“The only reason most American families don’t own an elephant, is that they have never been offered an elephant with no down payment and easy monthly payments.”
Your Safe Deposit Box Contents
Over 250 banks had their safe deposit boxes flooded and the contents damaged or lost during Hurricane Katrina in 2005. Also, over 1,300 box holders lost their valuables on 9/11/01 when a Chase vault in the World Trade Center was destroyed. The Federal Deposit Insurance Corporation does not insure the contents of boxes. Unless they are insured under your homeowner’s policy—the contents may not be insured at all! Some suggestions:
- Place anything subject to water damage in a waterproof container.
- Keep anything needed on short notice at home (e.g., passports and medical directives).
- Make photos of any valuables in the box in the event of a claim.
- Advise your attorney-executor-CPA of the location and contents of the box. Otherwise, when you are gone and if the annual box rental is not paid—the contents will eventually be turned over to the state.
- Consider having a joint-renter on the box account (spouse, child, etc.). Otherwise, it may require a court order for the heirs or executor to access the box after your demise.
- Check your insurance coverage on the contents of the box.
[Above information supplied by The Steward — a publication of Marsh Private Client Services.]
Roth IRAs
Roth IRA contributions are not tax deductible and are not reported on your tax return. On the other hand—you do not include in your taxable income any qualified distributions from the Roth IRA. This tax-free treatment includes all earnings in the account.
Income Limits. To contribute to the Roth, you must have compensation (e.g., wages, salary, fees, bonuses, etc.) that equal or exceed the contribution.
Age. There is no maximum age limitation for Roth IRA contributions.
Contribution Limits. If your only IRA is the Roth, the maximum 2007 contribution limit is the lesser of your taxable compensation or $4,000 ($5,000 if 50 or older). You can always contribute less than the maximum allowed. However you cannot pay more than the $4,000/$5,000 limit into both a Roth and a regular IRA—that’s the combined annual limit for all IRAs.
Phase-outs. That maximum Roth contribution allowed, gradually phases-out (disappears) starting when your modified adjusted gross income for joint tax returns hits $156,000 and is completely gone at $166,000—or $99,000 to $114,000 for single-filer’s tax returns (these are the year 2007 limits that change every year).
Spousal Roth IRS. You can also make contributions to a Roth IRA for your spouse, provided you meet the income requirements (above).
Time. Contributions can be made at any time during the applicable year or by the April 15 due date of your return in the following year (e.g., for the year 2007, contributions can be made from January 1, 2007 through April 15, 2008). You cannot contribute after that April 15 deadline, even if you file an extension for your tax return!
Distributions. You do not have to make any distributions from a Roth IRA—even after you reach age 70½—or ever during your lifetime. It’s entirely optional. However, you cannot make any of these tax-free distributions until five-years after you first started your Roth.
Children. As I have often recommended, begin a Roth IRA for your children with their very first teen-age part-time earnings, keep it up every year—and they will be Roth millionaires at age 65.
More Information. Get IRS Publication 590 “Individual Retirement Arrangements,” available at the IRS website IRS.gov, or call 800·829·3676 to request a free copy of this or any other IRS publication.
Outsourcing Your Payroll
We got a fair amount of feedback from some alarmed individuals about our February 2007 section titled: “Would You Like To Pay Your Payroll Tax Deposits—Twice?” To put this topic to bed, the following is a set of recent quotes from the Internal Revenue Service:
“Employers who outsource some or all of their payroll responsibilities should consider the following:
“The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though the third-party is making the deposits, the employer is the responsible party. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer’s account. The employer is liable for all taxes, penalties and interest due. The employer may also be held personally liable for certain unpaid federal taxes.
“If there are any issues with an account, the IRS will contact the employer. IRS correspondence is sent to the address of record so it is strongly suggested that the address not be changed to that of the payroll service provider as it may significantly limit the employer’s ability to be timely informed of tax matters involving their business.
“For the employer’s protection, the payroll service provider should be asked if they have a fiduciary bond in place. This could protect the employer in the event of default.
