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Checklist: Elder Financial Abuse

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanAging clients are growing in number and practitioners should address their needs.

Consider the Six Following Facts:

1 By 2050 the population aged 65 is projected to be 83.7 million. This represents significant growth, almost double the figure from 2012. The population 85 years and over will double by 2036 and then triple by 2049. The numbers are significant and the impact on CPA practices should be as well.

2 The 85-and-over United States population, the fastest-growing cohort in the country, is projected to rise from 5.8 million in 2010 to 19 million in 20501. The needs of these very elderly clients will be more pronounced, especially in terms of protection from elder financial abuse.

3 The biggest health concern is Alzheimer’s, which strikes at a 47 percent rate among the over 85 population2.

4 Mental illness and cognitive deterioration increase with age. So an aging population will result in an increase of these challenges as well. The average age of an Alzheimer’s diagnosis is 73. Almost half of those over the age of 85 have some cognitive impairment. Chronic illness also increases with age. 90 percent of seniors have at least one chronic disease, and three quarters have two or more chronic diseases. The challenges of chronic illness are broader than merely the cognitive issues associated with aging. Practitioners must recognize that mere physical frailty may make client targets for financial abuse.

5 The age for peak financial decision making is age 50. Financial decision making ability begins to decline by age 60 and is significantly impacted by age 80. Even more worrisome is the same studies indicated people’s perceptions of their abilities do not decline. At what age are most estate plans crafted? Likely much older3. The fact is that many clients wait too long to create an estate plan that addresses the challenges of aging. This delay exposes these clients to greater risks of elder abuse. Creating estate plans and signing documents at a time when the client is frailer and his or her cognitive abilities more limited may itself be the opening that perpetrators exploit. This growing gap between financial ability, and the aging client’s perception of his or her financial ability, is one of the gaps that perpetrators of elder financial abuse seek to exploit. It is also very telling of why preventing elder financial abuse is so difficult. Those who are vulnerable often perceive themselves as fully capable of making financial decisions. They will often simply not see any frailties to address in further planning. Practitioners that are truly acting in the long term role as “trusted adviser” may be the optimal professional to encourage planning.

6 Half of all people age 65 and older live alone4. This makes comprehensive planning, not merely the preparation of documents, essential for the protection of these clients. Many of these clients are not only vulnerable as a result of health challenges, but isolated in terms of having few if any family or friends to safely rely on to name in fiduciary capacities. Too often estate planners, and others, assume everyone has appropriate family members to name to serve as an agent under a power of attorney (or successor trustee under a revocable trust). The result is that these clients may be ill served by an estate planning process that presumes family or other trusted persons to serve in these vital capacities. That too could prove the unraveling of any safety the plan might have afforded. Different steps are needed.

Questions CPAs Should Ask

Planning for aging clients requires a different focus than other engagements. CPAs can clarify their role and delineate how they can protect aging clients by asking questions. Consider:

1. How can CPAs educate clients about the growing risks of elder financial abuse (identity theft, etc.)? Unless clients, and often their loved ones, are informed of the magnitude of the problems they are unlikely to pursue optimal planning.

2. What role can CPAs play to minimize the risks of elder financial abuse?

3. What practical steps can the CPA recommend to most aging clients to lessen the risks of financial abuse?

4. a) What roles can or should a CPA serve in under a client’s financial plan?

b) What liability does the practitioner face serving in those capacities?

c) What liabilities do the firm that the practitioner is affiliated with face?

d) Who should earn the fees involved, the practitioner, the firm, or some combination?

5. What steps can CPAs take to step fully into their role as the “trusted adviser” to protect aging clients? 6 What additional services can practitioners offer aging clients to minimize the risks of elder financial abuse, identify when abuse has occurred, and otherwise help protect aging clients?

7 How will the dynamics of the estate planning team change as a client ages? b) What new persons may serve on that team?

8 What role can CPAs serve when an agent under an aging client’s power of attorney acts? b) Similarly, what role can CPAs serve when a successor trustee under an aging client’s revocable trust serves?

9 Who should the practitioner deal with: agent under power of attorney, successor trustee under a revocable trust, guardian, care giver, who?

10 What steps should CPAs encourage clients to take with their estate planning attorneys to implement documents and safeguards to minimize the risks of elder financial abuse?

11 a) What signs of cognitive impairment should practitioners be alert for?

b) What corroborating evidence is advisable to obtain?

c) Who should a CPA consult with to determine a client’s capacity to take various actions?

d) Does the CPA have authority to speak to the persons who can provide the necessary input? If not, what approvals are necessary?

12 As the CPAs role widens, are additional services covered under existing malpractice coverage or is additional coverage advisable?

Checklist: Elder Abuse Planning Considerations

1 What is Elder Financial Abuse?: The crime must be defined to be identified. Elder financial abuse can be defined as the illegal or improper use of an older person's funds, property, or resources.5 That definition, as the crime itself is broad and wide ranging.

2 Reporting is Rare: Studies suggest that only one in 44 cases of elder financial abuse is ever reported. Whatever the actual figure may be, and that is likely impossible to discern, low reporting occurs for a variety of reasons. These reasons help better understand the crime of elder financial abuse and why advance planning to prevent, or at least identify it, is so important:

a) The frailty that creates the opportunity for elder financial abuse progresses to the point where the victim/client is not able to pursue the crime.

b) The duration and cost of legal remedies are both significant. The elder financial abuse victim may not have the strength, time, or financial resources to pursue the perpetrator. Even if family members or others discover the abuse they too may lack the willingness or ability to commit the requisite financial resources to pursue the victim’s legal rights.

c) Many of the elder financial abuse crimes are committed by family, close friends or others and the victim is embarrassed to discuss the matter.

3 Signs of Elder Financial Abuse: Understanding some of the common signs of elder financial abuse may assist practitioners in identifying problems. Consider:

a) Large payments, transfers, investments or other transactions occur and there is a dearth of supporting documentation about those arrangements. For example, the client’s bank account may reflect wire transfers of large sums to a title company or other third party to fund a purported investment but there is no documentation of the underlying contracts or details of what the wire was for (e.g., no operating agreement corroborating the investment, nor subscription documents signed that reflect the investment, etc.). Similar to this is new and unusual transactions. Sometimes even small unusual transactions may be an indicator of larger underlying problems.

b) When queries are made of the elderly client, agent under the client’s power of attorney, care giver or other persons involved about financial matters, the explanations provided are implausible, or worse. For example, the elderly client used to withdraw $100/week for incidental cash expenses (tips to delivery people, lawn care in the summer and snow shoveling in the winter, etc.). The amount has increased to $500-$1,000/month and the explanations are that “inflation has had an impact.” That is not sufficient to justify such a large increase. The poor explanation itself leads to further suspicion. Common explanations from family fiduciaries and caregivers might be similar to: “It’s none of your business,” “It’s for food,” or other comments that represent more of a deflection of the inquiry than an answer.

c) While it may be common for an agent under the client’s power of attorney to route mail, especially financial mail, to the agent’s address rather than to the client, often a better approach and one that is less worrisome, might be for the agent to receive duplicate statements and the client to continue to receive the originals. If an agent receives all statements it undermines any planning for checks and balances. Also, while it may be common for some seniors to shift mail to Post Office Boxes to minimize the risk of mail being stolen and confidential data compromised, who has access to that post office box? Who picks up the mail in the box?

