BLOG
IRS issues final regulations on inherited IRAs
The IRS has published new regulations relevant to taxpayers subject to the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. The final regs, which take effect in 2025, require many beneficiaries to take annual RMDs in the 10 years following the deceased’s death.
SECURE Act ended stretch IRAs
The genesis of the new regs dates back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the many changes in that tax law was the elimination of so-called “stretch IRAs.”
Previously, all beneficiaries of inherited IRAs could stretch RMDs over their entire life expectancies. Younger heirs in particular benefited by taking smaller distributions for decades, deferring taxes while the accounts grew. These heirs also could pass on the IRAs to later generations, deferring the taxes even longer.
The SECURE Act created limitations on which heirs can stretch IRAs. These limits are intended to force beneficiaries to take distributions and expedite the collection of taxes. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) are permitted to stretch out payments over their life expectancies. The following heirs are considered eligible for this favorable treatment:
Surviving spouses,
Children younger than “the age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.
All other heirs (known as designated beneficiaries) are required to take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) of his or her RMDs.
Note: In 2023, under another law, the age at which account owners must begin taking RMDs increased from 72 to 73, pushing the RBD date to April 1 of the year after the account owner turns 73. The age is slated to jump to 75 in 2033.
Proposed regs muddied the waters
In February 2022, the IRS issued proposed regs addressing the 10-year rule — and they brought some bad news for many affected heirs. The proposed regs provided that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. A lump-sum distribution at the end of 10 years wouldn’t be allowed.
The IRS soon heard from confused taxpayers who had recently inherited IRAs or defined contribution plans and didn’t know when they were required to start taking RMDs. Beneficiaries could have been hit with a penalty based on the amounts that should have been distributed but weren’t. This penalty was 50% before 2023 but was lowered to 25% starting in 2023 (or 10% if a corrective distribution was made in a timely manner). The plans themselves could have been disqualified for failing to make RMDs.
As a result, the IRS issued a series of waivers on enforcement of the 10-year rule. With the release of the final regulations, the waivers will come to an end after 2024.
Final regs settle the matter
The IRS reviewed comments on the proposed regs suggesting that if the deceased began taking RMDs before death, the designated beneficiaries shouldn’t be required to continue the annual distributions as long as the remaining account balance is fully distributed within 10 years of death. The final regs instead require these beneficiaries to continue receiving annual distributions.
If the deceased hadn’t begun taking his or her RMDs, though, the 10-year rule is somewhat different. While the account has to be fully liquidated under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.
To illustrate, let’s say that a designated beneficiary inherited an IRA in 2021 from a family member who had begun to take RMDs. Under the waivers, the beneficiary needn’t take RMDs for 2022 through 2024. The beneficiary must, however, take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031. Had the deceased not started taking RMDs however, the beneficiary would have the flexibility to not take any distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, the beneficiary would be in compliance.
Additional proposed regs
The IRS released another set of proposed regs regarding other RMD-related changes made by SECURE 2.0, including the age when individuals born in 1959 must begin taking RMDs. Under the proposed regs, the “applicable age” for them would be 73 years.
They also include rules addressing:
The purchase of an annuity with part of an employee’s defined contribution plan account,
Distributions from designated Roth accounts,
Corrective distributions,
Spousal elections after a participant’s death,
Divorce after the purchase of a qualifying longevity annuity contract, and
Outright distributions to a trust beneficiary.
The proposed regs would take effect in 2025.
Timing matters
It’s important to realize that even though RMDs from an inherited IRA aren’t yet required, that doesn’t mean a beneficiary shouldn’t take distributions. If you’ve inherited an IRA or a defined contribution plan and are unsure of whether you should be taking RMDs, contact us. We’d be pleased to help you determine the best course of action for your tax situation.
© 2024
Beware these 5 estate planning pitfalls
If you’re taking your first steps on your estate planning journey, congratulations! No one likes to contemplate his or her mortality, but having a plan in place can provide you and your loved ones peace of mind should you unexpectedly become incapacitated or die. Here are five basic pitfalls you’ll want to avoid:
Pitfall #1: not coordinating different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them to be components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.
Pitfall #2: failing to update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities, life insurance policies and other accounts. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.
Pitfall #3: not properly funding trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated, which will expose them to public inspection and subject them to delays. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.
However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.
Pitfall #4: mistitling assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.
Not only is titling assets critical, you should review these designations periodically. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.
Pitfall #5: not reviewing your plan on a regular basis. It’s critical to consider an estate plan as a “living” entity that must be nourished and sustained. Don’t allow it to gather dust in a safe deposit box or file cabinet. Consider the impact of major life events such as births, deaths, marriages, divorces, and job changes or relocations, just to name a few.
To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to us. We can help ensure that you’ve covered all the estate planning bases.
© 2024
Could a 412(e)(3) retirement plan suit your business?
When companies reach the point where they’re ready to sponsor a qualified retirement plan, the first one that may come to mind is the 401(k). But there are other, lesser-used options that could suit the distinctive needs of some business owners. Case in point: the 412(e)(3) plan.
Nuts and bolts
Unlike 401(k)s, which are defined contribution plans, 412(e)(3) plans are defined benefit plans. This means they provide fixed benefits under a formula based on factors such as each participant’s compensation, age and years of service.
For 2024, the annual benefit provided by 412(e)(3)s can’t exceed the lesser of 100% of a participant’s highest three-year average compensation or $275,000. As with other defined benefit plans, 412(e)(3)s are funded only by employers. They don’t accept participant contributions.
But unlike other defined benefit plans, which are funded through a variety of investments, 412(e)(3)s are funded with annuity contracts and insurance. In fact, the IRS refers to them as “fully insured” plans. The name “412(e)(3)” refers to Section 412(e)(3) of the Internal Revenue Code, which authorizes the plan type’s qualified status.
Under Sec. 412(e)(3), defined benefit plans funded with annuity contracts and insurance aren’t subject to minimum funding requirements — so long as certain conditions are met. Companies sponsoring these plans don’t have to make annual actuarial calculations or mandatory contributions. However, they risk penalties if a plan’s insurer doesn’t satisfy certain obligations. In other words, the plan needs to be safely insured.
Potential benefits
Some experts advise relatively older business owners who want to maximize retirement savings in a short period to consider 412(e)(3)s because of the way defined benefit plans differ from defined contribution plans. That is, business owners who sponsor and participate in defined benefit plans can take a bigger share of the pie — particularly if they have few, if any, highly compensated employees. Meanwhile, they can also enjoy substantial tax deductions for plan contributions.
In addition, 412(e)(3)s may be more attractive than other defined benefit plans for some small business owners. Although they tend to sacrifice potentially higher investment returns, these plans offer greater flexibility by using potentially lower-risk and easy-to-administer annuity contracts and insurance. They might also appeal to closely held business owners who want to maximize tax-deductible contributions to a retirement plan in the early years of ownership.
As is the case with all defined benefit plans, however, sponsors must have the financial stability to support their plans indefinitely. So, 412(e)(3)s usually aren’t appropriate for start-ups.
