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New SEC Rules on Fiduciary Standard

Posted by fhalestewart on April 19, 2018


From the SEC:

SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals

FOR IMMEDIATE RELEASE
2018-68

Washington D.C., April 18, 2018 —

The Securities and Exchange Commission today voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.

Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients.  By highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.

Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary.  Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.  For advisers, additional information can be found in Form ADV.  For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.

Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest.  The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.

SEC Chairman Jay Clayton stated, “The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct.  Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost.  The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors.”

The public comment period will remain open for 90 days following publication of the documents in the Federal Register.

*   *   *

FACT SHEET

SEC Open Meeting
Apr. 18, 2018

The Commission proposed two rules and an interpretation to address retail investor confusion about the relationships that they have with investment professionals and the harm that may result from that confusion.  Evidence indicates that retail investors do not fully understand the differences between investment advisers and broker-dealers, which could lead them to choose the wrong kind of investment professional for their particular needs, or to receive advice that is not in their best interest.  The Commission will therefore consider strengthening the standard of conduct that broker-dealers owe to their customers, reaffirming and, in some cases, clarifying the standard of conduct that investment advisers owe to their clients, and providing additional transparency and clarity for investors through enhanced disclosure designed to help them understand who they are dealing with, and why that matters.  The rulemaking package seeks to enhance investor protections while preserving retail customer access to transaction-based brokerage accounts and a broad range of investment products.
Proposal’s Highlights
Regulation Best Interest 

A broker-dealer making a recommendation to a retail customer would have a duty to act in the best interest of the retail customer at the time the recommendation is made, without putting the financial or other interest of the broker-dealer ahead of the retail customer.

A broker-dealer would discharge this duty by complying with each of three specific obligations:

  • Disclosure obligation: disclose to the retail customer the key facts about the relationship, including material conflicts of interest.
  • Care obligation: exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.
  • Conflict of interest obligation: establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.

Investment Adviser Interpretation

An investment adviser owes a fiduciary duty to its clients — a duty that the Supreme Court found exists within the Advisers Act.  The proposed interpretation reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients.

Form CRS – Relationship Summary

Investment advisers and broker-dealers, and their respective associated persons, would be required to provide retail investors a relationship summary.  This standardized, short-form (4 page maximum) disclosure would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

Investment advisers and broker-dealers, and the financial professionals who work for them, would be required to be direct and clear about their registration status in communications with investors and prospective investors.  Certain broker-dealers, and their associated persons, would be restricted from using, as part of their name or title, the terms “adviser” and “advisor” — which are so similar to “investment adviser” that their use may mislead retail customers into believing their firm or professional is a registered investment adviser.

Background

The Commission has been considering issues relating to changes in the market for investment advice, retail investor understanding of their advice relationships, and broker-dealer conflicts of interest, since the mid-1990s.  The staff studied these matters further pursuant to the Dodd-Frank Act’s mandate in Section 913.  Most recently, in June 2017, Chairman Jay Clayton sought public input on a variety of issues associated with standards of conduct for investment professionals.  Today’s proposed rules and interpretations are the outcome of the Commission and the staff’s extensive experience in and consideration of these issues

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What Exactly Is A Fiduciary Standard?

Posted by fhalestewart on March 27, 2018


Last week, I noted that a court overturned the DOL’s new “fiduciary” rule.  Since its enactment, the new rule has been a point of contoversy within the investment community.

However, what exactly is a fiduciary standard?  Let’s begin by looking at the definition of fiduciary, which, according to the Merriam-Webster online legal dictionary, is

“one often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation : one (as an agent) having a fiduciary duty to another.”

The definition contains a number of key concepts:

  1. “one … in a position of authority.”   The person on whom the law places the duty is “superior” to the other person, usually because the fidicuary has a specific skill-set that the other does not.  The fiduciary is an expert.
  2. The fiduciary “act[s] on behalf of another.”  The fiducairy must not consider himself ot his personal situation when making decisions, but instead the situation of the person for whom he is exercising his skills.
  3. The fiduciary “assumes a duty” or a “moral obligation.”  There’s an ethical component to the duty; it’s almost like a higher calling.
  4. The fiduciary must act
    1. In good faith: The Restatement of Contracts defines good faith as, “honesty in the fact of the conduct.”  Most other areas of law use similar terminology and concepts.
    2. “and with care, candor, and loyalty.”  To a certain extent, these restate the need to act for another instead of oneself irrespective of the fiduciary’s situation.
  5. The definition for obligation contains a number of phrases that imply a moral component …
    1. “binding oneself … by a moral tie.”
    2. “A duty … to follow a code.”
    3. “A course of action … imposed by conscience.”
      1. (The American Heritage Dictionary, (c) 1985).

Because the fiduciary has more knowledge or skill in a particular area, he can also take advantage of his client.  The law therefore casts the relationship between the fiduciary and his client in moral terms.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

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IRS Releases 2018 “Dirty Dozen” Tax Scam List

Posted by fhalestewart on March 22, 2018


This link will take you to a page that has a link to each of the IRS’ targeted transactions for 2018.

Here is a screen grab of the main IRS page:

IRS

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Court Overturns DOL Fiduciary Rule

Posted by fhalestewart on March 20, 2018


From the NY Times:

FR1

FR2

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The Arguments Against Asset Protection Trusts

Posted by fhalestewart on March 11, 2018


My colleague Jay Adkisson has written a summation of a new domestic asset protection trust case at Forbes.  Another colleague, Steve Oshins, has weighed in as well.   Mr. Adkisson argues this case is the final nail in the asset protection trust industry; Mr. Oshins argues for a less sweeping interpretation.

I counsel against these structures for a number of reasons, which are listed below in no order of importance.

1.) We have yet to see a grantor of a foreign or domestic asset protection trust (APT) win a case.  Planners who still like APTs correctly argue that these cases have a potent negative combination: blatant fraudulent transfers and unsavory characters — an admittedly very bad combination of facts.  Regardless, there are now a number of decisions where the APT failed when challenged.  Why?  That leads to point number two:

2.) APTs are bad public policy.  At the heart of any case involving an APT is a creditor enforcing a judgment.  A court upholding an APT will be opening the door to the idea that a debtor can “have his cake and eat it too;” he can be adjudicated to owe somebody money, have the financial capability to satisfy the debt, yet not do so — and, in fact, have a court say they don’t have to.  That’s a detrimental holding in a capitalist economy that depends on credit financing to fuel economic growth.  So far, courts don’t want to play.