d) While many clients have a favorite child, niece, grandchild, etc. most people seem to still bequeath assets in equal shares among a class of beneficiaries. When a dispositive scheme departs from this norm, especially if there is another suspicious connection to that beneficiary, this is a cause for concern and practitioners should, along with the assistance of counsel, investigate. A common example is a client whose will and beneficiary designations for decades benefited a list of beneficiaries equally. Then suddenly that historic division was modified in a new will or beneficiary designation to favor one family member who is spending increased time with the aging client, or has other unusual relationships.

e) While many clients intentionally have different dispositive patterns under beneficiary designations and legal documents, if there are not logical explanations as to why, that may indicate a financial abuse. For example, a client might name a new spouse as beneficiary of assets under her will and her children from a prior marriage as beneficiaries of a life insurance policy. That avoids fights over personal property or a home that might be used and funded by both. It might also be possible that the insurance or other asset that is not included in the taxable estate is given to a non-spouse beneficiary. On the other hand, if the client’s beneficiary designations were signed many years ago, and as the client’s health has deteriorated the client signed a new will that has a new and unusual dispositive scheme favoring one particular beneficiary that might be a sign of elder abuse. The favored beneficiary may have orchestrated the execution of the new will but not had the foresight or ability to identify and change the other beneficiary designations.

f) The care the elderly client is not receiving is inconsistent with the income or wealth she has. This might be a sign of heirs unreasonably manipulating the situation to minimize care costs and maximize their inheritances.

g) Household belongings have disappeared. This might be obvious from merely visiting the elderly client’s home. For example, marks on the wall where paintings once hung, or different shades on wood floors indicating where oriental carpets once lay, may be obvious. Another way to identify missing personal property is to compare the listed property on the homeowners’ policy to the actual property on the premises.

h) If the elderly client does not understand financial and other arrangements that have been made for him, are there fiduciaries who do understand it and sufficient checks and balances to protect the client?

i) If the client recently has reconnected with long lost relatives or has just made new "best friends" that could be a wonderful sign of socialization, or an indication of a perpetrator seeking to capitalize on the elderly client’s wealth and declining capabilities. Has the new found family member suddenly been added to a will or named agent under a power of attorney or been listed as a co-owner of a bank account?

4 Perpetrators: Understanding who might perpetrate elder financial abuse is important to protecting against it, and identifying it when it occurs. A key point is that there are a myriad of possible perpetrators, not just the fiduciaries or home health aides as many people assume.

a) Financial abuse can be committed by a caregiver. In simple forms the caregiver simply steals valuable jewelry or art from the patient. In other circumstances the caregiver might walk the patient past an ATM several times a week pocketing withdrawals the patient may not even remember making. It is sadly not uncommon to see caregivers manipulate their patients to sign new legal documents resulting in the caregiver inheriting, or obtaining through other means, significant sums and sometimes the entirety of the patient’s estate to the detriment of the natural heirs the patient may have otherwise intended.

b) Anyone from the client’s family members might be involved. While many are shocked by family members abusing an elderly parent or relative, this is all too common. In many cases the perpetrator does not view what is tantamount to abuse and theft as a wrong. Rather, they view it as an entitlement. “I gave my life taking care of mom, I deserve what I am taking and so much more.” The rationalizations, however, don’t change the result of what was done.

c) Organized crime has grown in its involvement in elder abuse cases in light of the amount of money at stake. Criminals can abuse the elderly in a range of ways including not merely theft of the elderly person’s assets but also laundering money through the elderly client’s accounts. Theft of the client’s identity, abuse of credit card information obtained under false pretenses, and other complex techniques are all common.

d) Relationships are often created for the express purpose of foisting an elder financial abuse scheme to abscond with assets. Elderly widows and widowers are often preyed upon but others who seize on their new vulnerability following the loss of a long time spouse or partner to create a new relationship for the express purpose of marriage followed by divorce, or perhaps just being named as an agent under a financial power or co-signer on an account. By the time the grieving widow or widower realizes what has occurred the culprit has often taken significant funds and moved away.

5 Educate Clients: Practitioners should make a concerted effort to educate clients, and their loved ones about the risks of elder financial abuse and protective measures that should be taken. Too often these conversations never occur. CPAs might focus meetings on tax compliance or investment allocations (if the CPA is handling the client’s investments). Estate planning attorneys have traditionally focused on documents and tax minimization. Financial advisers have traditionally focused on investment planning and while that has broadened to more comprehensive financial planning it often does not appear to address the elder financial abuse risks adequately. As noted above, one of the key reasons clients do not seek this information is that they are of the attitude: “Elder financial abuse cannot happen to me…I have a good family, I am wealthy…I am educated…etc.” Whatever the rationalization it is simply not true. Elder financial abusers show no bounds in who they will victimize. Many clients, and even advisers, believe wrongly that their wealth, education or supposedly close knit family precludes this from affecting them. It is not so.

6 Family Realities Should Change Planning: Many plans presume that every client has an array of trusted family members to name to serve in various fiduciary capacities, e.g. an agent under a durable power of attorney to handle finances when the client is incapacitated, a health care agent to make medical decisions, etc. The reality is often quite different. Only 20% of American families are intact families with a husband, wife and children. And even of that small percentage not all have good relationships with children, or children who are financially sound. Practitioners should have open discussions with clients as to who they have named in these capacities and whether the people they have named are really appropriate. Too often a client meets with a new attorney for an hour or two and races through these decisions. A lawyer who has no prior background with a client or the client’s family is at a severe disadvantage to a CPA who may have a decade’s long relationship with the client to observe or identify issues in who is named. It is advisable to broaden the discussion to include other advisers. It is important that the attorney or other adviser making the inquiries ask much more than “Who would you like to name as agent under your power of attorney?” Questions should include: “How long have you known this person?” “What is your relationship with this person?” “How and why do you feel confident this person would not abuse this role?”

Checklist: Financial Planning Considerations

1 Longevity Considerations: With clients potentially living for two or three decades past retirement age, planning to assure adequate financial resources for that duration is vital. Financial modeling can provide a more realistic assessment of the range of financial results a client may experience. This planning, which should be at the foundation of determining an asset allocation and other major financial decisions can provide an invaluable touchstone to compare actual expenditures when endeavoring to monitor for financial abuse. Without a baseline financial analysis it may be difficult to ascertain whether payments actually made are questionable.

2 Minimize Financial Risk: Practitioners should guide clients to minimize the risks of elder financial abuse. Guide clients to simplify financial matters including consolidating accounts into a single institution where feasible, automating banking, and having electronic bank statements go to more than one person. Simplification, consolidation, and checks and balances, makes it easier for designated persons to monitor and safeguard finances. Simplification makes it easier for a client with declining capabilities to monitor his or her own finances. This can also minimize the number of paper bills and statements a client receives. While this may sound simplistic, the reality is that most clients have too many accounts, disorganized financial records and worse. These lapses can provide weaknesses for perpetrators to exploit. Too many financial accounts likely means more paper documents in a mailbox to steal, more records to keep track of which an aging client may not be able to, more opportunities to confuse the client with sham investment recommendations.

Checklist: Estate Planning Considerations

1 Minimize Estate Planning Risk: Be certain the client has met recently with his or her estate planning to update his or her estate planning documents. Too many clients, and even practitioners view the fact that a client “has a will” as sufficient. It is not so. First, client circumstances change. If a home health aide has a client change a deed or account to transfer on death to the aide, the family will lose out. Having existing documents may prove irrelevant if an attorney, or other adviser, is not periodically reviewing account ownership, beneficiary designations and more. When was the last time the documents and planning were reviewed? Did the planning specifically focus on longevity planning issues or was it simply tax and dispositive planning (e.g., who gets what).

