High Net Worth Accounting

2016 IRA contributions — it’s not too late!

Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options

The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

© 2017

Should you make a “charitable IRA rollover” in 2016?

Last year a break valued by many charitably inclined retirees was made permanent: the charitable IRA rollover. If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions.

Satisfy your RMD

A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year in which you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (An RMD deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)

So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid out to you.

Additional benefits

You might be able to achieve a similar tax result from taking the RMD payout and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation. This has two more possible downsides:

• The reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.
• If your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 50% of your adjusted gross income for the year. (Lower limits apply to donations of long-term appreciated securities or made to private foundations.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.

A charitable IRA rollover avoids these potential negative tax consequences.

Have questions about charitable IRA rollovers or other giving strategies? Please contact Mark Patten at 214-696-1922. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.

© 2016

Limiting Personal Liability by Creating a C Corporation

money in handBusiness owners often use C corporations as a means of limiting personal liability. Typically, the owners attempt to shield their personal assets from business related liabilities.  While this can be a useful protection in some circumstances, like preventing a business creditor from placing liens on personal assets, it is often the case that the owner is protecting himself from an unlikely lawsuit while simultaneously subjecting himself to a guaranteed tax.  This is due in part to the fact that most lawsuits against corporations target the business’s insurance, rather than the owner individually.  There is another way to organize your business and its assets that will offer greater legal protection, flexibility, and reduce tax liability.

For many C corporations, the most valuable asset is the real estate that is used to conduct business. One of the biggest mistakes an owner can make is to place the property in the C corp.   There are two reasons why this is a mistake: 1) you have made the C corp a more attractive target for a potential lawsuits or creditor liens (there is a valuable assets that can be taken) and 2) any appreciation on the property will be subject to double taxation upon disposition of the property or liquidation of the business.  To avoid this situation, many tax planners recommend that business owners have 2 entities, a C corp for your business and a partnership or LLC to own the real estate.

The increased protection of your assets is pretty straight-forward in this situation.  Because you do not own the property, it will never be at risk in the event of a lawsuit or creditor action against the C corp.  The corporation is merely a tenet paying rent and has no claim to the property.  Since the partnership or LLC is controlled by the same owner that controls the C corp, there is virtually zero risk that the partnership/LLC would be sued by the tenet (the owner would not sue himself).

The tax benefits of placing the real estate in a partnership instead of the C corp can be realized anytime the real estate appreciates in value.  Let’s use an example to illustrate. Mr. Jones decides to start a business and purchases a building for $100,000.  Mr. Jones then forms ABC Inc. and transfers the property to the C corp, which takes the land with a $100,000 carry over basis.  Over the next 5 years, the land appreciates to a FMV of $200,000.  At this point, ABC Inc. decides to sell the real estate to capture some of the appreciation.  If the land is sold for the FMV of $200,000, ABC Inc. will recognize $100,000 of gain.  This gain is subject to corporate income tax of 35% (C corps do not get the more favorable capital gains rates).  After completing the transaction, ABC Inc. will receive $165,000.00 net of corporate tax. The second tax bite occurs with the distribution of the proceeds to Mr. Jones.  Of the $65,000 of gain remaining, Mr. Jones will owe a personal income tax of 23.8%, or $15,470.00.  The after tax proceeds to Mr. Jones on a $200,000 transaction with a $100,000 gain is $149,530, meaning over 50% of the gain was lost to taxes.  It should be noted that due to Section 311 (b), whether the property is sold by the corporation, given as a current distribution, or sold as part of a corporate liquidation, the transaction is treated as if the corporation sold the property for cash and distributed the cash as a dividend.

Now let us take the above example and modify it.  In this scenario, Mr. Jones places the property in a partnership instead of transferring it to the C corporation. After 5 years, when Mr. Jones decides to sale the property, he will not have to recognize the property’s appreciation as income at the corporate level. When transferring the property from the partnership to back to himself, Mr. Jones simply takes as basis in the property the lesser of the partnership basis in the building or Mr. Jones’s basis in the partnership.  Gain would then be recognized upon the subsequent sale of the property, but subject to the more favorable personal capital gains rates of 15%, 20% or 23.8% and without the secondary tax on the dividend.  If we use the same figures from the prior example, Mr. Jones’s after tax proceeds from the sale of his property would be $176,200, a net increase of $26,670, which is at the top marginal capital gains rate.

If you are looking for ways to limit your liability, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is  Dallas CPA that provides a full range of services to high net worth individuals. Our client base includes many corporate executives, as well as entrepreneurs and owners of closely held businesses.

Keep Family Disputes from Sinking Family Finances

Intergenerational squabbles don’t just make for tense holidays. Failures of trust and communication can put family wealth into jeopardy.