3.) Point number 2 is derived from the Uniform Trust Code’s commentary to §505 which “… follows sound doctrine in providing that a settlor who is also a beneficiary may not use the trust as a shield against the settlor’s creditors.  The drafters of the UTC concluded that traditional doctrine reflects sound public policy.”  Several courts that have ruled against APTs have referenced this section ot the UTC.

4.) Are courts turning against asset protection planning?  It depends on where you do it, but in California they are:

As indicated by Defendant’s testimony that prior to filing his bankruptcy petition, he met with an asset protection firm, and one of his goals in doing so, was to potentially protect his assets from potential creditors . . . and while he changed his mind about using the asset protection firm, the evidence of his consideration, meeting and paying the asset protection firm supports a finding that Defendant intended to hinder or delay his nonpreferred creditors. 

One could argue that this decision should be taken with a  grain of salt because it’s from California — a valid point.  But, you can see the argument being effective regardless of the jurisdiction.  Imagine this line of questioning in a deposition or at trial:

Lawyer: And on this date, you saw John Smith, correct?

Defendant: Yes.

Lawyer: Doesn’t Mr. Smith hold himself out as an “asset protection lawyer?”

Defendant: Yes

Lawyer: why did you feel the need to consult with him?

There’s no answer to this question that can’t be spun in a negative light.

5.) Creditors have a number of well-defined and clearly articulated methods of obtaining a judgment.  Even Texas — my home and debtor’s haven — has a statutory path for creditors to obtain a judgment and satisfy it.  What usually keeps creditors from pursuing a claim is time (litigation is an inherently long and drawn-out process), money (they will probably have to pay at least a portion of their ongoing legal bills), and effort (litigation takes an inordinate amount of time away from running a business).  If a debt is small, it’s far easier to write it off as a business loss (see §165) and be done with it.  But an aggressive creditor will eventually get his money.

6.) Every time I hear someone extol the virtues of a spendthrift trust, I’m reminded of the following line from the movie, A Princess Bride: “That word doesn’t mean what you think it means.”  A spendthrift provision prevents the voluntary or involuntary alienation of the beneficiary’s interest (§502 of the Uniform Trust Code).  So, let’s assume that beneficiary John Smith owes $10,000 to Mr. X.  Mr. Smith cannot transfer his interest to Mr. X to satisfy the debt (For more, please see Nichols, Assignee v. Eaton Et Al, 91 U.S. 716, 23 L.Ed. 254 (1875) ).

But a spendthrift provision only applies to the trust; once the money is distributed, it can be attached any number of ways.  If it’s transferred to a pass-through entity such as a family limited partnership, a creditor can use a charging order to obtain his funds.  If the money is transferred to a bank account, the creditor can simply levy the bank account.  For a discussion of the procedures in my home state of Texas, please read “Post-Judgment Remedies: Garnishment, Execution, Turnover Proceedings, Receiverships Under the DTPA, and “Other Stuff” by Donna Brown.  Ultimately, this gets back to point number 5: an aggressive creditor is going to get his money eventually.

7.) Why would you choose to be shielded behind an APT’s spendthrift provision — which is a new legal concept (in legal years) — when you can use a pass-through entity like an LLC whose liability shield is very well-developed?  Brief history: the corporate limited liability shield came about sometime in the mid-1800s.  I believe New York was the first state to adopt the concept.  It caught on like wildfire and has now been praised as a key concept of a capitalist society (For an in-depth discussion, please see Stephen Presser’s book, Piercing the Corporate Veil).

Corporate limited liability is now a very well-developed legal concept developed over hundreds of cases.  This is great news for planners because we have exacting detail about what works and what doesn’t.  Why not use this area of law — that also has a number of favorable decisions — instead of APT law which so far has issued a large number of anti-APT decisions?

Again, these are presented in no order of importance.  But with yet another asset protection trust failing when challenged, I believe these points have a great deal of merit.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

 

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Foreign Asset Protection Trusts; Let the Buyer Beware

Posted by fhalestewart on March 6, 2018


This is an article that I wrote for the TaxAnalysts Service a few months ago.157tn1817-Stewart

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Deferred Compensation, Part VII: Taxation of Benefits

Posted by fhalestewart on February 26, 2018


I often refer to reading the tax code as “hop, skip and jump” reading because one paragraph or section of the code will require the reader to reference several other sections in order to comprehend the meaning behind the first code section.    §402, which explains the taxability of deferred compensation, is a prime example of this approach.   Section (a) states:

Except as otherwise provided in this section, any amount actually distributed to any distributee by any employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under section 72 (relating to annuities)

Section 401(a) provides the relevant rules for a trust to obtain tax-exempt status.  By way of quick review, these include certain vesting timelines, minimum participation standards, and non-alienability requirements.  Section 501(a) is the tax code section that grants tax-exempt status to certain organizations as well as trusts specifically mentioned in §401(a).  And §72 contains the rules for annuities, which provides rules allowing the recipient to not be taxed on his return of principal.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Deferred Compensation, Pt. VII: Vesting

Posted by fhalestewart on February 19, 2018


The online Merriam-Webster dictionary defines “vesting” as “the conveying to an employee of inalienable rights to money contributed by an employer to a pension fund or retirement plan especially in the event of termination of employment prior to the normal retirement age”

The purpose of the vesting rules is to make sure that the money the employee contributes to the plan is his, and can never be taken away.  Here, there are actually two rules — one for contributions made by the employee.  These rights are “non-forfeitable” — they cannot be taken away.

The second rules apply to the employer’s contributions.  The statute contains two approved vesting schedules.  The first is the “3-year rule.”  If an employee has at least three years of service, he has a non-forfeitable right to 100% of the employer’s contributions.   The second is a schedule based on the years of service:

Untitled

Due to its somewhat stricter nature, most this schedule is more attractive from the employer’s perspective.

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Deferred Compensation, Part VII: Profit-Sharing

Posted by fhalestewart on February 13, 2018


Adding a profit-sharing component to your 401(k) plan can increase your contributions while also motivating employees.  All of the previously-discussed rules apply: you can’t have a top-heavy plan, you can’t discriminate in favor of certain employees, etc…

Here’s a general description of what’s involved from the code:

A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant.

The best part is the company is not required to make contributions every year; they can also determine the total amount of their contribution in the first quarter of the year, after sitting down with their accountant and getting a good idea for the previous year’s performance.

The total contribution is limited to the lesser of 25% of compensation or $55,000 (for 2018; $54,000 for 2017, subject to cost-of-living adjustments for later years).