2 Gift Provisions in Powers and Revocable Trusts: Rethink the gift provision included in powers of attorney and revocable trusts. The default provision for many clients might appropriately be a restriction prohibiting gifts. This is in sharp contrast to the historic practice of using annual gift exclusions as a default. Gift provisions have been notorious for their abuse by those perpetrating elder financial abuse. For the vast majority of clients the use of annual gifts is simply a tax anachronism.

3 Make Powers Safer: Consider the use of joint fiduciaries and/or a formal monitor position to integrate some protective checks and balances into a financial power of attorney. While nothing may prevent co-agents from colluding to financially abuse the principal, the likelihood has to be lower than a single agent unilaterally taking that action. Having someone monitoring the actions of the agent, especially if that is a CPA with financial training and expertise, is even a better precaution. Few people take this latter step.

4 Domicile Issues: Planning for aging clients should consider the possibility of needing to change a client’s domicile even if the client may lack capacity to do so. Domicile has traditionally been addressed by estate planners as a means of avoiding state estate tax in a decoupled state. With the increased importance of longevity planning, a broader and earlier consideration of domicile planning might be important. Whatever the reason that domicile may be changed, those charged with monitoring the client’s finances for potential elder abuse should be especially vigilant. Changing domicile may result in a change to a new lawyer who can practice in the new jurisdiction. Who selected that new lawyer? The client or a child attempting to convince the parents to change the dispositive provisions? Will laws in the new jurisdiction be harmful to the client’s financial security? Might they expose the client to a more robust spousal right of election for a recent spouse? Does the client even understand the ramifications?

5 Collaboration: Planning to minimize elder financial abuse should be a collaborative team of all advisers: the clients’ attorneys, insurance consultant, CPA, wealth adviser, care manager, charitable gift officer, and other professional advisors. Communicating with the client’s attorney and other advisers will enable every adviser to provide better quality service. Not only is planning for aging a multi-disciplinary task, but clients often tell different parts of their “story” to different advisers. Collaboration can help put the disparate pieces of the client’s “puzzle” together. Has the client named a reputable financial institution as a successor trustee instead of family? That might bring valuable safeguards, but the other members should not assume that the financial institution is beyond question and that the institution will actually fulfil its fiduciary duties to monitor a client’s assets for which it serves as trustee. There is never a guarantee. But adhering to a team process can provide vital checks and balances.

6 Make Revocable Trusts Safer: A banking institution or trust company can serve as a trustee or co-trustee to bring with it professionalism and independence (but see caution in the preceding paragraph). Consider integrating an independent care manager provision into the trust to perform a quarterly assessment and issue a written report to the corporate trustee, as well as to a key friend or family member (or perhaps the trust protector). As a CPA, you can have yourself named as a monitor charged with compiling periodic statements and perhaps more.

1. Old Age in America, by the Numbers, Dale Russakoff, July 21, 2010 .

2. Mark Miller, “Why Cutting-Edge Healthcare Will Help The Rich Live Longer,” May 8, 2015, Reuters.

3. Serena Elavia, “50 is Peak Age for Financial Decision Making,” Sept. 18, 2015, The article cites a Texas Tech University study.

4. Bonnie D. Kupperman, “Alone and Lonely in an Aging Population,”

5. The National Committee for the Prevention of Elder Abuse.

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16 Ways to Turn 1040s into Planning Clients

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD and Joy Maytak, J.D., LL.M.

mug martin shenkmanAn individual income tax return can be a treasure trove of planning opportunities and practice development opportunities for practitioners. Many practitioners are concerned about cost issues. Clients will negotiate prices, or complain about a modest increase in tax prep fees every few years, so it seems incongruous that the same client would be willing to spend much more for consultative services, but a meaningful percentage will. Consider some of the planning ideas and suggestions following.

____ 1. Filing Status

A taxpayer’s filing status is the first window into planning possibilities. Some taxpayers filing as single may be divorced and subject to a Property Settlement Agreement with a former spouse, which might dictate certain planning. A would-be planner should check lines 21 and 31a of the first page of the 1040 to determine whether the taxpayer is receiving or paying alimony. A planner should consider the effect of any alimony arrangement on the taxpayer’s present and future income stream and incorporate it into the planning. If you communicate with this particular client, or a group of clients via a templated letter, some of the questions to ask about the post-divorce situation might include:

a. Have you updated your beneficiary designation? The divorce may not preempt that and if you don’t change the beneficiary designation (unless the settlement restricts that) your ex may well inherit. Lots of people forget this as evidenced by the cases fighting over this each year that make it to court.

b. When is the last time you have reviewed the agreement to be certain you and your ex are complying? While CPAs are not likely to review legal issues there are often plenty of tax and economic issues they can address.

c. Was life insurance required under the agreement? Is it in force? How do you know? Might it be handled better?

____ 2. Head of Household Status

Taxpayers who file as head of household may also be subject to a Property Settlement Agreement with a former spouse and may also have the same concerns as a single taxpayer. Since this client has a child, other issues arise.

a. Has the client updated his or her will to name a guardian?

b. Who is the account owner on any 529 college savings plans? Many clients don’t realize that an ex-spouse (if named account owner) can pull out all the funds.

____ 3. Married Filing Separate Liability Considerations

If the taxpayer and spouse are filing separately might this be because one of them is in the midst of a substantial lawsuit? If so there may be a host of things that can be done (and that should not be done). Discuss asset protection issues, and if advisable recommend the client consult with an estate planning or bankruptcy attorney. The litigator may have little expertise with these matters and while handling the litigation may not be focused on broader issues. The most important advice, which many clients do not understand or imagine, is that if subject to suit, that spouse may not be permitted to change the title to assets (e.g., deed the house from joint to solely the spouse not being sued). Inappropriate transfers might subject the spouse being sued to worse results. Perhaps any parent or other benefactor can revise their wills to assure any assets bequeathed to the client being sued are to be held in appropriately protective trusts.

____ 4. Married Filing Separate Medical Considerations

Where the taxpayer and spouse have chosen to file separately in order to take advantage of one spouse’s large medical deductions and lower AGI, a planner should recommend that the taxpayers meet with their estate planning and review existing, or execute new, durable powers of attorney and health proxies. Review planning for medical expense deductions.

a. Is the client able to qualify for a full or partial payment under a disability policy?

____ 5. Married Filing Separate Matrimonial Considerations

A preparer should determine why a taxpayer is filing as married filing separately. If the taxpayer is separated, the preparer should coordinate with matrimonial counsel to provide such assistance as may be required for the taxpayer’s benefit.

a. Some taxpayers file separately because they were advised long ago before they entered the marriage to do so to keep assets separate.

b. Does that still make sense?

c. What is the penalty in terms of tax cost from this decision? Are there other options?

____ 6. Married Taxpayers Matrimonial Considerations

In the case where the taxpayer is married but subject to a prenuptial or postnuptial agreement governing their financial arrangements, a preparer should obtain a copy of the agreement. The preparer should review the agreement to determine the following:

a. What financial obligations does the agreement create?

b. Are there specific insurance requirements?

c. Is there a better tax method to achieve the goals of the prenuptial or postnuptial agreement?

