In 2012 taxpayers and their advisers were scratching their heads about the presidential election and its impact on future gift and estate tax exemptions because the $5 million inflation indexed per person federal estate and gift tax exclusion was scheduled to drop to $1 million on January 1, 2013.
Consequently, many wealthy matriarchs and patriarchs decided to make substantial gifts to family members by December 31, 2012 in order to report them on Form 709, gift tax returns, that needed to be submitted to the Internal Revenue Service by October 15, 2013 along with their personal tax returns. (*) The intent, of course, was to reduce the size of their taxable estates.
In 2012 and 2013 approximately 258,000 and 369,000 Form 709s were filed with the IRS. The aggregate amount of the gifts in those years was nearly $135,000,000,000 and $421,000,000,000, which was significantly higher than preceding years.
Many practitioners were expecting an influx of audits in 2015 and 2016 associated with the aforementioned 2012 and 2013 filings because once a Form 709 is filed and a gift fully disclosed, the IRS may not reopen the gift tax return if three years have passed. Data regarding 2014 audits has not yet been released by the Service. However, our conversations with estate planners, accountants, financial advisers, and trust officers indicate that very few 709s filed for the 2012 calendar year have been audited to date.
We will continue to keep you apprised of the number of audits in the State of Arizona and United States, the nature of the audits, and the manner in which the IRS attacks business appraisers’ opinions of value and lack of control and lack of marketability discounts applied to noncontrolling, nonmarketable minority interests in family businesses in 2012.
By Gary Ringel, CGREA
(*) The American Taxpayer Relief Act bill of 2012 (“2012 Tax Relief Act” or “Act”) was approved by the Senate and Congress on January 1, 2013 and signed into law by President Obama on January 2, 2013. As it turned out, the 2012 Tax Relief Act continued the estate tax exemption of $5 million, indexed for inflation from 2011. The Act also provided for a maximum estate tax rate of 40%. Therefore, in 2013 a married couple could make lifetime gifts having a value up to $10.5 million without incurring any federal gift tax.
The source for statistics related to Form 709 filings is the Internal Revenue Service.
The source for information regarding the American Taxpayer Relief Act is a January 16, 2013 article titled “Summary of Estate and Gift Tax Law Changes for 2013” authored by SchiffHardin LLP.Posted on February 11 2015 by admin
This was an economic damages case for which I was asked to provide testimony by the plaintiff. The trial was in Orange County, California. It occurred several years ago, right about the time I started testifying regarding these types of matters.
When I looked over at the jury members, I was a bit rattled to see two of them sleeping – soundly. Was my testimony that uninteresting? I then peeked at the judge. To my dismay, he too, was nodding – about ready to drift off into dreamland.
The client who paid for my time on this case did not get a favorable decision from the jury. I blamed myself for not being convincing enough. The attorney with whom I was working assured me, however, that it was not my testimony that hurt the case. It was, he said, the jury’s belief that liability did not exist on the part of the defendant. The good news was that I found out later that the case was successfully appealed by my client.
After testifying on this particular case, I decided that there was a lot more to testifying than just knowing the technical side of what I would be asked to testify about. I realized that I had to engage the decision makers – whether judge or jury, enough to keep them from dozing off or becoming quite bored about what I would be saying. I also decided that I had to become a very good teacher in the courtroom.
I started making eye contact with the judge if I was testifying at a bench trial or with the jury members if it was a trial by jury. I started to be more animated – in a professional manner, and using more inflections in my voice. I also discovered something else that would eventually be quite helpful to my ability to testify successfully. I noticed that CPA experts who opposed me in court would often lose the judge or jury, because of the experts’ insistence on speaking in very technical terms. This, I thought, was the experts’ way of showing the judge or jury just how intelligent they really were; and, because they were so intelligent, they were surely the more convincing witness.
I became a teacher. I studied the body language of the jury members and the judge whenever I started my testimony. If they had a glazed look in their eyes I knew I had to make things more simple and interesting. Then when I noticed their reaction changing – such as a slight nod of the head in approval, I knew I was on the right track. I eventually found that the ability to teach the jury, or the judge, about how a difficult damages calculation worked in language that they understood, gave me an edge over expert witnesses who seemed much more technically intelligent than I, but who spoke in terms that would make Einstein wince.
