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William Byrnes (Texas A&M) tax & compliance articles

Archive for November, 2010

Group Captive Insurance Companies and Year End Tax Considerations

Posted by William Byrnes on November 30, 2010


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As we have discussed in previous blogticles, captive insurance can be a viable method to more efficiently protect against certain risks under various circumstances.  For discussion on these topics please see our blogticles on AdvisorFYI from the week of August 30th, Monday through Wednesday, Alternative Risk Transfer BasicsRisk and Self-Insurance, andCaptive Insurance Company Introduction.

In addition, we have discussed in previous blogticles the ability to deduct prepaid expenses for certain items, both from an accrual basis and cash receipts and disbursements method taxpayer approach.  One such class of deductions that is generally allowable is, “insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.”

See generally our blogticles from November entitled, Year End Tax Planning: Pre-Paid Insurance Expense For Accrual Accounting Taxpayers, and Year End Tax Planning: Pre-Paid Expenses For Cash Accounting Taxpayers.

Read this entire set of articles starting at AdvisorFYI.

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Employer Owned Life Insurance and Notice 2009-48

Posted by William Byrnes on November 29, 2010


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Why is this Topic Important to Wealth Managers? Provides an update for wealth managers into the status of employer owned life insurance.  Discusses two notable exceptions to the general rule including income from the death benefits of an insurance policy when paid to a trade or business.

In 2006, Congress added Section 101(j) to the Internal Revenue Code which addresses the taxation of employer owned life insurance (EOLI) under Section 863 of the Pension Protection Act.  The law departed from the traditional status of life insurance proceeds payable by death of the insured as excluded from gross income. [1]

Section 101(j) essentially taxes life insurance proceeds payable at death, in the amount over contributions or basis, when the policy is owned by a trade or business, where the employer is the beneficiary, and the employee is the insured. [2] There are a certain number of exceptions where the benefit payable to the beneficiary will remain excludable.  [3] In all of the exceptional situations notice and consent requirements must be met. [4] For a discussion on the notice requirements specifically, or Section 101(j) generally, please see AdvisorFX: Death Benefits Under Employer Owned Life Insurance Contracts[5]

Since the enactment of law, the Service has issued guidance in regards to what transactions may be allowed under section 101(j).  That guidance came in part, last year when the Service published Notice 2009-48.

How do some of the exceptions work in consideration of the guidance published in Notice 2009-48?  Read our entire analysis and citations at AdvisorFYI.

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Domestic and International Reporting Compliance

Posted by William Byrnes on November 26, 2010


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This week’s blogticles discussed compliance reporting generally regarding foreign transactions and activities.  Today, we will continue to explore some of the common reporting requirements that are filed based on domestic and international activity.

Suspicious Activity Reports

Congress has enacted legislation to the affect that the Secretary of the Treasury requires financial institutions to report any suspicious transaction relevant to “a possible violation of law or regulation.” [1] The Financial Crimes Enforcement Network (FinCEN) maintains theses “reports in a central database and makes the information available electronically to state and federal law enforcement and regulatory agencies to assist in combating financial crime.” [2]

Currency Transaction Reports

Under Federal Statute the Department of the Treasury requires “banks, securities broker-dealers, money services businesses, casinos, and other financial institutions”, to file a “report for each transaction involving the payment, receipt, or transfer of U.S. coins or currency (or other monetary instruments as Treasury may prescribe)” in excess of $10,000. [3]

Report of International Transportation of Currency or Monetary Instruments

Read the entire article at AdvisorFYI.

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FATCA Act: Foreign Trusts

Posted by William Byrnes on November 25, 2010


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Use of Foreign Trust Property and Deemed Distributions

The new FATCA law expands 26 U.S.C. § 643(i) to provide that any use of trust property by a U.S. grantor or U.S. beneficiary, or any U.S. person related to a U.S. grantor or U.S. beneficiary, is treated as a distribution equal to the fair market value of the use of the property. [1]

“Thus, the rent free use of real estate, yacht, art work or other personal property (wherever located including the United States) or an interest-free or below-market loan of cash or uncompensated use of marketable securities will trigger a distribution equal to the FMV for the use of such property to the extent of distributable net income”. [2]

However, if the trust is paid the fair market value, within a reasonable period of time, for the use of property or the market rate of interest on a loan by the trust, the new law does not create a deemed distribution. [3] Read the entire article at AdvisorFYI.

