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The following is a news alert that we received from Thomson Reuters/PPC, the tax research service to which we subscribe.  It is very disturbing, and all our clients and friends of the firm should be aware of it:

Consumers and Tax Professionals Targeted in IRS E-mail Schemes:  The IRS has seen an approximate 400% surge in phishing and malware incidents so far this tax season. The emails are designed to trick taxpayers into responding to official communications that lead to websites designed to imitate official looking websites. The sites ask for social security numbers and other personal information. The sites also carry malware which infect computers and allow criminals to access files or track keystrokes to gain information. “While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. Tax professionals also are reporting phishing schemes to obtain their online credentials. If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov. IR-2016-28.

Rules of Thumb:

  • If the “IRS” or “Treasury Department” calls you threatening legal action against you for a tax issue of which you are unaware, hang up – IT IS A HOAX!  As we have pointed out in earlier blog posts, the IRS will never initiate action against you without following strict protocol and they will certainly not call you about something without corresponding with you in writing beforehand.
  • Similarly with e-mail – if an e-mail claims to be an official communication, don’t believe it.  Actually, try not to open it to avoid malware issues.  The bottom line is, the IRS does not use e-mail for “official communication.”[1]  However, if you have a doubt about the authenticity of an e-mail, you can call the IRS at the appropriate number (found at:  https://www.irs.gov/uac/Telephone-Assistance) and speak with them about it.  And, of course, consider reporting the incident as indicated above.

The Internet is a wonderful thing, but with the good comes the bad, and the ability to defraud uninformed taxpayers is right up there with the bad.  Don’t let these geeky, tech-savvy criminals take a bite out of you.

[1] If you are already under examination and working with an agent, s/he may use e-mail to communicate with you, but you will already know who s/he is.  In any event, the communication will not be “official.”

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche. Raymond Russolillo

I have been in and around family offices for over 30 years.  Frankly, I am still not sure what they are.

At best, the term “family office” is amorphous.   So is its history.  No one knows exactly when or how, but in Europe, the first family offices started in the 15th and 16th centuries just after the Crusades with land ownership being the main store of value being managed.  By contrast, the original U.S. family offices were created by wealthy merchants in the 19th century who hired trusted advisors to oversee their wealth and, by extension, their families while they traveled.  The concept grew and by the early 20th century families like Rockefeller, Phipps, and Pitcairn started their own offices to manage the family fortune for generations to come.  Today, many offices are started by those in technology and finance.  The fact is, then as now, no two offices are alike.

Since I like to simplify, I like to think of family offices as existing to take care of the “business of the family” rather than the “family business.”  It is a subtle, yet crucial difference.family office

In its simplest and most comprehensive sense, a family office is an organization or group of organizations which provide planning, compliance, and administrative services to one or more generations of a family.  These services are designed to preserve, enhance, and grow the already attained wealth of the family.  Importantly, the family office is not an operating company that creates wealth; it is a vehicle to manage and administer family wealth for current and future generations.  To the extent that a family office is involved with managing money for its clients, certain registration and compliance rules apply; these are beyond the scope of today’s discussion.

Ok, so I guess I DO know what a family office is!

These days, most family offices are started after the liquidation of a family operating business resulting in a large infusion of liquid capital to the family unit.  The patriarch/matriarch is often not as interested in “running the money” as they were in “running the family business” and the hiring of outside advisors and delegation of control often occurs.

There are two basic types of family offices, the single-family office (SFO’s) and the multi-family office (MFO’s).  Generally speaking, SFO’s are not economically viable unless there is a truly substantial amount of wealth, say $100 million or more.  As in days of yore, these offices come in a wide variety of flavors and can be as simple as a single employee organizing the multiple members of the family to full-fledged enterprises with a CEO, CIO, accountants, bookkeepers, and other professionals on staff at the beck and call of the family members.  MFO’s serve more than one family and may be private enterprises, combined to share infrastructure costs or may be public, commercial vendors organized around the wealth management model.  We tend to think of MFO’s being housed in private banks and money management firms.

A third type of family office is actually a variation on the theme of the MFO.  It is what I like to call the virtual family office (VFO).  In a VFO, independent high end service providers such as money managers, accountants, attorneys and bankers join forces to form teams to act as family offices without the family having to make the substantial investment required of an SFO.  The virtual family office also has an advantage over a traditional MFO in that the services are not limited to the offerings on the menu of the MFO.