Administrative requirements
Tax-favored treatment for 412(e)(3)s isn’t automatic. These plans must meet various requirements as spelled out in the tax code.
For example, as mentioned, 412(e)(3)s must be funded exclusively by the purchase of annuity contracts or a combination of annuity contracts and insurance. Sponsors must buy the contracts and/or insurance from insurers licensed by at least one of the 50 states or the District of Columbia.
Also, the contracts must provide for level annual (or more frequent) premium payments starting on the date each participant joins the plan. Premium payments need to end no later than the normal retirement age of a participant — or by the date the individual ceases participation in the plan, if earlier.
These are just a couple examples of the rules involved. It’s critical to fully understand all the requirements before sponsoring a plan.
An intriguing possibility
A 412(e)(3) plan may be an under-the-radar choice for some businesses under the right circumstances. For help choosing the best plan for your company, contact us.
© 2024
A self-directed IRA can benefit your estate plan — but know the risks
Traditional and Roth IRAs can be powerful estate planning tools. With a “self-directed” IRA, you may be able to amp up the benefits of these tools by enabling them to hold alternative investments that offer potentially greater returns.
However, self-directed IRAs may present pitfalls that can lead to unfavorable tax consequences. Therefore, you need to handle these vehicles with care.
Alternative investments
Unlike traditional IRAs, which typically offer a limited menu of stocks, bonds and mutual funds, self-directed IRAs can hold a variety of alternative investments that may offer the potential to earn higher returns. The investments can include real estate, closely held business interests, commodities and precious metals. Bear in mind that they can’t hold certain assets, including S corporation stock, insurance contracts and collectibles (such as art or coin collections).
From an estate planning perspective, self-directed IRAs have considerable appeal. Imagine transferring real estate or closely held stock with substantial earnings potential to a traditional or Roth IRA and allowing it to grow on a tax-deferred or tax-free basis for the benefit of your heirs.
Risks and tax traps
Before taking action, it’s critical to understand the significant risks and tax traps involved with self-directed IRAs. For example:
The prohibited transaction rules restrict dealings between an IRA and disqualified persons, including you, close family members, businesses that you control and your advisors. This makes it difficult, if not impossible, for you or your family to manage, work for, or have financial dealings with business or real estate interests held by the IRA without undoing the IRA’s tax benefits and triggering penalties.
IRAs that invest in operating companies may generate unrelated business income taxes, which are payable currently out of an IRA’s funds.
IRAs that invest in debt-financed property may generate unrelated debt-financed income, creating a current tax liability.
Proceed with caution
If you’re considering a self-directed IRA, determine the types of assets in which you’d like to invest and carefully weigh the potential benefits against the risks. Contact us with any questions.
© 2024
SECURE 2.0: Which provisions went into effect in 2024?
The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law in December 2022, bringing more than 90 changes to retirement plan and tax laws. Many of its provisions are little known and were written to roll out over several years rather than immediately taking effect.
Here are several important changes that went into effect in 2024:
Pension-Linked Emergency Savings Accounts (PLESAs). More than half of U.S. adults would turn to borrowing when confronted by an emergency expense of $1,000 or more, according to a Bankrate survey — a figure that has held steady for years. In response, SECURE 2.0 contains provisions related to emergency access to retirement savings, including PLESAs. PLESAs are defined contribution plans designed to encourage workers to save for financial emergencies.
Beginning this year, employers can offer PLESAs linked to employees’ retirement accounts, with the PLESA treated as a Roth, or after-tax, account. Non-highly-compensated employees can be automatically enrolled with a deferral of up to 3% of compensation but no more than $2,500 annually (indexed for inflation) — or less if the employer chooses. Employees can make qualified withdrawals tax- and penalty-free. Employers must allow at least one withdrawal per month, with no fee for the first four per year.
Starter 401(k) plans. SECURE 2.0 creates a new kind of retirement plan for employers not already sponsoring a qualified retirement plan, called a starter 401(k). Employers must automatically enroll all employees at a deferral rate of at least 3% of compensation but no more than 15%. The maximum annual deferral is $6,000 (indexed for inflation), plus the annual IRA catch-up contribution of $1,000 for those age 50 or older. No actual deferral percentage (ADP) or top-heavy testing of the plan is required, reducing the compliance and cost burden for employers.
Employers can impose age and service eligibility requirements, and employees may elect out. They also can choose to contribute at a different level. Employer contributions aren’t allowed, so less record keeping is required.
Top-heavy rules. Defined contribution plans that are considered “top-heavy” must make nonelective minimum contributions equal to 3% of a participant’s compensation. This can represent a significant expense for small employers. Top-heavy plans are those where the aggregate of accounts for key employees exceeds 60% of the aggregate accounts for non-key employees.
Starting in 2024, employers can perform the top-heavy test separately on excludable employees (those who are under age 21 and have less than a year of service) and non-excludable employees. The goal is to eliminate the incentive for employers to exclude employees from the plan to avoid the minimum contribution obligation.
SIMPLE IRAs. SECURE 2.0 boosts the annual Savings Incentive Match Plans for Employees (SIMPLE) IRA and SIMPLE 401(k) deferral limit and the catch-up limit to 110% of the 2024 contribution limits (indexed for inflation) for employers with 25 or fewer employees. Employers with 26 to 100 employees can offer the higher deferral limits if they provide a 4% matching contribution or a 3% employer contribution.
Employers now can make additional contributions to each employee in the plan, as well. Additional contributions must be made in a uniform manner and can’t exceed the lesser of up to 10% of compensation or $5,000 (indexed for inflation) per employee.
Early withdrawal exceptions. SECURE 2.0 allows penalty-free early withdrawals from qualified retirement plans for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Employees have three years to repay such withdrawals; no additional emergency withdrawals are permitted during the three-year repayment period, except to the extent that any previous withdrawals within that period have been repaid. The withdrawals are otherwise limited to once per year.
Victims of domestic abuse by a spouse or partner also are exempt from early withdrawal penalties for the lesser of $10,000 (indexed for inflation) or 50% of their vested account balances. The law’s detailed definition of domestic abuse includes abuse of a participant’s child or another family member living in the same household. Withdrawals can be repaid over a three-year period, and participants can recover income taxes paid on repaid distributions.
Note: An early withdrawal penalty exception for terminally ill individuals took effect in 2023.
Employer-provided student loan relief. Younger employees with large amounts of student debt have sometimes missed out on their employer’s matching contributions to retirement plans. SECURE 2.0 tackles this catch-22 by allowing these employees to receive matching contributions based on their qualified student loan payments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. Note that contributions based on student loan payments must be made available to all match-eligible employees.
Section 529 plan rollovers. Beginning this year, owners of certain 529 plans can transfer unused funds intended for qualified education expenses directly to the plan beneficiary’s Roth IRA without incurring any federal tax or the 10% penalty for nonqualified withdrawals.