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HIRE/FATCA Act: Part II Discussion

Posted by William Byrnes on November 24, 2010


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The Federal Government has estimated that the “United States loses an estimated $345 billion in tax revenues each year as a result of offshore tax abuses primarily from the use of concealed and undeclared accounts held by U.S. taxpayers or their controlled foreign entities.” [1]

In consideration of the goal of eliminating this gap, “it is not surprising that the government recently ratcheted up its pressure on taxpayers who structured their activities, in many cases, with the active help and assistance of promoters and facilitators to avoid reporting their taxable income on their tax returns or hide these offshore accounts from the government.” [2] This increased “pressure” came in the form of the HIRE Act passed in the first quarter of 2010. [3] As was discussed earlier this week,[4] the new law provides for reporting requirements by foreign financial institutions with U.S. accountholders about the status, specifically identity and balance, of their account. [5] Read the entire article at AdvisorFYI.

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How The Foreign Account Tax Compliance Act May Impact Your Business and Clients

Posted by William Byrnes on November 23, 2010


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During the first quarter of 2010, President Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment Act. “The act provides incentives for job creation, but in order to pay for the incentives, the act also contains significant changes that will affect foreign financial institutions that choose to do business with U.S. persons.” [1] Half of the “U.S. Congressional Record that contains the act” is “dedicated to foreign account tax compliance.” [2]

Therefore, “although the act is commonly referred to as the HIRE Act for its focus on job creation, one of its main purposes is to target tax dodgers’ use of foreign accounts.” [3] The act is basically a model of the 2009 Foreign Account Tax Compliance Act (FATCA) which was introduced by the Senate.   “The act incorporates substantially all of FATCA, with one important exception: FATCA would have imposed reporting requirements on material advisors, including attorneys, accountants, and other professionals, who advise on acquisitions or formations of foreign entities.” [4]

Read the entire article at AdvisorFYI.

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Section 1035 Exchanges Are Useful in a Down Economy: A Review

Posted by William Byrnes on November 19, 2010


Why is this Topic Important to Wealth Managers? Section 1035 exchanges are known for deferral of a taxable gain through a step-up in basis into a new contract.  The tax benefits granted by Congress are certainly advantageous, however, in an uncertain economy Section1035 exchanges also offer wealth managers the opportunity for new business.  Because of the potential little to no out-of-pocket expense associated with these transactions, many wealth mangers are currently implementing this advantageous exchange during sluggish times. 

It is often the case that policy owners’ expectations change during the life of a contract.  It makes sense to re-evaluate objectives to ensure they’re still aligned with client goals.  Section 1035 exchanges are one area where this practice is commonplace.

Generally, Congress allows owners of life insurance and annuity contracts to exchange that contract for another, similar or related insurance or annuity contract without recognizing any unrealized gain which may have accrued within the policy, so long as the insured stays the same.

Read the entire article at AdvisorFYI.

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Nonqualified Pension Plans and Life Insurance

Posted by William Byrnes on November 18, 2010


Why is this Topic Important to Wealth Managers? Provides information on one additional planning tool that many wealth managers find useful for affluent clients who own a small business.  Gives an overview of the nonqualified plans as well as proving a common use of life insurance to fund plan obligations well into the future.    

Simply a nonqualified pension plan is a retirement plan that does not meet the requirements under the tax code and federal employment law to be considered qualified, and therefore the nonqualified plan is treated differently for tax purposes. [1]

What are some of the advantages of using a nonqualified plan over a qualified retirement plan? [2] 

  • Flexibility and selectivity—because the plan is not subject to requirements under the qualified plan rules, employers have much more control in terms of who may be included and the varying terms of each individual participant. 
  • Vesting and contingencies—nonqualified plans allow for the employer to exclude all amounts not met by vesting conditions or contingencies that the employee must achieve to obtain the benefit.  Say for example, that the retirement funds become available to the employee after 10 years of faithful service to the company.  If the employee does not work for 10 years, no benefits have thus accrued and the employee has no benefit under the plan. 
  • Cost savings through minimal reporting requirements—since nonqualified plans do not usually fall within major regulatory scope of qualified plans, the cost to administer these plans is generally less than some alternatives.

How are nonqualified plans treated for tax purposes?  Read the entire blogticle at AdvisorFYI.

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Life Insurance in Qualified Pension Plans

Posted by William Byrnes on November 17, 2010


Why is this Topic Important to Wealth Managers?  Presents the general treatment of life insurance purchased through qualified pension plans.  Discusses a common scenario where life insurance premiums may be deductible by an employer aw well as the consequential income tax effect on plan participants. 

Suppose your client is the sole shareholder and president of a closely held corporation.  The business generates significant positive income and cash-flow on a steady basis. Assume the client himself may have an insurance need without the funds personally to cover the obligation.    Assuming further the business has a qualified pension (defined contribution or defined benefit) plan, one consideration may be to purchase life insurance through the qualified pension plan. [1]  Assume this option, up to an insurable interest limit, was also offered to all employees participating in the qualified plan. 