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Deferred Compensation, Part VI: Minimum Participation Standards

Posted by fhalestewart on February 6, 2018


In general, a plan cannot specifically require that employees work for the company at least 1 year or attain the minimum age of 21.  For large employers with several divisions, this can happen accidentally.  Here are two examples from the accompanying Treasury Regulations:

Example 1. Corporation A is divided into two divisions. In order to work in division 2 an employee must first have been employed in division 1 for 5 years. A plan provision which required division 2 employment for participation will be treated as a service requirement because such a provision has the effect of requiring 5 years of service.

Example 2. Plan B requires as a condition of participation that each employee have had a driver’s license for 15 years or more. This provision will be treated as an age requirement because such a provision has the effect of requiring an employee to attain a specified age.

Second, the plan cannot exclude an employee who attains a specific age.

Finally, there are minimum participation standards, which must comply with one of the following three rules.

1.) The plan must benefit at least 70% of the “non-highly compensated” employees

2.) The plan benefits—

(i) a percentage of employees who are not highly compensated employees which is at        least 70 percent of

(ii) the percentage of highly compensated employees benefiting under the plan.

3.) The company sets up its own classification system approved by the Secretary that benefits at least 70% of the non-highly compensated individuals.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Deferred Compensation, Part V: Exemption Planning

Posted by fhalestewart on January 30, 2018


When a person declares bankruptcy, all of their property becomes part of the estate — the total assets that are used to pay existing creditors.  Here is the exact definition contained in the bankruptcy code:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

      (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
     (2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—

        (A) under the sole, equal, or joint management and control of the debtor; or
        (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

This is very similar to the definition the gross estate in the estate tax code or gross income in §61 — it’s an exceedingly broad definition, designed to include every piece of property owned by the debtor.

The code, however, does allow several specific exemptions.  Under the federal statute, the debtor may choose federal or state law exemptions.  Under federal statute, retirement plans are excluded

§522(b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.

…..

     (C) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

 Most states allow this exemption as well.

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Deferred Compensation, Part IV: Non-Discrimination

Posted by fhalestewart on January 24, 2018


According to §401(a)(4), a deferred compensation plan cannot discriminate in favor of highly compensated employees (HCEs), which is a person who either owned 5% of the business at any time during the year or made more than $80,000 (inflation-adjusted) during the preceding year.

The regulations provide two safe-harbor tests for defined contribution plans (which comprise the vast bulk of 401ks).  The first is a “unified allocation formula,” which requires all plan contributions to be allocated in one of three ways:

  • the same percentage of plan year compensation,
  • the same dollar amount, or
  • the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the plan year.

While the rules do allow a C-Suite executive to benefit from the plan based on their status within the company, it doesn’t allow them to benefit more than their status would allow.

The second method uses a “uniform points method” which are determined by summing “the employee’s points for age, service, and units of plan year compensation for the plan year.”

The main point that advisers should take from these rules is that the regulations contain very rigid, mechanical rules that prevent the top of the employee ranks from rigging the retirement plan to their benefit at the expense of the rank-and-file.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

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Understanding the New Tax Law

Posted by fhalestewart on January 22, 2018


For those of you who are interested in the new tax law, please see this paper from Sam Donaldson, titled, Understanding the New Tax Law.

 

SSRN-id3096078

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Deferred Compensation, Pt. III: Non-Diversion of Trust Assets

Posted by fhalestewart on January 15, 2018


In order for a deferred compensation trust to the “qualified,” it must comply with all of §401s specific requirements.  Complete compliance creates tax-deferred status.  §501 states (emphasis mine), “An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.”

One of 401’s most important requirements is that funds can only be used for the benefit of the employees.  §401(a)(2) states in relevant part,

“(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries…”

To borrow language from contract law, this section contains a condition precedent, which is, “…  an event which must take place before a party to a contract must perform or do their part.”  The following hypothetical illustrates: Company A owes a significant amount of money and also has a large, well-funded retirement plan.  401(a)(2) prevents the company from raiding the retirement fund until every possible obligation of the trust is paid.

The Treasury Regulations add additional color:

(2) As used in section 401(a)(2), the phrase “if under the trust instrument it is impossible” means that the trust instrument must definitely and affirmatively make it impossible for the nonexempt diversion or use to occur, whether by operation or natural termination of the trust, by power of revocation or amendment, by the happening of a contingency, by collateral arrangement, or by any other means. Although it is not essential that the employer relinquish all power to modify or terminate the rights of certain employees covered by the trust, it must be impossible for the trust funds to be used or diverted for purposes other than for the exclusive benefit of his employees or their beneficiaries.

The phrasing is unambiguous, providing no legal “wiggle-room.”

In my introductory post on the topic, I specifically noted this code section uses trust language, placing a fiduciary duty and obligation on the sponsoring company.  This section furthers that observation.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

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Deferred Compensation, Pt. 2: ERISA

Posted by fhalestewart on January 10, 2018


29 U.S.C. Chapter 18 contains ERISA — the Employee Retirement Income Security Act, which was passed in 1974.  Its purpose is to protect employee benefit plans from employer malfeasance, such as using employee plans to fund corporate operations or pay corporate debts.

Like the deferred compensation section of the tax code, ERISA itself its own legal specialty.   A complete discussion would be the subject of an entire course in law school.  For our purposes, the following points are salient:

1.) The statute gives federal courts jurisdiction over a large number of causes of action related to ERISA: (“Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, fiduciary, or any person referred to in section 1021(f)(1) of this title. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of this section.).  This greatly increases the weight of potential litigation.

2.) The statute creates a complex compliance burden.  Here is a list of the sections contained in 29 U.S.C. Part I: Reporting and Disclosure:

ERISA Reporting

This is yet another reason why an entire industry exists to service deferred compensation plans.

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The First Revenue Bulletin of the Year Covers Several Important Issues

Posted by fhalestewart on January 7, 2018


IRB1

 

You can download it at this link:

irb18-02

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Deferred Compensation, Part 1: Introductory Concepts

Posted by fhalestewart on January 2, 2018


Certain sections of the tax code (such as §1031 like-kind exchanges and §482 transfer pricing) have become their own mini-specialty.  §401-§420 (deferred compensation) is another such area of the code.  In the following posts, I’ll go over the “high points” of these code provisions, starting with today’s general introduction to the topic.

