Collaborative FinancialSolutions, LLC
CA Insurance License #0B33145Janet Barr, MS, ChFC, CLULPL Registered Principal206 E. Victoria StSanta Barbara, CA 93101805-965-0101
janet.barr@lpl.comwww.collaborativefinancialsolutions.com
March 2012
Election Year Tax Talk: Deciphering theTerminologyBusiness Owner Succession PlanningSeniors Are Often Targets of ScamsCan I provide annuity payments to myheirs after I die?
Election Year Tax Talk: Deciphering the Terminology
See disclaimer on final page
This year's election chatter issure to include a healthy doseof tax talk. To keep up, hereare five terms you shouldknow.
The "Bush tax cuts"
A number of major taxchanges were enacted in 2001and 2003, including lowerfederal income tax rates, special maximumrates for long-term capital gains and qualifyingdividends, and increased standard deductionamounts. While most of the provisions wereextended by legislation passed in late 2010,these tax provisions are still commonly referredto as the "Bush tax cuts" or the "Bush-era taxcuts." With these provisions set to expire againat year-end, much of the tax debate will centeraround whether to extend the provisionsagain--particularly whether to extend theprovisions for all taxpayers, or only to thosewho make less than a certain amount (e.g.,individuals with incomes under $200,000,married couples with incomes under $250,000).
Alternative minimum tax (AMT)
The AMT is essentially a separate federalincome tax system with its own rates and rules.If you're subject to the AMT, you have tocalculate your taxes twice--once under theregular tax system and again under the AMTsystem. Bush tax cuts expanding AMTexemption amounts were extended onlythrough the end of 2011. This increases thepressure to address AMT this year--failure toextend AMT relief would result in an estimated30 million or more individuals being affected bythe AMT in 2012. (Source: U.S. CongressionalResearch Service. The Alternative MinimumTax for Individuals (RL30149; August 23,2011), by Steven Maguire.)
The "Buffett rule"
On August 14, 2011, the
New York Times
published an opinion piece written by WarrenBuffett, chairman and CEO of BerkshireHathaway (Warren E. Buffett, "Stop Coddlingthe Super-Rich,"
New York Times,
August 14,2011). In the piece, Buffett essentially arguedthat he and his "mega-rich friends" weren'tpaying their fair share, noting that the rate atwhich he paid taxes (total tax as a percentageof taxable income) was lower than the other 20people in his office. As Buffett points out, this ispartially attributable to the fact that theultra-wealthy typically receive a high proportionof their income from long-term capital gains andqualified dividends, which are currently taxed atrates that are generally lower than the ratesthat apply to wages and other ordinary income.President Obama has articulated the "Buffettrule" as the tenet that people making more than$1 million annually should not pay a smallershare of their income in taxes than middle-classfamilies pay. (Source: www.whitehouse.gov.)
Value added tax (VAT)
A value added tax (VAT) is a consumption tax,like a sales tax. What distinguishes the VATfrom a straight national sales tax is the fact thatthe VAT is assessed and collected at everypoint in the chain of production, on the "valueadded" at that step in the chain. Although aVAT can be implemented in different ways,here's one general approach: With a 10% VATin effect, a supplier who sells $100 of materialsto a manufacturer would pay $10 in VAT; themanufacturer who, in turn, sells a finishedproduct to a retailer for $150 pays $5 in VAT($150 sale price - $100 cost of materials,multiplied by the VAT rate); the retailer sells theproduct for $200, and pays an additional $5 inVAT ($200 sale price - $150 cost, multiplied bythe VAT rate). Total VAT paid on the product is$20, or 10% of the final sale price.
Flat tax
Simple in concept, a flat tax would apply asingle tax rate to individual income, or individualwages only (i.e., excluding investment income).A separate single rate might apply tobusinesses. Depending on the specificproposal, a base exemption may be allowed toexclude low-income families from the tax, andcertain deductions may be allowed indetermining the amount subject to tax.
