Friday, September 30, 2016

7 Ways to Tell If That IRS Tax Collections Call Is Fake


 A new IRS program set to take effect next spring may make it harder to tell which of those dubious phone calls many people get about outstanding tax bills are actually fake.
The agency announced this week that it’s hired four private debt-collection firms to search America’s couch cushions for overdue federal taxes: ConServe, based in Fairport, New York; Pioneer, based in Horseheads, New York; Performant, based in Livermore, California; and CBE Group, based in Cedar Falls, Iowa. The IRS says the four contractors will mostly get old, overdue accounts or accounts it doesn’t have the manpower to pursue.
One problem, however, is that taxpayers are up to their eyeballs in tax-collection scams and could easily mistake legitimate calls for yet another criminal trying to sucker them.
This year, the IRS reported it has already seen a 400% increase in phishing schemes. And in March, the Treasury Inspector General for Tax Administration, which oversees IRS activities, said it’s received over a million reports of phone scams involving fake tax collectors since October 2013. Over 5,500 people collectively have lost about $29 million, it said.
The IRS is aware of the problem — it keeps a dedicated, ongoing list of scams on its website. In May, for example, it warned taxpayers about phone calls regarding a bogus “federal student tax,” and in August it reported that IRS impersonators were demanding tax payments on iTunes cards and other gift cards.
Now that some debt-collection calls will actually have the IRS’ blessing, how will you be able to tell the real ones from the fakes? Here are seven red flags.


Under the new program, the IRS will first mail you a written notice that it’s turning your account over to a private collection agency. Then, one of the four collection agencies will send you a letter confirming the transfer. That agency is the only one that should be calling.


The contracted agencies aren’t allowed to accept payment on the IRS’ behalf. They also aren’t allowed to ask for payment on a prepaid debit card. Instead, they should send you to if you want to see your electronic payment options; checks should always be made payable to the U.S. Treasury and sent directly to the IRS, not the collection agency.


The IRS won’t assign your account to a private collection agency if you’ve already got an installment agreement going. Likewise, if you have or are negotiating an offer in compromise with the IRS, legitimate debt collectors shouldn’t be calling you.


The IRS won’t turn over accounts involving taxpayers who are deployed in combat zones or who are in presidentially declared disaster areas and are requesting relief from collection. If that describes you, and one of the IRS’ contracted collection agencies gets your case by mistake, it’s supposed to return it to the IRS. (That doesn’t mean you’re off the hook; it means the IRS will pursue payment itself.)


People who have died or are minors may have outstanding tax liabilities, but their accounts won’t be going to private collection agencies, according to the IRS.


The IRS’ private collection agencies have to keep their hands off cases involving tax-related identity theft, litigation, examinations, criminal investigations, levies, appeals or innocent spouse classifications — for those going through a divorce or other problems in their marriage.


The private collection agencies have to abide by the Fair Debt Collection Practices Act, which means they can’t swear at you, threaten you with violence or harm, call in the middle of the night or lie about what you owe, among other things. Though the IRS is using the law to ensure contracted debt collectors respect taxpayers, another agency — the Consumer Financial Protection Bureau — might say good luck with that. It gets more complaints about debt-collection companies than any other financial product or service.

Thursday, September 29, 2016

10 Reasons You Need a Taxable Investment Account

Mostly everyone reading this article is contributing to at least one retirement account, at least if you are employed or own a business. Some retirement accounts allow you a current income tax deduction or a tax-deferred account contribution (IRA's, 401k's, 403b's, 457b's, and defined benefit plans). When you begin taking distributions from these accounts, you will pay income taxes at your top marginal tax rate.

Hopefully that day will not come before retirement and (even more hopefully), our politicians will see to it that you are in a lower tax bracket during retirement. (Of course, as we've seen in the 2016 election cycle, nothing is predictable about politicians.) Other retirement accounts, chiefly Roth IRAs, don't allow a current deduction, but are totally tax free when you are ready to begin taking distributions at age 59.5.

Having a sizeable Roth IRA is a good estate planning move because the IRS does not require you to begin emptying your Roth over your lifetime, as you are required to do with traditional retirement accounts. This allows you to leave a tax-free "gift" to your heirs if you choose not to spend it all during your lifetime. But what we often overlook is that a retirement account doesn't have to be blessed by the IRS to be used for retirement. In fact, I believe that taxable retirement accounts are ignored because we are so focused on "authentic" (IRS-approved) retirement accounts. Everybody should supplement their savings with a taxable retirement account, in my opinion. That may sound like heresy from a CPA, but please hear me out. First of all, what do I mean by a "taxable retirement account"? All I'm referring to is a plain old investment portfolio that is not linked to any government regulations and that you are building for retirement. Sounds kind of boring but I am a big believer that the more boring your finances are, the more money you tend to have. Some of the benefits of a taxable retirement account are:

1. You have complete liberty over investments. You can use any fund family you desire, with any expense ratios, and any fund manager. In other words, you are not limited to the deal your employer made with your 401k provider.

 2. You have complete flexibility over your account. You can take money out before age 59.5 without penalty, you can add more than $18k per year to your portfolio, and you don't have to account to anyone but yourself  if you need to use the money in your account for any reason.

3. You can pledge your portfolio as collateral for a loan.

 4. You don't have to begin emptying your taxable account when you turn age 70

 5. You have "basis" in your account - when you take money out, you pay taxes only on the growth.

6. You pay a top tax rate of 20% on long-term capital gains and qualified dividends (from stock held for at least one year). This is about half of the current top tax bracket of 39.6% and over half if you take an early distribution and pay a 10% penalty for early withdrawal.