A beneficiary’s rollover amount is limited to a lifetime maximum of $35,000, and rollovers are subject to the applicable Roth IRA annual contribution limit. Rollover amounts can’t include contributions made to the plan in the previous five years, and the 529 account must have been maintained for at least 15 years.
Required minimum distributions (RMDs). Designated Roth 401(k) and 403(b) plans provided by employers have been subject to annual RMDs in the same way that traditional 401(k)s are. As of 2024, though, the plans aren’t subject to RMDs until the death of the owner.
Act now
Many employers need to amend their plans due to changes related to SECURE 2.0. Fortunately, they generally have until the end of 2025 to make these amendments as long as they comply by the law’s deadlines. Contact us for additional details.
© 2024
Undue influence claims may upend your estate plan
One of the goals in creating a comprehensive estate plan is to maintain family harmony after your death. Typically, with an estate plan in place, you have the peace of mind that your declarations will be carried out, as required by law. However, if someone is found to have exerted “undue influence” over your final decisions, a family member may challenge your will.
Defining “undue influence”
Undue influence is an act of persuasion that overcomes the free will and judgment of another person. It’s important to recognize that a certain level of influence is permissible, so long as it doesn’t rise to the level of “undue” influence. For example, there’s nothing inherently wrong with a son who encourages his father to leave him the family vacation home. But if the father was in a vulnerable position — perhaps he was ill or frail and the son was his caregiver — a court might find that he was susceptible to undue influence and that the son improperly influenced him to change his will.
To help avoid undue influence claims and ensure that your wishes are carried out:
Use a revocable trust. Rather than relying on a will alone, create a revocable, or “living,” trust. These trusts don’t go through probate, so they’re more difficult and costly to challenge.
Establish competency. Claims of undue influence often go hand in hand with challenges on grounds of lack of testamentary capacity. Be sure to create your estate plan while you’re in good mental and physical health. Have a physician examine you at or near the time you execute your will and other estate planning documents to ascertain that you’re mentally competent. Establishing that you are “of sound mind and body” when you sign your will can go a long way toward combating an undue influence claim.
Avoid the appearance of undue influence. If you reward someone who’s in a position to influence you, take steps to avoid the appearance of undue influence. Suppose, for example, that you plan to leave a substantial sum to a close friend who acts as your primary caregiver. To avoid a challenge, prepare your will independently — that is, under conditions that are free from interference by all beneficiaries. People who’ll benefit under your estate plan, including family members, shouldn’t be present when you meet with your attorney. Nor should they serve as witnesses — or even be present — when you sign your will and other estate planning documents.
Talk with your family. If you plan to disinherit certain family members, give them reduced shares or give substantial sums to nonfamily members, meet with your family to explain your reasoning. If that’s not possible, state the reasons in your will or include a separate letter expressing your wishes. Family members are less likely to challenge your plan if they understand the rationale behind it.
To deter challenges to your plan, consider including a no-contest clause, which provides that, if a beneficiary challenges your will or trust unsuccessfully, he or she will receive nothing. Keep in mind, however, that you should generally leave something to people who are likely to challenge your plan; otherwise, they have nothing to lose by contesting it.
Fortifying your estate plan
If you have questions regarding undue influence, contact us. We’d be pleased to review your circumstances and help determine if revisions to your estate plan are needed.
© 2024
How family businesses can solve the compensation puzzle
Every type of company needs to devise a philosophy, strategy and various policies regarding compensation. Family businesses, however, face additional challenges — largely because they employ both family and non-family staff.
If your company is family-owned, you’ve probably encountered some puzzling difficulties in this area. The good news is solutions can be found.
Perspectives to consider
Compensation issues in family businesses are often two-pronged because they can arise both 1) within the family and 2) between family and nonfamily employees. Salary inequities among siblings, for example, can breed resentment and fighting. However, simply paying them all the same salary can also create problems if one works harder and contributes more than the others.
Second, family business owners may feel it’s their prerogative to pay working family members more than their nonfamily counterparts — even if they’re performing the same job. Although owners naturally have the best interests of their loved ones at heart, these decisions may inadvertently lower morale among essential nonfamily employees and risk losing them.
Nonfamily staff may tolerate some preferential treatment for family employees, but they could become disgruntled over untenable differences. For instance, nonfamily employees often reach a breaking point when they feel working family members are underperforming and getting away with it, or when they believe family employees are behaving counterproductively or unethically.
Ideas to ponder
Effectively addressing compensation in a family business calls for a clear, objective understanding of the company’s distinctive traits, culture and strategic goals. A healthy dash of creativity helps, too. There’s no one right way of handling the matter. But there are some commonly used strategies that may be helpful in determining compensation for the two major groups involved.
When it comes to family employees, think beyond salary. Many family businesses intentionally keep salaries for these individuals low and make up the difference in equity. Because working family members are generally in the company for the long haul, they’ll receive increasing benefits as their equity shares grow in value. But you also must ensure their compensation is adequate to meet their lifestyle needs and keep up with inflation.
Incentives are usually a key motivator for family employees. You might consider a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward.
On the other hand, nonfamily employees typically recognize that their opportunities for advancement and ownership are generally more limited in a family business. So, higher salaries and a strong benefits package can be important to attracting and retaining top talent.
Another way to keep key nonfamily staff satisfied is by giving them significant financial benefits for staying with the company long term. There are various arrangements to consider, including phantom stock or nonqualified deferred compensation plans.
You can do it
If your family business has been operating for a while, overhauling its approach to compensation may seem overwhelming. Just know that there are ways to tackle the challenges objectively and analytically to arrive at an overall strategy that’s reasonable and equitable for everyone. Our firm can help you identify and quantify all the factors involved.
© 2024
An HSA can be a healthy supplement to your wealth-building regimen
Health Savings Accounts (HSAs) allow eligible individuals to lower their out-of-pocket health care costs and federal tax bills. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if you’re eligible.
Not only can an HSA be a powerful tool for financing health care expenses, it can also supplement your other retirement savings vehicles. Plus, it offers estate planning benefits to boot.
HSAs by the numbers
Similar to a traditional IRA or 401(k) plan, an HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. (Withdrawals for nonqualified expenses are taxable and, if you’re under 65, subject to a penalty.)
An HSA must be coupled with a high-deductible health plan (HDHP). For 2024, an HDHP is a plan with a minimum deductible of $1,600 ($3,200 for family coverage) and maximum out-of-pocket expenses of $8,050 ($16,100 for family coverage).
Be aware that, to contribute to an HSA, you must not be enrolled in Medicare or covered by any non-HDHP insurance (a spouse’s plan, for example). For 2024, the annual contribution limit for HSAs is $4,150 for individuals with self-only coverage and $8,300 for individuals with family coverage.
If you’re 55 or older, you can add another $1,000 annually. Typically, contributions are made by individuals, but some employers contribute to employees’ accounts.
Cost-saving benefits
HSAs can lower health care costs in two ways: 1) by reducing your insurance expense (HDHP premiums are substantially lower than those of other plans) and 2) allowing you to pay qualified expenses with pretax dollars.
