The Wiewel Law Firm

The Self-Employed Gain Benefit with Single 401(k)

There are benefits to being self-employed. However, saving easily for retirement hasn’t been one of them.

Without an automatic withdrawal from a regular income payment, it’s tough for the self employed to save toward retirement. However, there is an option, according to Next Avenue in “A Retirement Plan for the Self-Employed: The Single 401(k).”

Known as the Single 401(k), the Self-Employed 401(k), Individual 401(k), or the Solo 401(k), this is a retirement plan designed for self-employed people or sole proprietors, and if applicable, also for their spouses. With a Single 401(k), 100% employee salary deferral of up to $19,000 is permitted in 2019, if you are under 50. If you’re over 50, that number can go up to $25,000. It also allows an employer profit-sharing contribution of up to $56,000 per year, which lets you save even more by being both the employer and an employee of your business.

Using the Single 401(k) can save you more than $14,000 in taxes per year (that is, assuming a $56,000 contribution and a 25.7% corporate tax rate), while simultaneously offering a loan provision, just in case you need to tap your savings.

Who qualifies for a Single 401(k)? You have to be truly self-employed, either in your own full-time small business or a part time gig. Your business can be a sole proprietorship, partnership, or corporation, but it can only have no other employees or employees who aren’t eligible to participate in a traditional 401(k). Examples of people who aren’t eligible would be people who are under age 21 or who work fewer than 1,000 hours per year.

The Single 401(k) works well for a husband/wife partnership or a small business with only part-time employees.

It provides flexibility so that when times are good, you can put away a lot. When times are lean, you can save less. Additional benefits:

• Reduced taxable income for pre-salary contributions.
• Built-in profit sharing for maximum savings deductible against business income.
• The cost of the plan is a deductible expense.
• Investments grow tax deferred.
• Higher contribution limits than SEPs and SIMPLE IRAs.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include a Single 401(k).

Reference: Next Avenue (May 3, 2019) “A Retirement Plan for the Self-Employed: The Single 401(k).”

Families Deal with Estate Planning Opportunities

The basics of estate planning can deal with various situations.

Since family situations differ greatly, there can be challenges and opportunities as the members deal with estate planning basics, according to the Chicago Tribune in “Dealing with property transfers and gift taxes.”

In a situation in the article, the family home was rented to a daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land.

For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.

When you give someone a home, they receive it at the price that was paid for it plus these costs.

Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.

It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.

This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate attorney, who can evaluate all the factors, since every situation is different. One suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.

The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.

As for the question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, including the best way to transfer a family home under the laws of your state of residence.

Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”

Some Retirement Errors Can Be Fixed while Others Cannot

There are mistakes that can be avoided, and others may still be fixed. However, it is better to get it right the first time.

You can spend a lot of time planning for retirement. However, you can still make mistakes and some are fixable and some are not, according to USA Today in “Social Security, IRA and tax mistakes to avoid when planning retirement.”

Here are the fixable mistakes:

Getting your buckets mixed up. You may have heard of the planning model that uses buckets to help you get focused. The money you save for retirement is either in a taxable, tax-free or tax-deferred bucket. When people get to the end of the year or into tax season, they tend to focus on putting money into tax-deferred accounts, especially if they are over 50 and making catch-up contributions. However, it might be better to put money away in taxable or Roth IRA accounts.

A Roth account will let you withdraw money tax-free. A taxable account may also let you withdraw money at good tax rates for capital gains and dividend income.

In 2019, the annual IRA contribution is $6,000, or if you’re 50 and over, $7,000. The annual contribution for a 401(k) limit and other employee plans is $19,000 or $25,000, if you’re 50 and older.

You may need the tax savings later, when tax rates may be higher, more than you need it now.

Another fixable mistake: your HSA (Health Savings Account). Contributions go in and out of HSA accounts tax-free, if they’re used for qualified medical expenses. The money also grows tax-free in those accounts.

Making your Social Security plan. There are smart ways to take Social Security benefits, and there are not-so-smart ways to take Social Security benefits. How can you figure out what works best for you? Ask for help from the people who know. That includes your CPA, estate planning attorney and financial advisor. You should also talk with the people at Social Security. If you can delay taking benefits until FRA (Full Retirement Age), your monthly benefit will increase up to age 70. Should you withdraw money from your IRAs before taking Social Security? It all depends on your retirement savings. However, withdrawing money from your IRA now, would reduce future tax bills on the RMDs (Required Minimum Distributions) that begin at age 70½. Those distributions are taxed as ordinary income. If you’ve got large IRAs, RMDs might push you into a higher tax bracket.