Since employer contributions to qualified plans are sometimes deductible, amount used to purchase life insurance may be also, subject to the incidental limitation. [2]  First though, “[t]o qualify for deduction as a contribution to a qualified plan, the employer’s contribution must first qualify as an ordinary and necessary business expense within the limits of reasonable compensation.” [3] As a general rule, so long as the amount of the insurance is no more than 25% of the total cost of the plan the amount may be deducted as an incidental benefit to the plan. 

Read the entire blogticle at AdvisorFYI.

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Key Employee Life Insurance and the Transfer for Value Rule

Posted by William Byrnes on November 16, 2010


Why is this Topic Important to Wealth Managers?  Discusses a basic deferred compensation plan available to many small businesses seeking to retain key personnel.  Provides discussion on common transactions as well as expected tax consequences.

Key employee insurance generally means “a life insurance policy owned by and payable to a business that insures the lives…of employees whose deaths would cause a significant economic loss to the business, upon whose skills talents, experience or business or personal contacts the business is dependent, and who would be difficult to replace.” [1]

Generally, life insurance premiums payable by a business are not deductible. [2]  Which means the income received (whether in a single sum or otherwise) by the business, under the life insurance contract by reason of the death of the insured, is not included in gross income.  [3] 

If a key employee policy is transferred for valuable consideration, just as with other life insurance policies, the income tax benefit normally afforded to life contract proceeds payable at death may be extinguished. [4]

As was discussed a few weeks back in our blogticle: AdvisorFYI- Treatment Life Insurance Contracts—Part II: Secondary Market Participants, “[i[n the case of a transfer for valuable consideration…the amount excluded from gross income shall not exceed an amount equal to the sum of the actual value of the consideration paid and the premiums and other amounts subsequently paid by the transferee.” [5]   In other words, the transferee must include the death benefits as gross income over the amount of consideration and any additional premiums paid. 

Read the entire blogticle at AdvisorFYI.

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Life Insurance and the Generation—Skipping Transfer Tax

Posted by William Byrnes on November 15, 2010


Why is this Topic Important to Wealth Managers?  Provides details about one concept that wealth managers often overlook, the generation skipping transfer tax.  Also presents general concept themes and examples to show effective uses of life insurance and trust in consideration of the tax. 

In general, the generation-skipping transfer tax is levied on the value of life insurance that is transferred during the grantors lifetime or at death, to a skip person. [1]  The GST is levied in addition to estate and gift taxes. [2]

The generation-skipping transfer (GST) tax “scheduled to resume in 2011 at a rate of 55%, with a $1 million exemption. The rate was 45% in 2009, with a $3.5 million exemption.” [3]  For more information about the expiring tax cuts and new tax rates, see our blogticle: AdvisorFYI: Estate and Gift Taxes, Tax Cuts and More

“Certain direct gifts that qualify for the gift tax exclusion may also qualify for an annual exclusion that can be applied against the GST tax.” [4]  Many wealth managers encourage clients to take full advantage of the annual exclusion to avoid GST tax considerations at some later point.  However, “the expiration of the GST tax has complicated matters for wealthy individuals hoping to make 2010 gifts in trust that skip generations.” [5]  The use of trusts in consideration of the GST tax is discussed below.  For examples of insurance uses with trusts generally, see our previous blogticle: Trusts that Purchase Life Insurance; Known Formally as the “Irrevocable Life Insurance Trust

Please link to AdvisorFYI for the entire blogticle.

Posted in Estate Tax | Tagged: , , , , , , , | Leave a Comment »

What’s Next for the Estate Tax?

Posted by William Byrnes on November 13, 2010


The estate tax is scheduled to explode in 2011. Analysts have assumed for years that Congress would act to fix the estate tax before it expired in 2010 and reverted to its pre-2001 levels in 2011, but it is looking more and more likely that the current Congress will hand the problem off to the next Congress on January 11, 2011.  Although movement during the lame duck session is possible, it is not likely to generate any positive action on the estate tax.

Whether Congress acts on the estate tax or not, 2011 will likely bring drastic changes to the estate tax, requiring your clients to do significant tinkering on their estate plans. In the interim, estate planning professionals will continue to use disclaimer planning as a stop gap measure to deal with 2010′ s estate tax uncertainty. For instance, rather than split an estate’s assets between credit shelter and marital deduction trusts—which is unnecessary when there is no estate tax—all of the assets are devised to the spouse or the marital deduction trust.  The surviving spouse can then disclaim up to the tax-free amount— … Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the estate tax conundrum in Advisor�s Journal, see Estate Tax Chaos (CC 10-02).

For in-depth analysis of the federal estate tax, see Advisor�s Main Library: Section 2 A—Overview Of The Federal Estate Tax And Its Calculation.