In addition, any funds remaining in an HSA may be carried over from year to year and invested, growing on a tax-deferred basis indefinitely. This is a huge advantage over health care Flexible Spending Accounts, where the funds must be spent or forfeited (although some employers permit employees to carry over up to $500 per year). When you turn 65, you can withdraw funds penalty-free for any purpose (although funds that aren’t used for qualified medical expenses are taxable).
To the extent that HSA funds aren’t used to pay for qualified medical expenses, they’re treated much like those in an IRA or a 401(k) plan.
Estate planning benefits
Unlike traditional IRA and 401(k) plan accounts, with HSAs you don’t need to take required minimum distributions once you reach age 73. Besides funds used to pay qualified medical expenses, the account balance continues to grow on a tax-deferred basis indefinitely, providing additional assets for your heirs. The tax implications of inheriting an HSA differ substantially depending on who receives it, so it’s important to consider your beneficiary designation.
If you name your spouse as beneficiary, the inherited HSA will be treated as his or her own HSA. That means your spouse can allow the account to continue growing and withdraw funds tax-free for his or her own qualified medical expenses.
If you name your child or someone else other than your spouse as beneficiary, the HSA terminates and your beneficiary is taxed on the account’s fair market value. It’s possible to designate your estate as beneficiary, but in most cases that’s not the best choice. A non-spouse beneficiary other than your estate can avoid taxes on any qualified medical expenses that you incurred prior to death, paid with HSA funds within one year after death.
Contact us for more information regarding HSAs.
© 2024
Could conversational marketing speak to your business?
Businesses have long been advised to engage in active dialogues with their customers and prospects. The problem was, historically, these interactions tended to take a long time. Maybe you sent out a customer survey and waited weeks or months to gather the data. Or perhaps you launched a product or service and then waited anxiously for the online reviews to start popping up.
There’s now a much faster way of dialoguing with customers and prospects called “conversational marketing.” Although the approach isn’t something to undertake lightly, it could help you raise awareness of your brand and drive sales.
Concept and goal
The basic concept behind conversational marketing is to strike up real-time discussions with customers and prospects as soon as they contact you. You’re not looking to give them canned sales pitches. Instead, you want to establish authentic social connections — whether with individuals or with representatives of other organizations in a business-to-business context.
The overriding goal of conversational marketing is to accelerate and enhance engagement. Your aim is to interact with customers and prospects in a deeper, more meaningful way than, say, simply giving them a price list or rattling off the specifications of products or services.
In accomplishing this goal, you’ll increase the likelihood of gaining loyal customers who will generate steady or, better yet, increasing revenue for your business.
Commonly used channels
The nuts and bolts of conversational marketing lies in technology. If you decide to implement it, you’ll need to choose tech-based channels where your customers and prospects most actively contact you. Generally, these tend to be:
Your website. The two basic options you might deploy here are chatbots and live chat. Chatbots are computer programs, driven by artificial intelligence (AI), that can simulate conversations with visitors. They can either appear immediately or pop up after someone has spent a certain amount of time on a webpage. Today’s chatbots can answer simple questions, gather information about customers and prospects, and even qualify leads.
With live chat, you set up an instant messaging system staffed by actual humans. These reps need to be thoroughly trained on the principles and best practices of conversational marketing. Their initial goal isn’t necessarily to sell. They should first focus on getting to know visitors, learning about their interests and needs, and recommending suitable products or services.
Social media. More and more businesses are actively engaging followers in comments and direct messages on popular platforms such as Facebook, Instagram and Tik Tok. This can be a tricky approach because you want responses to be as natural and appropriately casual as possible. You don’t want to sound like a robot or give anyone the “hard sell.” Authenticity is key. You’ll need to carefully choose the platforms on which to be active and train employees to monitor those accounts, respond quickly and behave properly.
Text and email. If you allow customers and prospects to opt-in to texts and emails from your company, current AI technology can auto-respond to these messages to answer simple questions and get the conversation rolling. From there, staff can follow up with more personalized interactions.
A wider audience
Like many businesses, yours may have already been engaging in conversational marketing for years simply by establishing and building customer relationships. It’s just that today’s technology enables you to formalize this approach and reach a much wider audience. For help determining whether conversational marketing would be cost-effective for your company, contact us.
© 2024
Assets with sentimental value may require more thoughtful planning than those with greater monetary value
As a formal estate planning term, “tangible personal property” likely won’t elicit much emotion from you or your loved ones. However, the items that make up tangible personal property, such as jewelry, antiques, photographs and collectibles, may be the most difficult to plan for because of their significant sentimental value.
Without special planning on your part, squabbling among your family members over these items may lead to emotionally charged disputes and even litigation. Let’s look at a few steps you can take to ease any tensions surrounding these specific assets.
Communicate clearly
There’s no reason to guess which personal items mean the most to your children and other family members. Create a dialogue to find out who wants what and to express your feelings about how you’d like to share your prized possessions.
Having these conversations can help you identify potential conflicts. After learning of any disputes, work out acceptable compromises during your lifetime.
Bequeath assets to specific beneficiaries
Some people have their beneficiaries choose the items they want or authorize their executors to distribute personal property as they see fit. For some families, these approaches may work. But more often than not, they invite conflict.
Generally, the most effective strategy for avoiding costly disputes and litigation over personal property is to make specific bequests — in your will or revocable trust — to specific beneficiaries. For example, your will might leave your art collection to your son and your jewelry to your daughter.
Specific bequests are particularly important if you wish to leave personal property to a nonfamily member, such as a caregiver. The best way to avoid a challenge from family members on grounds of undue influence or lack of testamentary capacity is to express your wishes in a valid will executed when you’re “of sound mind.”
If you use a revocable trust (sometimes referred to as a “living” trust), you must transfer ownership of personal property to the trust to ensure that the property is distributed according to the trust’s terms. The trust controls only the property you put into it. It’s also a good idea to have a “pour-over” will, which provides that any property you own at your death is transferred to your trust. Keep in mind, however, that property that passes through your will and pours into your trust generally must go through probate.
Create a personal property memorandum
Spelling out every gift of personal property in your will or trust can be cumbersome. If you wish to make many small gifts to several different relatives, your will or trust can get long in a hurry.
Plus, anytime you change your mind or decide to add another gift, you’ll have to amend your documents. Often, a more convenient solution is to prepare a personal property memorandum to provide instructions on the distribution of tangible personal property not listed in your will or trust.
In many states, a personal property memorandum is legally binding, provided it’s specifically referred to in your will and meets certain other requirements. You can change it or add to it at any time without the need to formally amend your will. Alternatively, you may want to give items to your loved ones while you’re still alive.
Plan for all your assets
Your major assets, such as real estate and business interests, are top of mind as you prepare your estate plan. But don’t forget to also plan for your tangible personal property. These lower-monetary-value assets may be more difficult to deal with, and more likely to cause disputes, than big-ticket items.
© 2024
Making will revisions by hand is rarely a good idea
The laws regarding the execution of a valid will vary from state to state, but typically they require certain formalities. These may include signing the will in the presence of witnesses and a notary public.