7. You get to write off capital losses in the account.

8. You can use income from the account to offset an unused investment interest deduction

9. Your heirs get a stepped-up basis if they inherit the account from you.

10. Your heirs don't have to begin taking withdrawals from the account when they inherit it from you. Of course, taxable accounts can be problematic: money invested is not protected in the event of a lawsuit and you get basis instead of a tax deduction. That must be considered in the context of your goals and insurance protection in place. 

 Am I saying that having a taxable account is your top priority when saving for retirement? Not at all, but it may be near the top, depending upon where you are on your financial journey and the integration of tax planning with your short- and long-term financial goals. A taxable retirement account can be the perfect filler to some of the gaps in your tax and retirement planning strategy. Be sure to discuss incorporating one into your financial plans the next time you meet with your financial planner. 

Wednesday, September 28, 2016

Seek expert advice for dealing with inheritances

Inheritances received after the passing of a loved one have important estate, financial, and tax planning implications for the beneficiary.

Inherited Individual Retirement Accounts (IRA’s) are subject to specific rules on taxable and non-taxable distributions that depend on a multitude of factors. Things such as the relationship between you and the person who left you the IRA, their age, the type of IRA, whether the person was already receiving distributions from the IRA, whether you were named as a beneficiary or inherited the IRA under a Will, how many beneficiaries are named, and several other factors — some of which are time sensitive. Additionally, you may find that many of the distribution penalties and restrictions that apply to a traditional IRA also apply to an inherited IRA. 

Experts advise meeting with a trusted adviser to discuss your options before making any decisions. Given the complexity specific to inherited IRA’s and the multiple factors that could influence your tax liability and other penalties, you are wise to seek an expert opinion before making any withdrawals. We suggest consulting a local estate planning attorney, financial planner or Certified Public Accountant (CPA) to discuss your specific circumstances.

Tuesday, September 27, 2016

Beware of Fake IRS Tax Bill Notices

IRS Special Edition Tax Tip 2016-13,

The Internal Revenue Service and its Security Summit partners are warning taxpayers and tax professionals of fake IRS tax bills related to the Affordable Care Act.

The IRS has received numerous reports of scammers sending a fraudulent version of a notice - labeled CP2000 - for tax year 2015. The issue has been reported to the Treasury Inspector General for Tax Administration for investigation.

This scam may arrive by email, as an attachment, or by mail.  It has many signs of being a fake:
  • The CP2000 notices appear to be issued from an Austin, Texas address;
  • The letter says the issue is related to the Affordable Care Act and requests information regarding 2014 coverage;
  • The payment voucher lists the letter number as 105C;
  • Requests checks made out to I.R.S. and sent to the "Austin Processing Center" at a post office box.

IRS impersonation scams take many forms: threatening phone calls, phishing emails and demanding letters.  Learn more at Reporting Phishing and Online Scams


An authentic CP2000 notice is used when income reported from third-party sources, such as an employer, does not match the income reported on the tax return.  Unlike the fake, it provides extensive instructions to taxpayers about what to do if they agree or disagree that additional tax is owed.  A real notice requests that checks be made out to "United States Treasury".
If you have questions, feel free to contact us!

Monday, September 26, 2016

8 Must-Do Financial Tasks Before the End of the Year


With only one quarter left in 2016, it's about time to begin thinking about year-end planning strategies. While you still have a few more months, keep in mind that nearly all of the strategies that can reduce taxable income must be complete by Dec. 31. These eight tips can help you avoid leaving money on the table.

Contribute to a health savings account. If you have a high deductible health plan, an HSA can help you pay for medical expenses and reduce your taxable income through pre-tax contributions. When the funds are used for qualifying medical expenses the earnings won't be taxed. Although you aren't required to use all of the funds annually, HSAs offer investment options, allowing your pre-tax contributions to grow tax-free.

Annual HSA contribution limits for 2016 (under age 55) are $3,350 for an individual and $6,750 for a family. Consult the IRS guidelines for details.

Use your flexible spending account. Flexible spending accounts are similar to HSAs but differ in a few key ways. Medical FSAs can help offset qualifying medical expenses with pre-tax contributions. Unlike HSAs, FSAs must generally be depleted during the calendar year or your contributions will be forfeited. FSAs do not have investment options but also do not require participants to have a high deductible health plan.

The dependent care FSA is a unique benefit not available in HSAs. Qualified dependents are typically your children younger than 13. The expenses must be incurred to enable you (and a spouse, if married) to work, look for work, or enroll in school full time. If so, babysitters, summer day camp, and after-school programs could be reimbursable. Annual contribution limits for 2016 are $2,550 for the health FSA and $5,000 for dependent care if married filing jointly. Consult the IRS guidelines for full details.

Maximize contributions to a tax-advantaged retirement plan. Reduce your taxable income while saving for retirement. For participants of employer-sponsored retirement plans like a 401(k) or a 403(b), you may contribute up to $18,000 in 2016. Individuals older than 50 may make an additional catch-up contribution of $6,000.

If you can't afford to contribute the full amount, try to contribute enough to get the full employer match. Also consider annual increases to contributions by 1 percent or more. While anyone may contribute to a traditional IRA, there are income limitations on who may deduct their contributions, which depend on marital status and if you (and your spouse if applicable) are covered by a retirement plan at work. You have until April 15, 2017, to make additions to an IRA for the 2016 tax year. To determine your eligibility, review the IRS guidelines.