If the taxpayer intends to keep certain assets separate, then, instead of filing separately and potentially having a greater tax liability, proper recordkeeping may be a solution. By way of example, assume that a prenuptial agreement provides that certain investment assets are separate property but the income earned is applicable to marital expenses. Arranging for automatic transfer of the income from the separate accounts to a joint checking account keeps the assets separate while making the income available.

All taxpayers regardless of filing status should also consider asset protection planning in order to protect assets from future creditors and predators. There may be simple changes, e.g., owning the marital home jointly to provide a measure of protection. Many states provide that a residence owned by husband and wife receives some measure of protection from either spouse’s claimants. The house may have been held as tenants in common to fund a bypass trust. That decision may have been made before the advent of portability (or repeal of the estate tax) and may never have been revisited.

____ 7. Exemptions – Dependents

Many taxpayers have the additional concern of providing for their dependents. A planner should determine whether the taxpayer ought to consider one or more of the following:

a. Has the taxpayer established 529 plans?

b. Should the taxpayer consider this?

c. If a section 529 plan is established, have successor account owners designated?

d. Has anyone reviewed the selection of the 529 plan and its investment performance?

e. Consider trusts for minor beneficiaries. Does the client’s will provide for trusts for heirs?

f. When do those trusts end?

g. Most trusts are drafted very simplistically and distribute all assets to the child/beneficiary at some age, e.g. 30. Is that really advisable?

h. What if the child divorces at age 31? There are better approaches.

i. Do the parents have significant funds in custodial accounts for the children? It might be feasible to invest in a family partnership. The parent may also be able to spend custodial money down in order to reduce risk and use funds freed up in the process to fund a new trust that is more secure.

j. If the dependents are 18 or older, they should complete powers of attorney and living wills to protect themselves. Children heading off to college should sign these documents to permit their parents to help them as a routine prerequisite to heading off to college.

____ 8. Employer-Provided Benefits

a. Wage information often lends insight into other issues that may be relevant to planning for a client.

b. The planner should determine whether life insurance, long- or short-term disability benefits are being provided by the employer and discuss with the client whether the client should obtain additional insurance. The planner should help the client determine whether the disability insurance is adequate.

c. A key issue to consider is whether the waiting period before benefits may be paid is reasonable relative to the client’s and the client’s family’s needs and liquidity.

d. Too often clients assume that if they have coverage at work they are “fine.” But what if they change employment? What if after they change employment they have a health issue and cannot then obtain new coverage?

e. If they have both personal and work coverage are they coordinated?

f. If the client is contributing towards a qualified retirement savings plan, such as a 401K, the planner should obtain copies of the beneficiary designation forms and confirm that the beneficiaries have been properly designated.

g. If the client is not contributing to a qualified plan, the planner should determine why not. If the client is eligible for a pension upon retirement, the planner should help the client to confirm that resources generated by the pension will be sufficient to address the client’s needs.

h. In the event that the client has received or is expected to receive stock options, the planner should discuss whether and when the client should consider exercising the options in order to maximize the benefit. Perhaps it would be advantageous for the client to wait to exercise the stock options until after retiring to a lower cost state, e.g., Florida in order to reduce state tax liability. The planner and client should weigh the tax implications against the Company’s growth potential, possibly in consultation with a certified financial planner.


____ 9. Special Considerations for Principals of Closely Held Businesses

For planners servicing clients who are principals of closely held businesses, a planner should evaluate whether the compensation paid by the business is reasonable.

a. The IRS has become increasingly proactive in challenging arbitrary allocations between salary and distributions for owner-employees. Examiners are scrutinizing C corporation deductions to determine whether part of the deduction for salaries paid to shareholder-employees should be recast as a disguised dividend. IRS auditors have become keenly aware that some S corporation shareholders take artificially lower salaries in order to avoid employment taxes. If any of these payments are modified on audit, the taxpayer could be subject to interest and penalties on the underreporting. A planner should make clients aware of these issues and seek to insulate them from such challenges by the Service.

b. Be mindful that the tax changes proposed by President Trump may change the dynamic of how planning for business structures (e.g., form of entity) and owners (e.g., salary) may change. Too often clients retain whatever structure was in place without changing to adapt to new tax developments.

c. Whatever form of entity when was the last time the client/business owner met with his or her attorney to create minutes or other entity documents? Failure to observe entity formalities could lead to a piercing of the entity veil in the case of a suit and thereby reach the client’s personal assets.

____ 10. Interest and Dividend Income

Planners should confirm that clients are appropriately diversified and have sufficient liquidity to meet their needs.

a. A client who has moved recently may need to restructure their bond holdings to a new state. Further, while municipal bonds typically provide a degree of safety, excessive concentration of bonds from a particular state or issuer could pose unintended risk of inflation. Home equity lines of credit, margin accounts and other mechanisms may be considered to provide a client with sufficient liquidity to meet unanticipated costs.

b. Some clients may have fallen into the trap of diversifying investment advisors instead of their investments. A CPA/planner should be able to identify such a client just by reviewing the sources of interest and dividend income as reported on the Schedule B to the Form 1040. Upon discovery of this issue, a planner should advise the client to consolidate accounts with one investment advisor in order to ensure that the client’s investments are meeting the client’s financial goals.

c. Too often clients have not reconsidered their investment approach in decades and their circumstances and needs may be quite different now. The objectivity and independence a CPA practitioner can bring to this discussion, even if not well versed in investment details, can be invaluable to the client.

____ 11. Business, Rental, and Royalty Income

a. A client with business income reported on a Schedule C may need to consider restructuring the business as a limited liability company.

b. To the extent that the client is reporting business income on Schedule E, a planner should review the choice of entity and assess with the client whether the current choice is still optimal by evaluating the liability risk for business claims to reach personal assets.

c. The CPA/planner should also evaluate with the client whether the client ought to consider obtaining additional business insurance or riders to an existing homeowners’ insurance policy.

d. To the extent that the client owns S corporation stock, the planner should review trusts established by the client to confirm that they contain the appropriate language necessary to permit the trusts to hold S corporation interests. With the high estate tax exemption and even more so the possibility of repeal, more wills are being prepared by general practice attorneys that may have no tax sensitivity. It is more important than it ever has been for CPAs to identify these issues.

____ 12. Capital Gain or Loss

A planner should evaluate whether and to what extent a client may be able to maximize tax benefits by harvesting gains or losses. To the extent that the client has only one investment advisor, it could be helpful for a planner to reach out to that professional in order to determine the opportunities available. A planner may be able to help the reluctant client to consolidate accounts under one or two investment advisors by pointing out that an advisor can create more tax-effective strategies if s/he has all of the information about the client’s investments at her/his disposal.

____ 13. IRA Distributions

Whether or not a taxpayer is actually receiving IRA distributions, a planner should have a discussion with a client about the designated beneficiary of the retirement plan. It would be best for the planner to obtain a copy of the actual designated beneficiary clause and confirm that it is properly completed and identifies the appropriate beneficiaries. Clients often have various accounts from which to withdraw funds to cover living expenses. These might include a by-pass trust from a late spouse, an inheritor’s trust that may be Generation Skipping Trust (GST) exempt, a pension or IRA and other regular non-trust taxable accounts. Often, helping the client prioritize which accounts to access, to what extent, and with which priority, can provide substantial income tax, estate and GST tax and asset protection benefits.

