A Low-Cost Way to Leave a Lasting Legacy

With tax season behind us, it’s time to assist clients in their tax planning. For that reason, I felt it timely to discuss the IRD — I had one of my largest tax clients, and a good friend, surprised by this when his father passed away last year.

When an individual passes away, it’s almost certain that there’ll be a piece of his or her estate that can be taxed at a rate of almost 100%. It’s a little thing known as “income in respect of a decedent,” better known as IRD. It’s almost certain that you will have it in your estate — but your heirs may not see one thin dime of it. But the good news is that IRD can be used to make a charitable gift that can leave a lasting legacy.

What’s IRD? Basically, IRD is income that was owed to an individual upon death. It can include unpaid salary, most deferred-compensation arrangements (e.g., IRAs, employer-provided retirement and pension plans), accrued interest on bonds, previously untaxed appreciation in Series E savings bonds and similar government bonds.

The income is not included on the individual’s pre-death income tax return. But it gets hit with a multiple-tax whammy. How? IRD is subject to estate tax and income tax when it’s in the hands of the heirs (however, an income tax deduction for the federal estate tax paid is allowed to the taxpayer who has to include the IRD in gross income). With a top state and federal estate tax rate of 55% and a top income tax rate of 39.6%, the effective rate of overall taxation on IRD is around 80%. But when you pile on other possible taxes — extra death taxes in certain states, generation-skipping transfer taxes, state and local income taxes — the tax rate on IRD could approach 100%.

What to do:  Consider giving the IRD items that will wind up in an estate to charity instead of having it all go to the tax man. A gift to charity of IRD items will generally avoid the tough estate and income tax treatment these amounts receive. This can be structured as an outright bequest.

Important: Charitable gifts that involve IRD items must be structured just right to achieve the desired tax benefits. If it’s a large amount you may want to suggest that the client see an attorney.

Everything You Wanted to Know About CDs

A CD is a savings product. When you agree to purchase a CD, you agree to leave the money on deposit with the financial institution for a specified term. CDs usually pay a higher interest rate than other savings products because you agree not to make any withdrawals until the CD comes due. If you do withdraw your money before maturity, you usually must pay a penalty.

To attract and retain clients, institutions use creative marketing strategies when designing CD products. The main requirement is that both the institution and the client live by the terms that are set when the purchase is made. Since clients’ needs vary, institutions usually offer several products with different terms and features. For example, it’s possible that you could choose from among CDs with terms that range from three months to six years. Some institutions will bump up the interest rate a specified number of times during the term. Another popular twist is to allow clients to make deposits anytime throughout the term at the original interest rate. Then if the rates go down, the client has the advantage of depositing at the better rate.

If you are thinking of purchasing a CD, or looking for one to refer a client to, shop around and select the product that offers the options you, or your client, are most interested in.

The Power of Public Relations

As I have said to you in the past, the media – newspapers, radio, television and magazines are always searching for stories and angles. The key to good public relations is to determine who will be interested in your particular story or angle.

Just two of the many techniques which you can use to succeed with your long term public relations strategy are:

Provide news — Position yourself as an expert.

If you can do one or more of the following four things in a way which affects enough people — you can turn almost anything into news:

Solve a problem or create an opportunity

  • Identify a trend. Journalists love trends — especially those which affect a lot of people in their audience
  • Provide advice to the readers, listeners or viewers
  • Help the community

Patience is the name of the public relations game — it’s an activity in which there are few overnight successes. You really need to persevere and things will begin to fit into place. Harassing a journalist to publish your story is not a recommended practice.

Let’s focus on just one aspect — providing advice.

The sort of press releases which you can write and distribute which provide advice could include the following:

  • 7 Tips to Reduce Your Income Tax
  • Throw Away the Shoe Box — 10 Commandments for Good Record Keeping
  • 8 Often Overlooked Tax Deductions for Property Investors
  • How to Get the Most out of Your Computerised Accounting System
  • 9 Ways to Reduce your Taxes Which Won’t See You in Jail

It should be noted that these are snappy headlines which should guarantee that you capture the attention of the journalist, presenter or producer to whom you are forwarding your press release. You should always include the major theme of the press release in your first paragraph or you will guarantee only one thing — you will lose the interest of the recipient and you will not achieve publication.

Another strategy worthy of consideration is to add your own story or angle to a popular news item. This can often lead to substantial media coverage. It’s a good idea to keep your eyes and ears open for any tax changes to which you can add a local flavor or personal comment — you are most likely to gain some coverage and enhance your image in the process.

