The One Life CRUT (Charitable Reminder Unitrust)

Friday, 27 February 2009 10:06

In the case of a charitable remainder unitrust (CRUT) for the life of one beneficiary, a transfer is made of cash and/or property to a trust.  The donor reserves (either for himself or for some other non-charitable beneficiary) an interest in the property for life.  The trust must provide that the remainder interest in the property will pass at the death of the specified life to a qualified charity.

The major distinction between a charitable remainder unitrust and a charitable remainder annuity trust is that the donor reserves a varying annuity in the case of a unitrust.  In other words, the income received by the non-charitable beneficiary of a unitrust can and typically will vary from year to year.  As is the case for a gift to an annuity trust, a gift to a unitrust will result in income and gift tax charitable deductions, or an estate tax charitable deduction.  Gifts to a unitrust must meet highly complex and stringently enforced rules.  The unitrust pays a variable amount to the income beneficiary based on annual fluctuations in the value of trust assets.  This unitrust for life will qualify as such only if it meets the following requirements:

1. A fixed percentage (not less than 5%) of the net fair market value of the assets must be paid for the life of an individual living at the time the unitrust is created.


2. The fixed percentage amount must be paid at least annually (which means the unitrust assets must be revalued each year).


3. The payment must last for the life of the individual.


4. No amount can be paid to anyone other than a qualified charity at the termination of the retained interest.


5. At termination, whatever assets are in the trust must be transferred to (or for the use of) the qualified charity or retained by the unitrust for the charity’s use.

Tax Deductions

In the case of a charitable remainder unitrust gift, an immediate income tax deduction for the value of the remainder interest is allowed.  When the donor has retained a varying annuity, there is a deduction for the present value of the remainder interest that ultimately will pass to the charity.

The present value of the remained interest is based on tables in the income tax regulations specifically designed to value a remainder interest in a charitable remainder unitrust.  The donor receives an immediate income tax deduction but can continue to enjoy income from the property transferred to the trust.

Brock and Associates, LLC specializes in retirement, estate, tax, and business planning.  For more information, we encourage you to schedule a time for your free consultation.

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A Will Is No Substitute For An Estate Plan

Tuesday, 24 February 2009 08:07

If preparing a will has left you feeling satisfied that your estate plans are complete, be wary, this probably is not true.  Especially not true if you have simply taken advantage of the unlimited exemption from estate taxes by leaving everything to your spouse.

The fact that your will might state that everything you own goes to your mate does not necessarily make it so.  The beneficiaries named in other documents - joint property deeds, insurance policies, pension plan papers, IRAs, 401(k) plans and the like - will award possession to whomever is named in them, regardless of what the will document may specify.

If the estate will total more than $1,500,000 (subject to indexing up to $3,500,000 in 2009), leaving everything to a spouse is a bad idea.  The reason is that in addition to the unlimited spousal bequest, one can leave up to $1,500,000 tax-free to other beneficiaries.  If you fail to leave anything other than to a spouse, you are forfeiting that option. Then, when the spouse dies, assuming he or she has not remarried, the tax-free estate is limited to $1,500,000 in 2004.

To put it another way, when an estate, including life insurance, approaches $1,500,000, each spouse should own part of it individually.  This, together with the proper wills, assures that $3,000,000 can be passed on to heirs free of estate tax, regardless of which spouse dies first.

The tax savings from these moves are not inconsequential, since estates currently are taxed at a rate of up to 48 percent.

If the estate will exceed this unified credit amount, (and with company benefits, insurance and inflated home values, that is not exceptional), one should consider naming other heirs.  To protect the spouse during his or her lifetime, $1,500,000 might be put in a bypass or credit trust, with the spouse enjoying the full income from it.  Then, after the spouse’s death, the trust proceeds go to the named beneficiaries, free of further estate taxes.

A will is a rather inflexible estate-planning tool, and it is not effective in reducing the long term effect of estate taxes or the probate expenses that might accompany settlement.

An estate plan should be reviewed periodically by both your financial advisor and attorney.

Brock and Associates, LLC is a financial planning firm specializing in asset protection and generational wealth preservation.

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Stimulus act (ARRA) provides substantial tax breaks for businesses and individuals

Thursday, 19 February 2009 09:01

UPDATE: Earlier this week, we sent you a summary of the key tax provisions of the American Recovery and Reinvestment Act of 2009 (ARRA). Ongoing analysis of the act has yielded a small update to the alert's S corporation tax break information. Find the updated information below under "S corporation built-in gains tax relief."

On Feb. 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). While approximately two-thirds of the nearly $800 billion stimulus act is focused on government spending initiatives intended to create jobs and jumpstart the economy, about one-third provides tax breaks for businesses and individuals.

Businesses will enjoy new tax breaks

The act provides some new breaks that will benefit many businesses:

Reduced estimated tax payment requirements. For 2009, ARRA reduces the estimated tax payment requirements for many small business owners. Owners generally will qualify for the reduced payments if their adjusted gross income (AGI) for 2008 was less than $500,000 and if more than 50% of their 2009 gross income is generated from a "small business," which is defined as a business that, on average, had fewer than 500 employees during 2008.