The opening sentence of §401 contains a large amount of important information:

A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section— 

Here are that sentence’s key provisions:

  • “A trust:” trust law has over 500 years of common law history, dating back to Britain. There is an entire restatement on trusts which has been adopted by all U.S. states.  The legal tome Scott on Trusts is the leading academic treatise on the topic.  For an attorney, the word trust immediately leads to the phrase “fiduciary obligation,” which is best explained by these two phrases: “Alleged good faith on the part of the fiduciary forgetful of his duty is not enough…he must not have “honesty alone, but the punctilio of an honor the most sensitive.”[1] This is a very long and well-developed common law doctrine that has no wiggle room for legal shenanigans.  This is the duty placed on the company forming the plan regarding plan assets.  It’s also a primary reason why most companies outsource this task to third parties.
  • “organized in the United States – self-explanatory, but it should be noted
  • “forming part of a stock bonus, pension or profit-sharing plan:” Like “trust,” these words are also terms of legal art, each connoting specific concepts under the law.
  • “for the exclusive benefit of his employees:” “exclusive” is the key word, which, according to the online Merriam-Webster dictionary, means, “excluding other from participation.” Management can only use trust assets for employees.  Put another way, management can’t use the funds for company purposes like funding ongoing operations or acquisitions.
  • “qualified trust” is a trust that complies with section 401(a) (Treas. Reg. 1-401(0)) which has 33 different sub-sections. Some are very broad while others are very situation specific.  Regardless, it’s a very technical section of the code, which further explains why compliance is usually outsourced to third parties.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

 

 

[1] In Re Rothko, 43 N.Y. 2d 305 (I have reversed the order of the quotes for the sake of clarity).

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(Delayed) Merry Christmas and Happy New Year

Posted by fhalestewart on December 29, 2017


On behalf of Professor Byrnes and myself, we’d like to wish you a Merry Christmas and Happy New Year.  We’ll return next week.

 

 

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Deferred Compensation and Rabbi Trusts

Posted by fhalestewart on December 18, 2017


This will be the last post in our NQDC series.

Revenue Procedure 92-64 contains model language for a “Rabbit Trust,” which is a trust a company can establish to set-aside funds for a NQDC plan.  Companies routinely use these structures to allay employee concerns about actually receiving NQDC payments.

You can read the entire Procedure at this link on the Legal Bit Stream website.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

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Exempt Organization Oversight On the Decline

Posted by fhalestewart on December 18, 2017


From the Washington Post:

Years of conservative attacks on the Internal Revenue Service have greatly diminished the ability of agency regulators to oversee political activity by charities and other nonprofits, documents and interviews show.

The fall in oversight, a byproduct of repeated cuts to the IRS budget, comes at a time when the number of charities is reaching a historic high and they are becoming more partisan and financially complex.

…..

The main part of government tasked with policing those lines, the IRS’s Exempt Organizations division, has seen its budget decline from a peak of $102 million in 2011 to $82 million last year. At the same time, division employees have fallen from 889 to 642.

The division now lacks expertise, resources and the will needed to effectively oversee more than 1.2 million charities and tens of thousands of social welfare groups, according to interviews with two dozen nonprofit specialists and current and former IRS officials.

“This completely neutered them,” said Philip Hackney, a tax law professor at Louisiana State University and former Exempt Organizations lawyer at the IRS. “The will is totally gone.”

 

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New Paper: “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation”

Posted by fhalestewart on December 11, 2017


With new tax legislation comes new tax games, which is the topic the new paper, “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation,” available from SSRN.  I haven’t reviewed it, but it has received a large amount of publicity in the press.  It’s written by a group of tax professors.  Here is the abstract:

This report describes various tax games, roadblocks, and glitches in the tax legislation currently before Congress. The complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers. This report highlights particular areas of concern that have been identified by a number of leading tax academics, practitioners, and analysts.

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Recent PLRs Highlight How Not to Run a Charitable Organization

Posted by fhalestewart on December 10, 2017


Every week, the IRS releases PLRs covering the gamut of tax issues.  Several released this week drive home the point that running a 501(c)(3) organization is a complex process.

From PLR 2017-49015

PLR1

From PLR 2017-49014PLR2

Neither of these releases involves complex issues.  Instead, we see organizations that are not operating charitably,  not maintaining adequate books and records or allowing the IRS to examine records as requestions.  Anyone of these problems will provide the IRS adequate reason to revoke a tax-exempt status.

As a final point, charitable giving typically ramps up at year-end.  This is a good time to contact organizations to see if they are still tax-exempt.

 

 

 

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EU Finance Minister Blacklists 17 Jurisdictions

Posted by fhalestewart on December 7, 2017


From the Financial Times

European finance ministers have blacklisted 17 countries in a key part of the bloc’s crackdown on aggressive tax avoidance, while 47 other nations promised reforms to avoid being labelled tax havens.

American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, St Lucia, Samoa, Trinidad & Tobago, Tunisia and United Arab Emirates were all listed as so-called non-compliant jurisdictions.

The grey-list of countries promising to reform to meet the European Union’s criteria has grown by nine countries since Friday. Cape Verde and Morocco were the last two countries to agree commitments; Tunisia’s reform proposal arrived too late for it to be moved off the blacklist.

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Non-Qualified Deferred Compensation: When Can You Make Distributions (pt. 2)?

Posted by fhalestewart on December 5, 2017


As I noted in my previous post, the NQDC statute specifically states there are six events when a NQDC plan can make a distribution, one of which is when the service provider “separates from service,” which is defined in the Treasury Regulations as:

An employee separates from service with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer.

As with other aspects of this statute, there is little room for a liberal legal interpretation of the definition.

The statute further defines “termination of employment” as,

Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that the employer and employee reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the employee has been providing services to the employer less than 36 months).

The statute provides 2 tests.  Either there is a complete termination of employment or an 80% reduction in the amount of work performed (as compared to the preceding three years) by the service provider.  This is one of the few areas where a bit of definitional “play” exists in the statute.

Finally, the statute provides the following, non-exclusive set of factors to use in a “facts and circumstances” determination as to whether termination has in fact occurred:

1.) Whether the employee continues to be treated as an employee for other purposes (such as continuation of salary and participation in employee benefit programs),

2.) Whether similarly situated service providers have been treated consistently, and

3.) Whether the employee is permitted, and realistically available, to perform services for other service recipients in the same line of business.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

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Recent IRS Releases of Interest to Wealth Professionals

Posted by fhalestewart on December 4, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

Announcement 2017–15, page 534.

Announcement 2017–15 provides relief to victims of Hurricane Maria and the recent California wildfires. It permits easier access to funds held in workplace retirement plans and in IRAs, for periods beginning in September and October 2017 and ending March 15, 2018. The relief provided in the announcement is in addition to the relief already provided by the IRS pursuant to several recent news releases.

Notice 2017–67, page 517.

This notice provides guidance on the requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA) under section 9831(d) of the Internal Revenue Code, the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.