Rebalance your portfolio. The underlying asset classes in a portfolio rarely perform in the same manner – some may experience strong growth while others could remain flat or negative. Portfolios are constructed with this in mind, to diversify the risk and create an asset allocation consistent with the investor's risk tolerance. As the various asset classes experience different growth levels, rebalancing may be required to revert to the original asset allocation. Rebalancing isn't always necessary and there may be costs to doing so. In a taxable account, selling securities you've held for less than a year will result in short-term capital gains taxes.

Consider working with your financial advisor beforehand to avoid unintended consequences. For example, mutual funds issue their capital gains distributions in fourth quarter based on the year's trading. You could find yourself owing capital gains taxes on those distributions despite just purchasing the position.

Use tax-loss harvesting. Tax-loss harvesting involves selling underperforming securities in a taxable account and buying similar replacement securities to take the loss in the current year. If, after netting short-term and long-term gains/losses against each other, a loss results, the loss can be used to offset taxable income in the current year or carried forward if over the $3,000 maximum. Whenever possible, tax-loss harvesting should be done in conjunction with portfolio rebalancing to minimize the potential for unintended tax consequences, wash sales, and additional trading fees.

Consider a Roth IRA conversion. There are income limitations on regular contributions to a Roth IRA. However, these restrictions do not apply to Roth IRA conversions which are available to all earners once a year. For many reasons, individuals choose to roll their old 401(k) out of a former employer's retirement plan. Among the options for the retirement funds is a conversion to a Roth IRA. With a Roth IRA you will pay income taxes now and won't owe any tax on qualified distributions later. However, a Roth conversion doesn't always make sense. You'll need sufficient non-retirement funds to pay the tax due on the converted dollars and believe you're in a lower tax bracket today than you will be in retirement.

Roth IRAs can be a powerful tax-diversification tool, but only if executed as part of a larger financial strategy. A one-time Roth IRA conversion may have little impact if it only represents a small portion of your retirement assets. Like the other strategies outlined in this article, consult a financial advisor and tax professional first.

Give back. If you itemize deductions on your tax return you may be eligible for a charitable deduction. Making a sizable contribution? Consider donating appreciated securities instead of cash. Appreciated securities in a brokerage account can be donated directly to a charity. You can receive a deduction for the full fair market value on the date of the gift while avoiding capital gains taxes. Talk to your financial advisor for details.

Watch the timing of 529 plan distributions. To avoid a portion of your 529 plan funds being accidentally classified as a non-qualified distribution and potentially subject to income tax and a penalty, make sure to carefully plan the timing of withdrawals. For example, if you withdraw money from a 529 plan in December, but don't pay the tuition bill until January, a portion of the funds may be considered a non-qualified distribution if the total 529 plan withdrawals for the year exceeded the qualified higher education expenses paid.

As you compare distributions to expenses, remember not to double count the American Opportunity Tax Credit/Lifetime Learning Credit and don't include any expenses covered by tax-free scholarships in your calculations.

Some of these strategies may take longer than others to research and execute. Getting a head start can help ensure you don't miss out on any planning opportunities or chances to put some more cash back in your pocket.

Saturday, September 24, 2016

How to Pick the Right Retirement Date

Make sure your retirement date doesn't cause you to leave money on the table. Here's what to consider:
Employer 401(k) matches and bonuses. Most employers match contributions throughout the year, says Carol Sladek, head of work-life consulting at Aon Hewitt, but a few make a single contribution in December. Profit-sharing and bonuses are generally awarded at year-end. If you're due a cash payment, set your retirement date accordingly.

Unused vacation. At most companies, vacation days accrue over the course of a year. To get paid for any days you didn’t use, retire at the end of the year; otherwise, you may not be compensated for those days. If your employer is one of the few that still allots your full vacation at the beginning of the year and lets you take it at any time, ask your benefits manager whether you’ll be fully compensated by retiring after January 1.
Medical benefits. Be sure to use all the money you’ve contributed to your medical flexible spending account before you leave the company; otherwise, you’ll lose it. While you’re still on employer group coverage, take care of doctor visits and necessary medical procedures.

Thursday, September 22, 2016

Most People Need Not Worry About Estate Taxes

Welcome news: As of 2016, if you die with less than $5.45 million in assets — or $10.9 million if you’re married — your estate won’t owe federal estate tax.
Surprised? Most people are. As a financial planner, I come across many people who list avoiding estate tax as a top priority in their financial plan. But in reality, very few people accumulate enough wealth to make federal estate tax an issue.

Small minority hit with tax

Some people might be concerned about estate tax because the federal exemption amount used to be much lower. As recently as 2008, it was $2 million. In 2001, it was $675,000.
But since the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act passed in 2010, the estate tax exemption has been $5 million and higher. The amount increases each year to adjust for inflation.
The top estate tax bracket is 40%, so this high exemption amount saves a lot of people a lot of money. In fact, according to the Tax Policy Center, only 5,300 estates were expected to be taxable in 2015. That is, out of the 2.6 million people who were expected to die last year, only 1 out of every 495 was projected to have a taxable estate.
What’s more, you can also make tax-free gifts of up to $14,000 to any number of persons each year. And you can leave an unlimited amount of assets to your spouse or a charity without triggering federal estate tax.
If you will die with enough assets to have a taxable estate, rest assured that there are many loopholes, strategies and estate planning tools you can use to shelter your wealth. That’s a topic for another article.