Read more at institutional investor

Source: Keep Family Disputes from Sinking Family Finances

Love In The 21st Century: Bad Breakup Leads To Form 1099, Lawsuit

Source: Tony Nitti, a Forbes Contributor: view article on Forbes.com


As the town of Springfield’s resident oligarch, C. Montgomery Burns earned the ire of the townspeople through any number of misdeeds, including blocking out the sun, having the Rolling Stones killed, and stealing Christmas from 1981 through 1985.

But even the fictional Mr. Burns never sunk as low as his real-life namesake, who wound up in the Tax Court yesterday. That Mr. Burns, after bestowing nearly a million dollars worth of cash and cars on his girlfriend only to watch the union come to a quick and painful end, responded by issuing her a Form 1099.

Facts in Blagaich

Gather ’round, readers, and I’ll tell you a tale of a relationship built on the pillars of mutual trust and financial dependence that somehow went wildly astray.

Mr. Burns, then 71 years old, met Diane Blagaich, then 53, in 2009. Their relationship blossomed, but neither was determined to marry. Intent on solidifying their undying commitment to one another in a less formal but still legally binding manner, Burns and Blagaich entered into an agreement in 2010 whereby Burns would pay his girlfriend $400,000. In return, Blagaich would…accept the cash. Oh, and in addition, both Burns and Blagiach were required to “be faithful to each other and refrain from engaging in intimate or other romantic relations with any other individual.”

On top of the $400,000 he was contractually required to pay Blagaich, Mr. Burns handed another $273,000 and a $70,000 Corvette to his girlfriend in 2010. Early in 2011, however, Burns discovered that Blagaich had failed to live up to her obligation of fidelity by carrying on with another man throughout the duration of their relationship. In retaliation, Burns slapped a civil suit on Blagaich in 2011, and as one final kick-in-the-ass, filed a Form 1099 with the IRS stating that he had paid her income of nearly $750,000 in 2010. As you might imagine, however, Blagaich had reported no part of the amounts received as taxable income on her 2010 tax return.

The civil suit soon went to trial, and in late 2013 the state court found that Blagaich had fraudulently induced Mr. Burns to enter into the contract, and required her to repay the $400,000 she received pursuant to the agreement. The court further concluded that the remaining $273,000 of cash and the Corvette were gifts that Blagaich was entitled to keep.

IRS Responds

The IRS, having received a Form 1099 indicating that Blagaich had received income of nearly $775,000 in 2010, adjusted her tax return and assessed a tax deficiency and an accuracy related penalty.

Blagaich countered with two arguments. First, she maintained that the IRS was bound by the state court’s finding that $273,000 of the total payments were “gifts,” and were thus excludable from her taxable income under Section 102. The IRS countered by arguing that because  it was not a party to the civil suit, it was not required to adhere to the court’s findings. The Tax Court sided with the IRS, noting that the Service had no active, participatory role in the litigation. Thus, the matter of whether the $273,000 of cash and cars constituted income or a gift for federal tax purposes is a question that must be answered in a subsequent trial.

Next , Blagaich argued that her 2010 income should not include the $400,000 she was required to repay to Mr. Burns, because her requirement to repay the amount permitted her to invoke the principle of “rescission.’

As a cash basis taxpayer, Section 451 requires Blagaich to include in her gross income amounts received under the so-called “claim-of-right doctrine.” A taxpayer receives income under a claim-of-right whenever she “acquires earnings, lawfully or unlawfully, without the consensual recognition…of an obligation to repay.” Stated in English, if you receive cash that you’re not immediately obligated to repay, you’ve got income.

The doctrine of rescission represents a minor exception to the claim-of-right doctrine. It provides that a taxpayer doesn’t need to report an amount as income if their right to the income is rescinded and they either 1) make repayment or 2) recognize a liability to repay within the year of receipt.

If you’re particularly astute, you’ve already noticed the problem with Blagaich’s argument. She received the $400,000 in 2010. She maintained until 2013, however, that the cash represented a tax-free gift. There was no evidence to indicate that Blagaich had any obligation to repay the $400,000 at the end of 2010 — the year of receipt — and thus, the Tax Court concluded, the principle of rescission did not apply.

Thus, Blagaich was left with $400,000 of income in 2010, with the possibility of another $273,000 to be tacked on soon.


View Source at Forbes.com

Family Limited Partnerships: The Power to Move and Protect Your Wealth for Future Generations

Family limited partnerships (“FLPs”) give senior family members a tax efficient way to shift wealth to future family-clip-art-jTxpLpabcgenerations while still exercising control over their assets. As an added benefit, by forming a FLP, senior family members remove assets out of their estate—generally at a reduced transfer tax value.

