Tag Archive for: tax

Lifetime Giving: Another Tool in Your Estate Planning Toolkit

Lifetime Giving: Another Tool in Your Estate Planning Toolkit

Lifetime Giving: Another Tool in Your Estate Planning Toolkit

When a client comes in for an “estate plan,” they are usually thinking of a will or trust. These legal documents form the centerpiece of a comprehensive estate plan, but there’s another important tool in the estate planning toolkit that many people overlook: lifetime giving.

Lifetime Giving

Do you know you can give money up to a certain amount, called the annual gift tax exclusion amount, every year, to as many people as you’d like? For 2021, this exclusion amount is $15,000, so you can give up to $15,000/person to an unlimited number of people in 2021 without owing any federal gift tax or having to file a gift tax return. If you’re married, your spouse can do the same, so combined, the two of you can give up to $30,000 per person each year.

For example, Jose and Sarah have an adult child, Chris, who is married to Bob. If Jose and Sarah want to maximize their gifts to Chris’ family, they can give a combined total of $60,000: $15,000 each to both Chris and Bob. If Chris and Bob have children, Jose and Sarah can each make gifts to the grandkids as well.

The Benefits

Lifetime giving has several benefits. First, lifetime giving can be as simple as writing a check. An attorney can help you plan out a lifetime giving strategy and incorporate it into your overall goals, but legal assistance is not required to make lifetime gifts. Second, lifetime giving allows you as the giver to decide exactly who gets what and to apply any preconditions you may wish. Also, you have the satisfaction of seeing the recipients enjoy your generosity and they have an opportunity to express their appreciation. In addition, lifetime gifting enables you to act when it is most needed, for example, to help a grandchild go to college, buy a house, or start a business.

Finally, gifts that do not exceed the annual gift tax exclusion amount don’t count toward your lifetime combined estate/gift tax exemption, which is another benefit. That said, the estate/gift tax exemption amounts are so high (currently $11.7 million/individual and $23.4 million/couple) that estate tax avoidance is not a relevant consideration for most of us.

The Risks

On the flip side, lifetime gifting does come with a few risks. The biggest risk is that the money you give away today may be money you later need for yourself. Second, while you can revise a will or trust to change distribution plans as your circumstances or wishes change, lifetime gifting can’t be undone in the same way. Once the toothpaste is out of the tube, so to speak, it can’t easily be put back. For some people, these considerations may limit the practical value of the gift tax exclusion.

And for clients who may need long-term care in the foreseeable future, it’s important to know that Medicaid has a five-year lookback rule. If you make gifts today and apply for Medicaid within the next five years, your eligibility will be affected.

Conclusion

Many people may already be doing lifetime gifting in an informal way, such as small checks on birthdays. For some clients, greater lifetime gifting isn’t appropriate at this stage of life. For others, however, planned lifetime giving using the gift tax exclusion can be an easy, efficient, and satisfying way to distribute a significant amount of property.


Ellen Daniel Williamson | Farrow-Gillespie Heath Witter LLP

Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and practices probate, estate planning, and guardianship law. She was selected as one of “DVAP’s Finest” for her pro bono volunteer efforts through the Dallas Volunteer Attorney Program; she is a member of the Dallas Bar Association Probate, Trusts, & Estates section; a member of the estates manual committee; and a former co-chair of DAYL Elder Law Committee. Ms. Williamson assists with the creation and delivery of many continuing legal education programs for attorneys and enjoys speaking about estate planning and probate topics for senior groups and others. She earned her J.D. from SMU Dedman School of Law.

The Secure Act | Retirement | Estate Plan

The SECURE Act: Will it Affect Your Retirement Plan?

 A Late 2019 tax change will have a major impact on retirement planning!

The Secure Act | Retirement | Estate Plan

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the “SECURE Act.” Although it passed the House in July, the SECURE Act only recently passed through the Senate on December 19, as part of an end-of-year appropriations act. The SECURE Act implements quite a few technical changes which will affect retirement planning in general.  However, some of the most significant changes will have a direct and very substantial impact on estate planning.

In previous years, a plan participant (i.e. the individual who initially established and funded the IRA) could pass unused IRA assets to a so-called “stretch-IRA” for the benefit of a designated beneficiary (i.e. a person inheriting IRA funds on the participant’s death). The purpose of a stretch IRA was to extend the tax-deferral of the IRA. This would allow the minimum required distributions to be stretched out over many years, thereby increasing the overall tax benefit of the account. Often, participants would establish stretch-IRAs for their young grandchildren, hoping that the minimum required distributions would be based on each grandchild’s age. This would allow more assets to retain tax-deferred status longer and thereby decrease the overall tax burden.  For large IRAs, this decreased tax burden could be very significant.

The SECURE Act rescinds major tax benefits that had been available before 2020. Under the new rules, IRA assets inherited by a designated beneficiary must be distributed within 10 years of the participant’s death. A few exceptions to this rule apply, including surviving spouses, minor children (but not grandchildren), and disabled beneficiaries. The new 10-year distributions rule will apply in most other circumstances. 

Obviously, the loss of the stretch-IRA is important for tax planning purposes, but its significance goes even deeper. For example, when planning for a stretch-IRA, a participant is likely to have established one or more trusts in his or her estate plan. This type of planning would be particularly important where minors (like grandchildren) were expected to be the designated beneficiaries of the IRA.  Often, these trusts directed that no distributions were to be made from the trusts except for the required minimum distributions which would have been required under then-applicable law.  The expectation was that the IRA would be depleted incrementally over years. This would give the beneficiary limited access to the IRA assets with marginal tax impact triggered by each distribution.  Under the new law, however, the (only) required distribution comes at the end of the 10-year period.  Not only does this prevent the beneficiary from enjoying the extended use of the IRA assets, but the lump-sum distribution can have a seriously detrimental tax impact on the beneficiary.

Estate planning around retirement assets has always been complicated. The SECURE Act compounds this complexity. For clients whose planning was carefully tailored to the old regime, significant changes may be needed to avoid a major tax trap.

If you’d like to discuss how your estate plan might be impacted by the SECURE Act, please contact our office to set up a consultation.


Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Taxpayers and Nonprofits Can Have Their Cake and Eat It Too

The increase of the standard deduction under the Tax Cuts and Jobs Act of 2017 (the “TCJA”) is predicted to have a substantial impact on charitable giving. The TCJA doubles the standard deduction for individuals from $6,350 to $12,000, for couples from $12,700 to $24,000, and for heads of household from $9,350 to $18,000.  The increase will discourage most taxpayers from itemizing. When itemizing, taxpayers receive charitable tax deductions for donations made to nonprofits but when taxpayers choose the standard deduction, they are unable to receive any tax benefits for charitable donations. With more taxpayers choosing the standard deduction, taxpayers could be less incentivized to make donations.

The American Enterprise Institute reported there will be a $17.2 billion reduction in charitable donations this year.  The reduction in donations will hinder the ability of nonprofits to carry out their charitable missions.  However, studies like this tend to focus on more traditional charitable giving.  For those who are willing to put in a modest amount of effort, many planning opportunities remain. Taxpayers and nonprofits can still have their cake and eat it too.

Bunching

Two planning opportunities any taxpayer can explore are “bunching” and a Donor Advised Fund.  Bunching is when a taxpayer combines several years’ worth of their charitable donations and donates the collective amount in one year. For example, an individual taxpayer makes a $10,000 donation each year to a nonprofit. With the increase of the standard deduction, the taxpayer will choose the standard deduction, and not be able to realize a tax benefit from his or her $10,000 donation.  However, if the taxpayer were to bunch three years of his or her $10,000 donations into one lump sum, the taxpayer could make a $30,000 donation and exceed the new standard deduction threshold. By exceeding the new threshold, the taxpayer will be able to itemize his or her charitable donation and realize a tax benefit.

Donor Advised Fund

A Donor Advised Fund (a “DAF”) is another planning opportunity for taxpayers. A DAF is a separately identifiable account which holds irrevocable donations by a donor and is managed by a section 501(c)(3) organization. The use of a DAF is similar to bunching. With both options, a taxpayer makes a lump sum donation in one year to exceed the new standard deduction threshold and realize a tax benefit.  However, a DAF offers additional benefits. A DAF allows the donor to retain advisory privileges on how the funds should be distributed and invested.  As a result of those privileges, a donor may choose to distribute his or her donation to a nonprofit or nonprofits over several years. For example, a taxpayer makes the bunched $30,000 donation to his or her DAF account. A taxpayer can choose to advise the 501(c)(3) organization managing the account to make his or her traditional $10,000 donation to a nonprofit for the next three years. Donations in a DAF grow tax-free which means there is more money to donate to nonprofits.  Another benefit a DAF provides is that the 501(c)(3) organization handles the management of the account, reducing the administrative hassle and time commitment on the part of the donor.

Bunching and DAFs are two ways a taxpayer can realize tax benefits for charitable donations under the new tax plan.  Taxpayers wishing to explore these two opportunities or other opportunities should contact appropriate counsel to discuss their particular circumstances and identify the options that are best for them.


Amanda Brenner | Farrow-Gillespie & Heath LLP | Estate Planning

Amanda Brenner‘s primary practice areas are estate planning, business formations, and nonprofit organizations. Ms. Brenner advises clients regarding estate planning; and the formation and operation of nonprofit organizations and private foundations. She graduated from University of Pittsburgh School of Law in 2015.

The IRS’s Trust Fund Recovery Penalty: A Perilous Trap for the Unwary

Under the Internal Revenue Code (the “IRC”), employers must withhold certain taxes from employee pay. These monies are referred to as “trust fund taxes” because they are held in trust on behalf of the government, and employers must turn these withheld amounts over to the government on a regular basis.

For various reasons, employers sometimes fail to remit these trust fund taxes to the government when they are supposed to. For example, struggling businesses facing challenging financial decisions as to which creditors will be paid to keep the business afloat, may fail to pay withheld taxes and instead “borrow” from the government to pay other creditors first. This may be a perilous path not only for the employer but also for individuals within the organization who have decision-making authority. While other creditors may have to rely on veil-piercing concepts to collect the company’s liability from anyone other than the company, the federal government does not.

To allow the IRS to collect, Congress authorized § 6672 of the IRC which allows IRS to collect directly from the personal assets of certain control individuals. As was stated in Wright v. United States, “[t]he statute is harsh, but the danger against which it is directed—that of failing to pay over money withheld from employees until it is too late, because the company has gone broke—is an acute one against which, perhaps, only harsh remedies are availing.” 809 F.2d 425, 428 (7th Cir. 1987).

In a nutshell, § 6672 provides that any person required to collect, account for, and pay any tax imposed under the IRC who willfully fails to do is liable for a penalty equal to the total amount of the unpaid tax. Thus, liability under § 6672 attaches if an individual both (i) qualifies as a “responsible person”; and (ii) “willfully” fails to pay over the amount due.

Section 6672 has been interpreted by the courts quite broadly to encourage individuals to stay abreast of their companies’ withholding and employment taxes. As such, the penalty has ensnared many an unsuspecting charitable board member, officer, bookkeeper, accountant, investor, or other person associated with a taxpaying organization. Thus, it is important for anyone in such a position to bear in mind that their title carries significant risk. Even where such a person is completely non-complicit in the discouraged activity, they may still bear the burden of mounting a legal defense against IRS claims.

It is also important to understand that each such responsible person is liable for 100% of the trust fund recovery penalty. Perhaps the only significant limitation on the IRS’s latitude is that, while it may assess any and all responsible persons until the amount due has been paid, it can collect the tax due only once. Also, IRS claims preempt state law, rendering for example, creditor protections for homestead real property inapplicable.

While the government bears the burden of proving that the taxpayer is a responsible person, taxpayers bear the burden of proving a failure was not willful. Willfulness has been defined as the “voluntary, conscious, and intentional decision to prefer other creditors over the United States.” Ruscitto v. United States, 629 Fed. Appx. 429, 430 (3d Cir. 2015).

Illustration by legal assistant Charles Jackson

The willfulness requirement is satisfied when the responsible person makes the deliberate choice to pay the withheld taxes to other creditors, instead of paying the government. Where the responsible person does not segregate the trust fund taxes but uses them to cover operating expenses (such as employees’ wages and claims of other creditors), each payment may be a voluntary, conscious, and intentional decision to prefer other creditors over the government. This requirement is satisfied with something as simple as making payroll. Thus, in most business scenarios, negating willfulness can present a significant challenge.  Importantly, § 6672 is a civil, and not a criminal, statute. Its criminal analogue, § 7202, requires the additional concept of “known legal duty” to comply with due process of law requirements under the Constitution. However, no such requirement is associated with § 6672, so it is much easier for the government to meet its burden of proof.