Family offices can also be divided into three classes, with overlap of course, as follows:

  • Class A – Family Office Companies
    • Provide comprehensive financial oversight and estate management
    • Often charge a flat monthly fee
    • Advice is objective; report monthly to clients
  • Class B – Financial Services offered by lawyers, CPA’s and banks
    • Provide investment advice for a fee which may or may not be free from conflicts of interest
    • Can offer products and services outside the normal scope of a family office
    • Do not generally directly manage or administer illiquid assets in an estate.
  • Class C – Basic Estate Services
    • Monitors the estate and reports irregularities to the family or trustee
    • Provides basic administrative services such as bookkeeping and mail sorting
    • Generally run directly by the family

Once the province of the mega-wealthy, the family office has morphed into a concept from which a much wider group of high net worth families can benefit.  Traditional accounting, legal, and investment management relationships have often evolved to include related and much needed services that go far beyond the scope of the traditional relationship.  As one’s family wealth grows, so does the need for an integrated and comprehensive approach to managing the “business of the family.”

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche. Raymond Russolillo

A number of years ago, when I was employed as a manager at another accounting firm, I worked for a partner who used to say: “The dumbest thing a rich person can do is buy an airplane!”  He was convinced that, for all but those at the tippy-tippy top of the income pyramid, the 1% of the 1%, if you will, an airplane would be a waste of money.  And, back then he may have been right.

Of course, that was before 9/11 turned commercial flying into a daily nightmare whereby full-fare paying first and business class travelers (as well as bargain basement, standby student joyriders) are presumed potential terrorists and have to partially disrobe and unpack to prove otherwise.  What was a barely tolerable experience before 9/11 is now basically unbearable.

It was also before the “1%” added a few more zero’s to its average wealth.  Today’s wealthy are very wealthy and, while cost is always important, convenience and quality of experience is generally far more important.   Taking the hassle and the relative cost into consideration and suddenly that private plane doesn’t seem so expensive.

Consider this – Commercial airlines fly to about 550 airports in this country; general aviation has almost 10 times that number at its disposal!  You’re the boss in your own private plane, not the petulant overworked, underpaid flight attendant.  And best of all, you travel on your own schedule, without commercial aviation’s strip search and shoe removal rituals.  It does sound good.

Of course there is a huge, huge difference between the Cessna 150 that my dad used to own, fly and maintain himself, and the eleven jets (including a Boeing 707) that John Travolta owjohn travoltans.  Like everything else in life, you can drive a Hyundai or a Ferrari and they will both get you there but one is just a car and the other is…..A CAR!
So, just in case you are thinking about starting your own personal airline anytime soon, here are a few practical things to consider.  And, of course, if you do decide to take the plunge, please, please, please do that proverbial deep dive to quantify and qualify your potential purchase.

  • Why are you buying a plane?  Is it strictly for personal use or is there a business component?  If there is a business component, how much of one is there?  Can costs be shared in an efficient and equitable manner?
  • If business usage is a possibility, will it be “private” business usage or “public” business usage?  In other words, will the primary use be personal, subjecting the plane to the more relaxed Federal Aviation Regulations (FAR) Part 91 or will the primary use be that of a common carrier, subjecting the plane, its maintenance schedule and pilot competence and training to the more stringent rules of Part 135?  
  • How are you going to manage the risk?  What form of ownership works best – corporate, LLC?  If you will be sharing ownership, how will that be structured?  (Hint, hint – it will impact your insurance premiums.)  And, of course it is a given that you will need to use a specialty insurer to properly underwrite the risk.
  • How important is it for you to have an airplane standing by at all times to shuttle you wherever you have to go?  Remember, it’s not just the cost of the machine; it’s the people on your payroll who have to fly the darn thing!  But for the control freak, ownership really does have its privileges.
  • Will a fractional ownership arrangement (i.e., NetJets) provide what you need at a fraction of the cost?  Sometimes, a “timeshare” is ideal – lots of flexibility with little of the headaches.
  • What taxes will apply?  Oh boy, what a minefield this one is!
    • Depending on usage there may be a Federal transportation Excise Tax (FET).  Of course, the IRS and the FAA don’t necessarily agree on what constitutes “commercial usage” so you may be in for some differing interpretations.
    • State sales and use tax comes into play. Most states impose a sales tax on the purchase and delivery of an aircraft within their state, and nearly all have a similar tax on the use of the aircraft within their state.  A couple of years ago, a client insisted that he did not owe the State of New Jersey any use tax even though he clearly purchased, took delivery, and housed the plane in the State!  Luckily for us, he is no longer a client…..
    • There are rules on imputed income for the personal use of a business aircraft so, if a plane is held mainly for business usage, be prepared for a tax bite when the usage is actually personal.
    • There are rules concerning depreciation and allowable losses and material participation, basically determining what is deductible and when. Not particularly clear.    What is clear is the need to determine up front why and how you own and operate the aircraft in order to determine the tax impact.  Comprehensive assessment up front coupled with detailed records on the back end is critical to optimizing the tax bite.

