the power to modify the trust’s terms can correct mistakes in the trust document or clarify ambiguous language.
Choosing the right person
Appointing the right trust protector is critical. Given the power he or she has over your family’s wealth, you’ll want to choose someone whom you trust and who’s qualified to make investment and other financial decisions.
Many people appoint a trusted advisor — such as an accountant, attorney or investment advisor — who may not be able or willing to serve as trustee but who can provide an extra layer of protection by monitoring the trustee’s performance.
Choosing a family member as protector is possible, but it can be risky. If the protector is a beneficiary or has the power to direct the trust assets to him- or herself (or for his or her benefit), this power could be treated as a general power of appointment, exposing the protector to gift and estate tax liability and potentially triggering other negative tax consequences.
Due diligence is a must
Before deciding on appointing a trust protector, contact us. It’s important to review the trusts in your estate plan to ensure they’re drafted in such a way that there are no misunderstandings regarding the protector’s role and the authority you grant him or her.
March 16, 2020
Do you own a business but haven’t gotten around to setting up a tax-advantaged retirement plan? Fortunately, it’s not too late to establish one and reduce your 2019 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2019, and you can make contributions to it that you can deduct on your 2019 income tax return. Even better, SEPs keep administrative costs low.
Deadlines for contributions
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP first applies. That means you can establish a SEP for 2019 in 2020 as long as you do it before your 2019 return filing deadline. You have until the same deadline to make 2019 contributions and still claim a potentially substantial deduction on your 2019 return.
Generally, most other types of retirement plans would have to have been established by December 31, 2019, in order for 2019 contributions to be made (though many of these plans do allow 2019 contributions to be made in 2020).
Contributions are optional
With a SEP, you can decide how much to contribute each year. You aren’t required to make any certain minimum contributions annually.
However, if your business has employees other than you:
- Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and
- Employee accounts must be immediately 100% vested.
The contributions go into SEP-IRAs established for each eligible employee. As the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made, but at a later date when distributions are made — usually in retirement.
For 2019, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $56,000. (The 2020 cap is $57,000.)
How to proceed
To set up a SEP, you complete and sign the simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2019 (or 2020).
March 13, 2020
A Health Savings Account (HSA) can be a powerful tool for financing health care expenses while supplementing your other retirement savings vehicles. And it offers estate planning benefits to boot. The estate tax implications of inheriting an HSA differ substantially depending on who receives it, so it’s important to consider your beneficiary designations. If you name your spouse as beneficiary, the inherited HSA will be treated as his or her own HSA. That means your spouse can allow the account to continue growing and withdraw funds tax-free for his or her own qualified medical expenses. Contact us for more information.
March 10, 2020
If you’re the owner of an incorporated business, you probably know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason is simple. A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Therefore, if funds are withdrawn as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.
However, there’s a limit on how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. The IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder or a member of a shareholder’s family.
How much compensation is reasonable?
There’s no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include:
- The duties of the employee and the amount of time it takes to perform those duties;
- The employee’s skills and achievements;
- The complexities of the business;
- The gross and net income of the business;
- The employee’s compensation history; and
- The corporation’s salary policy for all its employees.
There are some concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
- Use the minutes of the corporation’s board of directors to contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.)
- Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
- Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
- If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.
Planning ahead can help avoid problems. Contact us if you’d like to discuss this further.
March 6, 2020
Payable-on-death (POD) accounts provide a quick, simple and inexpensive way to transfer assets outside of probate. They can be used for bank accounts, certificates of deposit or even brokerage accounts. Setting one up is as easy as providing the bank with a signed POD beneficiary designation form. When you die, your beneficiaries just need to present a certified copy of the death certificate and their identification to the bank, and the money or securities are theirs.
Beware of pitfalls
POD accounts can backfire if they’re not coordinated carefully with the rest of your estate plan. Too often, people designate an account as POD as an afterthought without considering whether it may conflict with their wills, trusts or other estate planning documents.
Suppose, for example, that Sam dies with a will that divides his property equally among his three children. He also has a $50,000 bank account that’s payable on death to his oldest child. If the other two children want to fight over it, the conflict between the will and POD designation must be resolved in court, which delays the distribution of Sam’s estate and can generate substantial attorneys’ fees.
Another potential problem with POD accounts is that if you use them for most of your assets, the assets left in your estate may be insufficient to pay debts, taxes or other expenses. Your executor would then have to initiate a proceeding to bring assets back into the estate.