To sum up, it is absolutely critical for all control persons within any taxpaying organization (including nonprofits and government entities, which are nonetheless subject to withholding requirements and employment taxes) make themselves aware of applicable deadlines and other procedural requirements. Failure to do so can result in life-altering penalties being assessed against personal assets including homesteads and other property which is generally considered exempt from creditor claims. Could you write a personal check for 100% of your organization’s employment taxes?

If you have questions regarding the Trust Fund Recovery Penalty or are facing other IRS issues, please reach out to FGHW for a consultation.


Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Tax Cuts and Jobs Act | New Tax Law 2017

The Tax Cuts and Jobs Act: What It Means for You

Tax Cuts and Jobs Act | New Tax Law 2017This information is current as of December 27, 2017.

At the request of our clients, we have summarized some of the more important provisions of the sweeping new tax law (“TCJA”), which was signed into effect on December 22, 2017.  Please note that all of these provisions are subject to interpretation by the Internal Revenue Service.  We will not know the true effect of the law until the IRS publishes regulations in the coming years.

These changes do not affect the tax return that you will file next year for 2017.  The changes will take effect with the tax return you file in 2019 for tax year 2018.

We cannot emphasize enough that this new tax law marks the biggest change to our tax system since the 1980s.  Your individual tax situation and your company’s tax situation may have changed dramatically.

To understand fully how the new tax law will affect your particular circumstances, you should consult your tax professionals.  In particular, everyone who owns or operates a business should make an appointment with the company’s tax professionals early in 2018 to consult on the effect of the new tax law.  To the extent those recommendations affect the company’s structure, corporate legal advice should also be sought before any changes are made.

However, here is an executive summary of a few things that you should think about doing now, meaning before December 31, 2017; or that you should think about doing very early next year.

Income Tax For Individuals

Tax Rates

The new law keeps a seven-bracket structure, but cuts tax rates in five of those brackets, and generally raises the threshold for each higher bracket. The top bracket — for individuals earning more than $500,000 per year, and married couples earning more than $600,000 per year – will be 37% in 2018, down from 39.6% in 2017.

Suggestion: To the extent possible, defer acceptance or recognition of income to 2018.

Standard Deduction

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, it’s increased from $12,700 to $24,000. The net effect of that change is that fewer taxpayers will itemize their deductions, because many more taxpayers will be better off taking the standard deduction instead.

Suggestion: If you think you may not itemize next year on your personal tax return, consider making this year’s and next year’s contributions to charity by December 31, 2017, to get the itemized deduction benefit now.

Suggestion:  If you have been thinking about donating an old car or other property to charity, consider doing it by December 31, 2017 to get the itemized deduction benefit now.

Personal Exemption

Gone.  Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents.  The new law eliminates the tax savings from those personal exemptions.

Property Tax and Sales Tax

Beginning in 2018, the deduction you can claim for property taxes and sales taxes will be limited to a total of $10,000.

Suggestion: Make sure you pay 2017 and prior property taxes by December 31, 2017.  These are the property taxes for which you already have a bill from the county tax assessor-collector.

Suggestion: Consider prepaying your 2018 home property taxes by December 31, 2017, if your county allows you to do so.  These are property taxes for which you do not yet have a bill, so you would have to estimate the correct amount.  We have confirmed that Dallas County allows prepayment of an estimated amount.  The county clerk requests that taxpayers clearly indicate 2018 prepayments on the check’s memo line, along with the property account number.

NOTE on Prepaying 2018 Property Taxes:   The IRS has now come out saying it will disallow deductions for property tax 2018 pre-payments on the theory that the tax has not yet been levied.  Many  advisers are saying that the IRS’s position does not comply with the language of the new law.  The TCJA expressly disallows prepaid income tax (which of course does not apply to Texas, because Texas does not have state income tax), but does not disallow prepaid property tax.  The argument is that if Congress had intended to disallow prepaid property tax, it could have done so with the same few words it used to disallow prepaid state income tax — ergo, Congress did not intend to disallow prepaid property tax.  The short answer is that nobody knows at this time whether prepaying your 2018 property tax will save you money, or will cause you more trouble than it’s worth.

For more information, please consult the IRS advisory opinion.  Most news sources are carrying articles on this issue, including the Dallas Morning News.

Suggestion: If you are contemplating a large purchase that is subject to sales tax (such as a car, RV, boat, aircraft, etc.), consider making that purchase by December 31, 2017, to maximize the deductibility of the sales tax.

Charitable Deductions

For those who itemize, the new law allows taxpayers to deduct contributions to public charities of up to 60% of their income, rather than limiting deductions to 50% of income.

Child Tax Credit

The new law doubles the child care credit to $2,000 per child under 17, and is available at higher income levels.

Mortgage Interest Deduction

Beginning in 2018, you may deduct the interest paid on new home mortgage loans of only $750,000 or less.  If you bought your home before December 15, 2017, you will still be able to deduct the interest on up to $1M of mortgage loan.  Experts are currently in disagreement whether a taxpayer may allocate some or all of the $750,000 to a vacation home, or whether vacation home mortgage interest is no longer deductible.

HELOC Interest Deduction

Gone.  Interest paid on a home equity loan is no longer deductible.

Alternative Minimum Tax

The alternative minimum tax (AMT) remains in effect.

Student Loans

If you have student loans, you may continue to deduct up to $2,500 per year in interest.

Medical Expenses

For 2018, you may deduct medical expenses to the extent they exceed 7.5% of your income.  For 2017, that threshold was 10% for most people.  This tax break for medical expenses will expire in 2019, and the threshold will return to the current level.

Suggestion:  If you are planning to have an expensive, uninsured medical procedure, 2018 is a good year financially to do so.

Health Insurance Mandate/Penalty

The tax bill repeals the “individual mandate” to purchase health insurance, effective for the 2019 tax year.  The mandate remains for 2018, so the economic effect of the repeal will not be known for several years.  However, the Congressional Budget Office estimates that, by 2027, 13 million fewer Americans will have health insurance, and that, because fewer healthy people will apply for insurance, health insurance premiums will increase as the pool of applicants consists of sicker people.  The brunt of premium increases will be felt primarily by families of four who make more than $98,000 per year.

Electric Car Credit

Drivers of plug-in electric vehicles can still claim a credit of up to $7,500.  Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.