So, if you end up deciding that it is indeed worth the hassle and you go for the gold (Donald Trump’s private 757 has gold plated seat recline buttons, safety belt hardware, power outlet covers, faucet handles and sink basins, for crying out loud!) please invite me over for a little spin.  Somewhere in the Caribbean is really nice this time of year!

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.

In an earlier post we described an interesting charitable technique known as thRaymond Russolilloe “conservation easement.”  In a nutshell, this technique allows you to swap some (permanent) flexibility with respect to your property for a healthy charitable deduction.  It is designed to encourage taxpayers to preserve open space for conservation or recreation purposes and to protect certain historic structures.   I encourage you to read the prior post for more details.  We think it is a great technique because, as we said then and still maintain now, it is the very essence of having your cake and eating it, too.

But, as in all things tax, you have to make sure you dot your I’s and cross your T’s.  A recently decided Tax Court case (David R. Gemplerle, et ux. v. Commissioner, TC Memo 2016-1) underscores the tax truism that form prevails over substance, especially in cases like this.

The Gemperle’s owned and lived in an historic home.  In 2007, they granted a facade easement on the property to the Landmarks Preservation Council of Illinois.  The Council guided them through the process, including the hiring of an appraiser who subsequently determined the value of the easement to be $108,000 which the taxpayers then claimed on their 2007 tax return.  On later examination, the IRS disallowed the deduction for the simple reason that the taxpayers did not attach a copy of the appraisal to the return as filed nor did they fully complete Form 8283, Noncash Charitable Contributions.  The Tax Court agreed with the IRS position, basically eliminating the deduction and, on top of it all, assessing  a 20% accuracy related penalty and a 40% valuation penalty.

In court, the IRS argued five points:  (1) the absence of a “qualified” appraisal; (2) the existence of some technical deficiencies with respect to the facade easement itself; (3) the failure of the taxpayers to include a copy of the appraisal with the return; (4) the failure of the taxpayers to attach an appraisal summary as required by regulations and; (5) the ultimate failure of the taxpayers to prove that the decrease in value was indeed $108,000.  The Tax Court stripped the issue down to its simplest and harshest essence – they threw out the taxpayer’s case because of the taxpayers’ failure to attach a copy of the appraisal to the tax return.  Because they were relying on this simple test of fact (was an appraisal attached? – No) they did not even need to consider any of the IRS’ other points.

We can argue this heavy handed decision on the part of the Court, but the moral of the story should be clear to taxpayers and practitioners alike – if the rules say to attach certain documentation to a return, do it!  Particularly in the area of valuation, form will often beat out substance.

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.

I guess physical house robberies and street muggings are too risky for criminals these days.  Over the past couple of years, an entire cottage industry of IRS scammers has sprung up whereby telephone “solicitors” call unsuspecting Raymond Russolillotaxpayers and threaten them with legal action if they do not pay their back taxes immediately.  A number of my clients have received such calls and were, to put it mildly, shaken up by the whole experience.

Here’s the deal – we all know that the IRS is a huge, unwieldy bureaucracy that is very easy to criticize and ridicule and just as easy to fear.  As an institution, it is far from perfect.  But, the one thing IRS really knows, and lives by, is PROCEDURE!  There are time constraints and notice requirements and all kinds of legal processes procedures in place to protect both the taxpayer and the taxing agency.  And the bottom line is, procedure dictates that IRS not shake down taxpayers by telephone!  If the IRS is truly “after” you, you will know because they always make first contact by mail.  The telephone may be used to communicate with you once you are in the audit process, but any settlement offer, assessment, or bill will always be delivered to you on paper, not by an angry, demanding phone call.

Scammers rely on taxpayers’ ignorance of procedure and fear of government agencies.  Don’t be so easily fooled.  Knowing the rules the IRS lives by will enable you to spot a scam and nip it in the bud.  The IRS will never:

  1. Call to demand immediate payment, nor will they call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

So, what if you receive a call from a scammer?  First of all, stop, take a deep breath….and do nothing.  End the call.  If you receive a voice mail message, you may want to save the recording, particularly if you plan to report the incident to the authorities.   If you have some doubt about the legitimacy of a call (under the theory that “where there is smoke there is fire” – perhaps you received a letter that you ignored or forgot about), you should immediately contact your tax advisor for assistance.  At the very least, you can contact the Internal Revenue Service yourself at (800) 829-1040 to see if there are any open tax items you may have neglected to address.  But, if you know you owe no taxes or you are unaware of any issues in dispute, you may want to consider reporting the incident to the Treasury Inspector General for Tax Administration (TIGTA) at (800) 366-4484 or at www.tigta.gov.  You can also file a complaint using the FTC Complaint Assistant; choose “Other” and then “Imposter Scams.”  Include the words “IRS Telephone Scam” in the notes.