Deferral of income from cancellation of debt. Taxpayers generally must recognize cancellation-of-debt income (CODI) when they cancel — or repurchase — debt for an amount less than its adjusted issue price. In certain situations, ARRA allows businesses to defer CODI generated from repurchasing business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year 2014 and then report the income ratably over the 2014 through 2018 tax years.

S corporation built-in gains tax relief. Although a C corporation conversion to an S corporation isn't a taxable event, the S corporation normally must hold on to its assets for 10 years to avoid tax on any built-in gains that existed at the time of the conversion. Under ARRA, for tax years beginning in 2009 and 2010, there generally will be no tax on an S corporation's net unrecognized built-in gain if the seventh tax year in the recognition period occurred before the 2009 and 2010 tax years.

The act expands some important tax breaks for businesses:

Net operating loss carryback. Generally, a net operating loss (NOL) may be carried back two years to generate a current tax refund, providing a cash infusion in times of loss. For 2008 (not 2009), ARRA extends the maximum NOL carryback to five years for small businesses with gross receipts of $15 million or less.

Work Opportunity credit. Employers can claim a credit equal to 40% of the first $6,000 of wages paid to employees in certain target groups, such as ex-felons, food stamp recipients and disabled veterans. ARRA expands the eligible target groups to include unemployed veterans and disconnected youth. This expanded benefit applies to such workers hired in 2009 and 2010.

Depreciation breaks extended.  To spur additional investment, ARRA extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $125,000 indexed for inflation). The expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $500,000 indexed for inflation). The new higher limit applies for calendar year 2009 or a business's fiscal year that begins in 2009.

Another depreciation-related provision extends the special allowance for certain property, generally if acquired in 2009. For eligible property, the special depreciation amount is equal to 50% of its adjusted basis. For passenger automobiles that are eligible property under the 50% bonus depreciation rules, the $8,000 increase for the first-year limit on depreciation also is extended to new vehicles placed in service in 2009.

Last year, corporate taxpayers were also allowed to accelerate their alternative minimum tax (AMT) and research and development (R&D) credits in lieu of taking the 50% bonus depreciation. That break has now been extended through 2009.

Energy-related breaks for businesses expanded.  ARRA creates or expands several energy-related breaks for businesses, such as the:

• Advanced energy investment credit,
• Renewable electricity production credit, and
• Alternative fuel pump tax credit.

Individuals also enjoy new tax breaks

ARRA also provides some new tax breaks for individuals:

New relief for most workers, retirees and other Social Security recipients. For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for joint filers and $400 for other filers. The credit generally is phased out for joint filers with AGIs exceeding $150,000 and for other filers with AGIs exceeding $75,000. Unlike last year's "recovery rebate," which was distributed via checks mailed to taxpayers, the new credit will generally be "paid" through a reduction in income tax withholding.

The act also provides a one-time payment of $250 to many people on fixed incomes, such as Social Security recipients and disabled veterans. Similarly, it provides a one-time refundable tax credit of $250 to certain government retirees who aren't eligible for Social Security benefits. Both the $250 payment and the $250 credit reduce any allowable Making Work Pay credit.

New sales tax deduction for vehicle purchases. ARRA creates a new above-the-line deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motorcycles and recreational vehicles. The deduction is available for vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009.

The deduction is not, however, available for tax attributable to vehicle value in excess of $49,500. The deduction also phases out based on AGI, but the limits are higher than those for the Making Work Pay credit: The phaseout begins for joint filers with AGIs exceeding $250,000 and for other filers with AGIs exceeding $125,000.

Other individual breaks expanded

The bulk of the tax relief for individuals involves expanding existing breaks. Here are the key changes to be aware of:

Credit for first-time homebuyers. Last year, a refundable credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but ARRA extends its availability to purchases made before Dec. 1, 2009. For qualifying purchases made after Dec. 31, 2008, the act also increases the maximum credit from $7,500 to $8,000. Perhaps most significant, the act eliminates the repayment obligation for taxpayers whose qualifying purchase occurs after Dec. 31, 2008 — except in situations where a home is sold within three years of purchase.

American Opportunity education credit (previously called the Hope credit). For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.

529 savings plans. 529 plan distributions used to pay qualified education expenses — tuition, room, board, mandatory fees and books — are generally tax free. For expenses paid in 2009 and 2010, ARRA expands the definition of qualified education expenses to include computers and computer technology.

Qualified small business stock gain exclusion. Generally, taxpayers selling qualified small business (QSB) stock are allowed to exclude 50% of their gain as long as they've held the stock for at least five years. ARRA increases the exclusion to 75% if the stock is issued after Feb. 17, 2009, and before Jan. 1, 2011.