529 Savings Accounts

If you have been making contributions to a tax-free 529 savings account for the next generations, you may use that money, beginning in 2018, for elementary and secondary school costs, as well as for higher education costs.

Alimony

If you pay alimony pursuant to a divorce that is final after December 31, 2018, the amount will no longer be deductible.

Moving Expenses

Moving expenses for job relocation will no longer be deductible.

Estate Tax for Individuals

The new tax law doubles the amount of money exempt from the gift and estate tax, which in 2017 was $5.49M per person.  Each individual can now give away, during lifetime and/or at death, $11.2M without incurring the estate tax.  Amounts in excess of $11.2M that an individual gives away during lifetime or at death will be taxed at the current rate of 40%.  This increase in the exemption will expire in 8 years, at which time the exemption amounts will return to $5.6M per person.

Income Tax for Businesses

Corporate Tax Reduction

The new law cuts the tax rate for C-Corporations from 25% to 21%, starting in 2018, and eliminates the Alternative Minimum Tax for corporations.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently an S-Corp or LLC with relatively high revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect C-Corp taxation status.

Suggestion:  Look to see where you can save money on tax, as it is important your business is making the highest profit possible. Click here for advice on where you can save tax within your business, ensuring your business is meeting the relevant tax charges and codes.

Pass-Through Entity Tax Reduction

The new law provides a 20% deduction to owners of certain S-Corporations, LLCs, partnerships, and sole proprietorships.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently a C-Corp with relatively low revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect S-Corp taxation status or to convert to an LLC.

Multi-National Company Tax Breaks

The U.S. is switching to a territorial system of taxation, which means companies will not owe federal taxes on income they make offshore. To take advantage of this long-term benefit, companies will be required to pay a one-time tax on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.

Sexual Harassment Payments

Beginning in 2018, companies can no longer deduct any settlements, payouts, or attorney’s fees related to sexual harassment claims if the payments are subject to non-disclosure agreements.

Suggestion:  If you are contemplating settlement of such a claim, consider closing the deal by December 31, 2017.

1031 “Like Kind” Exchanges

Nontaxable exchanges of appreciated property for similar property will now be limited to real estate only.  Trades of other types of property will be treated as sales and will trigger capital gains tax.

Suggestion: If you are contemplating a 1031 exchange of art or other personal or business property that has appreciated in value, consider completing that exchange by December 31, 2017 to avoid a capital gains tax in 2018.

Income Tax for Nonprofit Organizations

Standard Deduction Effect on Charitable Donations

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, the standard deduction has increased from $12,700 to $24,000. The net effect of that change is that more taxpayers will take the standard deduction rather than itemize their deductions. Because a taxpayer must itemize deductions to be able to deduct charitable contributions, fewer taxpayers will be able to deduct charitable contributions from their taxes.  To the extent that a donor is motivated in whole or in part by the deductibility of his or her contribution, the donor is arguably less likely to give to nonprofit organizations.  Generally speaking, 501(c)(3) organizations may see a decrease in donations by middle-income individuals.

501(c)(3) Deduction AGI Limit Increase

For those donors who do itemize, the new law allows taxpayers to deduct contributions to public charities totaling up to 60% of their income, rather than limiting those deductions to 50% of income.

Highly Paid Executives

The new law imposes a 21% tax on certain nonprofits that pay a salary above $1M to an executive.

Unrelated Business Income (UBI)

Unrelated Business Income, or UBI, refers to certain types of income for which a nonprofit must pay taxes, even though the organization is tax-exempt.  The new law prevents nonprofits from setting off losses in one stream of UBI against gains from another stream of UBI.  To know how the various “streams” of UBI will be defined, nonprofits must wait for the IRS to issue its regulations.  Suffice to say, though, that the IRS will be looking closely at UBI in the coming years.

Suggestion:  Nonprofits should consider an organizational audit in 2018 to ensure that they are accounting for UBI correctly.

Employee Benefits

The value of certain previously nontaxable employee benefits, including parking, transportation, and on-site athletic facilities, will be subject to Unrelated Business Income Tax beginning with the first pay period of 2018.

Donations Tied to Collegiate Season Tickets

Donations to a college or university to obtain the right to buy season tickets to sporting events are no longer deductible.

Private Foundations

The new law does not significantly affect taxation of private foundations.

Christian Kelso | Estate Planning | 663(b) distributions

It’s Time to Make Your 663(b) Trust and Estate Distributions!

Trusts and estates often pay more tax than individuals in like circumstances.  This is not because they are taxed at higher rates, but rather because the same rates applicable to individuals are “compressed,” meaning that each marginal rate increase happens at a lower level of income than it does for individuals.  For example, the highest rate of income tax for both trusts and individuals for 2016 was 39.6%, but whereas this rate only applies to income over $415,050 for single individual filers, for trusts and estates, this rate applies to all income over $12,400.  Other tax burdens, such as the 3.8% Net Investment Income Tax (a/k/a the “Obamacare Tax”) and higher rates of capital gains tax follow suit along similar lines.  Obviously, these add up to a significant potential tax burden.

Fortunately, there is a way to mitigate this tax burden.  Trusts and estates may take a deduction for “distributable net income,” which is generally the amount of income that is distributed from the trust to a beneficiary.  When this happens, the income is effectively shifted from the trust to the beneficiary, who simply adds it to their personal return and pays at whatever rate is applicable to them (including the distributed trust income, of course).

Since large amounts of unnecessary tax can be avoided by shifting income to beneficiaries in this manner, it is common practice for trustees to make distributions for this purpose, assuming, of course, that such distributions are permissible and proper under the terms of the trust.  But there is a problem:  How does the trustee know how much income to distribute from a given trust before the close of a given tax year?  Unfortunately, it is impossible, to know exactly how much income a trust has until after the tax year has closed, at which point, it’s too late to distribute all the income.

Enter IRC §663(b).  Under this special provision, a trust or estate may elect to treat any distribution made within the first 65 days of a given tax year as having been made on December 31 of the previous year.  In other words, the trustee gets 65 days after the actual close of the year to calculate how much income should have been distributed and then actually make that distribution.  The trustee then makes an election on the trust or estate’s income tax return (Form 1041) and voila, the problem is solved!