Finally, regarding other forms of communication, it is safe to say that the IRS is not even in the 21st century yet.  They do not use unsolicited e-mail (which itself is so 20th century), text messages, or any kind of social media to discuss your personal tax issues.

You know the old saw about “a fool and his money are soon parted.”  Don’t let fear and ignorance make you that fool.

Nappi-TedToday’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.

Well, we have reached the final day of a very informative week at the 50th Annual Heckerling Institute on Estate Planning in Orlando, FL.

It was a short day, but filled with great speakers such as Natalie Choate, Todd Angkatavanich, Martin Shenkman and the famous Jonathan Blattmachr.

Natalie Choate presented on “Estate Planning for Retirement Benefits: A Step-by-Step, How-to-Do-It Manual for Practitioners.” Her presentation was a practical guide to estate planning for those troublesome assets called retirement benefits. She explains how to deal with retirement benefits as part of a client’s estate plan: whom to choose as beneficiary of the plan; how best to leave the retirement benefits to the chosen beneficiary if he/she is a minor, a spouse, a “second spouse,” a disabled beneficiary, a charity, or “other”—or some combination of the foregoing. She discussed how retirement benefits fit in (or don’t fit in) with federal transfer tax planning; and the special rules you need to know when planning for retirement benefits.

The second session covered by Todd Angkatavanich was titled, “Soup to Nuts: A Practitioner’s Guide Through the Minefield.” Todd’s presentation provided a discussion of the many estate and gift tax pitfalls that practitioners need to keep in mind whenever structuring transactions between family members. He discussed a broad overview of the statutory provisions of sections 2701 through 2704. Additionally, he presented proactive planning tips to help practitioners navigate the Chapter 14 minefield.

There are a number of gift and estate tax issues that may arise under Internal Revenue Code (the “Code”) Chapter 14 in connection with transfers of business interests or transfers in trust when family members are involved. Contained within Chapter 14, generally there are numerous gift and estate tax provisions that are designed to discourage certain types of transactions or arrangements entered into between members of the same extended family. The violation of one or more of these provisions can cause an unanticipated deemed gift or increase in the value of one’s estate, which can potentially result in substantial gift or estate tax. Many of these sections of the Code are written very broadly and are not intuitive and can unexpectedly apply even when a transaction has not been structured with the intention of achieving estate or gift tax savings, or in circumstances where wealth transfer may not even be the objective.

Finally Marty Shenkman and Jonathon Blattmachr closed the conference with their presentation on “Practical Planning Strategies for the Future.” Their presentation reviewed several of the key planning strategies covered during the week, and explained why and how some of them will remain viable strategies for the future. They offered practical suggestions for how practitioners can prepare and grow despite the uncertainty the future presents. They discussed how estate planning will become increasingly dependent upon investment strategies and results, and explained why planning will be more predictable with greater investment certainty.

Scheier-DonToday’s blog post about the Heckerling Institute is written by Withum’s Estate & Trust Services Partner, Donald Scheier.

Today started with M. Read Moore’s recognition that U.S. estate planners must now work in a global environment. We can no longer only concern ourselves with the laws of the United States. We must be educated with respect to how various countries will treat the use of certain tax planning devices/methods.

We rely on the widespread use and acceptance of trusts, simplicity in organizing companies and expediency in financial transactions. However, governments and regulators around the world are often skeptical of these features, among other things, suspecting them of facilitating money laundering and tax evasion.

For example, many governments and international organizations think the following are sound public policies:

  1. Requiring financial institutions, lawyers, accountants, trust and company service providers and others providing services that involve some financial component to determine who actually owns and controls an entity, including in the case of a trust, most or all of the trust’s beneficiaries.
  2. Having a central register of shareholders of companies and settlors and beneficiaries of trusts that is available for review by law enforcement authorities, interested persons or perhaps even the general public.
  3. Requiring financial institutions and other persons involved in handling money to disclose information about their foreign customers and clients to governmental authorities or home countries on an automatic basis.
  4. Requiring lawyers advising clients outside of litigation to disclose known or suspected violations of domestic and foreign law to governmental authorities without tipping off the client.

