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Different Types of Trusts

The term “Trust” is a common description of ownership, especially in real estate.
If you or someone owns your residence in trust, what is the real meaning of the term?

In general, a trust is a right in property held in a fiduciary relationship by one party for the benefit of another. When the assets are placed in the trust they belong to the trust itself and not the trustee. The trustee holds the title to the trust property, and the beneficiary is the person(s) who receives the benefits of the trust.

There are several types of trust to consider:
A revocable or “living” trust is created during the lifetime of the trust maker.
For legal purposes it can be changed or cancelled by decision of the trust creator, also known as “grantor”. The grantor transfers the title of the property to the trust, but retains as the initial trustee and can remove the property from the trust at anytime. However the living trust can become irrevocable at the death of the grantor and the named trustees other than the grantor assume control of the trust activities. The trust has ownership over the assets after the trust maker’s death. Living trusts are commonly used to avoid probate of the estate assets.

Another type of trust is an irrevocable trust. After it is created this type of trust cannot be altered, changed, or revoked. Trust property cannot be distributed out of the trust, except under the specific terms written into the trust by the grantor.\ trust maker. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust’s assets from the grantor’s taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets.

Charitable trusts are trusts that are set up to benefit a particular charity or the public in general. Charitable trusts are often used as part of an estate plan to lower or avoid estate and gift tax.

A charitable remainder trust is the most common charitable trust, which provides the donor with many tax benefits.

First, you are allowed take a charitable income tax deduction and spread it over five years. The deduction is the original amount donated minus what you expect to receive in interest payments. Second, because the property is going to a charity upon your death, the property will not be included in your estate for estate tax purposes. Finally, it allows you to turn property that is not producing cash income into charitable tax deductions without paying capital gains taxes on the cumulative appreciation (increase in value). For example, if you donate stock that would have produced a huge capital gain, the charity will receive the benefit of the gross sale proceeds, and you will benefit from a charitable gift tax deduction.

Putting Your Money into Timeshares

Does it make sense to buy a timeshare? Negative opinions are easy to find, and there’s little doubt that high-pressure sales pitches may lead to some bad decisions. Nevertheless, millions of Americans own timeshares. Surveys indicate that purchasers tend to be well educated, with comfortable incomes.

Can so many capable and accomplished people all be wasting their money? The first question is do you buy a timeshare as an investment or simply a means of getting assured vacation time?

Old and new
Buying a timeshare essentially means prepaying for lodging on future vacations. Originally, timeshares reserved a predicted vacation occupancy time at a fixed destination. However, many timeshare schemes include the ability to trade a particular time at a fixed destination for another timeshare.

Example 1:
Mel and Lana King bought a timeshare many years ago for $15,000. This entitled them to a two-week stay at Resort A, in Room B, at a set time period each year. This sort of arrangement might work well if the Kings wish to spend the same two weeks at the beach every year. If they change their mind, the Kings might be able to rent the room and collect a fee (depending on the contract terms); alternatively, they could let friends or relatives use their slot. As you can see, such arrangements lack flexibility. The Kings’ circumstances might change, and the same yearly vacation plan might lose appeal. Thus, timeshare companies have sought ways to bring choice into the timeshare experience. Now, many deals involve points, rather than some sort of room swap.

Example 2:
Jim and Hope Grant put $25,000 into a timeshare last year. Instead of the right to use a specific room, they purchased an annual allotment of 200 “points” in a hotel chain’s timeshare network. Each year, they can use those 200 points to stay at a vacation destination listed at 200 points on the network. One year, the Grants’ 200 points might cover two weeks in a typical resort guest room; the next year, the same 200 points could allow the Grants to stay for one week in a luxurious suite with a beautiful view. And so on.