In summary, I learned two very important lessons on testifying in the courtroom: 1) Engage the jury and the judge. Try doing this by eye contact that is very sincere and using some body and hand gesturing. 2) Be a teacher. Speak and explain in a manner befitting of the level of education and experience of the jury, or judge in a non-jury trial. Try not to get overly-technical with your explanations.
And, one more thing, I….. zzzzzzz.
By Don Bays CPA/ABV, CVA, CFF
Calculating Income for Child Support – Can You Deduct Your Dog Grooming Expense? (He greets clients in your office.)Posted on February 3 2015 by admin
As forensic accountants, we are often asked to assist in divorce cases in order to determine the income of one, or both of the parties to help the Court decide the child support and spousal maintenance obligations. Often in these cases, the husband or wife is self-employed or owns a family business. One of the more controversial parts of our engagement is evaluating the expenses of the company which have been deducted from gross earnings on the tax returns and financial statements of the company. The Arizona Child Support Guidelines state that gross income for child support means gross receipts minus ordinary and necessary expenses required to produce income.
When we review the listed expenses, we must ask the question: “Should the reported expense amounts be considered ordinary and necessary business expenses for the generation of income, or should they be classified as personal or owner discretionary expenses, and therefore, not deducted from the gross receipts for purposes of child support?”
Here are just a few of the examples of interesting expenses we have seen and explanations we have heard over the years:
- “I have to look great in my job”. Although some jobs such as acting and modeling require these types of expenditures, for the average business owner the cost of clothes, dry cleaning bills, haircuts or plastic surgery are not deductible for determining income for child support purposes.
- “My job stresses me out and gives me severe back pain.” I can relate, but the cost of massages and spa days are not deductible.
- “I was late for a business meeting.” Although we see speeding tickets and even traffic school listed as expenses, they are not deductible for calculation income for child support.
- “I work out of my home.” Although this is true for many people, the expenses deducted must be reasonable. We have seen clients deduct everything from the cost of their groceries, pool maintenance, expensive home renovations and their entire mortgage.
- “I am entertaining clients.” Ah yes, the most common explanation for questionable deductions such as boats, cabins, sports tickets, and fancy meals. We also often see a lot of family entertainment deducted – miniature golfing, skating and water parks. It is the forensic accountant’s job to sift through these expenses and make a reasonable determination of what is “ordinary and necessary” for the generation of income.
By Julia Miessner, CPA, CFFPosted on January 27 2015 by admin
A former Tucson real estate agent was indicted on more than 20 counts related to real-estate fraud. The agent began operating a property management company in 2008 after suffering declines in his personal income due to the real estate crash which hit Arizona. By 2012, numerous clients had filed complaints with the Arizona Department of Real Estate contending they were no longer receiving rent payments from the agent and that he was not returning calls. An estimate of losses to clients is in excess of $60,000.
A Coolidge, Arizona man was convicted of fraud and theft charges related to personal use of client deposits and other funds in 2011. State prosecutors had accused the former councilman of taking somewhere between $55,000 and $283,000 to pay for personal expenses including telephone bills, shopping sprees and trips to Las Vegas.
In April 2013, a Maricopa County property management company closed its doors after a “cease and desist” order was issued by the Arizona Department of Real Estate (ADRE). An investigation by the ADRE led to findings of multiple violations including the misuse of trust funds and faulty paperwork. The owner of the property management company was indicted one year later on theft, forgery and fraud schemes. It is estimated that client losses are approaching $300,000, much of which were used for personal expenses including trips to Hawaii and New Orleans.
Property managers are required to have a real estate license in the State of Arizona. But that license does not mean they have been properly trained in property management. The 90 hours of in-class training required for a real estate license hardly cover property management issues such as receipt and handling of rent and security deposits, use of trust accounts for the deposit of those funds and reconciliation of those trust accounts.
If you are in need of a property management firm, protect yourself with a few simple steps:
- Verify they hold an active real estate license in the state
- Inquire as to level/years of experience in handling trust accounts
- Require monthly accountings to be submitted timely
- Search azre.gov for licensing and disciplinary records
If your property manager is not responding to your concerns, has treated you unfairly, or you have experienced a financial loss, file a complaint with the Arizona Department of Real Estate.
By Melissa Loughlin-Sines, ABV/CPA, CVA, CFE, CFFPosted on January 20 2015 by admin
GIFT YOUR RESIDENCE TO YOUR BENEFICIARIES DURING YOUR LIFETIME, CONTINUE TO RESIDE IN IT AND SAVE TAXES
WHAT IS A QPRT?