Tax planning for the long-term. Do you stop thinking about taxes the minute your annual taxes are filed? Most people do but that’s a mistake. Instead, start thinking about tax planning. Experts say consider the amount of taxable income over the next five to 15 years. Once you have a general idea of what that will be, start figuring out how you’ll avoid launching yourself into a higher tax bracket. There are many different tax strategies, and your estate planning attorney and CPA will be able to help with tax planning. However, there are also two fairly straightforward ones you can put into place yourself.

First, tax harvesting. This involves selling investments at a loss, when you are in high-income years and selling investments that produce capital gains in low-income years. For instance, use a capital loss as an offset to ordinary income (up to $3,000 per year). If you have more than $3,000, it becomes a carry-over to future tax years. Selling investments that produce capital gains in a low-income year might make the difference between paying taxes at 15% instead of 20%, or even 0% rather than 15%. Check with your tax professional.

Next, using IRA or Roth IRAs. If you qualify to contribute to a traditional IRA in high-income years and a Roth IRA in low-income year, you get the best of both worlds. The first will let you reduce your AGI (Adjusted Gross Income). The second will let you reduce your future tax bill.

Reference: USA Today (March 30, 2019) “Social Security, IRA and tax mistakes to avoid when planning retirement”

Tough Situations May Develop when Inheriting the Family Farm

Tax liabilities can lead to a severe financial misstep.

If you are likely to inherit the family farm, it would be wise to pay special, close attention to your estate planning attorney and CPA, according to Capital Press in “The family farm is coming to you: What’s next?”

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, which could be more than $600,000.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax. That saves $600,000.

The estate tax may not be so bad, depending upon your state’s estate tax, which is probably lower than the highest capital gains rate. If you live in Oregon, you may be eligible for the Oregon National Resource Credit, which was created to reduce Oregon estate taxes on family farms. Your estate planning attorney will be able to help you plan for and manage these taxes.

If you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

Just be sure that you comply with all reporting requirements. If you are in Oregon and took the Oregon National Resource Credit, then for five out of eight years after the death, the recipient of the inherited property is required to file an annual certification to keep the credit that was used to lower the estate tax. Failure to comply, means that a portion of the estate tax will have to be repaid.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. 

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

When It Comes to Farming, It’s All about the Family

Government regulations usually have less impact than family relations.

There are some big mistakes that farmers can make. It is best to be aware of them and avoid following in the footsteps of others, according to Ag Web in “5 Estate Planning Mistakes You Don’t Want To Make.”

The estate exemption will only be this high for a limited period of time. When the Tax Act expires in 2025, the exemption will be back down to $5.5 million per person and $11 million for a couple.  However, there is an election in 2020. There is no guarantee that the limits will remain in place until 2025.

The family is a bigger risk to the future of any family business than taxes. Blended families, stepparents, siblings and half-siblings and how family relationships work or don’t work is the bigger reason why family farmers, ranchers and business owners need estate and succession planning.

Second, people make a huge mistake in trying to treat their children the same. Fair does not always mean equal. Think about who is working on the farm, and who is not. Who is going to do a great job maintaining the family legacy, and who has already left to live in another state?   

Third, you cannot simply title your property, so your kids and your spouse own it together and it passes to them when you die. It sounds nice and simple, but it’s a huge mistake. People think they want to do this to avoid probate, but it creates many problems. If you just add names on property and there is no bill of sale, you create a taxable gift. What happens if one of your children gets divorced? 

Fourth, the plan to “sell off the farm, when I retire” plan is a terrible tax burden to place on yourself. If you sell the last crop and auction off the equipment, there will be a big income tax bite. Farmers tend not to pay a lot of income taxes. They sell this year’s grain next year, and they deduct next year’s expenses this year. They buy equipment in December and then depreciate it, but then when you do a retirement sell off, you get all the taxes that you’ve been pushing away all at once.

Fifth is the one that dooms so many families, both farmers and non-farmers. You can’t copy your neighbor’s estate plan and hope it will work. Every family is different, and no matter how small your town, everybody does not know the exact details of everybody else’s business.  

Reference: Ag Web (Jan. 15, 2019) “5 Estate Planning Mistakes You Don’t Want To Make”

Traditional Pension Plans are on the Way Out, So What’s Next?