Pros and cons
Timeshare enthusiasts express many reasons to make this choice. You’re guaranteed a place to stay on vacation, perhaps an extremely desirable one, without having to purchase and maintain a second home year-round. In a far-flung network, you might have access to some splendid vacation opportunities. Having a timeshare may force even the most dedicated workaholics to spend some time sailing or skiing. Moreover, as the timeshare promoters might say, you could be paying for tomorrow’s vacations at today’s prices. Among their drawbacks, the financial benefits of timeshares are uncertain, to say the least. You’ll have a substantial upfront outlay, far more than the cost of vacation lodging for a year or two. If you make a partial initial payment, the seller probably will offer financing, but the interest charges might be steep. You’ll also have annual maintenance fees to pay, and perhaps some extra costs for using certain features of the plan. Moreover, timeshares may have little or no resale value. Indeed, one strategy is to acquire a timeshare on a growing online secondary market, for a fraction of the initial price. You’ll have to pay future maintenance fees, though.

Proceed with caution
Ultimately, you should approach a timeshare as you’d evaluate any major outlay. Don’t make a snap decision, especially after hearing a persuasive sales pitch. Read the contract carefully and get answers to any questions that arise. Crunch the numbers.

Example 3:
In example 2, the Grants pay $25,000 for a timeshare; each year they can use 200 points for vacations in the network. The Grants calculate that 200 points will get them around $3,000 worth of vacation lodging, at current rates. Assume the maintenance on this hypothetical timeshare is $800 a year. If so, the Grants will save $2,200 on their lodging: they’ll pay $800 maintenance instead of the $3,000 going rate.
In such a situation, it will take more than 11 years for the annual savings to justify the upfront outlay, assuming no resale value. If there were a resale value, the numbers would be much different. Our office can help you go over the numbers in a timeshare you’re considering, to help you make an informed decision.

Planning for Today’s Pensions

Some observers have commented that few private sector workers can look forward to pensions after retirement. The traditional pension, an employer sponsored schedule of fixed payments to a retiree and perhaps a surviving spouse, is becoming a rarity. Nevertheless, millions of people do have a form of pension these days, variable payments based on investment returns related to employee contributions and investment appreciation.

How RMDs work
At that age, required minimum distributions (RMDs) typically begin from retirement plans, such as traditional IRAs and 401(k)s. With proper planning, RMDs can serve as a long-term pension and also provide benefits to a surviving spouse.

Beyond age 70½, you generally must withdraw at least a certain amount from your retirement plan each year. The number is based on your age and the account balance at the end of the previous year. Any shortfall triggers a 50% penalty.

Example 1:

Craig Jackson will reach age 70 this July, so he’ll be 70½ in January 2017. His first RMD will be for 2017, based on his December 31, 2016, IRA balance. Assume Craig’s IRA balance will be $600,000 then. He can go to the IRS “Uniform Lifetime Table” and find age 71: the age he’ll turn in 2017. The IRS table shows a “distribution period” of 26.5 years at 71, so Craig will divide his $600,000 IRA balance by 26.5, to get $22,642, his RMD for the year. (IRA owners whose spouse is their sole beneficiary and is more than 10 years younger use a different table, resulting in a smaller RMD.) Craig can withdraw a larger amount in 2017, but a smaller distribution will be penalized. If his 2017 IRA distributions total $10,000, he’ll lag the RMD by $12,642 and owe a 50% penalty: $6,321. Each year, Craig will repeat the process, using the relevant distribution period and IRA balance. In the year he turns 76, for instance, the distribution period will be 22 years, reflecting a reduced life expectancy. If Craig has a $440,000
IRA balance on the previous December 31, his RMD would be $440,000/22, or $20,000 that year.

Pension planning
By following the RMD guidelines, Craig can construct a do-it-himself pension. He can contact his IRA custodian early in 2017, determine his RMD for the year, and request the annual amount to be paid in monthly installments.