 

https://www.irs.gov/pub/irs-irbs/irb17-47.pdf

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Non-Qualified Deferred Compensation: When Can You Make Distributions (pt. 1)?

Posted by fhalestewart on November 29, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

Section 409A contains a very strict set of times when a NQDC plan can make distributions.  They are:

(i) separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)),
(ii) the date the participant becomes disabled (within the meaning of subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,
(v) to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or
(vi) the occurrence of an unforeseeable emergency.

Death (iii) and a specified time (iv) are not legally debatable; they simply are.

Like other key provisions of 409(A), disabled is specifically defining in the statute:

(C) Disabled: For purposes of subparagraph (A)(ii), a participant shall be considered disabled if the participant—
(i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or

(ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participant’s employer.

This term is tightly written, offering lawyers little interpretational wiggle room.  It’s obvious that a formal medical opinion (and probably a second) is required for the client file.

Finally, there is the unforeseen emergency:

The term “unforeseeable emergency” means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participant’s spouse, or a dependent (as defined in section 152(a)) of the participant, loss of the participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

The terminology strongly implies the “fortuity” element in an insurance contract, strongly hinting that the insured does not have the ability to take preventative measures to avoid the event.  It’s also highly likely that a medical opinion will also be required.

Next, we’ll discuss the “separation from service” requirement.

 

 

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Today’s Tax Legislation Headlines

Posted by fhalestewart on November 27, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

Republicans look at making changes (WaPo)

CBO says Senate hurts poor more than originally thought (WaPo)

New tax bill will lift the prohibition on churches engaging in political activity (NYT)

Do or die time for tax legislation (Politico)

Thune predicts that changes will occur but that the tax bill will pass (Politico)

 

 

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Happy Thanksgiving From the Wealth and Risk Management Blog

Posted by fhalestewart on November 22, 2017


On behalf of Prof. Byrnes and myself, we’d like to wish you and your family a happy Thanksgiving.

We’ll return next week.

 

 

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Today’s Tax Policy Headlines

Posted by fhalestewart on November 20, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

The plan is unpopular (WaPo)

Will the tax plan help the middle class?  The answer is complicated (NYT)

The Joint Committee on Taxation’s publication website has numerous studies on the tax plan (JCT)

Tax bill reflects the growing division between Republicans and higher education (WaPo)

 

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Non-Qualified Deferred Compensation: The “Substantial Risk of Forfeiture” Requirement

Posted by fhalestewart on November 14, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

Income for tax purposes is defined in the broadest possible terms.  §61 states it as “income from whatever source derived.”[1]  The case law adds further clarification and detail.  Glenshaw Glass defined income as “undeniable accessions to wealth, clearly defined, and over which the taxpayers have complete dominion.”[2]  The latter term is central to a properly structured non-qualified deferred compensation (NQDC) plan.  If the taxpayer has any control over the plan’s income, he will have to include the total income in his annual income.

Therefore, all money in a NDQC plan must be subject to a substantial risk of forfeiture.[3]  “[E]ntitlement to the amount [must be] conditioned on the performance of substantial future services by any person or the occurrence of a condition related to a purpose of the compensation, and the possibility of forfeiture is substantial.”  The future services must be performance based, and they cannot include “any amount or portion of any amount that will be paid either regardless of performance, or based upon a level of performance that is substantially certain to be met at the time the criteria is established.”[4]  These two conditions further support the requirement that the NQDC contract must be in writing.[5]  They also strongly allude to an employment law component in which the service recipient and provider agree on a basic compensation level and an additional layer, which will be paid for through the NQDC plan.

Finally, the “substantial risk of forfeiture” element can’t be met if the service provider is the sole owner of the company.  The underlying rationale is simple: he or she will not use their management position to not pay themselves – it’s simply not going to happen.  The examples in the Treasury Regulations imply that a 20% ownership stake is the maximum amount the service provider can own of the company and still benefit from the NQDC plan.  But this same section also says the ultimate determination is based on the “facts and circumstances.”[6]

[1] 26 U.S.C. §61

[2] Comm’r v. Glenshaw Glass, 348 U.S. 426 (1955)

[3] Treas. Reg. 1.409-1(a)(d)(1)

[4] Treas. Reg. 1.409A-1(e)(1)

[5] See also Treas. Reg. 1.409(A)-1(e)(“The term performance-based compensation means compensation that amount of which, or the entitlement to which, is contingent on the satisfaction of pre-established organizational or individual performance criteria relating to a performance period of at least 12 consecutive months.”)

[6] Treas. Reg. 1.409(A)-1(d)(3)

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New Limits For Qualified Plans

Posted by fhalestewart on November 12, 2017


Code section 415 specifically defines the total benefits and contributions allowed for a “qualified” plan.    Exceeding these limits will strip a plan of its tax-deferred status.  Code section 401(b) requires the Secretary to annually adjust various amounts.  A few weeks ago, the IRS released Notice 2017-64 which contains various adjustments.  You can read the entire release at this link.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

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Today’s Tax Policy Headlines

Posted by fhalestewart on November 9, 2017


Senate bill differs from House’s (NYT)

Tax bill math is getting complicated (WaPo)

House leaders rounding up votes (Politico)

Support for tax plan still positive (Politico)

Election results potentially change the tax plan (Politico)

Multinational companies lobby against 20% excise tax (BB)

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

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Non-Qualified Deferred Compensation: Some Additional Definitions

Posted by fhalestewart on November 6, 2017


In this post, I’ll take a look at several more definitions related to non-qualified deferred compensation (NQDC) plans, beginning with the definition of “plan:”

“The term plan includes any agreement, method, program or other arrangement, including an agreement, method, program or other arrangement that applies to one person or individual.”[1]

Here, we see the Treasury using the standard definitional tactic of using several words that, while moderately different, convey the same idea.  However, the commonplace definition of the word “plan” (“a method for achieving an end.”)[2] along with its synonyms[3] would have sufficed.

The plan must be in writing.  While not explicitly stated, it is strongly implied in the regulations.

“…a plan is established on the latest of the date on which it is adopted, the date on which it is effective, and the date on which the material terms of the plan are set forth in writing.  The material terms of the plan may be set forth in writing in one or more documents.”[4]

In addition, because of the sheer complexity of NQDC, it’s best to have a governing document.  (I googled the search term “NQDC sample plan and found several online examples, here, here and here).