Tax Tips – A Simple Estate-Planning Tip

This article shows you a great and somewhat unknown estate tax shelter and tax planning tip. This is something you can share with your accounting and bookkeeping service clients.

Many people have provided for their favorite charity in their wills. But not many people know about a simple technique that can accomplish their charitable giving goals — and pass more of their wealth on to their loved ones.

Here it is:  Instead of making an outright bequest in a will for charity, the individual should name the charity as a beneficiary of their company retirement plan or IRA. When they die, the charity will still get the amount they want it to — but their heirs will get a lot more.

This strategy is brought to you by a little concept known as “IRD.” This stands for “income in respect of a decedent.” When someone with a retirement plan dies and the proceeds of the plan are paid out, the money flows into the individual’s estate as IRD income. This money is taxable to the estate — and it may also be taxed as income to the person who ultimately receives it. When all of the taxing authorities get finished with IRD income, they can take around 80 percent of it. The individual’s heirs may see only 20 cents of every dollar the plan pays out.

Example:  Wilson has $300,000 in his 401(k) plan. In his will, he gives his retirement plan to his kids and he gives $100,000 to his favorite charity.
Result:  At death, the charity gets its $100,000 and the kids get their $300,000. But the kids also get this: a Form 1099-R. This form is sent to them by the retirement plan administrator because the $300,000 is taxable income to the kids.

In order for Wilson to leave more to his kids, all he has to do is eliminate the $100,000 to charity in his will. He also has to go to his employer to instruct it to send the first $100,000 from his 401(k) plan to charity when he dies.

New result:  The charity still gets its $100,000. And the kids still get their $300,000 — but $100,000 of it is a tax-free inheritance. They still get a 1099-R, but it’s for only $200,000 from the plan. The charity gets a 1099-R for the remaining $100,000 from the plan that it received. But the charity can rip it up because, as a tax-exempt organization, it pays no tax on this money.

This technique can also be used in conjunction with other assets that trigger heavily taxed IRD income. This includes savings bonds, unpaid bonuses, lottery winnings, unpaid rental income, and installment sales obligations.

Tax Simplification: “Yeah, Right!”

This article goes into more detail about the reasons businesses will always have a legitimate need for accounting and bookkeeping services.

A recent student asked me how to respond to a well-meaning relative who felt that accounting was a dying occupation because of tax simplification. I’m often asked if a simpler tax code, meaning flat-tax or federal sales tax, would eliminate the need for accountants. Those who ask this question obviously don’t understand what an accountant does.

First of all, I don’t think such a tax bill could ever pass. Too many special interest organizations with powerful lobbying groups will lose too much to let any such bill pass without a fight.

  • Religious organizations will argue that their funding from contributions will dry up.
  • National homeowners’ associations will argue (and rightfully so) that homes will drop in value as mortgage interest will no longer be deductible.
  • Medical organizations will buy TV ads telling stories about people with debilitating diseases and high medical bills going to ‘tax prison’ because they lost their medical deduction.
  • And, those are just the obvious ones.

Plus, most tax simplification plans will tax the poor heavier and the wealthy lighter than they do now. That’s a hot-potato that neither political party will support.

No, the public will never let such a thing happen.

Even if we were to assume that such a tax program will be adopted, accountants will remain in high demand. Certainly simpler tax laws may eliminate tax preparers. But most tax preparers aren’t accountants.

The primary and most beneficial roles accountants perform are in the area of management controls, and cash management. A company stands to gain much more through staying on top of these areas than saving on lower taxes. Let’s face it, companies don’t go out of business because they are paying too much in taxes, but they will if they have poor controls, or poor cash management.

Big businesses certainly understand this. A large company I once worked for had four thousand accountants. Less than 1% of these accountants worked in the tax department. In other words, 99% of the accountants with this company were working on providing management with crucial information regarding profitability, while monitoring the company’s financial position. This company understood that income taxes are a necessary evil that require some attention, but the potential for business improvement is much greater in other areas.

So, do we ignore taxes? Certainly not! Taxes must be completed, and done correctly according to law. Besides, a good tax preparer may save a tax payer hundreds of dollars, if not thousands in taxes — sometimes many times the cost to have the taxes prepared.

Tax preparation will always be needed. And, my guess is that it will become even more complicated before becoming any easier.

Regardless of the tax law, however, accountants will always be a critical part of the business world.

Also, see the article entitled “Why are Businesses Begging for Your Services?” This is “must reading” for every freelance accountant.

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