Example 2:
In our previous example, Craig’s 2017 RMD will be $22,642. That’s $1,887 per month, for 12 months. Craig can have the IRA custodian transfer that amount into his checking account each month, which effectively would provide him a pension for the year. The monthly RMD payouts would vary in future years, as explained. RMDs from traditional IRAs generally are fully or mostly taxable, so Craig can choose to have taxes withheld, reducing the monthly deposit. Alternatively, Craig can receive the full RMD each month and make quarterly estimated tax payments. Using the IRS table in this manner, year after year, Craig will never deplete his IRA, so he’ll always have monthly cash flow. If he reaches age 90, for example, the distribution period on the uniform table will be 11.4 years, meaning that Craig’s RMD will be about 8.8% of his IRA. The balance can stay in the IRA, growing tax-deferred. If Craig’s wife, Dana, survives him, and Dana is the sole IRA beneficiary, she can roll Craig’s IRA into her own name. Then Dana can have her own RMD schedule—her own lifelong pension—in addition to RMDs from any IRAs Dana already has established herself. Note that Dana and Craig can take more than the RMD obligation each year. As long as they are older than 59½, there will be no early withdrawal penalties. However, taking more than the RMD likely will increase the tax bill and reduce the amount of future cash flow from IRAs.

Easier riding
If you don’t need money from your IRA in retirement, following the RMD table is the best way to minimize unwanted taxes. But what if you are relying on those funds for a comfortable lifestyle after you stop working? Then the IRS table can deliver a practical guideline for tapping your retirement fund. By following the table, you will withdraw more from your IRA after a period of successful investing, and less after a market pullback has devalued the account. You won’t have to worry about how much or how little to take out, with every hiccup of the financial markets. RMD based IRA withdrawals; along with Social Security checks can provide a lifetime stream of cash flow.

Should Companies Pay Summer Interns?

Each year, many companies—large and small—offer summer internships. The interns are frequently college students between academic years, and they may be unpaid. Recently, such arrangements have come under fire from those contending interns should be put on the payroll.
The advantages of unpaid internships are clear: Companies probably have relatively low financial obligations for the services of their interns. Especially in the summer, when many employees are on vacation, it may be helpful to have extra individuals around. If interns make a favorable impression, they might provide employers with a stream of productive, paid employees in the future.

Alternatively, various advocates assert that interns are truly employees, who should be paid for the work they do. The federal Department of Labor (DOL) apparently takes this view, at least in many circumstances. The DOL has published a six-part test, all parts of which must be met, in order for a for profit firm to justify not paying interns. The key point is that an internship must be training that benefits the intern, without any current benefit to the employer. Failing to pass the six-point test, an employer must compensate interns according to the law for the services performed, by this standard.

Mixed messages
The six part test includes that the internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment; The internship experience is for the benefit of the intern; The intern does not displace regular employees, but works under close supervision of existing staff; The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; The intern is not necessarily entitled to a job at the conclusion of the internship; and the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Not everyone accepts the DOL’s view. Last year, in Glatt et al. v. Fox Searchlight Pictures et al. (7/2/15), the U.S. Court of Appeals for the Second Circuit vacated a district court’s ruling in favor of former interns who sought after-the fact compensation. The appeals court said of the DOL’s six-part test, “[w]e do not find it persuasive, and will not defer to it.” Instead, the Second Circuit stated that the question of required pay revolves around which party was the primary beneficiary of the arrangement, and sent the case back to the district court. Given this background, how should business owners proceed if they offer or are thinking about offering internships? An astute first step is to consult an attorney. Get an opinion about the status of local law and legal advice about how to structure your internship program. In any case, business owners should carefully consider whether they want to offer unpaid internships. How much will you truly save by not paying interns? Do those savings outweigh the potential future recruiting benefits of paying your interns and the reduced exposure to future legal challenges? Both sides may have valid points, but you should take a clear view of the issue before making decisions.

Business Tax Benefits

On Friday, December 18th, 2015 President Obama signed into law a bill, the PATH Act, which addressed tax extender provisions that had expired during the course of the past year. The bill retroactively extends into law a host of key expired individual, business and energy tax breaks. Some provisions have been temporarily extended; others have been made permanent.

The tax code includes Section 179, which permits first-year deduction (expensing) of amounts spent for business equipment. After $500,000 of equipment purchases, the allowance is phased out, dollar-for-dollar. For 2015, expensing up to $500,000 of equipment is allowed, and the phase out doesn’t begin until $2 million of purchases. Both the $500,000 and $2 million amounts will be indexed for inflation, starting in 2016.