____ 14. Age and Disability

a. Clients over age 65 may have a need for a revocable living trust for the proper management of assets.

b. A planner should ensure that both a durable power of attorney and a health care proxy are adequate and in place.

c. For the disabled client, a planner should explore whether necessary home improvements may qualify as a medical expense deduction. Specifically, a client may be able to deduct the cost of special equipment and home improvements if the main purpose is medical care. These can include: adding an accessible entrance ramp, installing a lift, widening doorways, building handrails, modifying cabinets, etc. While the opportunity exists, the planner must exercise great care to help the client corroborate the medical need and ensure that the expenses are not deducted to the extent they increase the value of the home.

d. For clients who report large medical expenses on their tax returns, the planner should evaluate whether the client has adequate insurance and whether the client is maximizing health savings accounts or other tax-favorable plans to pay deductibles and non-covered costs.

____ 15. Real Estate Taxes

a. A planner should consider the location of all of the client’s real property and the effect of state estate tax laws when putting together an estate plan. The client may wish to consider changing domicile to a state without an estate tax, such as Florida. Only about 18 states still have an estate tax. If the federal government repeals the federal estate tax more states may eliminate their taxes as well.

b. To the extent that a client is paying substantial real estate taxes, a Qualified Personal Residence Trust may be an advantageous, if an estate tax issue remains (but consider the loss of basis step up).

____ 16. Charitable Gifts

Large donations may indicate the client is charitably inclined so that charitable estate and gift tax planning may be appropriate. With the recent drop in interest rates, a client may be able to maximize estate planning goals with the Charitable Lead Trust and a private foundation may enable the client to create a legacy of giving that will extend beyond their natural lives.

Change the Conversation

Few clients understand the scope of assistance a CPA can provide beyond tax compliance. They need to be educated and that will take a proactive effort and investment by the practitioner or firm. Here are a few thoughts:

• Identify 20-50 better clients and call them during less busy times and discuss a few planning ideas from an “eyeball” of their return. Don’t make a sales pitch but rather share some thoughts. Clients will well understand you can do more for them if you only whet their appetite. All will appreciate the input. By self-selecting clients you believe are the most likely candidates for more work (and see the ideas below before you limit your perspective on what more work can entail) you’ll enhance the potential for further work, whether from that client or referrals from them. We call these “A” clients.

• Develop simple templates of emails or letters to categories of clients, e.g. trust clients. Have a simple but tailorable list of points that can quickly be tailored to the particular client or return mostly by deleting points that are not applicable so that you have a succinct list of planning points. For example, every trustee should keep trust records to minimize the risk of violating fiduciary duty, enhance the benefits of the trust (e.g. coordination of distributions with beneficiary income tax status), assure that the trust is current (is it an old bypass/credit shelter trust set up when the estate tax exemption was $1 million that is now useless)? Clients rarely note boilerplate emails since they have proliferated to the point of becoming a nuisance. However, a real letter or email addressed to them noting something relevant to their situation may well command real attention and stand out from the “static” of pre-packaged email newsletters.

• Enclose a short tailored planning letter or memo with each return package. We enclose an article of new planning ideas with each month’s billing. Clients appreciate getting more than just a bill. Every practitioner knows their client base. Invest some time and tailor a memo or letter to that. A practitioner in New York City likely does not have too many clients with farm or ranch interests. A practitioner in Missouri may have a lot of clients with those concerns. Some practitioners have a lot of physicians in their client base, some don’t. Prepare something relevant and just enclose it in mailings you are doing anyhow. Here’s a simple and really practical idea that should not be difficult for any practitioner to create: “5 Planning Mistakes We’ve Seen Clients Make in the Past Year.” Tailor it to your client base. Write short actionable steps clients can get their hands around. Skip the usual ending “Please call our office to make an appointment to discuss these and other issues that might concern your file.” If clients are smart enough to hire you they don’t need trite sales pitches. Just offer good information that works for the majority of your clients.

If you can start the conversation, and the points below will give you more ideas, you can generate new work. It’s really easy for a client to ask her golf buddies how much they paid for their 1040 and then give you a hard time if your fee is $100 greater. But if you are working in more of an advisory capacity that comparison and cost sensitivity follows a different litmus test. It becomes “Was that advice worth the cost.” In many cases it will be worth more.

Maximizing the potentials of tax planning requires more regular conversations between adviser and client. Start the conversation.


This article is intended to provide a useful roadmap that highlights the planning opportunities apparent in typical federal income tax returns. We hope that we have offered helpful insight that will guide your conversations with your clients and help you to transform from tax preparer to overall adviser and planning strategist.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.


Joy Matak, JD, LLM is the CohnReznick Trusts and Estates National Practice Co-Leader and provides wealth transfer strategies to assist high net-worth families accomplish asset protection, tax planning and business succession goals. 


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Documentation to Transfer Closely Held LLC Interests by Gift or Sale

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanFunding Irrevocable Trust with Family or Closely Held LLC Interests

LLCs are the default entity for most family or closely held business and real estate ventures. Practitioners are therefore commonly involved in assisting clients with these transfers. The role of the CPA will vary depending on the involvement of the client’s lawyer, an outside appraiser and others. The following is a broad checklist listing much of the information that should be organized for each family or closely held LLCs interest and suggested steps to be taken with respect to the transfer of your interests to an irrevocable trust. Many of the examples use real estate as an example, but if the LLC owned different assets or business interests these would simply have to be changed to be relevant to the particular circumstances. Even though a number of the documents should be prepared by others, e.g., a real estate appraiser (assuming the practitioner does not perform real estate appraisals) or legal documents, the practitioner still needs these steps on his or her radar screen.