The need for estate planning

So does all of this mean that you don’t need an estate plan? Absolutely not. I would argue that virtually everyone needs some elements of an estate plan, such as an advanced health care directive and a durable power of attorney.
Most people should also have at least a basic will to establish what will happen with their minor children and assets when they die.
Keep in mind that estate tax rules might be changing: Presidential candidates Hillary Clinton and Donald Trump have proposed changes, and a new IRS proposal could raise estate taxes for wealthy business owners.
Keep in mind, too, that you may have a state estate tax: Currently, 15 states and the District of Columbia do. However, all of them have an exemption amount and maximum tax rates that are far lower than the federal rate of 40%. New Jersey has the lowest exemption amount ($675,000), and Washington has the highest maximum estate tax rate (20%).
When it comes to estate planning, tax isn’t the key thing for most people to worry about — it’s making sure the other elements of your estate plan are in order.

Wednesday, September 21, 2016

3 Smart Tax Moves to Make Now


Tax planning shouldn't just be something that you do at the end of the year -- it should be an ongoing process. Not only will smart tax planning help you maximize your deductions, but it will allow you to spread out your financial burden throughout the year. With that in mind, here are three moves you can make right now, and when tax time rolls around, you'll be glad you did.

Boost your IRA and 401(k) contributions

For the 2016 tax year, you're allowed to contribute up to $5,500 to a traditional or Roth IRA, with an extra $1,000 catch-up contribution allowed if you're over 50. And you can choose to defer $18,000 of your compensation into your 401(k) or similar employer-sponsored retirement plan if you're eligible to participate in one, or up to $24,000 if you're over 50. That doesn't include any matching contributions your employer gives.
I realize that it's not usually necessary or practical to completely max out your retirement savings allowances. The point, however, is that you can contribute a heck of a lot of money to your retirement accounts, and now could be a great time to throw in a little more.
Aside from the tax benefits, the big reason I emphasize aggressive retirement saving is that most Americans don't save nearly enough. Worse yet, most Americans have no idea of how much they'll need to have in savings for a comfortable retirement. You can read a thorough method of determining your own retirement number here, but to put things into perspective, by using the 4% withdrawal rule that most experts suggest, $1 million in the bank translates to about $40,000 in annual sustainable retirement income.
Also, it's a good idea to err on the side of caution and try and save a little more than you think you'll need. After all, the last thing you want is to be 85-years-old and run out of money.
Fortunately, a little extra can go a long way, especially if you're still a few decades away from retiring. If you put an extra $1,000 away per year for 30 years, you could end up with an additional $95,000 for retirement, based on an historically conservative 7% rate of return. If you can save an extra $2,000 per year, you'd have an additional $190,000. That's a small price to pay for a nice extra cushion once you're retired.

Tax-loss harvesting: It's not just for the end of the year

Tax-loss harvesting refers to the practice of selling investments at a loss in order to offset capital-gains taxes on other investment profits, or to reduce one's overall tax burden.
I'll use a personal example to illustrate this. Back in 2008, I bought First Solar stock for a little over $200 per share. Well, they can't all be winners: First Solar sits at approximately $35 as I write this. If I were to sell my shares, I could use the loss to avoid capital gains taxes on any profitable investments I decide to sell.
Furthermore, if I don't have any investment profits, I can use up to $3,000 of an investment loss to reduce my other income that's subject to tax. And any amount above that can be carried over until the next tax year.
People tend to wait until the end of the year to do this, but strategic losses can be utilized at any time. Besides, if you get rid of some of your losing investments now as opposed to right before the new year, you'll have an additional three-and-a half months to put that money back to work on your next winner.

Charities could really use your donations now

More than half of charitable organizations receive the majority of their contributions during the last three months of the year. While they're definitely grateful for the donations, it could be extra nice to give them your contribution a little early, when it's been over nine months since their last high-income season. After all, issues like homelessness, hunger, and animal rescue aren't unique to the holiday season.
Besides, why wait until you're spending tons of money on gifts to write a check to your favorite charity? It might be easier to spread your holiday spending out a little bit and take some of the holiday burden off of your wallet.
Charitable giving can be an excellent tax deduction and is one of the largest and most common deductions taken by those who itemize on their tax returns. All I'm saying is that, by making charitable giving a year-round process, you'll take the end-of-year pressure off of yourself and help your favorite organizations even more by giving them the cash when they can really use it. And a great time to start this new charitable outlook is right now.

Why the sense of urgency?

None of these tax moves need to be done right now in order to take advantage of them. You can sell losing investments and donate to charity all the way through December 31, and you can make your IRA and 401(k) contributions as late as April 15, 2017. That's not the point.
Rather, my point is that the smartest move is to start thinking about tax planning (and retirement saving) as a year-long process, not just something that you scramble to do at the end of the year, and for a few weeks every April. By getting a head start on these three things now, you'll have less to stress about as the deadlines actually approach.

Tuesday, September 20, 2016

How to minimize taxes on retirement savings accounts


Building retirement savings requires careful planning and so does drawing down those savings once you reach retirement.
The essence of the challenge is to draw your nest egg down carefully, so you don't spend your savings too soon. However, taxes can accelerate the burn rate of your assets. To some extent, you can reduce the tax impact by managing how you draw on your retirement savings account.