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Business Owner Succession Planning
Every successful business owner musteventually face the question: What will happento my business when I become disabled, retire,or die? Sooner or later, you will generally needto identify someone to transfer your ownershipinterest to family members, co-owners, keyemployees, or an outside party. Without asuccession plan, the business may need to beliquidated.
Successor management
One of the first questions that should probablybe addressed is: Do you have successormanagement readily available to run yourbusiness? Without it, the business may fail. Youmight look among co-owners, family members,and key employees for candidates. It may benecessary to train successor management,helping others develop their skills or evenbringing in new talent. Of course, if you sell toan outside party, that party may provide theirown management. It should be noted thatsuccessor management can, but need not, bethe same as the successor owners.
Co-owners
If you have co-owners, you and your co-ownersmay wish to keep ownership limited to a selectgroup. One way to do this, while providing amarket for your interest in the business, is foryou and the other owners or the business entityto enter into a buy-sell agreement. A buy-sellagreement is a legally binding contract in whichthe owners of a business set forth the termsand conditions of a future sale or buyback of adeparting owner's share of the business.Specifically, buy-sells control when owners cansell their interests, who can buy an owner'sinterest, and at what price.
Family members
Keeping the business in the family can presentmany issues that may contribute to the successor failure of the business as it is transferred tothe successor generation. Do you wish to sellthe business to family members, make gifts orbequests of interests, or perhaps use somecombination of these? Do you need income forretirement, for your surviving spouse, or for thepayment of final expenses? You may need toprovide compensation to family membersworking in the business and profits to familymembers retaining an ownership interest, whilecashing out some family members or otherwiseproviding for them.Gifts you make are generally subject to federalgift tax. But you can make gifts of up to $13,000per recipient per year free from gift tax usingthe annual exclusion. You can effectivelydouble that amount by splitting gifts with yourspouse. You can often obtain significantvaluation discounts by making gifts of interestsin a family limited partnership or a family limitedliability company.In 2012, you can also make gifts or bequests ofup to $5,120,000 that are sheltered from federalgift tax and estate tax by the basic exclusionamount. This limit applies to all gifts you makeduring life and to your estate at your death.Under some circumstances, spouses may beable to effectively double the limit by splittinggifts with a spouse or by using the unusedexclusion of a deceased spouse (portability).Note, though, that unless Congress acts, in2013 the exclusion will be reduced to $1 millionand portability expires. Similar exclusions orexemptions apply for generation-skippingtransfer (GST) tax purposes, an additional taximposed when the transfer is to someone twoor more generations younger than you. Theremay also be state gift, estate, or GST tax toconsider.Sales to family members can utilize buy-sellagreements and installment sales. Installmentsales allow the family member to makepayments over time.
Key employees
You may have some key employees workingfor you, who provide some unique skills andvalue to your business, and who have aninterest in owning the business. You may beable to sell the business to them utilizingbuy-sell agreements and installment sales. Abusiness can also be sold to an employee stockownership plan (ESOP), a tax-favoredretirement plan for employees.
Outside party
In some cases, succession is not practicalusing transfers to co-owners, family members,and key employees. Or it may be that you needto obtain the highest possible price for the sale.In that case, selling to an outside party may bethe answer.
Income tax consequences
Generally, the sale of your interest in abusiness will result in capital gain or loss taxtreatment. You generally receive a tax basisstepped up (or stepped down) to fair marketvalue for property you own at your death.Therefore, there will generally be no capitalgain if your estate sells your interest shortlyafter your death. Also, if you sell your interest inan installment sale, capital gains (if any) aregenerally not taxed until installment paymentsare received.
What will happen to your business when you become disabled, retire, or die? You will generally need to identify someone to transfer your ownership interest to family members, co-owners,key employees, or an outside party. There are many options for you to consider.