Although §663(b) distributions may provide a significant benefit, the can also represent a significant danger to trustees.  On the one hand, any distribution from a trust should only be made if and to the extent it is proper under the terms of the trust.  Even if such a distribution is permissible, it may not be in the best interests of a given beneficiary, as taxes are only one of many considerations.  On the other hand, a §663(b) distributions can save a significant amount of tax, so failing to make such a distribution, if permitted, could subject a trustee to liability for waste.

Making the right decision requires careful analysis.  The fiduciary attorneys at Farrow-Gillespie & Heath, LLP are well-versed with the applicable law and have the practical experience to understand the nuanced process that is involved with make the right decision.  If we can help you with this, please don’t hesitate to call.

The trust and estate planning attorneys at Farrow-Gillespie Heath Witter LLP, located in downtown Dallas, serve all of your trust and estate planning needs, including:

  • Estate planning for small estates
  • Estate planning for large, taxable estates
  • Trust review and modification
  • Trust and estate administration
  • Trust litigation
  • Will contests
  • Probate
  • Heirship proceedings
  • Guardianships

Family Governance Arrangements: Putting the SUCCESS into Succession Planning

It is a little known fact among us mere mortals, but the über-rich have a trick for both keeping the peace in their families and preserving their vast fortunes. They engage in something called family governance planning. Most of us are unfamiliar with this concept although those working in family law like for example Goodman Ray Solicitors should understand what this means, however it’s not difficult to grasp on a fundamental level. Put simply, family governance has two parts: First, it involves identifying and agreeing on specific goals which a family can actively pursue. Second, it involves establishing rules by which those goals will be pursued and what each family member will contribute in the furtherance of that pursuit. In other words, family governance charts a course for the family unit and provides clarity and transparency among and between the individual family members so that they can function more cohesively as a group.

I. The Problem. Most families fail to conduct any family governance planning whatsoever. In fact, most families do exactly the opposite. Rather than discussing openly the nature and extent of their bounties, most family heads in America will actively hide details about their wealth from their children and other family members. And their loved ones often pay for it in the form of costly legal disputes, intra-familial discord and lasting, emotionally-charged feuds.

Why do we do this? Well, there are two major obstacles, one or both of which may impact a given situation. First, discussing wealth is taboo. We all know that it is distasteful to discuss wealth publically, but the problem is that too many of us take the rule too far. Discussing wealth in a private setting with close family is not taboo. Second, discussing wealth is hard. If one is to have a proper discussion about their wealth with family, they need to arrange a meeting, collect all sorts of information and come up with an agenda. One also needs to know what to say, what questions to ask and how to listen to other family member’s input. All of this is labor-intensive and emotionally charged. Fortunately, however, there is quite a bit of help available, from books for those who want to educate themselves to professionals available to provide direct guidance.

Family governance seeks to minimize negativity by addressing some or all of the following:

  1. Expectations regarding wealth;
  2. Caring for elderly family members;
  3. Employment within the family business;
  4. Investment and management of family assets;
  5. Procedures for resolving grievances;
  6. Spousal issues;
  7. Enfranchisement and training of younger generations; and
  8. Charitable giving.

Different families will apply family governance strategies to varying degrees depending on a number of factors, such as size of the family, relative ages of the family members, assets held by the family, status of existing family relationships and quite a few more. Thus, every structure is necessarily bespoke and it is usually quite helpful to have a professional guide who can provide guidance, technical clarity and an unbiased third-party perspective.

II. The Tools. There are many forms that family governance can take. At the highest levels, comprehensive family governance planning may include some or all of the following:

  1. Regular family assemblies;
  2. Family mission statement;
  3. Family constitution;
  4. Formalized narrative of family history and traditions;
  5. Family counsel tasked with dispute resolution;
  6. Various committees (i.e. Investment, Education, Administrative, Charitable, etc…); and
  7. Trustees.

Typically, larger, wealthier families will employ more of these components while families of more modest means will employ less. At a minimum, however, regular (usually annual) family assemblies are necessary to identify the extent to which various components are needed and flesh them out. These assemblies (which in certain circumstances can even be deductible for income tax purposes) often take the form of a family vacation or reunion where participants are encouraged to both work and play.

III. The Program. A typical family assembly agenda might look like this:

A. Set the tone and talk family history. A family assembly will usually begin with an initial session to set the tone for the assembly, as well as the goals and ground rules. Steps should be taken to avoid disillusionment by family members because participation by all relevant players is crucial. Therefore, the patriarch or other organizer should avoid talking down to the other family members and focus instead on listening to the others’ thoughts and opinions. That said, it should be clear from the start that the purpose of a family assembly is not to voice grievances, assign blame or point fingers. Rather the focus should be on moving forward towards a common goal. At the end of the day (or weekend or week), the primary goal should be for everyone in the family to be “on the same page” about family business, relationships and expectations.

After setting the initial tone and ground rules, the family may benefit from some exercise designed to promote what the military calls “unit cohesion.” That is, a discussion designed to get the family pumped up about its own history and traditions. Discussions of family heritage, retelling of family lore and recognition of individual accomplishments (i.e. since the last family assembly), may help motivate the family to proceed with the work ahead. The family should also acknowledge the extent to which it was able to meet its goals as set out in the previous family assembly.

B. Review mission statement. At this point, the family mission statement should be restated and evaluated. Note that this is done before the new goals are set out because the adoption of new goals will be guided by the family mission statement. That is, goals that do not fit within the mission statement probably should not be adopted.

Often times, this discussion is best had over dinner with a little (but not too much) drink. It also provides an opportune time to incorporate and educate spouses. Remember, the directive to have fun at a family assembly is just as important as the conduct of business.

C. Get to business. The next step is to report on the status of family affairs and set expectations. This will often be the point at which the patriarch does the most talking. He or she should describe with appropriate specificity the outlay of the family’s assets and liabilities. An accurate description of his or her estate plan is also germane to this part of the meeting and should be made in front of all relevant family members with complete transparency. The implications, tax and otherwise, of any estate planning techniques should also be explained to each expectant beneficiary so that they can have clear expectations of what is to come and avoid being blind-sided by confusing legal jargon and unintended consequences when the time finally comes.

When discussing his estate plan, a patriarch should make sure to declare his intentions regarding how beneficiaries are to enjoy their inheritance and put them on notice of any restrictions on the use of property. Clarity with regard to the enjoyment of property held in trust can go a long way to reduce friction between beneficiaries and trustees. Thus, the patriarch should state whether he or she intends for future generations to enjoy the estate assets liberally, as a nest egg, or only as a safety cushion. Some mention should also be made regarding the ability of spouses to benefit from the estate. Finally, there will almost always be tax-based restrictions placed on assets held in trust. These along with any others (for example promoting certain behaviors) should be made clear.