3 types of retirement savings and how they're taxed

From a tax standpoint, there are basically three types of savings vehicles:
  1. Ordinary savings, on which income and capital gains are fully taxable
  2. Tax-deferred savings, such as employer-sponsored retirement plans and traditional IRAs, on which taxes are not paid until the money is taken out
  3. Tax-exempt savings, such as a Roth individual retirement account (IRA), on which taxes were paid upfront so they can now grow tax-free with no further tax due upon withdrawal
Because of the tax advantages of numbers 2 and 3, financial planners often suggest drawing first from taxable savings in retirement, so you can hold on to assets with favorable tax treatment for a longer time. However, in an issue of the "Financial Analysts Journal," Kirsten A. Cook, William Meyer and William Reichenstein make the case that retirees might derive greater tax efficiency from a more complex approach. This strategy draws on both taxable and tax-advantaged vehicles throughout retirement.

How to reduce the impact of taxes on retirement accounts

To incorporate elements of this kind of approach, the following are six things you should think about in planning retirement withdrawals:

1. Coordinate asset allocation with taxable status

Investors generally own a mix of stocks, bonds, and cash equivalents. In planning where to put each asset class, keep in mind that income is taxed differently than capital gains, with the effective tax rate on income often higher for many taxpayers. If this is the case for you, it might be worthwhile to park fixed income holdings in tax-advantaged accounts, with a heavier concentration of stocks in your taxable accounts.

2. Plan a withdrawal strategy before making required minimum distributions

In most cases, you will pay a penalty if you withdraw money from a tax-deferred plan before reaching age 59 1/2. At age 70 1/2, you are required to start taking distributions from a tax-deferred plan, and paying any tax liability that results from those distributions. In between those ages of 59 1/2 and 70 1/2, you have the flexibility to draw on a tax-deferred plan at your discretion. Once you enter this window of time, you have the most latitude to alter your withdrawal strategy to manage your tax liability.

3. Don't confuse withdrawal schedule with spending rate

Keep in mind that in these discussions of withdrawals from tax-advantaged plans, those withdrawals do not necessarily mean you should be spending this money as it comes out. Sometimes, the withdrawal is simply a matter of shifting the money from a tax-advantaged to a taxable account, but you should still be preserving some of that money for later in retirement.

4. Look to Roth IRAs as a useful intermediate phase

As will be explained in the next two points, there are times when it makes sense to incur the tax liability of taking money out of a tax-deferred account. Since not all such withdrawals are meant to be spent immediately, having a Roth IRA to roll this money into can let you continue to enjoy tax-free growth after paying the tax on the initial distribution.

5. Consider gradual withdrawals to stay in a lower tax bracket

If you have little or no taxable income in retirement, you should be taking a little money out of your tax-deferred plans every year once you reach age 59 1/2. If you limit that amount to the total of your personal exemptions and standard deductions, you can essentially take the money out tax-free. In a progressive tax structure, it may also make sense to take out just short of an amount that would take you out of the lowest tax bracket. This way, you do not end up taking larger distributions that force you into a higher tax bracket once you turn 70 1/2.

6. Coordinate withdrawals with deductions

Beyond matching distributions from tax-deferred plans with personal exemptions and standard deductions, there is also another option to further limit your tax liability. You can make heavier distributions in years when you have large itemized deductions (such as for medical expenses).
Tax strategies often come down to the specifics of an individual's situation, so you can't always generalize about what works best. However, a more tax-efficient withdrawal approach demonstrates that it is always wise to do some scenario testing before making decisions that could affect your taxes.