Page 2 of 4, see disclaimer on final page
Seniors Are Often Targets of Scams
Anyone can fall victim to a financial scam, butseniors tend to be particularly popular targets.Frequently, fraud perpetrated against seniors isnot reported until long after the scam hasoccurred, usually because victims don't realizethey have been scammed or know where toreport the scam, or because victims are tooembarrassed to admit that they have beentaken. Nevertheless, it's important for seniorsand their family members to be aware of thesigns that may point to a fraudulent scheme,and know what steps can be taken to preventbecoming victims of a scam.
Why seniors?
Seniors are a popular target for scammers for anumber of reasons:•Seniors are more likely to own their ownhomes, have a nest egg that's liquid andeasily accessible, and have excellent credit.•Today's generation of seniors were raised tobe kind, helpful, trusting, and polite--perfectqualities for a scammer to exploit, knowingthat it's hard for some seniors to simply say"no."•Age has a tendency to affect memory, andscammers count on seniors not being able toremember important details when reporting ascam to the authorities.
What to look for
Scams targeting seniors often occur in one ofthree ways--through the Internet, on thetelephone, or in person. And just when youthink you've heard of all the possible scams outthere, scammers will come up with anotherscheme intended to victimize seniors. The FBIwebsite (www.fbi.gov) has a section dedicatedto fraud targeting seniors. The site describes anumber of schemes that have been discovered.It's a good idea to check this site regularly tokeep updated on new scams. Here are some ofthe more popular scams that have victimizedseniors.
Scams related to health care
There are a number of scams that focus on thenew health-care law, health insurance forseniors, and Medicare. These scams may focuson "Obamacare" benefits, claiming that there isa "limited enrollment period," great insurancecoverage including drug benefits for a lowmonthly cost, free medical equipment, low-costdrugs, or free medical tests given atnonmedical facilities like health clubs orshopping malls. To be on the safe side, don'tsign a blank insurance claim form, since yourinsurance company may be billed for items younever received; generally don't do businessover the phone or in person with a door-to-doorsalesman for medical services or benefits; andcall your insurance carrier to be sure that whatyou're supposed to be getting "free of charge"is actually covered by your insurance.
Telemarketing scams
We've all been subjected to telemarketing, andit isn't always a bad thing. Some products andservices are legitimate. However, telemarketingalso serves as a way to scam people,especially seniors. Some warning signs thatshould prompt you to decline the offer includebeing told you "must act now or the offer won'tbe good," any offer that seems to be free(except that you have to pay for shipping andhandling or administrative fees), therequirement that you provide your credit ordebit card information or bank account number,and the suggestion that you "leave a checktaped to your front door for a courier to pick up."In any case, if the caller tells you it isn'tnecessary to check out their company orconsult family members or your lawyer, it'sprobably best just to decline altogether.
Internet and e-mail scams
Seniors' use of the Internet and e-mail isincreasing daily, and so are Internet scamstargeting seniors. Many such scams are basedon getting credit or debit card information forservices or merchandise that is never delivered.If you're going to give out this informationonline, try to ensure that the site is secure andreputable. Depending on the Web browser youuse, you may see a padlock icon or some otherindication to symbolize that there's a higherlevel of security to send important personalinformation, but it's not a guarantee that the siteis secure. Also, check out the source of themerchandise or service before buying. It shouldhave a physical address and phone number(s)that actually work.In another type of Internet scam, people sendyou an e-mail claiming to be in possession oflarge sums of money and need you to helpthem open a U.S. bank account. Often, theyask that you "seed" the account with your ownmoney, and in return, they'll pay youhandsomely. Don't believe this promise anddon't respond to the e-mail.
Bottom line
In short, as we've all heard before, if it soundstoo good to be true, it probably is. If you fallvictim to a scam, in addition to reporting it toyour local police, you can report it to the FBIthrough their electronic tip line found atwww.fbi.gov.
Here are a few things that may help you protect an elderly relative from being victimized by a scam: •Become familiar with your loved one's finances •Recommend that they have any regular income directly deposited to their bank •Suggest that they consult you or someone else they trust before buying any service or product over the phone, online, or via the mail
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