There are only six events that allow the plan to distribute assets:

  • separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)),
  • the date the participant becomes disabled (within the meaning of subparagraph (C)),
  • death,
  • a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,
  • to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or
  • the occurrence of an unforeseeable emergency.[5]

These terms are not subject to over-lawyering.  Potentially malleable terms (e.g. “disabled” or “separation from service”) are further defined in the statute or require the Secretary’s approval.  The underlying message is clear: don’t get cute.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

[1] Treas. Ref. 1.409(A)(c)(1)

[2] https://www.merriam-webster.com/dictionary/plan

[3] Id (“arrangement, blueprint, design, game, game plan, ground plan, master plan, program, project, roadmap, scheme, strategy, system”)

[4] Treas. Reg. §1.409(A)(3)(i):

[5] 26 U.S.C. 409(A)(2)(i)-(vi)

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ICIJ Begins to Release the “Paradise Papers”

Posted by fhalestewart on November 5, 2017


As you may know, the International Consortium of Investigative Journalists released the Luxembourg Leaks database in 2014 (which you can view here).  This showed a number of EU based tax structures based in Luxembourg.  “Luxembourg Leaks” helped to jump-start the OECD’s base erosion and profit shifting initiative.

From today’s release:

The Paradise Papers is a global investigation into the offshore activities of some of the world’s most powerful people and companies.

The International Consortium of Investigative Journalists and 95 media partners explored 13.4 million leaked files from a combination of offshore service providers and the company registries of some of the world’s most secretive countries.

The files were obtained by the German newspaper Süddeutsche Zeitung.

The Paradise Papers documents include nearly 7 million loan agreements, financial statements, emails, trust deeds and other paperwork from nearly 50 years at Appleby, a leading offshore law firm with offices in Bermuda and beyond.

 

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

 

 

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Today’s Tax Policy Headlines

Posted by fhalestewart on November 3, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors. 

 

Potential impact of the proposed changes (NYT)

Mortgage deduction change could hurt the housing industry (NYT)

Plan delivers a permanent corporate tax cut (NYT)

GOP plan is a “sensible framework,” but it still explodes the deficit (WaPo)

The hidden 465 tax bracket (Politico)

Who pays more under the GOP plan? (Politico)

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The Lastest Tax Policy News Headlines

Posted by fhalestewart on November 2, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.   

Republican tax plan to lower cap on mortgage interest deduction to $500,000 loans (WaPo)

Red State Dems are willing to work with Republicans on taxes (WaPo)

8 Charts of the US tax system from Wonkblog (WaPo)

Republicans release tax plan (NYTimes)

A list of the plans major changes (BB)

 

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Non-Qualified Deferred Compensation: Timing and Constructive Receipt Issues

Posted by fhalestewart on October 30, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

 

It’s doubtful that anybody in the Financial Services industry is unaware of qualified retirement plans such as 401(k)s and IRAs.  Knowledge of them is required to pass licensing exams and every firm includes them in sales literature.  Non-qualified plans (NQDC), however, are less well-known, largely because they are more complex and appeal to a far smaller group of potential buyers.  Although their application is narrower, in the right circumstances they can provide clients with tremendous advantages.

This post begins a series on NQDC.  We will be spending a large amount of time with the tax code and accompanying treasury regulations; this is necessary due to NQDC’s complexity and numerous regulations.  But before delving into the code, let’s use basic statutory analysis and analyze the “plain meaning” of the words, beginning with “non-qualified.”  The primary difference between NQDC and qualified plans is that the former don’t comply with §401’s safe harbors – especially the rules relating to “highly compensated individuals”[1] and the plan funds not being subject to the plan sponsor’s general creditors.[2]  In fact, the treasury regulations define NQDC as much by what it isn’t[3] as what it is.  Moving onto the other words, the Merriam Webster online dictionary defines the word “deferred” as “withheld for or until a stated time”[4] and “compensation” as “payment.”[5]  Combining these two definitions, we get: payment for services that is withheld until specifically enumerated events.

A properly implemented NQDC plan requires that the client does not formally receive income before certain events[6] or else he will become liable for the accompanying taxes at inopportune times (along with penalties).  Therefore, we need to know when a taxpayer recognizes income to avoid attribution from these events.  This naturally leads to a discussion of the two accounting methods.  The cash method stipulates that “all items which constitute gross income … are to be included for the taxable year in which actually or constructively received.”[7]  The most obvious example occurs when the taxpayer’s account increases by a specific amount of money.  The accrual method is the second system.  It has two factors: all events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy.[8]  For example, once the taxpayer has done the agreed upon work and sent an invoice, he can book the income under the accrual method.

The client must also avoid constructively receiving income, which is defined in §1.451-2(a):

Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.

The service provider cannot reach, attach, pledge, or be credited with all or any portion of the money set aside under the plan.  This requires that all funds in the NQDC plan be subject to a substantial risk of forfeiture, which is discussed in treasury regulation §1.83-3(a).

a substantial risk of forfeiture exists only if rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial.

The most commonly used situations in NQDC contracts are continued performance by the service provider or the occurrence of a major corporate event such as a merger or acquisition, specific sales goals, going public, and the like.    

            This post only covers the surface of several key NDQC components.  However, it should provide the reader with a basic overview of these key elements.

Next, we’ll dig deeper into the definition of an NQDC plan.

 

[1] 26 U.S.C. 401(a)(4)

[2] See 26 U.S.S. 401(a)(2)

[3] The Treasury regulations define NQDC by what it isn’t.  See generally Treas. Reg. §1.409A-1(a)(2)(i) through Treas. Reg. §1-409A-1(2)(ix)

[4] https://www.merriam-webster.com/dictionary/deferred

[5] https://www.merriam-webster.com/dictionary/compensation

[6] 26 U.S.C. 409(A)(2)(A)(i)-(vi)

[7] Treas. Reg. §1.446-1(c)(i)

[8] Treas. Reg. §1.446-1(c)(ii)

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The Destination-based Approach to Business Taxation, Explained

Posted by fhalestewart on October 30, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

 

From the article:

An alternative approach has been to identify fundamental tax reforms that can deal more adequately with the new economic realities. One such approach builds on the concept of business cash-flow taxation, first proposed in the late 1970s by the Meade Committee (Institute for Fiscal Studies 1978). Originally conceived as a tax on the cash flows of domestic producers (an ‘origin-based’ tax), the cash-flow tax had many potential benefits, including eliminating the tax on normal returns to new investment, removing tax-based incentives for corporate borrowing, and eliminating the need to measure income of companies with complex business arrangements. But this standard cash-flow tax leaves in place the pressure for international tax competition via incentives for companies to shift the location of profitable activities and reported profits to low-tax countries. This shortcoming led to consideration of a destination-based cash-flow tax (DBCFT), which adds ‘border adjustment’ to cash-flow taxation and has the effect of basing the tax on the location of consumers rather than on the location of profits, production, or corporate residence.