The FLP structure consists of a general partner and limited partners who typically hold a 1% and 99% interest, respectively, of the total FLP equity. For illustration, senior family members—“the parents”—initially hold both the general partner[1] and limited partner interests. Over time, the parents transfer their limited partnership interests to their children and/or grandchildren as gifts. Even considering the transfer of their LP interests, the general partner parents maintain complete control of the FLP, a role similar to a CEO of a corporation. Meanwhile, the limited partners are considered passive participants and have no control over the FLP. Moreover, transferring their LP interests reduces the parents’ taxable estates and they can avoid the gift tax (and use of the application exclusion amount) as long as the value of each unit transferred to each child does not exceed the annual gift tax exclusion amount ($14,000 per donee in 2015).

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Here’s an example: David and Lisa Smith transfer assets valued at $12 million to a FLP, and collectively become the general partners through an LLC with a 1% interest. Simultaneously, the Smiths—as individuals—also become limited partners with a collective 99% interest. Eventually, the Smiths want to share their 99% LP interest evenly among their four children. To accomplish that, the Smiths annually transfer the maximum allowable gift to each of their four children. That’s a total of $14,000 from each parent to each child each year for an annual total of $112,000 ($14,000 X 2 parents X 4 children). In a decade (assuming no change in the annual gift tax exclusion amount), the Smiths can transfer $1,120,000 to their heirs while that amount is correspondingly removed from the Smith’s taxable estate.

If the Smiths wish to accelerate those transfers, possibly to move highly appreciating assets out of their estate sooner, they can use any portion of their applicable exclusion amount ($5.43 million per donor in 2015) for a total tax free transfer of $10.86 million. Recall that even as the parents transfer their limited partnership interests, they remain in control of the FLP and its assets.

Adding up the Benefits

One of the many benefits of the FLP structure is that valuation discounts are typically applied to limited partnership interests. That is because the limited partners have only a passive interest in the FLP. Specifically, because the limited partners have no management authority or control over the FLP or its underlying assets, they cannot authorize dividends, nor can they sell or transfer their LP interests without consent from the general partner. Because of this lack of control and lack of marketability, the LP interests are typically valued at a discount of as much as 30 – 50% to the FLP underlying assets. This means senior family members can use these valuation discounts to transfer larger amounts of assets each year without violating the annual gift tax exclusion parameters. This translates to additional tax savings.

Let’s go back to the Smiths: If the limited partner interests have an associated 30% valuation discount to the underlying assets, then each parent could actually gift $40,000 worth of FLP assets annually to each child ($28,000 / 70%). That brings the total to $160,000 worth of gifted assets per year, and $1,600,000 in 10 years. The same concept applies to the applicable exclusion amount (“AEA”). Valuation discounts of 30% increase the parents’ collective AEA to $15.51 million ($10.86 million / 70%).

Other substantial FLP benefits include the following:

– A FLP has the ability to protect the family’s assets from creditors. For example, a creditor can latch onto a child or            parent’s limited partner interest with only a “charging order.” Meaning, if a charging order is obtained, creditors              only have the right to receive limited partner distributions which the general partner can decide to withhold. That            leaves the creditor with no money to gain. Moreover, creditors with a charging order have no power to force the                FLP to liquidate assets.

– FLPs enable families to pool their assets, to simplify their estate administration, to create a joint system of family              assets management, and in turn teach children how to manage assets.

– An FLP can ensure the extension of a business even after the senior family member dies, can limit the liability of                individual owners, and consolidate the management of the family business into a sole entity.

– FLPs facilitate the process of gifting, protect assets from otherwise irresponsible family members, and minimize               the expenses of assets management.

Care should be used

FLPs can, however, present a potential challenge from the Internal Revenue Service. Particularly, the IRS may challenge valuation discounts on transfers of FLP assets to family members. In the past, the IRS has used various strategies to disallow and/or reduce discounts. Namely, the IRS may declare that the FLP lacks economic substance and should be ignored. The IRS may also proclaim that the FLP formation is itself a gift, i.e. a transfer of the underlying assets, instead of a transfer of discounted partnership units. The IRS may also use its in-house valuation experts to contest the amount of discounts claimed by the taxpayer’s appraiser.

That means the FLP must be specifically structured and designed to fulfill a valid investment or business purpose. For instance, the FLP can be used to conduct a family business, gather and manage family wealth smoothly and coherently, combine family wealth to maximize growth and investment, and devise a succession plan for transferring business management through generations. Also, valuation discounts should be well supported and documented and determined by a valuation expert.

As always, anyone wishing to create a Family Limited Partnership for themselves and their heirs should consult with an experienced advisory team that can assist them in constructing the FLP. Please contact Mckinnon Patten if you have any questions or wish to confer with our skilled team of accountants.

[1] As an added layer of liability protection, the parents typically form and operate an LLC to serve as the general partner.