Example 1:
ABC Corp. spent $600,000 on equipment in 2015. The company can deduct $500,000, the permanent Section 179 cap, while the other $100,000 can be depreciated under other rules.

Example 2:
XYZ Corp. spent $2,100,000 on equipment in 2015. That’s $100,000 over the $2 million limit, so Section 179 expensing is reduced by that $100,000, from $500,000 to $400,000. If the company expenses $400,000, it can depreciate the remaining $1,700,000 under other rules.

The PATH Act includes off-the-shelf computer software as Section 179 property, which was not always the case.

R&D tax credit
The PATH Act also gave permanent status to the research & development tax credit (R&D credit), retroactive to 2015. This credit can be used by companies that increase their qualified research expenses. Qualified research expenses includes the costs of in-house qualified research and amounts paid to outside contractors for qualified research. If the credit can’t be used currently, it can be carried forward or transferred in an acquisition. Technology-based companies may be the main users of this tax credit, but firms in all fields may get some benefit. Tracking R&D costs to qualify for the credit can be complex, however. Our professionals can help your business set up the procedures to make the most of this tax break.

Higher Education Tax Breaks

In 2009, Congress replaced the Hope Scholarship Tax Credit with the American Opportunity Tax Credit (AOTC). Compared with the Hope credit, the AOTC offers more annual tax savings and is available to people with higher incomes.

Moreover, the AOTC can be claimed during a student’s first four years of higher education, whereas the Hope credit was limited to the first two years. Under the AOTC, the maximum tax saving is $2,500 per student per year; to reach that amount you must spend at least $4,000 per student in a calendar year. In addition, 40% of the AOTC (up to $1,000) is refundable, which means you can receive a payment from the IRS if you owe no tax.

Money you pay for tuition and related fees counts for calculating the tax credit. Other qualified expenses (OQE) include expenditures for course materials, which mean books, supplies and equipment needed for a course of study.

If you buy a computer and the computer is needed as a condition of enrollment or attendance at the educational institution, you may include the computer purchase price as a qualified expense.

To get the full AOTC, your modified adjusted gross income (MAGI) must be $80,000 or less, or $160,000 or less if you file a joint return. The credit phases out for taxpayers with MAGI over those amounts, with no credit allowed if your MAGI is over $90,000 or $180,000 if you file a joint return.

529 plans
These plans, offered by most states, allow contributions to grow, tax free. Withdrawals also are untaxed to the extent of qualified higher education expenses. Previously, computers and related equipment were considered “qualified,” for this purpose, only if they were required by the school for course attendance or enrollment. Under the PATH Act, outlays for computers, peripheral equipment, and Internet access and computer software are classed as qualified expenses, even if they are not specifically required. Thus, if you buy a computer or related items for college, you can take money from the student’s 529 plan to cover the costs without owing any tax or penalty.

ABLE accounts
Another PATH provision affects ABLE accounts, sometimes known as 529A plans. ABLE accounts are for individuals with special needs; tax free distributions allow beneficiaries to pay for disability-related expenses without sacrificing government assistance benefits. Formerly, ABLE beneficiaries were limited to their home state’s plan, but now any state’s ABLE plan will be acceptable.

IRA Charitable Donations

For most people, using IRA dollars for charity is a two-step process. You take money from your IRA, reporting taxable income. Then, you donate it to the charity or charities of your choice, perhaps claiming a tax deduction for the contribution.

Another alternative is to make charitable contributions directly from your IRA. This is called making a qualified charitable distribution (QCD) which goes directly from your IRAs to recipient charity. QCD’s are available only to IRA owners age 70½ or older. Such individuals can use QCDs every year now, up to $100,000 per year.

Once IRA owners reach age 70½, they usually must take certain amounts of required minimum distributions (RMDs) each year or pay a 50% penalty on any shortfall. QCDs count toward RMDs.

Joyce Harris, age 72, has a 2016 RMD of $20,000. If Joyce, who gives $5,000 to charities each year, makes those donations directly from her IRA, that $5,000 counts toward her RMD for the year, so she’ll only have to withdraw another $15,000 from her IRA in 2016. She’ll report only $15,000 of taxable income, not $20,000, but she won’t get a tax deduction for the $5,000 flowing from her IRA to charities.