  1. Coordination of Legal, Appraisal and other Work. The more of these steps that can be handled internally by legal counsel for the real estate business/entities, the more efficient and cost effective. This will especially be true if other family members are undertaking similar planning.
  1. 2704 Regulations May Eliminate Valuation Discounts.
    1. The Treasury (IRS) recently issued Proposed Regulations that may eliminate valuation discounts. These Regulations could be effective as early as December 31, 2016. The loss of discounts could have a substantial adverse impact on leveraging these real estate LLC interests out of your clients’ estates. This might result in a flurry of gift and sale transactions before these Regulations become effective.
    2. This same issue should affect all other owners and thus many if not all owners should be undertaking similar planning by year-end. If this is the case then all owners can share the costs of the appraisals, preparation of transfer documents and other steps. This will greatly simplify the process and lower the cost of all the transfers involved for any particular owner (e.g., your client).
    3. This checklist might prove useful to coordinate that effort. If other owners will not become involved or will not proceed in this matter it is important that you guide your client to the appropriate steps and realistic cost estimates.
  1. LLC Owner Details.
    1. Information as to the owners and their relationships for each entity should be obtained.
    2. This may be essential to the interpretation of the operating agreement and what must be done to approve the particular transfers your client wishes to make.
    3. In the future this may be essential to determine the applicability of the 2704 valuation discount restriction rules (i.e., is it a family controlled entity in technical not common usage terms).
  1. Appraisal.
    1. Appraisals must be completed by “qualified appraisers” as defined in applicable Regulations. The qualified appraiser must complete a “qualified appraisal” which also must comply with a checklist of requirements contained in applicable tax laws.
    2. The appraisal must be a two-tiered process.
      1.                                                i.     First the fair market value of underlying real estate must be determined. An MAI appraisal of the fair market value of each real estate property owned by each LLC is necessary. The appraiser will require all the applicable information to complete this type of appraisal: rent rolls, historical operating expenses and rents, survey, leases, and so forth.  Whatever data you have used to make these estimates might be useful for an appraiser and might defray appraisal costs but formal appraisals should be collected (e.g. prior appraisals for estate planning purposes, bank appraisals, etc.).
      2.                                              ii.     An appraisal of the ownership entity and, in particular, the LLC membership interests of the member which will be transferred as part of the estate planning. This will require that the appraiser be provided with the governing legal documents for the entity, several years of tax returns, and other data. Some of this is discussed elsewhere in this checklist.
  1. Real Estate Documents to Collect.
    1. Narrative.
      1.                                                i.     A narrative for each property/entity that describes the relationship of the owners, who manages the property/entity, the type of property, any plans or anticipated future for the property (e.g., hold for long term, potential sale in a specified time frame, planned rehab, etc.).
      2. Accounting data.
        1.                                                i.     Rent roll.
        2.                                              ii.     Financial statements for a number of prior years.
        3.                                             iii.     Distributions, salaries and other economic benefits the family receives from the property, and any other important facts.
      3. Deed.
        1.                                                i.     For any entities that are closely held it is recommended that the deeds to the underling properties also be part of the documentation organized to be certain that they are held in the correct entity name.
        2.                                              ii.     While this might seem unnecessary, I have seen errors in deeds and entities for clients with similarly significant holdings. It is imperative that before any entity interests are transferred it be certain that the properties are properly titled in those entities. If such an error were discovered on an IRS audit following transfers it could be costly and could undermine significant components of a plan.
      4. Mortgage.
        1.                                                i.     Current balance will be necessary for the appraiser.
        2.                                              ii.     Mortgage documentation will be necessary for real estate counsel to review to ascertain what prerequisites if any may affect your intended transfers.
      5. Leases or other contractual agreements.
        1.                                                i.     These may affect valuations or assist your real estate counsel in identifying restrictions, notice or other requirements for transfer.
  1. Entity Documents to Collect.
    1. Formation Certificate.
      1.                                                i.     Documents filed on the formation of the entity.
      2.                                              ii.     Any amendments.
      3. Certificate of good standing for the entity.
        1.                                                i.     This is inexpensive but, surprisingly even for well-organized clients, some issues are identified. It is preferable that any issues as to the validity of the entity be addressed by the CPA or attorney before estate planning transactions are consummated.
      4. Confirmation of the tax status of each entity.
        1.                                                i.     While most LLCs are taxed as partnerships some elect to be taxed as S or C corporations. Confirmation of the tax status is vital because of the importance of achieving a basis step up on death.
        2.                                              ii.     If the ownership entity is a partnership or LLC taxed as a partnership the ability to step up the inside basis of the partnership in the asset, referred to as a IRC Sec. 754 basis adjustment, will be crucial whether this has been addressed for entities involved. This should all be reviewed now and if amendments are advisable, negotiating (if necessary) with other owners, an amendment and restatement of the entity documents to give members/partners the right to demand that the entity make a 754 basis adjustment.
      5. Operating Agreement.
        1.                                                i.     Copies of the governing documents for each entity. This is generally an “operating agreement” for an LLC but sometimes other records are involved.
        2.                                              ii.     Copies of all amendments. The most current agreement should reflect all current owners and their correct owners and should be consistent with applicable income tax returns (e.g., Forms K-1 of Form 1065 if the LLC entity is taxed as a partnership).
        3.                                             iii.     Please be certain all copies provided are of fully executed documents. If these do not exist, have the client follow up with counsel.
        4.                                             iv.     This should be reviewed by your corporate/real estate counsel to ascertain whether transfers of your interests as between each of you and then trusts is permitted.
        5.                                              v.     As noted below an amended and restated operating agreement should be prepared reflecting all transfers. Many lawyers simply prepare an assignment of LLC membership interests. On a tax audit it is preferable to have an operating agreement reflecting ownership interests before the transfer and one reflecting the revised ownership percentages after the transfer.
      6. Other key legal documents.
        1.                                                i.     This could include minutes or consents or other documents.
      7. Recent federal income tax returns for the entity.
        1.                                                i.     If the LLCs have all chosen to be taxed as partnership for income tax purposes then this would be Form 1065.
      8. Tax Basis.
        1.                                                i.     An estimate of the tax basis for the properties held by each entity. This is important to consider the pros and cons of shifting any of these interests outside of your estates (e.g. via direct gifts, gifts through GRATs, or sales to a grantor trust, etc.).
        2.                                              ii.     Depending on the anticipated holding period for a particular property or entity, the magnitude of appreciation, and other factors, it may prove more advantageous to retain a particular asset inside your client’s estate rather than shifting it out. Real estate, in particular, is a somewhat unique asset for purposes of this type of analysis in that if a property is a quality property that you intend to hold for the long term, or for which a tax deferred Code Section 1031 is feasible (but beware that proposals have been made to severely restrict this tax benefit), then removing that asset from your client’s estate may be more beneficial than retaining it to realize a basis step up. In all events consider putting the client on notice of basis considerations.
  1. Transfer restrictions.
    1. Confirmation by real estate counsel that any contractual restrictions on transfer have been met or that none exist.
    2. This could include lender requirements (e.g., due on transfer clauses).
    3. Depending on the nature of the properties involved, anchor tenants, or others may have negotiating contractual restrictions or perhaps only notification requirements before transfers.
  1. For LLC interests gifted to an irrevocable trust.
    1. Gift letter. A letter signed by the donor member transferring by gift LLC interests to the irrevocable trust.
    2. Assignment of LLC interests.
      1.                                                i.     An assignment document transferring LLC interests from you as owner to the irrevocable trust.
      2.                                              ii.     This should be signed by the trustee confirming acceptance of the gift.
      3. If the LLC certificates its membership interests, a new membership certificate indicate the interests or units owned by the trust. If not all interests or units are being given a second certificate reflecting the interests or units retained by the transferor member after the gift should also be provided.
      4. Amended and restated operating agreements reflecting membership interests and owners after the gift.
  1. For LLC interests sold to the irrevocable trust.
    1. All the same documents listed above for gifts but instead of a gift letter the following documents might be included.
    2. A sale of interests will be necessary if you wish to transfer more value of interests then a mere gift will permit. This will depend on the size of the member’s estate, the value of the interests involved, how much exemption the member still has remaining (the total in 2016 is $5,450,000), and other factors.
    3. LLC membership interest purchase and sale agreement.
    4. Note given by irrevocable trust for purchase of LLC membership interests.
    5. Security agreements with respect to sale if trust buys interests for a note.
  1. Gift tax returns.
    1. Be certain the client is aware of the requirements to file a gift tax return reporting the transactions.
    2. Sales may be reported as “non-gift” transactions on the gift tax return.
  1. Consolidation.
    1. It might be useful to consolidate smaller holdings into a single family real estate holding entity to simplify the legal work and formalities of gifts and/or sales to various trusts.
    2. If, for example, no other members wish to make transfers, it may be simpler for you to transfer all your family real estate LLC interests to a new personal LLC holding company and then use membership interests in that new holding company to transfer interests to your irrevocable trust.