A qualified personal residence trust (QPRT) is a trust typically designed to transfer a primary residence (*) to your beneficiaries during your lifetime which, if you elect, permits you to serve as the trustee. The term of the QPRT is usually between 10 and 20 years. QPRTs are governed by IRS Section 2702(a)(3)(A)(ii).
CAN I LIVE IN THE HOUSE DURING THE TERM OF THE QPRT?
You may live in the property until the end of the term, but you are required to pay all taxes and expenses associated with the residence, just as if you still owned it.
WHAT OCCURS AT THE END OF THE QPRT’S TERM?
At the end of the term, the ownership of the home will be conveyed to your beneficiaries or to a trust for their benefit. At that juncture, you must enter into a lease agreement with the beneficiaries or trust and actually pay that rent. Otherwise, the IRS could argue upon your death that the property should be included in your estate because the QPRT was never valid.
DOES THE CREATION OF A QPRT DECREASE THE VALUE OF MY ESTATE?
If you were to give your home today to beneficiaries, free and clear, the value of the gift would be equal to the fair market value of the home. However, by gifting the residence to a QPRT; you remove the asset from your estate, lower estate taxes at the time of your death, and take advantage of the individual lifetime gift tax exclusion of $5,340,000.
WHAT ARE THE FACTORS THAT INFLUENCE THE VALUE OF THE GIFT?
The exact value of a gift made through a QPRT depends on several factors, including but not limited to:
- Your age upon the creation of the QPRT;
- The market value of the home as determined by a qualified appraiser; and
- The length of the term of the QPRT. The longer the term of the trust, the lower the taxable gift.
WHAT ARE THE RAMIFICATIONS IF I OUTLIVE THE TERM OF THE QPRT?
In order for a QPRT to succeed, you must outlive the trust term. If you die before the end of the term, the home will be brought back into your estate and subject to estate taxes.
The value of the QPRT gift also depends on the IRS interest rate that is in effect for the month when the QPRT is created because it is used to calculate the present value of the beneficiaries’ remainder interest. The higher the interest rate, the smaller the gift associated with the QPRT. The IRS interest rate has been very low for the past few years, but as it starts to move upwards again, QPRTs will generally become increasingly attractive.
A QPRT is an excellent estate planning tool if structured with foresight and reasonable assumptions. It allows you to optimize the value of your home from both a gift tax and estate tax perspective while enabling you to retain the use and enjoyment of your residence for many years.
Gary Ringel, CGREA, Managing Director, Henry & Horne, LLP Business Valuation & Litigation Support Services Group
(*) The dwelling can also be a vacation home or boat as well as structures appurtenant to it.
One of the sources for this blog is an article published by Brown Brothers Harriman & Co. that was written by Michelle J. Hong, Vice President and Director of Wealth Planning.Posted on January 7 2015 by admin
We just rang in the New Year, 2015, and it is now a time for reflection on 2014. First and foremost, I wish to thank all the clients we served during the past year. Henry & Horne, LLP’s Business Valuation and Litigation Support Services Group (H&H BV/LS Group) provided forensic, valuation and litigation services to more than 200 clients during 2014. This included business valuations for a variety of purposes: the litigation environment, damages analyses for litigation purposes, and forensic accounting services in fraud and litigation matters, among others. Thank you for your patronage.
I would also like to thank the many referral sources for your confidence in our ability to deliver high-quality forensic and valuation services. This includes attorneys, other CPAs, bankers, colleagues, financial professionals and clients. Without your referrals, we would not be in business. Thank you for the numerous referrals you have made to the H&H BV/LS Group during 2014.
I cannot forget to thank my co-workers. We are one of the largest forensic and valuation service groups in the Valley. Each of you brings a unique personality, background and experience that contributes to making the H&H BV/LS Group work environment collegial and enjoyable. Your individual strengths enhance the qualities of the other members and the H&H BV/LS Group as a whole. Your hard work and dedication to quality work contributed significantly to our success over the prior year.
No doubt, 2015 will bring challenges. However, with great clients, wonderful referral sources, and a strong core group of dedicated forensic and valuation professionals, the H&H BV/LS Group will be ready to meet them.
Happy New Year!