But what happens if, after your will and other estate planning documents are completed, you need to make a change? Perhaps you’ve welcomed a new grandchild to the family or need to change the way your assets are distributed.
To avoid the time and expense associated with formally updating your will, it may be tempting to simply make the change by hand and initial it. But this is almost always a bad idea. For one thing, handwritten changes are highly susceptible to a challenge, which may result in a protracted probate court battle. So much for saving time and money. Even worse, depending on the law in your state, handwritten changes may not be binding.
Many states permit so-called “holographic wills.” These handwritten wills are valid if they meet certain requirements. Typically, the maker of the will must write the will by hand and sign and date it. Some states permit handwritten changes to a typewritten will if the changes meet all the requirements of a holographic will. That means each change must be handwritten, signed and dated. In other states, handwritten changes must satisfy the same formalities (such as witnesses and notarization) as for typewritten wills.
To ensure that your estate planning goals are carried out, discuss your needs with your attorney and avoid the temptation to make handwritten changes.
© 2024
Businesses must face the reality of cyberattacks and continue fighting back
With each passing year, as networked technology becomes more and more integral to how companies do business, a simple yet grim reality comes further into focus: The cyberattacks will continue.
In fact, many experts are now urging business owners and their leadership teams to view malicious cyber activity as more of a certainty than a possibility. Why? Because it seems to be happening to just about every company in one way or another.
A 2023 study by U.K.-based software and hardware company Sophos found that, of 3,000 business leaders surveyed across 14 countries (including 500 in the United States), a whopping 94% reported experiencing a cyberattack within the preceding year.
Creating a comprehensive strategy
What can your small-to-midsize business do to protect itself? First and foremost, you need a comprehensive cybersecurity strategy that accounts for not only your technology, but also your people, processes and as many known external threats as possible. Some of the primary elements of a comprehensive cybersecurity strategy are:
Clearly written and widely distributed cybersecurity policies,
A cybersecurity program framework that lays out how your company: 1) identifies risks, 2) implements safeguards, 3) monitors its systems to detect incidents, 4) responds to incidents, and 5) recovers data and restores operations after incidents,
Employee training, upskilling, testing and regular reminders about cybersecurity,
Cyber insurance suited to your company’s size, operations and risk level, and
A business continuity plan that addresses what you’ll do if you’re hit by a major cyberattack.
That last point should include deciding, in consultation with an attorney, how you’ll communicate with customers and vendors about incidents.
Getting help
All of that may sound a bit overwhelming if you’re starting from scratch or working off a largely improvised set of cybersecurity practices developed over time. The good news is there’s plenty of help available.
For businesses looking for cost-effective starting points, cybersecurity policy templates are available from organizations such as the SANS Institute. Meanwhile, there are established, widely accessible cybersecurity program frameworks such as the:
National Institute of Standards and Technology’s Cybersecurity Framework,
Center for Internet Security’s Critical Security Controls, and
Information Systems Audit and Control Association’s Control Objectives for Information and Related Technologies.
Plug any of those terms into your favorite search engine and you should be able to get started.
Of course, free help will only get you so far. For customized assistance, businesses always have the option of engaging a cybersecurity consultant for an assessment and help implementing any elements of a comprehensive cybersecurity strategy. Naturally, you’ll need to vet providers carefully, set a feasible budget, and be prepared to dedicate the time and resources to get the most out of the relationship.
Investing in safety
If your business decides to invest further in cybersecurity, you won’t be alone. Tech researcher Gartner has projected global spending on cybersecurity and risk management to reach $210 billion this year, a 13% increase from last year. It may be a competitive necessity to allocate more dollars to keeping your company safe. For help organizing, analyzing and budgeting for all your technology costs, including for cybersecurity, contact us.
© 2024
Conservation easements are under IRS scrutiny
For many years, conservation easements have been a powerful estate planning tool that enable taxpayers to receive income and estate tax benefits while continuing to own and enjoy the properties. So it’s no surprise that the IRS has been scrutinizing easements to ensure they meet tax code requirements. The tax agency has even issued a warning that some of the transactions are “bogus tax avoidance strategies.”
Curbing abusive arrangements
A conservation easement is a restriction on the use of real property. It involves an arrangement to permanently restrict some or all of the development rights associated with a property. The easement is granted to a conservation organization — usually a government agency or qualified charity — by executing a deed and recording it in the appropriate public records office. The organization is responsible for monitoring the property’s use and enforcing the easement.
In a legitimate transaction, a taxpayer can claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets tax code requirements. The IRS explains that “in abusive arrangements, promoters are syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested.” The tax agency added “these abusive arrangements, which generate high fees for promoters, attempt to game the tax system with grossly inflated tax deductions.”
As part of recent legislation, an easement-related provision changed the tax code to curb certain abusive conservation easement transactions. The IRS announced it “is committed to ensuring compliance with the conservation easement deduction law as amended and will continue to keep an eye on transactions that are ‘too good to be true.’”
A guide for auditors
To assist auditors examining tax returns, the IRS has a Conservation Easement Audit Technique Guide (ATG). The fact that the ATG is more than 100 pages demonstrates how complex the transactions are and how serious the IRS is about uncovering abusive arrangements.
The ATG explains that to qualify for tax benefits, an easement must be granted exclusively for one of the following purposes:
To preserve land for public recreation or education,
To protect a relatively natural habitat of fish, wildlife or plants,
To preserve open spaces, either for the public’s “scenic enjoyment” or according to a governmental conservation policy that yields a “significant public benefit,” or
To preserve a historically important land area or a certified historic structure.
It’s critical for an easement to be carefully drafted so there’s no confusion about which land uses are given up and which are retained.
Tax benefits
For estate tax purposes, a percentage of the land’s value (up to certain limits) can be excluded from a gross estate (in addition to any reduction in value resulting from the easement). Certain other limitations apply.
For income tax purposes, a qualified transaction entitles a taxpayer to deduct the easement’s value (defined as the difference between the property’s fair market value before and after the easement is granted) as a charitable gift. The deduction is subject to the same limitations that apply to other charitable donations. Conservation easements valued over $5,000 must be supported by a qualified appraisal.
Common errors
The ATG identifies common mistakes when making donations. They include:
Use of improper appraisal methodologies and overvalued easements,
Failure to comply with substantiation requirements, and
Failure to restrict development of the land in perpetuity, allowing the easement to be abandoned or terminated.
If you’re contemplating a conservation easement, know that the IRS is scrutinizing them. Work with tax, legal and valuation professionals to stay out of IRS trouble and avoid losing valuable tax benefits.
© 2024
8 key features of a customer dispute resolution process for businesses
No matter how carefully and congenially you run your business, customer disputes will likely happen from time to time.
Some of the complaints may be people looking to negotiate a discount, “game the system” or even outright defraud you. But others could be legitimate complaints arising from mistakes on your company’s part, technological glitches or, perhaps worst of all, fraudulent actions by a third party.