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CPAs' Role Grows After Estate Tax Repeal

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanDonald Trump won the Presidency and the Republicans control both the House and Senate. Republicans have long wanted to abolish the estate tax, or as they have labeled it the “death tax.” President Trump included in his pre-election platform abolishing the estate tax. Regardless of the outcome of this proposal practitioners need to consider how a repeal of the estate tax, and other possible outcomes, might affect their clients. The practical reality is that the federal estate tax has not affected many clients for years since the exemption was raised to a $5 million inflation adjusted level. However, regardless of the outcome of the efforts to repeal the estate tax, estate planning will affect all clients. Regardless of the tax implications to any client, the role CPAs play in the estate planning process should continue to grow, not decline. Following are points to consider about the possibility of repeal and the continued role CPAs can serve.

Repeal of Estate Tax

If the estate tax is repealed practitioners should guide clients to review the entirety of their estate plans. This includes title (ownership) of assets, wills, trusts, insurance coverage and more. Most estate plans, even for smaller estates, may be based on tax oriented planning and clauses. Many clients (perhaps most) have not updated their wills and estate plans in many years and those plans may be based on the assumption of a federal estate tax, and in fact a much lower exemption that exists now. So repeal could only serve to exacerbate how disjointed their plan might be. For example, many wills (or revocable trusts if that is the primary document) mandate funding a credit shelter (bypass) trust to avoid estate tax. That entire planning construct might become irrelevant. If CPAs don’t proactively engage clients many will assume “Gee there is no estate tax I don’t have to do anything.” For many clients the specific manner in which their will is worded could result in that assumption being correct, or devastatingly wrong.


Example 1
A husband and wife are in a second marriage and both have children
from prior marriages. The husband’s will provides that the largest amount that
won’t create an estate tax should pass to a credit shelter trust that benefits his
current spouse and former children. When the husband’s will was signed the
estate tax exemption was $1 million so that amount would have passed to this
family trust and the balance to a martial trust (or outright marital disposition).
If the estate tax is repealed the entire estate would pass to this family trust
likely creating more contention between the current wife and children.



Example 2
Given the same facts as above, except the husband’s will provides
that the amount up to the estate tax exemption should pass to a credit shelter
trust that will benefit his current spouse and former children. When the husband’s
will was signed the estate tax exemption was $1 million so that amount
would have passed to this family trust and the balance to a martial trust (or
outright marital disposition). If the estate tax is repealed the exemption is zero
and the entire estate would pass to the marital trust cutting out his children.
The reality is that the practitioner and/or the client’s attorney must review the
exact language in the client’s current will or revocable trust, and the title to
assets. If the CPA practitioner is not comfortable evaluating these nuances (in
many cases only the paragraph in the will setting forth the funding allocation
between trusts) the client can and should be encouraged to consult with his or
her estate planning attorney.


Repeal of Gift Tax - Forms 709

If the estate tax is repealed that does not necessarily mean that the gift tax will be repealed. Historically, the gift tax has served as a backstop to both the gift and estate tax. If the estate tax is repealed, the gift tax’s role as a backstop to the estate tax is obviated. However, the gift tax may still serve an important purpose to backstop the income tax. Without a gift tax a taxpayer could transfer highly appreciated assets to anyone with net operating loss, a non-resident alien not subject to US income tax, heirs in lower brackets, etc. and have them consummate a sale. So the gift tax may remain. However, retaining the gift tax will retain significant complexity of the transfer tax system and will affect very few taxpayers. So it is possible that the gift tax will be eliminated or retained. If the gift tax is retained then anytime a client makes a transfer that does not meet the present interest requirements, or which exceeds the annual exclusion ($14,000 in 2017), a gift tax return will be required as under current law. Without any estate tax, and such a high gift tax exemption, that filing requirement will be absurd for most clients.


Example 3
Jane and Tom Smith have an estate worth $4 million. Their daughter
Cindy was recently married and is buying a house. They gift her $75,000
for the down payment. Since the gift exceeds the $14,000 gift tax exemption
(or $28,000 if the gifts are split between Jane and Tom and Cindy) a gift
tax must be filed. The aggregate estate is so far below the estate tax exemption
for one taxpayer ($5,490,000 in 2017) that the likelihood of a federal
estate tax might be insignificant. Does the CPA prepare a gift tax return as
required? The law requires it. Would any client in Jane and Tom’s situation
be willing to pay a CPA to file a gift tax return? It is highly unlikely. Perhaps
the practical answer is for practitioners to add a paragraph on gift tax filing
requirements to the general 1040 questionnaire or other communications
explaining these requirements and leaving it in the client’s hands to make
the decision. It would not be surprising to find that the gift tax is retained
and the outdated filing requirements illustrated above to remain.



If the estate tax is repealed practitioners should make an effort to educate clients that existing life insurance and insurance plans (e.g., a life insurance trust) should not automatically be terminated. Life insurance for many clients will retain valuable investment benefits (tax deferred, additional diversification, etc.). For many clients life insurance may prove a valuable planning tool for aging. Clients may have purchased life insurance to pay an estate tax. But with increasing longevity the clients may well live into their 90s or beyond and end up spending down most of their estate for living expenses, health care, nursing homes, etc. What the client initially anticipated, a large inheritance to their children and insurance to cover the estate tax, may now more realistically be longevity, not estate tax, reducing their estate. The life insurance may prove to be essential to their initial plan, but for a very different reason. Even if life insurance is determined no longer to be relevant, practitioners should educate clients to not merely cancel the policy for its cash value (in the case of a permanent policy) but rather to have an insurance expert evaluate the policy and recommend options. A policy may be sold into the secondary market for much more than cash value. It may be possible to convert the policy into a different type of policy or annuity to thereby repurpose it into something more appropriate to fit the current environment. Too often clients simply react instead of plan.

Forms 1041

Before completing any Form 1041 practitioners should evaluate the trust with the client to determine if it still serves its intended purpose without an estate tax. Even without an estate tax many, perhaps most, trusts will remain viable to protect assets from claimants, divorce, and more. However, the clients may no longer understand the relevance of that trust. If a trust in its present form is no longer optimal, it may be possible to decant (merge) the trust into a new trust that better serves current purposes. It may also be possible, depending on the terms of state law and the trust instrument, to have the beneficiaries and grantor agree by contract to a non-judicial modification of the trust. While it might be costly, if the other options are not viable, in some instances seeking court reformation of a trust might be worthwhile. In some instances the application of a trust might be modified by changing the nature of the assets or distributions to better conform to the new environment.

Non-Tax Planning

Estate planning never should have been entirely about tax issues. The repeal of the estate tax does not in any manner affect the importance of non-tax planning. Practitioners should guide clients to refocus planning to a range of vital issues, further discussion of which is beyond the scope of this article: planning for aging, asset protection planning, divorce planning and much more.


Whatever happens with estate tax repeal, the role of the practitioner will remain vital to planning. Clients will likely not understand the many nuances of planning and presume that if the estate tax is repealed they need to do nothing. That may be a dangerous mistake in terms of their family and planning.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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Checklist: 1040 Planning Idea

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkman√ MULTI-GENERATION CRT

Blended families are common, perhaps the norm (only about 20% of family units are comprised of traditional intact families). For many of these clients portability solves any estate tax concerns. The real issue is planning to protect children of a prior marriage, the current spouse and doing so when the primary estate asset is an IRA. A multi-life charitable remainder unitrust (CRUT) can provide an approach that addresses these planning challenges. The IRA can be bequeathed to a CRUT that initially benefits the surviving spouse and mandates a 5% payout. Following the death of the surviving spouse the CRUT continues for the named children of the prior marriage paying them 5% for life and on their demise the remainder passes to a qualified charity. Thus, the IRA provides for the spouse to support her for life, and then passes the benefits to the children after her death, all in an income tax efficient manner. Use of CRTs for IRAs of non-taxable estates was a concept probably many had not considered. This can provide a valuable and better approach than the traditional credit shelter trust when the primary asset is an IRA.