Although the United States is a member of the Financial Action Task Force (“FATF”), its customer due diligence rules lag behind those in much of the rest of the world. Currently, U.S. financial institutions must generally verify the identity of their customers by taking a copy of their driver’s license or passport and proof of address. Many financial institutions go beyond this with respect to entities and ask for copies of relevant organizational documents, including trust agreements. The United States, however, currently does not require financial institutions to identify the beneficial owners of entity accounts except in certain (two) limited situations.

However, in August 2014, the Department of the Treasury, through the Financial Crimes Enforcement Network or “FinCEN,” proposed certain regulations that would require U.S. financial institutions to increase the information they are required to gather.

Mark R. Parthemer spoke in detail about concerns and problems one faces when trying to select a Trustee. He aptly named his discussion, “The Trustee Selection Minefield.” He focused on the tax and non-tax factors that must be considered in the choice of Trustees, such as the grantor’s desire to keep as much control over the assets and beneficiaries. These choices have to be reviewed in light of the potential pitfalls of appointing a person who can cause complications under IRC Section 2036, 2038, 2014 and situs.

Among the Non-Tax Factors to consider are:

  1. Legal Capacity
  2. Personal attributes of Trustee
    • Judgement and Experience
    • Impartiality and Lack of Conflict
    • Investment Sophistication
    • Permanence and Availability
    • Sensitivity to Individual Beneficiaries Needs
    • Accounting, Tax Planning and Record Keeping
    • Fees
  3. Situs Selection issues

Among some of the more common gift tax issues are:

  1. Complete or incomplete gift
  2. Should there be an Ascertainable Standard (HEMS)

Estate tax issues such as who is the “Grantor” is important because of IRC Sections 2036 & 2038 have estate inclusions where certain powers retained by the Grantor will bring the Trust back into the Estate.

To avoid inadvertent adverse tax effects, consider using a “savings clause” to limit automatically any retained powers of the grantor or of the beneficiary.

It is important to understand what the grantor is trying to accomplish in order to determine the powers and limitations that must be incorporated into the trust.

Nancy G. Henderson explored the strategies to use when a poorly drafted or “stale” trust which she defined as an “existing irrevocable trust no longer serving a client’s estate planning objectives.” However, such old and cold trusts can be diamonds in the rough that simply need a little polish to shine again. Her session examined in-depth the use of trust-to-trust transfer techniques such as loans, guarantees, purchases, consolidations, distributions, joint investments and preferred partnerships, among others, to rejuvenate existing inter-vivos and testamentary irrevocable trusts to assist the client in meeting his or her new estate planning goals.

Some alternative strategies for handling a stale trust:

  1. Just Ride it Out – A Stale Trust might be ignored and minimally maintained. The grantor hopes that, with the passage of time, it will be consumed and disappear.
  2. Use It for the Benefit of the New Trust – Rather than abandon the Stale Trust, another trust might be created (the “New Trust”) and the assets of the Stale Trust might be used to grow the assets in the New Trust.
  3. Partner Up with a New Trust – Sometimes the hidden value of the Stale Trust can be realized by partnering with a New Trust in some form of joint venture or joint investment.

Richard S. Franklin’s session on Lifetime QTIPs underscored the multipurpose use of them. These are increasingly the strategy of choice for exclusion use, but these versatile trusts also facilitate minority interest valuation savings, asset protection, gift tax valuation protection, sales to defective “grantor” trusts, and more. His session provided ideas for specific uses (see below) of Lifetime QTIPs and practical implementation guidance.

Some of the Specific Uses of Lifetime QTIPs:

  1. Funding Testamentary use of Donee Spouse’s Applicable
    Exclusion Amount
  2. Funding Lifetime use of Donee Spouse’s Applicable Exclusion Amount
  3. Funding use of Donee Spouse’s GST Exemption
  4. Funding Lifetime use of Donor Spouse’s Applicable Exclusion Amount
    • Formula QTIP Election
    • Simulated FAC Gift
    • Formula Disclaimer
    • Decedent’s Surviving Spouse v. Transferor’s Spouse.
  5. “Grantor” By-Pass Trust
  6. Minority Interest Planning
  7. Donee of Excess Value under Formula Allocation Gift or Sale (a la Petter)
  8. Sales to Defective Grantor Trusts
  9. Income Tax Basis Adjustment
  10. Creditor Protection Planning
  11. Elective Share Planning
  12. Pre-Separation/Divorce Planning
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