Whatever the case may be, you can protect your business’s reputation and even strengthen its brand by creating and maintaining an effective customer dispute resolution process that includes eight key features:
1. Easily accessible channels of communication. Post easy-to-find and clearly written directions on your website, social media accounts and other channels detailing how customers can report problems, suspected errors and fraud on their accounts. The directions should include up-to-date contact info for your company and identify any forms or documentation required. Also provide a succinct description of your dispute resolution process, so customers know what to expect.
2. An efficient timeline. Naturally, it’s imperative to respond as quickly as possible to customer concerns or complaints. Today’s technology allows businesses to immediately send automated replies confirming receipt of the customer’s message and assuring the sender that you’re investigating. If the matter appears legitimate, you can follow up with a resolution timeline stating the next steps in the process.
3. Empathy and understanding. Train employees to listen patiently and acknowledge to customers the inconvenience of potential errors or fraud on their accounts. Remind customer-facing staff to keep open minds and not automatically assume any customer is making a false report.
4. Rigorous investigatory techniques. Thoroughly investigate disputes to ascertain root causes. Precisely how you should do so will depend on the nature of your industry and operations, as well as the specifics of the complaint.
To ensure consistency and build a robust document trail, however, require employees performing investigations to first gather all available account information and transaction records. Investigators should also carefully preserve emails and other electronic messages, as well as record or transcribe phone conversations with complaining customers and, if applicable, other involved parties.
5. Strong data protection. Your business should already have up-to-date cybersecurity safeguards in place to prevent data breaches and identity theft. But your customer dispute resolution process should include additional layers of protection. For example, apply “the principle of least privilege,” which means, in this case, only authorized employees directly involved in investigations have access to pertinent data.
6. Transparency and proactive follow-ups. Keep customers informed throughout the entire process. Don’t “leave them hanging” and wait for them to follow up with you. Provide them with regular updates on investigations and inform them of outcomes as soon as they’re available.
7. Timely resolution. If a dispute is found to be in the customer’s favor, quickly make the necessary corrections — such as refunds or account adjustments. Also consider providing a temporary discount, free replacement items or complementary services. Many companies also issue an apology, though you may want to consult your attorney on the language.
If you deny a claim, provide a detailed explanation of the evidence and your reasoning. Consider allowing some customers to appeal decisions not in their favor by submitting supplemental information.
8. Documentation and analysis with an eye on continuous improvement. Last, be sure to continually learn from incidents. Retain records of all customer disputes and fraud claims to identify patterns and trends. Use this data to improve your internal controls and investigatory processes, make decisions on technology upgrades, and train customer-facing teams. By doing so, you may be able to prevent disputes in the future or at least lessen their frequency.
© 2024
When providing for your children, one trust may be better than two
One of the most effective ways to provide for your children in your estate plan is to set up trusts for them. Trusts offer many benefits, including the flexibility of when and how to make distributions, protection of assets from beneficiaries’ creditors and protection of assets from being divided as part of a beneficiary’s divorce. They may also help protect the funds from depletion by a beneficiary with a substance abuse problem, a gambling addiction or bad spending habits.
Many parents’ estate plans call for their assets to be split into equal shares and used to fund a separate trust for each child. But, depending on your circumstances, it may be preferable to pool your assets into a single “pot” trust.
Fair isn’t necessarily equal
Parents generally want to avoid “playing favorites,” so separate trusts appeal to their sense of fairness. But “fair” and “equal” aren’t necessarily the same thing. Think about how you use your funds now. If one of your children has a specific need — whether it’s college tuition, medical care or something else — it’s likely that you’ll pay for it without feeling any pressure to spend the same amount on your other children.
View your estate plan in the same light: Fairness means providing for your children’s needs, regardless of whether you distribute your assets equally.
For example, suppose you have two children, Stella and Lucy, ages 23 and 18, respectively. Stella recently graduated from college and Lucy is about to start. You’ve already spent more than $200,000 on Stella’s tuition and other college expenses. If you were to die tomorrow, and your estate plan divides your wealth equally between Stella and Lucy, Stella will come out ahead. That’s because she already received the benefit of $200,000 in college expenses. Lucy, on the other hand, will need to tap her trust fund to pay for college.
Consider a pot trust
A pot trust can be a great way to continue meeting your children’s individual needs and avoid giving one child a windfall, like Stella received in the example above. As the name suggests, you pool assets into a single trust and give the trustee full discretionary authority to distribute the funds among your children according to their needs.
Essentially, a pot trust allows the trustee to spend your money the way you would if you were alive. If one of your children has substantial education expenses or medical bills, the trustee has the authority to cover them, even at the expense of your other children’s inheritances.
For many families, a pot trust makes sense when children are relatively young and are likely to have differing needs that can change dramatically over time. If appropriate, your plan can call for the pot trust to be divided into separate trusts for each child at some point in the future — for example, when the youngest child reaches age 21, 25 or some other milestone.
Choose your trustee carefully
For a pot trust to be effective, it’s critical to choose your trustee — as well as a backup trustee — carefully. As with any type of trust, your trustee should be trustworthy and impartial and have the skills necessary to manage the trust assets. But for a pot trust, it’s particularly important for the trustee to have the ability to communicate effectively with the beneficiaries.
Because distributions depend on each beneficiary’s unique needs, the trustee must understand those needs, as well as your objectives for the trust, and be able to explain the reasoning behind his or her decisions to all the beneficiaries. Contact us with questions regarding a pot trust.
© 2024
B2B businesses need a cohesive strategy for collections
If your company operates in the business-to-business (B2B) marketplace, you’ve probably experienced some collections challenges.
Every company, whether buyer or seller, is trying to manage cash flow. That means customers will often push off payments as long as possible to retain those dollars. Meanwhile, your business, as the seller, needs the money to meet its revenue and cash flow goals.
There’s no easy solution, of course. But you can “grease the wheels,” so to speak, by strategically devising and continuously improving a methodical collections process.
Payment terms
Getting paid promptly depends, at least in part, on the terms you set forth and customers agree to. Be sure payment terms for your company’s products or services are written in unambiguous language that includes specific due dates, payment methods and late-payment penalties. To the extent feasible, use contracts or signed payment agreements to ensure both parties understand their obligations.
If your business operates on a project basis, try to negotiate installment payments for completion of specific stages of the work. This approach may not be necessary for shorter jobs but, for longer ones, it helps assure you’ll at least receive some revenue if the customer runs into financial trouble or a dispute arises before completion.
Effective invoicing
Invoice promptly and accurately. This may seem obvious, but invoicing procedures can break down gradually over time, or even suddenly, when a company gets very busy or goes through staffing changes. Monitor relevant metrics such as days sales outstanding, revenue leakage and average days delinquent. Act immediately when collections fall below acceptable levels.
Also, don’t let the essential details of invoicing fall by the wayside. Ensure that you’re sending invoices to the right people at the right addresses. If a customer requires a purchase order number to issue payment, be sure that this requirement is built into your invoicing process.
In today’s world of high-tech money transfers, offering multiple payment options on invoices is critical as well. Customers may pay more quickly when they can use their optimal method.