As described in a series of papers, including Auerbach (2017), converting an origin-based cash-flow tax into a destination-based cash-flow involves relieving tax on export revenues and imposing tax on imports, in precisely the same manner as is done under existing value-added taxes (VATs). The key difference from a VAT is that the DBCFT maintains the income tax deduction for wages and salaries, and thus amounts to a tax on domestic consumption not financed by labour income, in principal a much more progressive tax than the VAT.

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IRS Reading Room Releases of Interest

Posted by fhalestewart on October 29, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

Every weekend, the Service releases PLRs and other non-precedential documents via the electronic reading room.

Electing out of GST Exemptions.

Denial of tax-exempt status

Denial of tax-exempt status

Denial of tax-exempt status

 

 

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The Latest Tax Policy Headlines

Posted by fhalestewart on October 28, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

The Republican Congress has vowed to pass tax reform by the end of the year — a very ambitious schedule.  This makes the situation very fast-moving and fluid.

What executives are saying about the tax bill (BB)

One big obstacle to tax reform (BB)

Lobbyists are swarming capital hill (BB)

Major divisions still exist for the tax bill (WaPo)

Tax bill shrouded in mystery (Politico)

 

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Today’s Tax Policy Headlines

Posted by fhalestewart on October 27, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

 

House narrowly passes budget (WaPo)

House passes budget (NYT)

Republicans from high tax states send party message (WaPo)

Major divisions remain on tax legislation (WaPo)

6 things that could derail the GOP’s tax plan (Politico)

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401(k) Contribution Cuts are Still on the Table

Posted by fhalestewart on October 25, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

 

From the Washington Post:

House Ways and Means Committee Chairman Kevin Brady on Wednesday suggested a tax bill he is preparing to introduce could force changes to 401(k) plans and other retirement accounts, potentially bucking a promise from President Trump that those accounts would be left alone.

Brady, speaking at a breakfast hosted by the Christian Science Monitor, said “we think in tax reform we can create incentives for people to save more and save sooner.”

He said he was “working very closely with the president,” but he also said many people who have tax-incentivized retirement accounts contribute $200 per month or less, a level he thought was too low.

…..

Several hours later, Senate Finance Committee Chairman Orrin Hatch (R – Utah) said he would also not agree to Trump’s vow to protect 401(k) plans, saying instead that he was open to changes if they made sense.

This situation is VERY fluid.  According to the same article, key provisions of the bill such as the actual tax brackets and specific deductions are still being hammered out.

 

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Today’s Stories on Proposed Tax Cuts

Posted by fhalestewart on October 24, 2017


In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance Law, Captive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.    

 

Here’s a list of articles from this mornings papers

Trump’s promise narrows GOP’s options (WaPo)

Trump is making tax-cutting difficult (NYT)

Tax cuts are coming; so are the fights to pay for them (NYT)

Trump promises “No change” to 401(k) plans (NYT)

A look inside the White House’s tax planning (Politico)

Draft is coming in days (Bloomberg)

Conservative leaders open to keeping top rate (Bloomberg)

 

 

 

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Are FLP Discounts Back?

Posted by fhalestewart on October 23, 2017


From Wealthmanagement.com

In a report issued on Oct. 2, 2017, Treasury Secretary Steven Mnuchin recommended that the proposed Internal Revenue Code Section 2704 regulations be withdrawn. Those regs would have restricted the use of partnerships and other entities to generate valuation discounts. The Internal Revenue Service had released a proposal in August 2016 in an attempt to limit what it perceived as an erosion of the applicability of Section 2704 and the creation of artificial valuation discounts. A hearing was held on on Dec. 1, 2016. Almost 30,000 formal comments were submitted to the Treasury.

The report states: “Treasury and the IRS now believe that the proposed regulations’ approach to the problem of artificial valuation discounts is unworkable…. The proposed regulations could have affected valuation discounts even where discount factors, such as lack of control or lack of a market, were not created artificially as a value-depressing device.” It goes on to say that: “Treasury and the IRS plan to publish a withdrawal of the proposed regulations shortly in the Federal Register.”

In 1998, the IRS issued a series of TAMs that outlined several fact patterns the Service believed were suspect.  They then began attacking various FLP structures, winning a fair number of cases.  But at some point, enough case law developed to show practitioners what not to do.  Once jurisprudence weeded out the bad patterns, FLP discounts continued anew.

Last year, the Treasury issued revised valuation rules, essentially gutting FLPs.  But now it appears the Treasury is reversing its stance.  But before moving forward, I’d wait until we see the new regulations published.

  

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Conservation Easements Are Having a Difficult Time Qualifying

Posted by bonddad on October 22, 2017


The Service made certain conservation easements a listed transaction in Notice 2017-10.

Now we’re seeing conservation easements that aren’t subject to reporting requirements run into aggressive judicial analysis.  From Bloomberg Law:

In BC Ranch II, LP v. Commissioner, the Fifth Circuit recently reversed the Tax Court in holding that a taxpayer qualified for a charitable contribution deduction for the donation of a conservation easement. The main issue involved whether the easement in question violated the in perpetuity requirement of §170(h)(2)(C). In BC Ranch, two limited partnerships donated one conservation easement each to a qualified donee and, subsequently, sold limited partnership interests. Each limited partnership interest entitled the limited partner to one five-acre homesite parcel. Pursuant to the deed of easement, the property covered by the easements could be amended, but only to the limited extent needed to modify the boundaries of the five-acre homesite parcels. Further, any modification could only be done within the ranch property subject to the easement. The modification provision also prohibited any amendment that would increase any homesite parcel above five acres. For any such a modification to occur, the donor, the donee, and the owner of the homesite parcel in question would have to agree and the modification would be permitted only if the boundary line modification did not, in the donee’s reasonable judgment, directly or indirectly result in any material adverse effect on any of the conservation purposes.

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Texas A&M University Law seeks to hire faculty and staff

Posted by William Byrnes on September 18, 2017


  1. Associate Law Professor-Associate Director of Law Library -TX8512600: https://www.linkedin.com/jobs/view/451155511/ 
  2. Assistant Director, Academic Support: https://jobpath.tamu.edu/postings/113980
  3. IT Generalist II: https://jobpath.tamu.edu/postings/113987
  4. Program Coordinator I (Admissions): https://jobpath.tamu.edu/postings/113981
  5. Development Officer III: https://jobpath.tamu.edu/postings/113984
  6. Career Services Position Assistant Director: https://jobpath.tamu.edu/postings/112694
  7. Associate Director: https://jobpath.tamu.edu/postings/113252

 

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my nine Lexis tax titles are now available

Posted by William Byrnes on August 22, 2017


author landing page for the newly revised and updated Estate Planning Guide coming soon!