“Employers should ask the service provider to enroll in and use EFTPS (Electronic Federal Tax Payment System), so they can confirm payments made on their behalf. EFTPS maintains a business’s payment history for 16 months and can be viewed on-line after enrollment. The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process.”
That should be all the information anyone needs on this topic.
Asset Protection
In today’s litigious society, this is a serious topic worth considering. This information is about 80% legal and 20% tax—so you know which experts to consult with before you make any moves. Asset protection does not mean avoiding the responsibility for legitimate debts. But it can help you avoid being held hostage to unreasonable demands, while maintaining control of your assets. (See the credit line at the end of this section and understand that almost all this information has been supplied by the law firm noted. I’m not practicing law—I have enough trouble with just accounting and taxes.)
Liability Insurance. This is your first line of defense. Probably doctors, lawyers and other professionals are the most exposed to professional malpractice claims—and require major amounts of professional liability insurance. However, any of us can be sued under various kinds of liability claims. We all need liability insurance—and probably in larger amounts than most of you currently maintain. It’s not at all uncommon for even a non-professional individual to end up on the wrong end of a multimillion-dollar liability claim. How much is your coverage?
Excess Liability Insurance. This is a separate policy that “wraps around” your primary liability coverage of homeowners’, auto, etc. It is relatively cheap because it pays nothing until your primary coverage is exhausted. Further, the larger the excess coverage you buy, the less the cost per $100,000 of coverage. Why? Because as these amounts grow larger, the less likelihood there is of them having to pay. We find that the average recommended excess coverage is frequently in the $3 million to $5 million range, with annual premiums ranging from $1,000 to about $4,000. Everyone with substantial assts needs this insurance! Remember, this is excess general liability insurance and not the specialized professional malpractice insurance that is quite different.
Gifts. The easiest way to protect assets from your creditors is to give them away to your children or other family members. This works fine—except that the assets and your control thereof are gone forever.
Titling of Property. Quite complicated, but it’s frequently possible to title property in a form that protects the property from the claims of you and your spouse’s separate creditors. However, this does not protect you from the claims of your joint creditors. An alternative is to completely transfer title to a spouse who usually has far less exposure to liability and other claims. For example, a doctor or other professional transfers title to his housewife-spouse. Further, even in a community property state it’s possible to partition community property into separate property—and then give it to the other spouse. (CAUTION: Better have a strong, secure and stable marriage if you do so.)
Trusts. The greatest protection at the largest cost and complication—is to transfer your assets to an offshore trust established in a debtor-friendly foreign jurisdiction. Another complicated one is a “Domestic Asset Protection Trust” now offered in a handful of states. It purports to allow you to protect assets from your creditors even if you retain a discretionary beneficial interest. (Boy, do you have to see your lawyer!)
Children’s Trusts. You can protect assets from your heirs’ creditors by placing them in trust for your children with “spendthrift” provisions. These rules prohibit the beneficiaries from selling or assigning their interests, either voluntarily or involuntarily. But a spendthrift trust won’t avoid claims from your creditors unless you relinquish any interest in the trust assets. The kids’ trust must be the irrevocable owner. This may be a better way to transfer assets to your children—than outright gifts…
Retirement Plans. A qualified plan is one of the best ways to safeguard your assets. These plans generally are exempt from creditors’ claims, at least until the benefits are actually distributed. IRAs also offer some limited protection against creditors. (Ask O.J. Simpson.)
Family Limited Partnerships (FLPs). Transfers to an FLP in exchange for limited partnership interests for you and your family can also protect your assets. (A properly structured FLP can also be used to reduce gift and estate taxes on transferred assets.) In general, a limited partner’s creditors cannot reach the FLP’s assets — they can only obtain rights to receive distributions (if any!) from the FLP to the limited partner. By retaining a small general partnership interest (e.g., 1% or 2%) you can retain control over the property while keeping your liability to a minimum.
CAUTION: The IRS hates FLPs because they substantially reduce both gift and estate taxes. They may challenge them both before and after the founder’s death. Therefore, it is most essential that you use legal experts — to structure them properly to survive an IRS challenge.