Of course, end-of-life planning is ancillary to any discussion of estate planning, and depending on how things play out, may be just as important, if not more so. Modern medicine makes it increasingly likely that each of us will need extensive care, often for a number of years before we die. Not only is this care labor-intensive, it is incredibly expensive and emotionally draining on family. By setting out a plan before incapacity, we can greatly reduce these burdens on our loved ones. To this end, we might want to discuss i) the nature and extent of the care we might need, ii) the expected costs and how they will be covered, as well as iii) how specific family members might participate in assisting with such care and the extent, if any, to which they should be compensated for their efforts. Remember that caring for a loved one can be a full-time job in and of itself. Also, caregivers who are able to maintain regular employment may have to reduce their hours, pass up promotions and otherwise sacrifice in ways that are financially burdensome, so compensation will often be appropriate.

The estate and end-of life planning portion of a family assembly may be the most difficult for the patriarch. As mentioned above, discussing wealth remains extremely taboo in our society and nobody wants to think about a slow decline towards the inevitable. However, in controlled circumstances, these discussions can literally save future generations from ruin, so it may be helpful to view openness as a lesser evil. One way to mitigate apprehension in this regard is to set clear expectations for family members’ keeping the discussion confidential. Also, clear policies for when and how such information may be brought up with younger family members will likewise provide comfort. In any event, a balance must be drawn between the need to promote family unity and the desire to avoid embarrassment (or worse) if details are made public.

D. Setting goals for moving forward. Once family members have been apprised of the family’s overall status, they can go about setting goals for the future. This may be a tricky part of the program, because family members may not understand what options are available as family goals or the extent to which their eventual achievement might be realistic. But this part can also be the most fun because it affords the individual family members the opportunity to think creatively and plan with hope in their hearts about the future. The nature and extent of the particular goals will vary widely from family to family. Within a family, the goals will likely change over time as well. To the extent there is a large family business, a stronger focus on business objectives will be needed. These might include some discussion of:

  1. Goals relating to growth;
  2. Acquisition or divestiture of assets;
  3. Development of new products or services;
  4. Employee matters (including hiring family members, spouses or others); and
  5. Tax matters.

Other families, however, might focus more attention on personal goals such as:

  1. Family members’ education (i.e. high school, college and/or professional degrees);
  2. Identifying charitable beneficiaries to support;
  3. Family members’ personal goals (i.e. weight loss, writing a book or promotion at work); and
  4. Setting standards for the care of elderly or disabled family members.

Setting goals necessarily requires the family to assess its own definition of success. Some measures of success can be objective. For example, determining an amount the family intends to give to charity may be straightforward. On the other hand, success may also manifest itself more as a path than a destination. That is, the continuance educational goals developing new familial relationships (i.e. through marriage or the birth of children) are more subjective.

E. The plan of attack. Once the goals have been laid out, the family can map out a path to success. Typically, they will do this by first brainstorming ideas for achieving their goals and then by developing (and memorializing) clear steps each will agree to take in furtherance of each goal.

There are a few keys, however, to doing this effectively. First, larger tasks must be broken down into progressively smaller ones until they become realistically achievable for the individuals responsible for their completion. Thus, the creative gives way to the practical. Also, it is important that all family members are encouraged to avoid creating work for others. Some families have rules effectively stating that the person who mentions some new task should be in charge of seeing to it that the task, if adopted, is completed.

Second, it is very important to avoid disenfranchising any family member. The input of all family members, once they meet certain general criteria, should be valued. Thus, the tasks assigned to younger family members will be very different than those assigned to older family members, but they should not be described in terms that portray relatively less value. For example, a family may choose to enfranchise children at age 16. At that age, however, the child’s primary focus should be finishing high school with the best possible grades and beginning the next phase of life (be that military service, technical school, college or something else). While young family members may work at the family business in the summer, they will not be responsible for the successful deployment of the new marketing push for the coming fall. Similarly, adult family members with diminished capacity or those who simply are not interested in participating in the family business should be provided with some opportunity to contribute, no matter how trivial that contributions might seem. This is because the very essence of family is promoted by each individual’s opportunity to contribute and their ability to “own” some task.

Third, it is absolutely critical that deadlines be placed on each step of the plan. Like it or not, it is a reality of human nature that the road to hell is often paved with good intentions. A family will have done itself no good if it fails to implement the plan, however masterful it may have seemed when laid out. By providing deadlines, individual family members can be motivated to take the necessary steps towards realizing the family’s stated goals. Of course, the deadlines (like the individual steps themselves) must be realistic. This may take several attempts to get right—that is, several years’ worth of family assemblies—so families should not allow themselves to be put off by this. Rather they should adjust their expectations accordingly. And to the extent possible, individual family members should avoid criticism of others who missed their deadlines. Giving a family member less responsibility for the coming year because failed to meet deadlines in the past is criticism enough for most.

F. Review and revise documents. After setting out the path towards achieving its goals, the family may wish to revisit operational documents and procedures and amend or adjust as needed. Are the nepotism rules for the family business sill relevant and just? Does the constitution adequately address methods for resolving conflict? Does the policy for loaning money to family members need adjustment? Likewise, appointments to the family council and any committees should be made at this time. Note that this may not be something that all family members at the assembly participate in. Depending on the particular family’s circumstances, this may be the exclusive purview of the family council.

G. Here’s to us! The final agenda item for most family assemblies is to recognize a job well done by all. It can be hard work to map out the family’s year, so thanks and congratulations all round are in order, particularly if and to the extent that the family has been able to conduct its business peacefully and on schedule.

IV. Tailoring the Plan. Obviously, not every family will follow the exact plan laid out above, but it is illustrative as to how family governance can be implemented. Some families may wish to adopt a paired down version of this plan while others may wish to add to it. For example, workshops can be added to help keep up to date with market trends or other matters relevant to the family business, as well as legal, tax, financial, insurance and other matters.

Regardless of how the family governance is implemented, it is very important that the family continues to meet periodically. Most families will choose to meet annually, but bi-annual or quarterly meetings are also standard. Less frequent meetings, however, may not provide the necessary continuity or guidance. Indeed, a lot can happen in a year!