Why would Joyce do this? There are several situations in which using a QCD could pay off. Perhaps most important, Joyce will be able to satisfy her $20,000 RMD obligation yet only report $15,000 of income, thus, reducing what otherwise would be her adjusted gross income (AGI) by $5,000. For some taxpayers, QCDs can eliminate any addition to AGI from their required IRA distributions. A lower AGI, in turn, can offer many benefits throughout your tax return. Our office can go over your specific situation to see if using an IRA for donations after age 70½ would be tax effective for you.

Deducting Sales Taxes

Taxpayers who itemize deductions on Schedule A of IRS Form 1040 can deduct some state and local tax payments including state income taxes and real estate taxes. In situations where the taxpayer’s resident state does not impose income taxes, tax payers may deduct sales taxes where the amount of state and local income taxes is less than sales taxes.

Marge and Nick Palmer usually itemize deductions on their joint tax return. Generally, the Palmers deduct the state income tax they pay. In 2015, though, their income fell, and so did the state income tax they paid. The Palmers also have made some large purchases, paying steep amounts of sales tax. For 2015 and future years, the Palmers can deduct the sales tax they paid instead of the state income tax they paid, if the amount of sales tax exceeded their income tax. This tax provision obviously helps people who live in a state with no income tax; other taxpayers also may benefit. A taxpayer may deduct the actual amount of sales taxes paid during the year or, alternatively, can use tables created by the IRS to determine the allowable deduction. If a taxpayer uses the tables to determine the deduction, he or she can add the tax paid on certain items (cars and boats, for example) to the amount from the IRS tables.

Are My Social Security Benefits Taxable?

Approximately 55 million people receive social security benefits and of those 15 million people pay taxes on their social security benefits. Demographically 40 million of the beneficiaries are age 65 or older.

Determining if your benefits are taxable is complicated and depends on your other income and filing status.

The first step in calculating whether your social security benefits are taxable is to determine what your ”Combined Income” is which is the sum of your “Adjusted Gross Income” plus Nontaxable Interest plus one half of your Social Security Benefits.

If your “Combined Income” exceeds $44,000 up to 85% of your Social Security Benefits may be taxable.

How to Sell Your Home Tax Free

One of the best available tax breaks for individuals (not corporate, trust or partnership entities) was created in the Taxpayer Relief Act of 1997 which allows qualifying individual taxpayers to exclude all or a portion of the gain from the sale of their home (principal residence) from income taxes. Basically under Section 121 of the Internal Revenue Code, single taxpayers may exclude up to $250,000 of gain ($500,000 of gain for joint returns).

In order to qualify for the tax free treatment on the gain the individual taxpayer must satisfy an ownership, use, and frequency test. The ownership test requires that the individual taxpayer own the home (the deed is in your name) for at least two (2) out of the past five (5) years. The use test requires that the individual taxpayer uses the home as his or her principal residence (you live in and occupy the home as opposed to renting the home). The frequency test means that the exclusion can only be used once every two years.

There are special rules for joint returns. The joint $500,000 exclusion is available if:
a. Either spouse meets the ownership test; and
b. Both spouses must meet the use test; and
c. Neither spouse excluded a gain in the last two (2) years.

A reduced exclusion is available where the ownership and use test is not met. The reduced exclusion is available where the sale of your home was due to a change in employment, bad health, or unforeseen circumstances.

You must report the sale of your home on your tax return if you:
a. Receive a Form 1099-S, Proceeds From Real Estate Transactions or
b. A portion of the gain is taxable or not excluded.

If neither of the above applies then you do not have to report the gain from the sale of your home.
If the amount of the gain on the sale of your home exceeds the $250,000 or $500,000 exclusion then the excess gain is reported as a long term capital gain on your Schedule D and receives the favorable benefit of the lower long term capital gain tax rate. Unfortunately, if you experience a loss on the sale of your home the loss is not deductible on your tax return since the IRS considers it a personal loss.