Fraudulent Conveyance. This legal concept goes back to England in 1601, in a ruling against a man who gave his sheep to a relative to keep them out of the hands of his creditors (baaaaad boy!). There are various laws in various states, but they all have the same purpose. They are intended to prevent you from transferring property with the intent to hinder, delay or defraud present or future creditors (a “future creditor” is approximately someone you presently have reason to believe may create a legal problem in the future). To exaggerate: the bottom line is that you cannot begin to transfer assets today, when you are about to be hit with a multi-million dollar lawsuit tomorrow! The time to implement asset protection strategies is when the skies are clear; there are no storm clouds even looming on the horizon — and peace and quiet prevails in your entire life. (And here I thought a “fraudulent conveyance” was a new car that wouldn’t start.)
In summary, the more your exposure to potential liability and the more your total unprotected assets — the more you require legitimate asset protection. The time to protect your assets is now — and if you wait until someone even threatens to bring a claim — it may be too late!
[Except for my added comments and with my thanks, all the information in this section was supplied by the law firm of Valensi, Rose, Magaram, Morris, & Murphy, PLC — Los Angeles (Century City), CA.]
Incorporation Overview
A prime reason for incorporation is to limit the personal liability of the owners-shareholders, to just the amount they have invested in the corporation. It also can provide the owners with a personal shield against product and other liability claims. Generally, shareholders in a corporation are not personally liable for claims against the corporation and are “at risk” only to the extent of their investment in the corporation (except for professionals). However, strict observation of corporate formalities (e.g., annual meetings, minutes, etc.) must be observed — or the “corporate veil” can be pierced — and personal liability imposed on the officers-directors-shareholders.
Officers-directors-shareholders of the corporation are generally not liable for the corporation’s debts, although in some cases they may be held liable for failure to withhold and pay over to the IRS the federal income taxes from employees’ wages (many states have similar laws regarding employees’ withheld state income taxes — and California also has a comparable rule regarding unpaid sales taxes).
Given the ultra-high incidence of IRS audits of sole proprietorships (Schedules C), a secondary reason for incorporation is to considerably decrease the chances of an IRS audit — particularly in the case of smaller corporations. (This is not always a trivial consideration…depending…)
General Characteristics of All Corporations
The chief attributes of a corporation are:
- Perpetual life.
- Limited liability (a big plus these days!).
- Centralized management.
- Ease of transferability of stock ownership.
- The corporation can hold title to property.
- Your investment in the corporation is permanent.
For all the advantages of operating as a corporation, you must understand and remember every day: it is a separate legal entity that must be dealt with scrupulously and at arm’s length. The courts, the creditors and the IRS are all looking over your shoulder. Consult your lawyer and your tax advisor before you ever make a questionable corporate move or omit an essential corporate procedure. You must accept the responsibilities that accompany the many, many advantages of the corporate form of business.
Relying on Your Tax Preparer
Here is another of the many cases in which a questionable tax preparer placed the taxpayer in terrible trouble (also see May 2007 FINANCIAL FAX re: Wesley Snipes).
A California contractor operating as a sole proprietorship had three years’ income of $3.5 million, $2.7 million and $3.4 million. He wanted to find an accountant who could “save him taxes.” He found one in St. Louis who reported the taxpayer’s income for all three years as zero! He did not question the tax returns or file amended tax returns even after he had another accountant review them.
He was assessed all the taxes, plus big interest and substantial underpayment penalties. He then went to Tax Court that upheld all the IRS assessments. He got killed! And good luck trying to get any money back from that St. Louis tax preparer — if you could even find him. (Lehrer, Tax Court Memo 2006-156).
P.S. With those kinds of earnings, you would think someone would have advised him to form a corporation or LLC — given the liability protection, asset protection and potential tax advantages that could have been achieved. A real economic waste…
Conclusion
If you think about it, all the preceding information, in one form or another, was about — protecting, saving, accumulating or conserving your assets. Consider the advice, avoid the mistakes and increase your wealth!