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A Proposal to Leverage FATCA to Punish Black and Grey Hat Governments.

Posted by William Byrnes on February 16, 2017


please download my proposal https://ssrn.com/abstract=2916444

Abstract: Professor William Byrnes examines whether it is prudent for taxpayers to trust the governments of the 117 countries that scored a fifty or below on Transparency International’s Irs_logocorruption index. The complete information system invoked by the Foreign Account Tax Compliance Act (FATCA) encourages, even prolongs, the bad behavior of black hat governments by providing fuel (financial information) to feed the fire of corruption and suppression of rivals. Professor Byrnes recommends that the United States leverage a “carrot-stick” policy tool to incentivize bad actors to adopt best tax administration practices.  Article download at https://ssrn.com/abstract=2916444

Keywords: FATCA, Common Reporting Standards, OECD, Exchange of Information, Taxpayer Rights, IGA, corruption

Professor William Byrnes is the primary author of Lexis’ Guide to FATCA and Common Reporting Standard Compliance – 2017.  He designed then wrote the initial 2012 edition and has grown it to the #1 FATCA resource for advisors and institutions.  Now in its fifth edition for 2017!

Over 1,800 pages of analysis of the FATCA and CRS compliance challenges,  79 chapters by FATCA and CRS contributing experts from over 50 countries. Besides in-depth, practical analysis, the 2017 edition includes examples, charts, timelines, links to source documents, and compliance analysis pursuant to the IGA, CRS agreement, and local regulations for many financial centers.   This fifth edition will provide the financial enterprise’s FATCA and CRS compliance officer the tools for developing and maintaining a best practices compliance strategy.  No filler of forms and regs – it’s all beef !  See Lexis’ order site and request a copy of the forthcoming 2017 edition – http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp?pageName=relatedProducts&prodId=prod19190327

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Aggie Law Announces New Tax Clinic IRS Matching Grant Will Support Clinic for Low-Income Taxpayers

Posted by William Byrnes on September 27, 2016


Thanks in part to a grant from the Internal Revenue tamu-banner-300x250-v2Service, Texas A&M University School of Law will soon open the doors of its newest clinic, focused on serving low income taxpayers.

The grant is part of the Low Income Taxpayer Clinics (LITC) program, administered by the Office of the Taxpayer Advocate at the IRS to make the services of these clinics more widely available, particularly in underserved areas.

Under the interim direction of Jack Manhire, Director of Program Development and Senior Lecturer at Aggie Law, the Tax Clinic will provide legal counsel as defined by the LITC program criteria. Services will focus primarily on tax disputes and are available to those who qualify as low income taxpayers. The clinic also gives Texas A&M law students an opportunity to work directly on federal tax controversy cases by receiving provisional admission to represent taxpayers before the IRS.

The law school is currently seeking qualified professionals to permanently fill the leadership positions at the clinic, which will be one of nine clinics offered through the law school.

“We are very excited to be a part of the LITC community,” Manhire said. “We are fully dedicated to serving the needs of the Fort Worth area and the educational enrichment of our students. We also plan to leverage cutting-edge technology and our Aggie network to represent taxpayers in some of the most underserved communities in Texas.”

According to the Taxpayer Advocate Service, “Low Income Taxpayer Clinics (LITC) assist low income individuals who have a tax dispute with the IRS, and provide education and outreach to individuals who speak English as a second language (ESL). LITCs can represent you before the IRS or in court on audits, appeals, tax collection matters, and other tax disputes. Services are provided for free or for a small fee. Although LITCs receive partial funding from the IRS, LITCs, their employees, and their volunteers are completely independent of the IRS. In order to qualify for assistance from an LITC, generally a taxpayer’s income must be below a certain threshold, and the amount in dispute with the IRS is usually less than $50,000.”

The clinic, Aggie Law’s ninth, will be located in the Star-Telegram building in Downtown Fort Worth.

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Online Wealth Management Launched for an Industry ‘Fearless On Every Front’

Posted by William Byrnes on September 26, 2016


Texas A&M University School of Law announces the launch of its revolutionary online graduate curricula in Wealth Management  — developed as an important part of the public tamu-banner-300x250-v2university’s mission.  Delivered completely online, the Wealth Management curricula is built around the needs of wealth advisory professionals to become versed in the legal and planning aspects of financial analysis, high net wealth taxation, portfolio management, family office, charitable planning, retirement and executive compensation, securities and market regulation, and insurance/annuities. Lawyers and non-lawyers alike will take a deep dive into the intricacies of managing wealth and its associated risks, critical in a rapidly evolving workplace climate.

Texas A&M law professor William Byrnes, who conceptualized both curricula and pioneered online legal education 20 years ago, quoted an industry research report, “industry research from analytics firm Cerulli Associates uncovered that 43% of all financial advisors are either at or are approaching retirement with one-third of advisors between 55 to 64.  Advisory firm Edwardes Jones, with 12,000 locations and more than $900 billion assets under management agreed with the Cerruli report that 237,000 new financial professionals are needed to keep up with the demand of retiring baby boomers.” Says William Byrnes, “Yet universities remain stuck in a silo approach to education, with graduates unprepared for the financial advisor requirements of these firms and their clients.  Firms must be fearless pushing universities to fulfil their role for educating and training graduates for employment outcomes.”

Ernst & Young’s Tax Insights magazine, distributed to its clients and through the Financial Times,  stated “Texas A&M University is among the pioneers of change in tax education. In 2013, the State of Texas not only established a new law school at the university but also gave it carte blanche to create a new education model.”

“Very few law graduates that my company interviews studied advanced planning and thus can’t sit down with clients to address these tax and financial advisory questions,” added Robert Bloink, an attorney who has advised on over two billion dollars of insurance premium.

“For complex modern families with multiple marriages and various children, a properly educated wealth manager knows the questions to ask, then how to research and analyze the legal and financial issues associated with non-probate assets”, interjected Dr. George Mentz of the American Academy of Financial Management which is mentioned as an industry professional association for financial analysts on the Department of Labor website.

“A client-centric wealth management approach  requires that the education model be developed and taught by multi-disciplinary academics and professionals.” explains William Byrnes. “A Texas A&M graduate will be able to evidence career preparation as a financial advisor or financial analyst wealth manager with an industry tailored wealth manager curriculum that includes aspects of the Series 7, wealth, and legal planning.”   According to National Law Journal (May 20, 2013), “No one in legal academia has more experience with online master’s degrees than William Byrnes.”

 

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