Reminders and follow-ups
Once you’ve sent an invoice, your company should have a step-by-step process for reminders and follow-ups. A simple “Thank you for your business!” email sent before payment is due can reiterate the due date with customers. From there, automated reminders sent via accounts receivable (AR) or customer relationship management (CRM) software can be helpful.
If you notice that a payment is late, contact the customer right away. Again, you can now automate this to begin with texts or emails or even prerecorded phone calls. Should the problem persist, the next logical step would be a call from someone on your staff. If that person is unable to get a satisfactory response, elevate the matter to a manager.
These steps should all occur according to an established timeline. What’s more, each step should be documented in your AR or CRM software so you can measure and improve your company’s late-payment collections efforts.
Typically, the absolute last step is to send an outstanding invoice to a collection agency or a law firm that handles debt collection. However, doing so will usually lower the amount you’re able to collect and typically ends the business relationship. So, it’s best viewed as a last resort.
What works for you
If your B2B company has been operational for a while, you no doubt know that collections aren’t always as simple as “send invoice, receive payment.” It often involves interpersonal relationships with customers and being able to exercise flexibility at times and assertiveness at others. For help analyzing your collections process, identifying key metrics and measuring all the costs involved, contact us.
© 2024
IRS extends relief for inherited IRAs
For the third consecutive year, the IRS has published guidance that offers some relief to taxpayers covered by the “10-year rule” for required minimum distributions (RMDs) from inherited IRAs or other defined contribution plans. But the IRS also indicated in Notice 2024-35 that forthcoming final regulations for the rule will apply for the purposes of determining RMDs from such accounts in 2025.
Beneficiaries face RMD rule changes
The need for the latest guidance traces back to the 2019 enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among other changes, the law eliminated so-called “stretch IRAs.”
Pre-SECURE Act, all beneficiaries of inherited IRAs were allowed to stretch the RMDs on the accounts over their entire life expectancies. For younger heirs, this meant they could take smaller distributions for decades, deferring taxes while the accounts grew. They also had the option to pass on the IRAs to later generations, which deferred the taxes for even longer.
To avoid this extended tax deferral, the SECURE Act imposed limitations on which heirs can stretch IRAs. Specifically, for IRA owners or defined contribution plan participants who died in 2020 or later, only “eligible designated beneficiaries” (EDB) may stretch payments over their life expectancies. The following heirs are EDBs:
Surviving spouses,
Children younger than the “age of majority,”
Individuals with disabilities,
Chronically ill individuals, and
Individuals who are no more than 10 years younger than the account owner.
All other heirs (“designated beneficiaries”) must take the entire balance of the account within 10 years of the death, regardless of whether the deceased died before, on or after the required beginning date (RBD) for RMDs. (In 2023, the age at which account owners must start taking RMDs rose from age 72 to age 73, pushing the RBD date to April 1 of the year after account owners turn 73.)
In February 2022, the IRS issued proposed regs that came with an unwelcome surprise for many affected heirs. They provide that, if the deceased dies on or after the RBD, designated beneficiaries must take their taxable RMDs in years one through nine after death (based on their life expectancies), receiving the balance in the tenth year. In other words, they aren’t permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and could push them into higher tax brackets during those years.
Confusion reigns
It didn’t take long for the IRS to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. How? Beneficiaries could have been dinged with excise tax equal to 25% of the amounts that should have been distributed but weren’t (reduced to 10% if the RMD failure is corrected in a timely manner). The plans could have been disqualified for failure to make RMDs.
In response to the concerns, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. It also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD.
The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around — and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.
Now the IRS has again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the deceased passed away during the years 2020 through 2023 on or after the RBD. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs, and plans won’t be disqualified based solely on such missed RMDs.
Delayed distributions aren’t always best
In a nutshell, the succession of IRS waivers means that designated beneficiaries who inherited IRAs or defined contributions plans after 2019 aren’t required to take annual RMDs until at least 2025. But some individuals may be better off beginning to take withdrawals now, rather than deferring them. The reason? Tax rates could be higher beginning in 2026 and beyond. Indeed, many provisions of the Tax Cuts and Jobs Act, including reduced individual income tax rates, are scheduled to sunset after 2025. The highest rate will increase from 37% to 39.6%, absent congressional action.
What if the IRS reverses course on the 10-year rule, allowing a lump sum distribution in the tenth year rather than requiring annual RMDs? Even then, it could prove worthwhile to take distributions throughout the 10-year period to avoid a hefty one-time tax bill at the end.
On the other hand, beneficiaries nearing retirement likely will benefit by delaying distributions. If they wait until they’re no longer working, they may be in a lower tax bracket.
Stay tuned
The IRS stated in its recent guidance that final regs “are anticipated” to apply for determining RMDs for 2025. However, based on the tax agency’s actions in the past few years, skepticism about that is understandable. We’ll continue to monitor future IRS guidance and keep you informed of any new developments.
© 2024
IRS issues guidance on tax treatment of energy efficiency rebates
The Inflation Reduction Act (IRA) established and expanded numerous incentives to encourage taxpayers to increase their use of renewable energy and adoption of a range of energy efficient improvements. In particular, the law includes funding for nearly $9 billion in home energy rebates.
While the rebates aren’t yet available, many states are expected to launch their programs in 2024. And the IRS recently released some critical guidance (Announcement 2024–19) on how it’ll treat the rebates for tax purposes.
The rebate programs
The home energy rebates are available for two types of improvements. Home Efficiency Rebates apply to whole-house projects that are predicted to reduce energy usage by at least 20%. These rebates are applicable to consumers who reduce their household energy use through efficiency projects. Examples include the installation of energy efficient air conditioners, windows and doors.
The maximum rebate amount is $8,000 for eligible taxpayers with projects with at least 35% predicted energy savings. All households are eligible for these rebates, with the largest rebates directed to those with lower incomes. States can choose to provide a way for homeowners or occupants to receive the rebates as an upfront discount, but they aren’t required to do so.
Home Electrification and Appliance Rebates are available for low- or moderate-income households that upgrade to energy efficient equipment and appliances. They’re also available to individuals or entities that own multifamily buildings where low- or moderate-income households represent at least 50% of the residents. These rebates cover up to 100% of costs for lower-income families (those making less than 80% of the area median income) and up to 50% of costs for moderate-income families (those making 80% to 150% of the area median income). According to the Census Bureau, the national median income in 2022 was about $74,500 — meaning some taxpayers who assume they won’t qualify may indeed be eligible.
Depending on your state of residence, you could save up to:
$8,000 on an ENERGY STAR-certified electric heat pump for space heating and cooling,
$4,000 on an electrical panel,
$2,500 on electrical wiring,
$1,750 on an ENERGY STAR-certified electric heat pump water heater, and
$840 on an ENERGY STAR-certified electric heat pump clothes dryer and/or an electric stove, cooktop, range or oven.
The maximum Home Electrification and Appliance Rebate is $14,000. The rebate amount will be deducted upfront from the total cost of your payment at the “point of sale” in participating stores if you’re purchasing directly or through your project contractors.