By Steve Koons, CPA, ABV, ASA, CFFPosted on December 30 2014 by admin Posted on December 23 2014 by admin Posted on December 16 2014 by admin
Alice decided to try the internet dating service, Ace Dates (“Ace”). She was looking for a future soul mate and put her trust in Ace to help her find the perfect man. Alice was required to provide a photograph of herself and some personal background information. The Ace people would then find compatible fellows in their database and submit each party’s personal information to the other member of the potential couple, with first names only notated.
Through this process Alice got hooked up with a couple of gents that she met via the date scene. She was unimpressed with both. On her third arranged date Alice met a man, Harvey, whom she thought would fulfill all her dreams of having “Mr. Right” in her life for the rest of her days. Alice made a dire mistake.
After several dates and becoming quite accustomed to having Harvey around, Alice noticed some subtle changes in Harvey’s behavior towards her. Harvey seemed to have quite a temper, sometimes berating Alice loudly in restaurants. One day Harvey got so irritated with Alice that he clenched a fist as if to strike her. This was not at all the kind of relationship Alice had envisioned. She parted ways with Harvey soon after.
It turned out that Harvey had served two prison sentences for aggravated assault. One of the charges stemmed from his causing physical harm to a past girl friend. The charges somehow escaped Ace’s screening processes. Had Alice known beforehand of Harvey’s dark past she never would have made the connection with him. There was a way that Alice could have run a check on Harvey without his knowledge and with no charge to her.
Alice resided in Arizona in the City of Phoenix which was in the county of Maricopa. Alice could have accessed the Maricopa County Superior Court website (*). There she would have had the opportunity to search Harvey’s name under various court categories: Civil, Criminal and Family Court cases. Searching under the Criminal Cases tab, she would have found Harvey’s name and all the related court actions from the time he was first charged with a crime to the time he was sentenced. She also could have read the court’s minute entries relating to the various hearings involving Harvey.
Now knowing that Harvey had been sentenced to one of the state’s prisons, Alice could have accessed the state’s Department of Corrections website (**) and found out much about Harvey’s prison record, such as: the details of his charges and how many years he served in prison; at what jobs did he work while in prison; whether he had any disciplinary actions against him while in prison, and other information.
Accessing criminal background information on Harvey using the county superior court and the state department of corrections websites would have alerted Alice that it might not be a bad idea to dump Harvey before too much dating time had elapsed. And, the information would have been provided at no charge. (***)
By Don Bays, CPA/ABV, CVA, CFF
(***) Although this article is applicable to background searches in Maricopa County, Phoenix, Arizona, readers in other Arizona counties and counties in other states may find that their counties offer similar research capabilities, at no charge.Posted on by admin
According to experts gathered at the 51st annual Economic Forecast Luncheon on December 3, 2014 at the Phoenix Convention Center, it could take another two years for Arizona’s economy to recover from the depths of the Great Recession.
Below are some statistics, comments and opinions two of the panelists shared with the audience about the status and future of Arizona’s fragile economy,
Lee McPheter – Director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business
“As of May, the United States finished gaining back 100 percent of its jobs lost in the recession, but in Arizona alone, we’re only 69 percent of the way there. We expect to regain that last 96,400 jobs in the next year and a half.”
“So far this year, Arizona has experienced 2 percent job growth, while our state’s 30-year average is a much higher 4.2 percent. Still, this rate was good enough to rank Arizona as the No. 12 state for job growth as of October.”
“Arizona unemployment has dropped from 7.8 percent last year to 6.8 percent this year. However, we continue to recover much more slowly than from past economic downturns, and we continue to face risks from ineffective growth policies at the national level.”
“Population growth could go up from 1.4 percent in 2014 to 1.5 percent next year.”
Elliott D. Pollack – Chief Executive Officer of Elliott D. Pollack and Company
“We still see relatively sluggish employment growth, fewer people moving, millennials delaying home purchases, many people still waiting out their required seven years in the credit ‘penalty box’ after foreclosures, and overall difficulty in getting home loans.”
According to Pollack, full recovery is still years away and we agree with him. Consequently, we encourage you to be patient and conservative while maintaining a watchful eye for opportunities as the Arizona economy continues to grow.
By Gary Ringel, CGREA-- Older Entries »
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- Will Your 2012 Gift Tax Return be Audited by the IRS?
- Testifying in Court – It’s Not Just What You Say But How You Say It
- Calculating Income for Child Support – Can You Deduct Your Dog Grooming Expense? (He greets clients in your office.)
- Property Management Fraud
- Qualified Personal Residence Trusts