Monday, September 19, 2016

Estate Planning: Choose the right person for the job

You are doing your estate plan. You have to choose people for certain duties. You may be tempted to name your spouse or the kids in birth order because you think that it is the fair thing to do. But is it the right thing to do? Have you really thought about the skill set that is necessary for the jobs that need to be accomplished?
You have different jobs depending upon the estate planning documents you have and the instructions you have in those documents. Generally, there are two main types of jobs that are included in estate planning documents: those jobs relating to handling finances and other property and those jobs relating to taking care of you.
With your will, you appoint one or more personal representatives with at least two backups to handle your finances and other property (in your sole name at the time of your death and do not have a beneficiary designation). Your finances and other property will have to go through probate. Your personal representatives not only will have to manage your finances and other property after your death, they will have to navigate the probate court process.
Your will is only effective after death. During your lifetime, the financial agent and at least two backups that you appoint in your financial power of attorney are responsible for your finances and other property that are owned solely by you or that you can access as a joint owner. Your agents pay your bills, manage your investments and other property in order to provide for you. The powers granted to your agents in your financial power of attorney generally expire when you do.
Your trust is not only effective during your lifetime, but also after your death. You appoint one or more trustees to manage your finances and other property that have been transferred or otherwise funded into your trust. Most of our clients are the trustees of their own trusts while they are alive and well. However, you need to appoint one or more successor trustees with at least two backups to take care of the trust property for your benefit and possibly other loved ones when you are mentally disabled.
You also will need to appoint one or more successor trustees to manage the trust assets after your death for your designated beneficiaries. If you have set up separate lifetime trusts for any of the beneficiaries to take effect after your death, you also need to appoint trustees of those trusts.
Do your spouse and the kids, in birth order, have the skill set to handle your finances and other property? If one of your loved ones is always going into debt and never has enough money, even though he or she has a decent job, then maybe you should rethink appointing them as successor trustee. Maybe money management skills are not one of the gifts that God has given them.
If one of the kids always has their hand out to you and dipping into the family financial bucket, do you think they would be able to resist dipping into the family financial bucket when they are in charge? Is it fair to you or to your other loved ones to face that financial risk? Is it fair to the  individual who lacks money management skills to be put into such a situation?
If the individual cannot even handle their own finances, how are they also going to handle yours during your disability? They are going to have to collect your income, pay your bills, reconcile accounts and protect and preserve your assets.
I have seen more than once when a financially challenged spouse or child is appointed as personal representative, financial agent or trustee, that funds get "borrowed" by the individual. The individual has every intention of paying the money back, but doesn't, for the same reason that led them to "borrow" the funds in the first place. The money is gone. It is spent.
When a personal representative, financial agent or trustee improperly "borrows" funds of others to use for their own benefit, it is a form of embezzlement and is a crime. It does not matter if they intended to pay the money back. It could end up with “hi-ho, hi-ho it's off to jail they go.”
Most of our trust clients have a disability panel made up of at least three individuals who make the determination that they are unable to effectively manage their property and financial affairs. When your disability panel makes that determination, you are out as trustee and then your nominated disability trustees can take over.
Sometimes the disability panel members and the disability trustees are the same individuals. Sometimes they are not. It depends on their skill set. Similarly, many of our clients have a disability panel that triggers when their agent can act under a financial power of attorney. Like with a trust, sometimes the disability panel members are the designated agents. Sometimes they are not.
I have seen a number of situations where a spouse or a child named to a disability panel could not emotionally make the determination and sign the disability certificate when it was clear that the person could not effectively manage their property or financial affairs.
In your health care power of attorney, you appoint a patient advocate and at least two backups to make medical and mental health care treatment decisions for you when you cannot. If you give it to them, they also have the power to withhold or withdraw life-sustaining treatment at end of life when artificial means are being used to keep you alive and prolong the dying process. Basically, they would have the power to pull the plug.
Is your patient advocate emotionally not only ready to make medical and mental health care treatment decisions, but also life and death decisions? I have seen a number of situations where the patient's instructions were very clear, but the spouse or child patient advocate could not make the decision to withhold or withdraw treatment that could or would lead to the patient's death.
Choose wisely. Pick the people who have the skills to do the job that you want them to do. That is probably the fairest thing you can do for yourself and your loved ones

Sunday, September 18, 2016

4 Steps to Reducing the Chances of Fraud


Strengthening your internal controls and taking advantage of data and analytics (D&A) will go a long way to preventing fraud – or at least increasing the likelihood of detection before it can cause catastrophic damage. Below are four ways to put these strategies into action:
  1. Fight back with technology: Companies should be using automated computer programs with D&A capabilities to conduct 24/7 surveillance and monitoring. Our survey found that only three percent of frauds were detected by proactive data analytics; this is a clear indication that companies are not fully utilizing this important fraud-fighting weapon.
These types of software programs are capable of monitoring and analyzing:
  • all business transactions, anywhere in the world
  • employee conduct, including when they arrive and leave; computer usage; where they go on business premises, etc.
  • public records, news and social media for indications of employee or third party lifestyle changes, financial activities, questionable activities, etc.
D&A programs can be designed to flag aberrations or changes in behavior or business patterns that might be indicators of fraud.
  1. Conduct regular fraud risk assessments: One of the best strategies to combat fraud is a regular fraud risk assessment conducted as part of an enterprise-wide risk assessment process. Formal assessments should be conducted annually; it should be done more frequently if the company is experiencing high levels of change. This would include companies expanding globally, implementing new business operations, or subject to new regulations.
These assessments can show where a company has gaps in its internal controls (e.g., both activity-based and entity-level). They can also help companies prioritize the areas in which it needs to invest in anti-fraud measures.
  1. Know your business partners and third parties: In addition to monitoring their employees, companies need to scrutinize their business partners and other third parties conducting business on their behalf. This is particularly true as companies extend their reach across the globe.
Specifically, organizations should:
  • perform comprehensive background searches and integrity evaluations prior to entering into a business relationship.
  • periodically check to ensure that suppliers are billing them as per contractual agreement; this can be required under the “right to audit” clause that’s normally included in business agreements.
For companies with hundreds, let alone thousands or tens of thousands, of business relationships, this may seem like an overwhelming task. But the same technology and D&A advancements discussed above can enable you to conduct cost-effective due diligence of third parties and contractual agreements, both initially and throughout the course of your relationship.
  1. See something, say something: One of the most effective ways of detecting fraud is through the good, old-fashioned technique of encouraging tips from employees and/or vendors and suppliers. To be successful, however, it’s essential to develop a strong culture in which employees (and third parties):
  • are aware of the risks of fraud
  • know what to look for
  • have ready access to reporting options
  • are not afraid to come forward (this is critical)
What to look for: As noted earlier, it’s likely that the fraudster is an employee who’s been with your company for several years, often a well-respected individual who no one suspects. But there typically are tell-tale signs of fraud, if you look closely enough.
For example, the following are some of the top red flags associated with fraudsters1:
  • Living beyond means
  • Financial difficulties
  • Overly close association with vendors/customers
  • Control issues/unwillingness to share duties
  • “Wheeler-dealer” attitude/shrewd or unscrupulous behavior
  • Divorce/family problems
Nurture a culture of trust: See something, say something is a catchy phrase. But it won’t mean a thing unless employees believe that they won’t have to fear for their job if they raise a red flag. This may be an easier task for some companies than others, but it will be worth the effort.
Provide training courses on fraud, and offer a variety of “whistle blowing” options, such as their supervisor, a human resources person, or an anonymous hotline (preferably that’s independent from the company).
Take appropriate action: Once an alarm is sounded – whether from a tip or a D&A alert – you need to take appropriate action.
Not every transactional aberration, change in behavior, or employee exhibiting a red flag means that a fraud is being perpetrated. However, you need to at least make an inquiry into the matter, regardless of who the suspect is. And depending on the tip or the result of your initial inquiry, a more formal investigation may need to be conducted.
It’s also a good practice to publicize when an executive, manager or other employee is found guilty of fraud, particularly if it’s the result of a tip. It will help reinforce the perception that your company takes tips seriously, acts upon them, and does not retaliate against people who come forward.
All of these action steps will not prevent fraud from occurring but will discourage some individuals from attempting it. The simple truth is that as long as individuals think they can gain financially through illegal means without getting caught, they will try to commit fraud.
However, by being aware of who potential fraudsters are, and employing the strategies covered in this article, you stand a better chance of ferreting them out before they can do real damage.