To the extent that family assemblies are deductible, they can also provide a patriarch with an excellent avenue for shifting wealth. In other words, a family assembly is not much different than a corporate retreat, so they provide an opportunity to give family members something nice (a trip) without any estate or gift tax consequence.

Also, the importance of seeking professional assistance cannot be overstated. A third-party facilitator provides numerous benefits. First, they can make arrangements for the family assemblies by coordinating with family members, booking hotel rooms, securing meeting spaces, preparing agendas and much more. Next, facilitators provide unbiased perspective to aid in the decision-making process. To this end, they can provide guidance with developing family goals, as well as breaking tasks down into achievable parts. Similarly, they can help keep the family on track. Family assemblies can easily devolve into chaos without someone who is willing and able to provide the requisite guidance. Furthermore, a facilitator can assume the role of the “bad guy” and help avoid negativity between family members. Finally, a professional facilitator may have the experience and specialized knowledge to provide clarity and answer questions regarding legal and other matters. Not only will this help promote realistic expectations, but it will also provide the patriarch an opportunity to communicate his or her thoughts and feelings without being the one who is actually talking. In other words, it affords the opportunity to talk without the appearance of talking down.

V. Pairing Down. Successful families of means use family governance to achieve their goals and preserve wealth. This can be a very involved (and therefore expensive) prospect. Fortunately, however, the same principles developed by and for the very rich can also be adapted for families of more modest means. By seeking the guidance of a professional to help develop a family governance plan and facilitating family assemblies, the family can compound the benefit derived.

VI. Fact-based example. While the benefits of goal-setting in the family business context may be easier to grasp, an example will illustrate how family governance can provide great benefits in other areas as well:

Assume Family consists of Dr. Patriarch (a successful physician), Mrs. Matriarch (a homemaker), Junior (an MBA working for a large corporation), Daughter (an art history major working as a docent at a local museum) and Baby (a high-school senior trying to decide on the right college). Assume that Family has a net worth of $7mm. At their annual family assembly in the Texas Hill Country, Junior expresses a desire to strike out on his own doing the same thing he has been doing at his large company. Similarly, Daughter expresses her desire to write a book about art collections of Upper Bavarian monasteries in the mid-1290’s. Baby, on the other hand is debating whether or not to attend an expensive private school or a state school. Finally, Mrs. Matriarch has joined the board of prestigious local charity that raises money for medical research.

At their assembly, the family might determine it will lend Junior the funds he needs to start his business and the specific terms on which that loan will be made (and repaid). The family might also determine to purchase equity in the new company.

Additionally, the family may agree to support Daughter by encouraging her to meet set deadlines for certain portions of her book. In this manner, they can increase Daughter’s motivation to accomplish her goals. She is less likely let herself down if doing so would also mean letting her loved ones down. Finally, the family might agree to hold their next family assembly in the Bavarian Alps, as it would be relevant to Daughter’s work.

Next, since all the family members are together, they will all be able to provide guidance to Baby with regard to his college decision. Also, the financial impact of his final decision will be out in the open for everyone to see. If Baby decides to attend the expensive, private college, it may be appropriate for him to enter into a loan agreement with Patriarch to cover the additional tuition, particularly if the other two children attended significantly less expensive schools.

Regarding charitable activities, the family can determine an appropriate amount that it will give away in the coming year. They might further agree that Mrs. Matriarch’s charity will be the charitable recipient and that they will purchase a table at the charity’s annual gala large enough for all the family members (along with a spouse or date)

VII. Conclusion. Family governance provides clarity of purpose, guidance for achieving specified goals and unity among family members. At the end of the day, this translates into increased family happiness. Of course, both time and money must be invested, but the rewards will generally exceed the costs by a wide margin. After all, what price can a family put on its own happiness?

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Read about author Christian S. Kelso

Angela Hunt Assists Aldredge House to Keep Doors OPen

Forming a 501c3: The “Texas Three-Step”

Individuals and families may establish a 501c3 tax-exempt charitable organization to accomplish substantive philanthropy while receiving very favorable tax treatment. The degree of maintenance such an organization requires depends whether the organization can be classified as a public charity or is instead a private or family foundation.

Either way, forming a 501c3 is a three-step process.

Step One: Form the Organization

A charitable organization must be formed as a corporation in the state in which it is to be located. Many states, including Texas, have a special corporate form called a “nonprofit corporation,” which the organization is required to use be able to qualify for tax-exempt status. Special provisions must be included in the Articles of Formation.

Formation of a nonprofit corporation in Texas is less expensive than formation of a business corporation. To register the entity with the state, the filing fee is only $25.

Step Two: Obtain Federal Tax-Exempt Status from the IRS

Formation as a nonprofit organization does not automatically make the organization tax-exempt. For the organization’s income to be tax-free, and for donations to be tax-deductible to the donor, another step must occur. The organization must file for tax-exempt status with the IRS.  The application for tax-exempt status (Form 1023) is a comprehensive application for which legal assistance is usually desired. Small organizations may qualify for the new, simpler application (Form 2012-EZ) that was introduced in 2014. Most organizations with anticipated annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible for the shorter application.

Step Three: Obtain State Tax-Exempt Status from the State of Formation

After an organization receives its tax-exemption letter from the IRS, a final step remains. The state in which the organization was incorporated must be notified of the IRS tax-exempt status. Most states, including Texas, have a streamlined process for obtaining state tax-exempt status once the IRS has approved federal tax-exempt status.

For a consultation on forming or administering a nonprofit organization or charitable foundation, contact us at (214) 361-5600 or email info@fghwlaw.com

Employment Law | Farrow-Gillespie & Heath LLP

Affordable Care Act Information for Employers

The Affordable Care Act is a federal statute that creates new responsibilities for employers. Employers who have fewer than 25 “full-time equivalent” employees can qualify for a small business health care tax credit if they pay at least 50% of the employees’ health insurance premium costs and offer coverage through the Small Business Health Options Program (“SHOP”) Marketplace. Larger employers face new requirements to insure their employees—and steep penalties, should they fail to comply with the requirements. In 2015, employers with 100 or more full-time equivalent (“FTE”) employees must offer coverage to 70% of those employees and their dependents. And beginning in 2016, all employers with 50 or more FTE employees must offer coverage to 95% of those employees and their dependents.