Real estate values have grown substantially in recent years so it is likely practitioners will see more clients considering donations of appreciated real estate. An issue many real estate donations raise is the donee charity’s concern about potential environmental risks. In some cases appropriate due diligence can be done before the donation is contemplated, but this is not always feasible. What can be done? The donee charitable organization may accept the contribution of donated property in the name of a single member LLC. This will enable the charity to insulate itself from any potential environmental liability associated with the property by confining that risk inside the single member LLC. This will not jeopardize the donor’s income tax deduction. Notice 2012-52, 2012-35 IRB.


Charitable contributions of inventory are only deductible up to the income tax basis of property. Clients, especially those with informally run closely held businesses, not realizing this limitation may donate unneeded business property and simply list it as another non-cash contribution. IRC Sec. 170(e).


Many clients do not face an estate tax so a bequest to charity will provide no tax benefit. Consider having the bequest paid in advance of death so that an income tax deduction may be realized. Be certain to have the charity sign a written acknowledgement that the gift is an “advancement” of the bequest to avoid the client being held responsible twice.


It has not been conventional to permit charitable gifts from a bypass trust, since the goal historically has been to maximize the assets outside the surviving spouse’s estate. Instead charitable bequests could be made by the surviving spouse or from the estate of the surviving spouse to garner an estate tax charitable deduction. However, the new tax paradigm might provide an incentive to rethink this traditional approach. If the family unit has charitable giving objectives, then selecting the optimal source from which to fund those charitable gifts could maximize the overall tax benefits of the contributions. The bypass trust might be in a higher income tax bracket than any family member so that distributions to charity may provide the biggest tax bang for the buck. Further, if the family unit will be making charitable donations in any event, using highly appreciated assets inside a bypass trust to fund charitable bequests may be a cost effective and simple means of avoiding future capital gains taxes without the risks associated with general powers or other approaches.


These have become common in estate planning for large estate planning transactions such as sales to grantor trusts, distributions in kind from GRATs, etc. When structuring such transactions the optimal spillover receptacle is a charity. If a charity is named it involves a third party that helps give support to the validity of the overall transaction. Public policy should also seem to favor protecting a potential gift to charity.


Contributions, reported on Form 1040 are deducted on Schedule A (below-theline deductions) and are subject to the 50%, 30%, or 20% of adjusted gross income (AGI) limitations. In contrast, however, on a Form 1041 for a complex (non-grantor) trust the charitable contribution deduction is reported abovethe- line and there are no percentage limitations. This is because the trust is governed by IRC 642(c) instead of IRC 170. So charitable trusts can provide a significant income tax advantage over individuals making a comparable donation. The deduction, on a complex trust, might shift net investment income (NII) for purposes of the 3.8% surtax from the trust to the tax-exempt charitable beneficiary. Practitioners should consider recommending that when clients are planning trusts, when appropriate, charitable beneficiaries or the right to make contributions, be included.


Interest in Residence and Farms Generally, a charitable deduction is not permitted for charitable gifts of less than a donor’s entire interest in property. IRC Sec. 170(a)(3). Donations of a remainder interest in a farm or residence is subject to special and favorable rules. A client can donate a remainder interest in a residence, live there for the rest his or her life, yet gain a current income tax deduction. Home sale prices have recently fully recovered since the recession. The current low interest rates, combined with high home prices, make this a particularly valuable technique now.


It is not uncommon for clients to make commitments to charity. While this can be noble, if it is not preceded by rationale financial planning and forecasts, a client might find themselves in an awkward financial position where they may not feel comfortable carrying out the pledge. Children, or other heirs, when they become aware of the pledge might also try to convince the parent/donor to cancel the pledge in order to enhance their future inheritance. The enforceability of a charitable pledge will depend on state law and the facts involved. Some states will permit a charity to enforce a pledge even if there was no consideration given and even if the charity did not take steps to rely on that pledge (e.g., begin construction of a building based on a large pledge). Some courts will enforce a charitable pledge simply because of the social desirability of assuring that donors meet pledges. More Game Birds in America, Inc. v. Boettger, 125 NJL 97, 101 (1942).


If a charity solicits donations to fund a particular projection, e.g., building a school, and if the condition of the solicitations is that the donations will be returned if the minimum funds are not received sufficient to fund the designated project, the client/donor cannot deduct the donated funds until it is assured that the condition will be met. Rev. Rul. 77-148, 1977-1 CB 63.


Donors will often negotiate as a condition of their donation that a building be named after them. This presents a house of issues that practitioners are likely to become more involved with over time. First, there must be a donor agreement that clearly addresses all aspects of the naming in writing. While counsel is likely to be involved in the drafting, CPA practitioners should still play an active role. Be certain the client’s concerns as well as practical issues are addressed. How long does the charity agree to use the client/donor’s name for? What if the building is renovated? Demolished? Repurposed? How will the donor’s name be displayed? There is another issue that could raise potentially significant tax issues. If a wealthy retired donor negotiates to have a town theater named for her, there may be no income tax implications and the full amount of the donation may be deductible (subject to the usual charitable giving limitations). But what if the client/donor is currently involved in and owns a family business that operates real estate in the same locale that the theater that is being named will be located. Will the value of that naming right provide economic benefit to the local family business? Depending on the circumstances it might well provide a significant benefit. Does the value of that economic benefit have to be applied to reduce the potential charitable gift for income tax deduction purposes? The law is not clear and these situations could be very fact sensitive. The donor agreement counsel negotiates to confirm the naming right itself might be the primary document the IRS uses to challenge the deduction.


If a charity makes a commitment to a client/donor to use the funds donated for a specific purpose but reneges on that application of the donated funds, the donor might be able to receive a refund of the donation. In one particular case the charity committed to build a modern animal welfare facility designed to serve a particular geographic region and to name seal rooms to be located in the new building for the donors. Instead, the charity unilaterally opted to build a smaller building without the separate rooms thereby negating the naming opportunity. The donors sued and received a refund of their donation. Adler v. SAVE, 432 N.J. Super. 101, 74 A.3d 41 App.Div. (2013).


Practitioners should exercise care to assure that when a client submits an appraisal to support a contribution that the appraisal meets all the criteria for a qualified appraisal if required or the donation may be denied. No charitable contribution deduction is permitted for donations exceeding $5,000 (excluding cash or marketable securities) unless the donor obtains a “qualified appraisal” by the due date of the return. Treasury Regulations Sec. 1.170A-13(c)-13 list the details of these requirements. In one case the taxpayers donated residential property but the appraisal report submitted with the return neglected to include several required items necessary to a qualified appraisal: the expected date of the property being contributed to the city, the terms of the agreement between taxpayers and the city as to the use/demolition of the property, the appraiser’s qualifications, and the required statement that the appraisal was prepared for income tax reporting purposes. JAMES HENDRIX, ET AL., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant Case No. 2:09-cv-132. The strict rules for what constitutes a qualified appraisal prohibit a party to the transaction from giving the appraisal. This can present a challenge when life insurance is donated because the insurance company who issued the policy, and likely would provide the Form 712 that is used to determine value, may not be able to be a qualified appraiser under these rules.

Martin M. Shenkman is the author of 42 books and more than 1,000 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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