Thursday, September 15, 2016

5 steps to strengthen internal controls at small businesses and not-for-profits


Internal controls may lag at smaller organisations as managers sacrifice them for the sake of service delivery, particularly at cost-conscious not-for-profits and start-up organisations.
Yet the risks are too great to ignore. Consider that the Association of Certified Fraud Examiners (ACFE) in its Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study found that businesses with fewer than 100 employees are more vulnerable to occupational fraud. The median annual fraud loss for religious, charitable, or social service organisations was $82,000. This amount does not take into account the cost to the organisation’s reputation. Because charitable organisations are in the public eye, the occurrence of fraud, or even allegations of fraud, can significantly affect an entity’s ability to attract support.
There are many approaches to risk management, but the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) Internal Control – Integrated Framework can be used by virtually any organisation, large or small, to strengthen governance, improve the reliability of financial reporting, and deter fraud. The COSO framework emphasises that internal controls should be designed with consideration for the entity’s unique environment and its risk tolerance. It does not prescribe specific activities. Instead, it offers a structured approach to making risk-based, informed decisions. Applying the COSO framework, leaders can lend analytical abilities to identify risks and optimise controls to support critical processes.
Here are five low-cost steps to consider as a starting point: 
Set a strong tone internally. Internal controls are processes affected by people and the actions they take every day in our organisations. The ACFE’s study showed that only 6.4% of fraud is discovered by external auditors. Internal controls involve everyone in an organisation, and the board and leadership team set the tone.
Provide a formal system for individuals to raise concerns without fear of retaliation. The ACFE study found that fraud is most often discovered from tips – in 29.6% of cases. The best thing managers can do is create a mechanism by which employees can report concerns. Even the smallest organisation can adopt a whistle-blower policy and incorporate that policy into employee handbooks and training for new workers. The online resource library of the American Institute of CPAs’ Not-for-Profit Section has a sample of such a policy, which can be downloaded and tailored to individual organisations.
Be attuned to what is happening within the organisation. Managers should be aware of conflicts, tensions, pressures, or incentives that could compromise decision-making, integrity, and the reliability of the entity’s financial reporting. Examples of such pressures could be aggressive growth goals, a poorly designed incentive-based compensation structure, or unbalanced workloads that lead to unfair treatment, employee resentment, and burnout. Employees who are under pressure are more prone to ignore internal controls or take advantage of control weaknesses for their own benefit.
Focus on relationship-building and open communication. It is possible to maintain an attitude of professional scepticism and, at the same time, build relationships on a foundation of trust. One way: adopting open-book managementpractices and explaining not just “how” but “why” particular processes are needed from a business perspective. Address issues of noncompliance first by identifying the behaviour you observed, then giving the employee an opportunity to voice his or her concerns. Second, acknowledge the employee’s viewpoint and then explain the business reason for the change. Finally, clearly state your expectations going forward. Use “I” instead of “you” in communication. Example: “I noticed that your supervisor did not preapprove this transaction” is better than “You didn’t get proper approval from your supervisor.” Keep interactions professional, not personal.
By establishing controls and processes that did not exist previously, you may cause an internal power struggle. An employee may perceive a new process, such as a new process for authorising transactions, for example, as a sign of distrust. Give employees a chance to express concerns before implementation, and be sure to explain the business rationale.
Consistently enforce policies across the entity to uphold fairness. Periodic, one-on-one discussions with individuals about organisational policies can be enlightening. Training new employees is a given, but some organisations fail to apprise employees of the acceptable use of the organisation’s property, including confidential and sensitive information. Check references and conduct pre-hire and periodic background checks, particularly for employees involved within the finance or accounting function and for those who have access to sensitive information. Also, review IT systems access logs. As much as possible, separate duties so that no single individual has control of all aspects of a transaction, and separate authorisation from recordkeeping.
In small organisations, unwritten policies can be effective where a process has existed for a long time and is a well-understood practice and where communications channels involve a minimum number of management levels as well as close interaction with, and supervision of, personnel. Keep in mind, though, that no matter how well designed controls are, they are not failsafe. Although managers cannot prevent all problems from occurring, the leadership tone they set by treating individuals fairly, and identifying and remedying issues, sends a strong signal about activities that are acceptable and those that are unacceptable.

Wednesday, September 14, 2016

Harvest Your Investment Tax Losses Throughout the Year


Summer just ended: Why am I writing about tax-loss harvesting?