POD best practices
Generally, POD accounts are best used to hold a modest amount of funds that are available immediately to your executor or other representative to pay funeral expenses or other pressing cash needs while your estate is being administered. Using these accounts for more substantial assets could lead to intrafamily disputes or costly litigation.
If you use POD accounts as part of your estate plan, be sure to review the rest of your plan carefully to avoid potential conflicts. Contact us with any questions.
March 2, 2020
No one said estate planning is easy, and this is especially true if you have a “blended family.” The good news is that there are two trust types — a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT) — that can provide for your children from a previous marriage while also taking care of your current spouse and any children from your current marriage.
At minimum, you should have a will in place that specifies how your wealth should be distributed. Otherwise, a significant portion of your estate may go to your children from a previous marriage — even if they’re now adults and don’t need the assets as much as your current spouse and any other children.
To implement your wishes for wealth distribution, you may find it helpful to establish a QTIP trust. This trust qualifies for the estate tax marital deduction, meaning that assets you transfer to the trust aren’t taxed when you die, and the entire amount is available for your spouse’s support. But unlike an ordinary marital trust, a QTIP trust can provide your spouse with income for life while preserving the principal for your children (from either your current or previous marriage, or from both) or other beneficiaries.
When your spouse dies, though, the trust assets will be subject to tax as part of his or her estate, even if the assets are to pass to your children as instructed in your will.
In some cases — particularly when one spouse is considerably younger than the other — a QTIP trust may not be the best solution. That’s because the children from a first marriage, who may be much older than those from the second marriage, may have to wait years until the younger spouse dies and they can receive their inheritance.
In situations like this, an ILIT may be a better solution. The ILIT purchases life insurance on the older spouse, who makes annual exclusion gifts to the trust to cover the premiums. If the ILIT is designed properly, there won’t be any estate tax on the insurance proceeds.
When the older spouse dies, the trust collects the death benefit and pays it out to the children from the first marriage. The older children receive their inheritance immediately, and the other assets remain available to provide for the younger spouse and children.
Discuss your plans
Before choosing any estate planning approach, discuss your plans with your loved ones. Even if your plan is inherently fair, it may not be perceived that way without an explanation. In addition, consider the consequences of different wealth transfer strategies. QTIP trusts and ILITs are only two of the many tools available to control the distribution of your wealth in a way that minimizes taxes and maximizes benefits for everyone involved. Contact us with any questions.
February 20, 2020
Whether you’re moving to another country for work-related reasons, retirement or simply want an opportunity to experience a new culture, it’s important to understand the potential tax and estate planning implications. If you don’t, you could be hit with some unpleasant surprises. Here are three possible pitfalls:
Double taxation. If you’re a citizen of the United States, U.S. taxes will apply even after you move to another country. So if your estate is large, you might be subject to gift and estate taxes in your new country and in the United States (possibly including state taxes if you maintain a residence in a U.S. state). You also could be subject to estate taxes abroad even if your estate isn’t large enough to be subject to U.S. estate taxes. In some cases, you can claim a credit against U.S. taxes for taxes you pay to another country, but these credits aren’t always available.
One option for avoiding U.S. taxes is to relinquish your U.S. citizenship. But this strategy raises a host of legal and tax issues of its own, including potential liability for a one-time “expatriation tax.”
Real estate issues. If you wish to purchase a home in a foreign country, you may discover that your ability to acquire property is restricted. Some countries, for example, prohibit foreigners from owning real estate that’s within a certain distance from the coast or even throughout the country. It may be possible to bypass these restrictions by using a corporation or trust to hold property, but this can create burdensome tax issues for U.S. citizens.
Unfamiliar inheritance rules. If you own real estate or other property in a foreign country, your heirs may run up against unusual inheritance rules. In some countries, for example, your children have priority over your spouse, regardless of the terms of youIf you’re planning to move overseas, it’s time for an estate plan reviewr will.
Review before you relocate
If you’re considering a move overseas, discuss your plans with us before making a move. We can review your estate plan and finances and make recommendations to help avoid tax pitfalls after you relocate.
February 19, 2020
Merline & Meacham, P.A. is pleased to announce that attorney Marie Monroe was recently named to the Greenville Humane Society’s board of directors.
Marie provides Merline & Meacham, PA. with expertise in estate planning and non-profit law, among other areas of practice. She has been involved with both The Community Foundation of Greenville and the Meals on Wheels Endowment. Marie and her family rescued their dog, Snerdley, in 2011.