Only 20% of organizations in U.S. still offer traditional pension plans.

There are many ways to save for your pension, as the traditional company plans fade away. However, the important thing is to learn about the alternatives, according to DJC Oregon in “As pensions are phased out, alternatives are sought.”   

Pension plans still exist but they are shrinking, with only 20% of organizations still offering a traditional defined benefit plan open to all employees.

Employers are encouraging their workers to save for retirement, by offering educational resources to help with financial planning. The Society of Human Resource Management (SHRM), a national human resources association, reports that organizations are bringing in retirement experts for group classroom sessions or offering financial advice through online portals.

Many employers offer matching contributions to 401(k) plans, as an added incentive to save. One major employer, Abbot Laboratories, announced a program to help employees save for retirement, while paying off student debt. The employees are eligible for the Freedom to Save program, as long as they are contributing 2% of their eligible pay to student loans through a payroll deduction. The company will match the amount and deposit it into the employees’ 401(k) account without requiring them to make a contribution themselves.

Employers who recognize that their employees spend most of their time at work, can make a difference in the financial literacy and savings habits of their workers. Employers who want to retain the best talent are also willing to offer these kinds of benefits. It becomes a win-win for both the employer and the employee.

A new twist to retirement saving is to encourage retirement saving participation through auto-enrolling employees into plans. Everyone can opt-out and they can change the percentage that is saved. However, the default is to be enrolled.

Some employers take one day and sweep all employees into target-date funds, which are set up as a “set-it-and-forget-it” fund that gets more conservative, as you get older. With this method, employees don’t have to get involved in researching and analyzing their investments or making asset allocations as they age. It’s only done for one day. However, companies do find that many employees decide to leave their funds into those target date funds.

The problem? Companies know that if you are too conservative when starting out, your retirement funds can’t grow as much as is needed. If you take too much risk later in life, your retirement could be at risk.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and options for retirement.

Reference: DJC Oregon (Sep. 21, 2018) “As pensions are phased out, alternatives are sought”

Roth IRA Conversion Is Popular but Not for Everyone

A cost comes along with a Roth conversion and you can lose some tax deferral.

Americans have moved more than $75 million, since Congress approved the partial or full IRA conversion to a Roth IRA.  However, while it is popular, it doesn’t always work out for the best, according to The Wall Street Journal in “When to Ignore the Crowd and Shun a Roth IRA.”

Retirement funds that go into a Roth get tax-free growth and tax-free withdrawals, minus any required payouts based on age, which is a sticking point for IRA owners.

A traditional IRA grows tax free, but withdrawals are taxed as ordinary income. Those pesky Required Minimum Distributions (RMDs) are also a permanent fixture, even if you don’t need the money.

However, Roth conversions come at a cost. You’ll have to pay a tax to transfer your money from the traditional IRA to the Roth and you may lose valuable tax deferral, without gaining more valuable tax-free benefits.

This is a deadline to bear in mind: after tax year 2018, you won’t be allowed to undo a Roth conversion.

What are some further reasons to take a pass on the IRA Roth conversion train?

Your tax rate is probably going down. If your tax rate is going to be lower when you take withdrawals, the transfer will cost more. If you are going to convert, do so in a low tax-rate year when income takes a dive. For instance, if you are in your 20s and have an IRA and return to school, or if you’ve retired but aren’t yet taking IRA RMDs.

The same goes for someone who is about to move to a state where taxes are lower.

Where is the money coming from to pay the tax bill for the conversion? If you don’t have the money to pay the tax bill and plan on using money from the IRA to pay it, you’re using assets that could otherwise grow tax free.

Converting to an IRA raises your income level for that year. Therefore, benefits that exist at a lower income tax level might lose value as your income takes a leap. Tax breaks for college or other deductions could be lost.

If you make frequent donations to charity, you can use your traditional IRA’s RMD to donate to charity. The donation can count toward your required payout, up to $100,000 per year from your IRA. You can’t do that with a Roth.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include a Roth IRA conversion.

Reference: The Wall Street Journal (Aug. 17, 2018) “When to Ignore the Crowd and Shun a Roth IRA”

Oil Prices May Put Trust Haven in Jeopardy

Alaska has long had an advantage as a preferred state for trusts but the decline of prices in the oil industry may weaken its position.