For an employer to determine whether it comes within these new requirements, the employer must first calculate its number of full-time equivalent (“FTE”) employees. Each employee who works 30 hours or more per week, over at least 120 days per year, is a full-time employee. But hours worked by part-time employees also add to the FTE number; if, for example, five part-time employees work a total of 60 hours per week, their employer would need to add two FTE employees to its total. Notably, affiliated companies may be treated as a single employer under the Act.  As a result, three companies each having 20 FTE employees could either: 1) qualify for small business health care tax credits, if they are treated as three separate employers; or 2) be subject to the employer coverage mandate, if they are sufficiently connected to be treated as a single employer.  It is therefore particularly important that companies who share ownership or control, or who otherwise coordinate their business activities, consult with counsel to determine their employer status under the ACA.

Once an employer confirms that it is subject to the employer mandate, it has more decisions to make. For each year that the employer does not offer any insurance coverage to its employees, it will face a $2,000 penalty per FTE, minus the first 30 employees (or, in 2015, minus the first 80 employees). To avoid such penalties, the employer should offer its employees an “affordable” plan that provides “minimum value” under the ACA. These calculations are complex. Generally, “minimum value” requires that the employer pays at least 60% of the plan’s costs, and “affordable” requires that an employee’s premiums cost no more than 9.5% of his or her household income. If the employer’s plan is deemed to not provide minimum value, or to not be affordable, the employer will be fined $3,000 for any full-time employees who receive federal premium subsidies for marketplace coverage. Some employers may, nevertheless, opt for “skinny plans” that may not meet the required minimum essential coverage under the Act, but which will avoid the $2,000-per-employee penalty and reduce coverage costs.

For more information about how the Affordable Care Act may affect your business, please contact board-certified health care attorney Scott Chase or employment lawyer Julie Heath.

Probate Law | Farrow-Gillespie & Heath LLP

The Probate Process for a Valid Texas Will

The Executor of a Will has the responsibility of submitting the Will for probate. Under the rules of the probate courts, an individual desiring to probate a Will must be represented by an attorney; and the attorney must appear in court on behalf of the executor of the will whenever a court appearance is required. The first steps an Executor should take are (1) finding the Will and putting it in a secure place; and (2) contacting a probate attorney.

If a Texas Will properly provides for an Independent Representation, the role of the probate court (and thus the expense to the estate) is minimized — and the procedure is quick and easy. If the Will is in order, and no will contest is filed, the Will can be probated in as little as two or three weeks, at a fixed fee.

Assuming that there is no will contest or other significant delay or complexity, the usual procedure for probate and administration of a valid Texas will naming an independent executor is as follows:

  1. As your attorneys, we file the original will and an application for probate with the probate court.
  2. A 10-day waiting period ensues while the court publishes notice that the will has been filed.
  3. After the 10-day waiting period, a hearing is held on the application for probate.
  • The Executor of the will (or someone close to the decedent whom the Executor designates) must accompany us to the hearing.
  • If the will is being probated in Dallas County, the hearing is held on the 2nd Floor of the Records Building, on the corner of Main Street and Houston, in downtown Dallas.
  • The Executor must testify as to the date of death and other facts.  We will go over the testimony with the Executor in advance of the hearing, and we will answer any questions that the Executor has about the hearing or any other aspect of probate.
  • To serve as Executor, a person must not be
    • a legally incapacitated person;
    • a convicted felon;
    • a non-resident of Texas, unless the person appoints a resident agent in this State; or
    • a person whom the court finds unsuitable.
  1. The Executor must sign the Executor’s Oath, which will be notarized and filed with the court clerk.
  2. After the hearing and the filing of the Oath, the court clerk will issue “Letters Testamentary.” The Letters Testamentary are certified documents that serve as authority for the Executor to do everything that must be done – e.g., transfer title to property, access bank and brokerage accounts, sell assets, distribute cash and other assets to the beneficiaries, etc. — to administer the estate.
  3. We will send the following notices; and we will then file with the court clerk proof that the notices were sent:
  • Mandatory published notice (in the Daily Commercial Record) to general unsecured creditors.
  • Mandatory notice by certified mail, and a copy of the will, to each of the named beneficiaries.
  • Mandatory notice by certified mail to each secured creditor, such as mortgage holders.
  1. The Executor must arrange for a final tax return to be filed for the decedent, and possibly for a tax return to be filed on behalf of the estate. We can recommend a CPA for those tasks, if you do not already have one who is experienced in filing estate returns, or we can do the returns ourselves, as you prefer.
  2. The Executor must contact all insurance companies with which the decedent held life insurance policies, and all institutions at which the decedent held retirement accounts, to ascertain whether the proceeds are probate assets or non-probate assets. We will do these tasks for you if you prefer; and we can advise how to distribute the proceeds from these assets.
  3. The Executor is responsible for making a written Inventory of the estate. We can assist in this process to whatever degree the Executor prefers.
  4. In the event the deceased person owed money to creditors, and the creditors file a valid claim with the Executor, the Executor must pay those valid claims out of the estate’s funds.
  5. After the Inventory is completed and filed (or an affidavit of completion and delivery is filed instead), and valid creditors are paid, the Executor must proceed to carry out the terms of the will.  The Executor may need to sell certain assets, but in any event, the Executor must transfer and distribute all of the bequests to the named beneficiaries. We can assist you in that process at an hourly charge, including drafting any deed transfers or other documents that are necessary. Once Letters Testamentary are obtained in an Independent Representation, no permission from or involvement by the court is necessary to sell any of the assets, or to distribute the bequests. However, the Executor should keep good records of every transaction; and in some estates, it is a good idea to obtain receipts and releases from each beneficiary as his or her distribution is completed.
  6. Once the terms of the will are satisfied, the process is complete. Nothing further needs to be filed with the court.
Liza Farrow-GIllespie | Farrow-GIllespie & Heath LLP | Dallas, TX

New Simpler 501c3 Application for Small Charities

In July 2014, the Internal Revenue Service introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

The new Form 1023-EZ is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Previously, all groups — regardless of size — went through the same lengthy application process regardless of size. This process created long delays for all organizations seeking to receive tax-exempt status.

According to the IRS: “The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. . . . We believe that many small organizations will be able to complete this form without creating major compliance risks.”

A reduced fee accompanies the streamlined application.  Whereas larger groups required to use the standard Form 1023 must pay a filing fee of $850, smaller groups entitled to use Form 1023-EZ must pay only $400. For either application, the fee is due at the time application is made.

For more information on charitable organizations, call us at 214-361-5600 or contact info@fghwlaw.com.