Tax-focused articles tend to proliferate at the end of the year. These reminders are often helpful. Unfortunately, many investors end up thinking that tax-loss harvesting can be managed handily in December, as they make last-minute trades to balance out capital gains with losses for better income-tax outcomes.

In fact, tax-loss harvesting is a tactic best performed whenever its advantages are ripe, at any time of year. In this age of volatile markets, for example, the loss you could have sold—and reaped for a tax offset—last September might have been back to significant positive territory well before Halloween.

Selling that holding for a loss in September and then buying it again 31 days later to adhere to the IRS's wash-sale regulations could have banked you a capital loss to offset capital gains. You might also have been able to offset up to $3,000 of ordinary income.

Sound simple? It's not exactly. There are critical concerns to be weighed, including the disciplined purchase of a proxy—a comparable security—for the sold holding during the 30 day-period when wash-sale rules don't permit you to get back in. Here are five things you need to know:

1. Understand the rules.

The IRS requires you to start by offsetting like-gains with like-losses. You offset long-term capital gains with long-term capital losses (long-term is defined as held for one year or more). Ditto with short-term-gain offsets, which are taxed as ordinary income. Any remaining losses—including long-term losses—can be applied against ordinary income for a maximum of a $3,000 offset per year.

If you've done all that and have still more harvestable losses, these can be carried forward into future tax years—indefinitely. There is no limit to the amount of losses you can carry forward.

The IRS's wash-sale rule stipulates that you can't purchase any "substantially identical" security or stock whose loss you apply to offset gains for 30 days before or after you sell that security. Nor can you obtain an option or contract to acquire that security during this period. And keep in mind: This rule applies to securities purchased by you and your spouse, as well as those held in non-taxable accounts such as individual retirement accounts, trusts held in your names and even companies you hold through your tax ID.

2. Consider your entire tax picture and long-term goals.

Know your tax rate now and when it may change—if you're planning to retire or return to work soon, for example. This is key to understanding how much any contemplated tax-loss harvest might benefit you. Many new retirees find themselves in a more hospitable income-tax environment: Filers in the two lowest tax brackets pay 0% on long-term capital gains.

Investors often juggle multiple goals for multiple accounts. And we all also face a host of uncertainties and unclear time horizons for many major life events. The point is, you still need to set out long-term goals that attempt to take all of these into account as best you can. Any move you make in your portfolio to create a tax efficiency should honor your long-term investment planning.

3. Make sure the reward is worth the risk.

Every trade represents potential risks. In the case of tax-loss harvesting, one of the most obvious risks is that the market ends up moving in ways you didn't anticipate. Is selling that particular holding worth your while? Is it a unique positioning that has no obvious replacement or proxy? Let's go back to the wash-sale rule. What if you're sitting on a loss in a stock whose long-term potential, in your view, is quite strong? Why would you take on the risk that the market will see things your way in the next 30 days, and send the stock rocketing upward?

4. Follow a discipline.

In the example above, I referenced an individual stock. As long-term investors, our discipline prevents us from jumping in and out of great stocks with attractive long-term prospects. But in the case of mutual funds and exchange-traded funds, it's easier to find proxies that meet the IRS's wash-sale rule of not being "substantially identical" securities. For these holdings, you can likely find an ETF proxy that's highly correlated—but tracks a different index. Let's say you harvest a large-cap mutual fund. You could then purchase an ETF that tracks an index like Standard & Poor's 500-stock index as a proxy, holding it for 30 days. On the 31st day, you sell the proxy and get back in the original fund that best meets your portfolio's strategic positioning.

For my clients, I check for potential harvesting opportunities at least once a month. And I make sure we create as small a tracking error as possible in timing trades and getting similar pricing. The key here is continuing to maintain your asset allocation exposure—and sticking to your discipline.

5. If it's the right thing to do, go for it.

I seem to have mentioned a lot of "don'ts." Here's another: If a harvestable tax loss meets your criteria, don't wait. You might as well leverage the volatility in today's markets. There's a time value to money, and a capital gains tax deferred is like getting an interest-free loan from the IRS.

By all means, harvest those losses and defer away.


Tuesday, September 13, 2016

Four Benefits of a Living Trust

Estate planning is largely centered on relieving the worries that result from the death of a loved one.  Nobody wants their family and friends to be weighed down during a time of grief by avoidable court costs, unprotected assets, and ugly disputes among disgruntled heirs.  It’s much better to provide your heirs with an estate plan that allows them to avoid court and offers more privacy and protection.  Often the best solution is to have an attorney create a properly prepared and funded Living Trust in order to accomplish the following:
1. Avoid Probate.  For a Will to be verified and enforced, it must go through probate, which can be a long, stressful, and costly process. If you own property in another state, your family may also have to endure probate in that state, called an ancillary estate.
2. Maintain Privacy.  Probate is a public process, so interested parties are able to submit claims and contest your will.  Solicitors also will have access to your family’s personal and financial information.
3. Limit Court Interference during Incapacity.  If you become incapacitated, your care and assets may require expensive legal proceedings and guardianship.  A Will is not helpful, as it takes effect only when you die.  But a Living Trust allows your care and assets to be managed privately during your incapacity by people you’ve chosen in advance.
4. Protections for Your Beneficiaries.  A Living Trust can contain spendthrift provisions to shield assets from a beneficiary’s personal creditors, and allow you to control the age and other circumstances at which a beneficiary can have access to assets.