One of the most popular trust haven states in the U.S has been Alaska as attorneys sought more friendly laws and taxes for their clients. Taxes were not the focus of Alaska to raise revenue with the state looking instead to revenue from the oil industry.

However, Alaska now faces problems on two fronts as its natural oil reserves are beginning to dwindle at the same time that oil prices are very low. This has left the state in a very large financial hole. As Forbes reports in "Embattled Oil Creates Slippery Slope For Alaskan Trusts," the state is now considering an income tax.

The proposed income tax law does not make an exception for trusts. If it passes any trusts administered in Alaska that make money and do not distribute it to beneficiaries would have to pay income tax. Additionally, any beneficiaries would have to pay income tax to Alaska on trust distributions whether or not the beneficiaries live in Alaska or have even ever been to the state.

Alaska's days as a trust haven will most likely come to an end if an income tax should become law.

Reference: Forbes (Dec. 22, 2015) "Embattled Oil Creates Slippery Slope For Alaskan Trusts"

Estate Planning for the Farm

Estate planning doesn’t concern itself only with financial savings or your home. It can also include your property and land. And in no other industry is land more valuable than farming. By building and implementing an airtight estate plan, farmers and ranchers can ensure a smooth transition of land ownership and management when the time comes. An estate plan can provide for the needs of all family members, even those who aren’t actively engaged in its daily functions. It also can help mitigate the risk of high inheritance taxes on land that is made more valuable by inflation. And because land is not a liquid asset, an estate plan is important in stemming and addressing any potential settlement problems.

In “Planning for Farmland,” the Black Hills Pioneer reports that a quarter of the nation’s agricultural land is likely to change hands in the next decade, according to the USDA Natural Resources Conservation Service. That land needs to remain productive and valuable. This important objective can be achieved with an effective estate plan. The NRCS says that a sound estate plan can help accomplish at least four goals:

• Transfer ownership and management of the agricultural operation, land, and other assets to a new operator;
• Avoid unnecessary transfer taxes, such as income, gift, and estate taxes;
• Provide for financial security and peace of mind for all generations;
• Foster the next generation’s management capacity.

The American Farmland Trust (AFT), an organization operating under the NRCS, serves agricultural landowners, concerned citizens, planners, local officials, state agency staff, land trusts and policymakers. The AFT answers complex questions on all types of issues.

Talk with a qualified estate planning attorney and make sure your hard-earned investment and family legacy is properly protected.

Reference: Black Hills Pioneer (September 4, 2015) “Planning for Farmland”

New Regulations Affect Family Limited Partnerships and Family LLCs

The Internal Revenue Service is about to toughen the rules on a type of investment vehicle that has been abused by some very wealthy families to avoid millions of dollars in taxes. The wealthy are allowed to use family limited partnerships, family limited liability companies and their variants to hold family businesses, real estate or other illiquid, hard-to-value investments. And they can discount the value of the assets because that is seen as the only way people outside the family would buy in, particularly since nonfamily members have no control over what the partnership does. But some partnerships have put marketable securities, even cash, into the entities and still claimed a discount even though the investments have a value that is easy to determine. Others have taken steep and unreasonable discounts on the value of the partnership shares solely on the basis that the entity itself is family-owned. A few have gone so far as to value the assets they hold at a steep discount for estate tax purposes only to turn around and liquidate the partnerships and distribute the cash as soon as the statute of limitations on estate tax audits has passed.

The New York Times recently reported more on this subject in “Navigating Tougher I.R.S. Rules for Family Partnerships.” It appears that there may be new regulations restricting what will be allowed with family partnerships. There’s no definitive information on the exact terms of those regulations, their effective date or whether or not the wealthy should scramble to make transfers now.

The White House estimated in 2012 that closing this loophole could net at least $18 billion in tax revenue over 10 years. Assets in family partnerships, like securities and cash, still have a value that does not support a discount of 30%. Some advisers argue that the partnership, not the individuals, controls when securities are bought and sold and distributions are made. However, tax experts expect that entities set up to hold businesses or assets that require consolidated management, like rental properties, will still see some discount.

If a family has significant real estate, typically they use discounts to transfer interest in the entity. If you’re already setting up a partnership or making gifts to one to accelerate what they were doing, get it in under the deadline. The IRS won’t make the date retroactive, so get going.

Talk to your estate planning attorney about how this change may affect your estate planning.

Reference: The New York Times (August 17, 2015) “Navigating Tougher I.R.S. Rules for Family Partnerships”