The tax treatment
In the wake of the IRA’s enactment, questions arose about whether home energy rebates would be considered taxable income by the IRS. The agency has now put the uncertainty to rest, with guidance stating that rebate amounts won’t be treated as income for tax purposes. However, rebate recipients must reduce the basis of the applicable property by the rebate amount.
If a rebate is provided at the time of sale of eligible upgrades and projects, the amount is excluded from a purchaser’s cost basis. For example, if an energy-efficient equipment seller applies a $500 rebate against a $600 sales price, your cost basis in the property will be $100, rather than $600.
If the rebate is provided at a later time, after purchase, the buyer must adjust the cost basis similarly. For example, if you spent $600 to purchase eligible equipment and later receive a $500 rebate, your cost basis in the equipment drops from $600 to $100 upon receipt of the rebate.
Interplay with the Energy Efficient Home Improvement Credit
The IRS guidance also addresses how the home energy rebates affect the Energy Efficient Home Improvement Credit. As of 2023, taxpayers can receive a federal tax credit of up to 30% of certain qualified expenses, including:
Qualified energy efficiency improvements installed during the year,
Residential energy property expenses, and
Home energy audits.
The maximum credit each year is:
$1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150), and
$2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.
Taxpayers who receive home energy rebates and are also eligible for the Energy Efficient Home Improvement Credit must reduce the amount of qualified expenses used to calculate their credit by the amount of the rebate. For example, if you purchase an eligible product for $400 and receive a $100 rebate, you can claim the 30% credit on only the remaining $300 of the cost.
Act now?
While the IRA provides that the rebates are available for projects begun on or after August 16, 2022, projects must fulfill all federal and state program requirements. The federal government, however, has indicated that it’ll be difficult for states to offer rebates for projects completed before their programs are up and running. In the meantime, though, projects might qualify for other federal tax breaks. Contact us to determine the most tax-efficient approach to energy efficiency.
© 2024
Why some businesses choose to execute a pivot strategy
When you encounter the word “pivot,” you may think of a politician changing course on a certain issue or perhaps a group of friends trying to move a couch down a steep flight of stairs. But businesses sometimes choose to pivot, too.
Under a formal pivot strategy, a company consciously changes its strategic focus in a series of carefully considered and executed moves. Obviously, this is an endeavor that should never be undertaken lightly or suddenly. But there’s no harm in keeping it in mind and even exploring the feasibility of a pivot strategy under certain circumstances.
5 common situations
For many businesses, five common situations often prompt a pivot:
1. Financial distress. When revenue streams dwindle and cash flow slows, it’s critical to pinpoint the cause(s) as soon as possible. In some cases, you may be able to blame temporary market conditions or a seasonal decline. But, in others, you may be looking at the irrevocable loss of a “unique selling proposition.”
In the latter case, a pivot strategy may be in order. This is one reason why companies are well-advised to regularly generate proper financial statements and projections. Only with the right data in hand can you make a sound decision on whether to pivot.
2. Lack of identity. Does your business offer a wide variety of products or services but have only one that clearly stands out? If so, you may want to pivot to focus primarily on that product or service — or even make it your sole offering.
Doing so typically involves cost-cutting and streamlining of processes to boost efficiency. In a best-case scenario, you might end up having to invest less in the business and get more out of it.
3. Weak demand. Sometimes the market tells you to pivot. If demand for your products or services has been steadily declining, it may be time to reimagine your strategic goals and pivot to something that will generate more dependable revenue.
Pivoting doesn’t always mean going all the way back to square one and completely rewriting your business plan. More often, it calls for targeted changes to production, pricing and marketing. For example, you might redefine your target audience and position your products or services as no hassle, budget-friendly alternatives. Or you could take the opposite approach and position yourself as a high-end “boutique” option.
4. Tougher competition. Many industries have seen “disrupters” emerge that upend the playing field. There’s also the age-old threat of a large company rolling in and simply being too big to beat.
A pivot can help set you apart from the dominant forces in your market. For example, you might seek to compete in a completely different niche. Or you may be able to pivot to exploit the weaknesses of your competitors — perhaps providing more personalized service or quicker delivery or response times.
5. Change of heart. In some cases, a pivot strategy may originate inside you. Maybe you’ve experienced a shift in your values or perspective. Or perhaps you have a new vision for your business that you feel passionate about and simply must pursue.
This type of pivot tends to involve considerable risk — especially if your company has been profitable. You should also think about the contributions and well-being of your employees. Nevertheless, one benefit of owning your own business is the freedom to call the shots.
Never a whim
Again, a pivot strategy should never be a whim. It must be carefully researched, discussed and implemented. For help applying thorough financial analyses to any strategic planning move you’re considering, contact us.
© 2024
Can a split annuity strategy help you achieve a balance in retirement?
You may be currently facing this dilemma: You’ve retired (or you’re approaching retirement) and, while you want to maintain your current standard of living, you also want to preserve as much of your wealth as possible for your family. This balance can be difficult to achieve, especially when your retirement can last decades.
One strategy that may provide that balance is a split annuity. It creates a current income stream while preserving wealth for the future.
Different types of annuities
An annuity is a tax-advantaged investment contract, usually with an insurance company or other financial services provider. You pay either a lump sum or annual premiums, and in exchange, the provider makes periodic payments to you for a term of years or for life.
For purposes of the split annuity strategy discussed below, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.
Annuities can be immediate or deferred. As the names suggest, with an immediate annuity, payouts begin right away, while a deferred annuity is designed to begin payouts at a specified date in the future.
From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income taxes, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow faster than many comparable taxable accounts, which helps make up for their usually modest interest rates.
Annuities offer some flexibility to withdraw or reallocate the funds should your circumstances change. But keep in mind that — depending on how much you withdraw and when — you may be subject to surrender or early withdrawal charges. Most annuities provide some exceptions to these charges under certain circumstances, such as withdrawals attributable to disability, loss of employment or death of the annuity owner. Withdrawals before age 59½ may also be subject to a 10% tax penalty.
Split annuity strategy
A “split annuity” may sound like a single product, but in fact it simply refers to two (or more) annuities, usually funded with a single investment. In a typical split annuity strategy, you use a portion of the funds to purchase an immediate annuity that makes fixed payments to you for a specified term (10 years, for example). The remaining funds are then applied to a deferred annuity that begins paying out at the end of the initial annuity period.
Ideally, at the end of the immediate annuity term, the deferred annuity will have accumulated enough earnings so that its value is equal to your original investment. In other words, if the split annuity is designed properly, you’ll enjoy a fixed income stream for a term of years while preserving your principal.
At the end of the term, you can reevaluate your options. For example, you might start receiving payments from the deferred annuity, withdraw some or all of its cash value, or reinvest the funds in another split annuity or another investment vehicle. Deferred annuities often allow you to withdraw some of their cash value penalty-free, but depending on how much you withdraw or reinvest, you may be subject to early withdrawal penalties or surrender charges.
Contact us with questions regarding the tax implications of split annuities.
© 2024