AMT relief granted early this year.  One tax provision affecting individuals that many thought wouldn't be enacted until later in the year is the extension of alternative minimum tax (AMT) relief. ARRA provides a one-year "patch" that increases the AMT exemption. For married couples filing jointly, the 2009 exemption is $70,950. For singles and heads of households, it's $46,700, and for married filing separately, it's $35,475.

The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2009 phaseout ranges are now $150,000 to $433,800 for married filing jointly, $112,500 to $299,300 for singles and heads of households, and $75,000 to $216,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range.

Additionally, ARRA extends a provision through 2009 that allows certain nonrefundable personal tax credits to provide a benefit against the AMT. These include the dependent care credit, the American Opportunity credit and the Lifetime Learning credit. The act also excludes from the AMT any income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010 refundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.

Energy-related breaks expanded for individuals

ARRA creates or expands several energy-related breaks for individuals, such as:

• Transit benefits,
• Residential energy property credit,
• Residential energy-efficient property credit, and
• Plug-in electric vehicles credit.

Help given to laid-off workers. Although much of ARRA focuses on working Americans, it also provides some tax relief for laid-off workers. For 2009, the act suspends federal income tax on the first $2,400 of unemployment benefits per recipient.

Take full advantage

ARRA may significantly affect your tax liability in a variety of ways. If you would like more detailed information about this new tax law, please give us a call or sign up for a free consultation. We would be glad to help you determine exactly how ARRA will affect your tax liability — and what you should do to take full advantage of the act.

Best regards,

Brock and Associates, LLC
435.673.9599

Brock and Associates, LLC is a financial planning firm specializing in asset protection and generational wealth preservation.

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Taking Money Out Of A Family Business

Tuesday, 17 February 2009 08:54

With the changes made by tax reform, it is time to rethink the most profitable ways of taking money out of the family business.

• Keep personal ownership of business assets (such as real estate and business equipment) and lease them to the company.

Benefits:  You get to claim depreciation deductions for the assets on your personal return, giving tax-shelter benefits.  Should a time come when the business no longer needs the assets, you may dispose of them for your personal account.

• Hire family members who are in a low tax bracket (such as children or even parents).

Benefits:  The business gets to deduct the payments at a relatively high tax rate, while the hired family members report income at a lower rate, thus cutting the family’s overall tax bill.

Family members may also become covered by tax favored benefit programs established by the business, such as medical plans and retirement programs.

Moreover, if you run the business as a proprietorship, you do not have to pay Social Security taxes on the wages paid to children under age 18.  While tax reform limits the shifting of investment income to children under age 14, it does not restrict the shifting of earned income.  In addition, the Tax Court has upheld salary deductions for children as young as seven years old.

• Set up an irrevocable trust for a child over age 13 (or other low tax bracket family member), and give it ownership of assets used in the business (such as equipment or real estate).  Then have the trust lease the assets to the company.

Lease payments made by the company will be deductible at its high tax rate while they will be taxed to the trust at a lower rate, again cutting the family’s overall tax bill.  Important:  The trust must have an independent trustee who will manage it in the child’s best interest.

Brock and Associates, LLC specializes in retirement, estate, tax, and business planning.  If you would like more information on family business planning strategies, please schedule a time to meet with our qualified professionals.

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The Benefits of a Charitable Remainder Unitrust (CRUT)

Thursday, 12 February 2009 09:05

A Charitable Remainder Unitrust (CRUT) is used to provide an income to a non-charitable beneficiary while at the same time transferring the remainder interest to a qualified charity.

The donor would irrevocably transfer securities or property to a trustee.  In return, the trustee would pay the donor (or other income beneficiary) income from the property for life.  The donor could also provide that if he or she predeceased a spouse, the spouse in turn would receive income from the donated property for life.  The donor would receive payments based on a fixed percentage of the fair market value of the assets placed in trust.  The assets would be revalued each year.

Additional Contributions

Unlike the Charitable Remainder Annuity Trust (CRAT), however, the CRUT may continue to receive assets in later years.  The Charitable Remainder Unitrust (CRUT) also differs from a CRAT since the stream paid out by the CRUT trust must be at least 5% of the annual reappraised value of the corpus.

Thus, while the CRAT pays a fixed sum of income that never varies in amount, the Charitable Remainder Unitrust (CRUT) may distribute greater or lesser amounts of income, depending on the reappraised value of the corpus and accumulated income.

Appreciation

If the value of the corpus and income continues to appreciate, the amount of the payment to the non-charitable beneficiary may increase with each succeeding year.  This makes the CRUT an effective means of fighting inflation.  If, however, the value of the assets continues to depreciate over a period of years, the CRUT may actually pay less income to the non-charitable beneficiary than was originally intended.

If a grantor wishes to ensure an annual increase in the value of the income payment to the non-charitable beneficiary, the grantor should fund the corpus of such a trust with assets that pay a guaranteed rate of return, such as U.S. Treasury notes that pay interest tied to a specific rate of return.

Brock and Associates, LLC specializes in retirement, estate, tax, and business planning.  For more information on setting up a CRUT, we encourage you to schedule a time for your free consultation.

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