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IRS Changes Value of Charitable Contributions Made by Trusts

Posted by William Byrnes on November 12, 2010


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Charitable contributions offer an opportunity to do good in the community while reaping tax benefits, but the tax benefit of a charitable contribution can be jeopardized by poor planning.  Especially challenging can be the structuring of contributions by complex trusts as illustrated by the recently released IRS ruling, ILM 201042023. 

There, a trust’s charitable contribution deduction was limited to the trust’s basis in the property;  a deduction was not permitted for unrealized appreciation of the donated property.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the benefits of charitable giving, see Use Charitable Giving to Enhance Family Business Succession Planning (CC 10-76).

For in-depth analysis of the use of charitable giving in estate planning, see Advisor’s Main Library: F�Estate Planning Through Charitable Contributions.

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Health Care Reform Causes an Avalanche of 1099s

Posted by William Byrnes on November 11, 2010


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The Health Care Act includes many provisions that are not directly related to health care but which are intended to fund the colossal government expenditure necessitated by the Act. One of the most burdensome changes imposed by the Health Care Act is the massive expansion of the payees and payment types that require a 1099. The new requirements will trigger a flood of paperwork for everyone involved, including payors, payees, and the IRS.

The new information reporting requirement will kick in on January 1, 2012. But the IRS will not be releasing guidance on the changes right away, so the time for taxpayers to implement the new requirements may run short. The comment period preceding the IRS’s release of proposed regulations passed at the end of September, so we can expect proposed regulations in the coming months. Advisor’s Journal will keep you informed as the IRS implements these new rules.   Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Health Care Act in Advisor’s Journal, see Changes Affecting Individuals in the 2010 Health Reform Law (CC 10-15), Changes Affecting Business in the 2010 Health Reform Law (CC 10-16), and Changes Affecting Large Employers in the 2010 Health Reform Law (CC 10-17).

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Advisor Fakes Death to Avoid Fraud Charges

Posted by William Byrnes on November 10, 2010


An investment advisor accused of fraud faked his own death by parachuting D. B. Cooper-style out of his single-engine plane with ninety pounds of gold strapped to his chest, leaving behind a trail of twisted metal and offshore bank accounts.

Plot summary of the latest New York Times best seller?  Nope. It is the true story of Marcus Schrenker, an Indiana financial advisor who was recently sentenced to prison for defrauding investors—including family members and friends—out of over $1 million.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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The Department of Labor Releases Final 401(k) Disclosure Rules

Posted by William Byrnes on November 9, 2010


Fee disclosure rules for 401(k) plans were expected out of the Department of Labor in early 2011, but the Department beat its own estimates, releasing a final rule on plan fee disclosures on October 14, 2010.   The rules impose significant disclosure requirements that are important for everyone associated with self-directed employee retirement plans, including employees and their advisors and plan fiduciaries.

The new rules apply to plan years beginning after November 1, 2011. Although plan administrators have over a year to comply with the new requirements, the disclosure requirements are very extensive—the release that includes the regulations is over 150 pages long—and will require significant action on the part of most plan fiduciaries, so time is of the essence.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of 401(k) retirement plans, see Advisor’s Main Library: Section 17.5  401(k) Plans.

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IRS Has Mercy on Noncompliant Split-Dollar Program

Posted by William Byrnes on November 8, 2010


The IRS’s latest split dollar rulings is a cautionary tale that, despite its happy ending, illustrates the danger lurking at every corner of the split-dollar life insurance regulations.  The ruling shows that, despite otherwise meticulous adherence to the tax code and regulations, a split-dollar arrangement can fail for lack of filing a simple annual statement with the IRS.  In PLR 201041006, the IRS considered a charity’s request to grant the charity an extension to make a required filing under the split-dollar regulations.

The taxpayer in the case is a charity (Charity) that ran a split-dollar life insurance program for its high-level employees.  Not having any expertise with SDPs, Charity hired a company to revise its SDP.  On the consultant’s recommendation, Charity entered into a new SDP. The new SDP was entered into after the Treasury issued final regulations under §§1.61-22 and 1.7872-15, which can carry adverse tax consequences for both parties to a split-dollar arrangement. 

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of IRS split-dollar rulings in Advisor’s Journal, see Modification of Split-Dollar Arrangement Not a Material Change to Underlying Life Insurance Contract (CC 08-17) and Notice 2007-34 Explains Application of Section 409A to Split-dollar Life Insurance Arrangements (CC 07-18).

For in-depth analysis of split-dollar life insurance, see Advisor’s Main Library: Section 15.2  Split-Dollar.

Posted in Insurance, Taxation, Wealth Management | Leave a Comment »

 
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