The premier conference for estate planning professionals to hear the latest legal and tax strategies in estate planning is presented by The Heckerling Institute on Estate Planning (aka “Heckerling”) every January.  This year marked the 57th year of the conference, which I attended with my colleague, and once again, it did not disappoint, imparting some good takeaways for our clients.  Nine months into 2023 seems like a good time to revisit these items that will impact estate planning techniques in the coming years.

Several presenters spoke on estate and gift tax planning in anticipation of the upcoming sunsetting of the increased lifetime exemption after 2025.  The Tax Cuts and Jobs Act of 2017 doubled each person’s lifetime estate and gift exclusion to $10 million, which, when adjusted for inflation, for 2023 is $12,920,000.  If the TCJA provisions are allowed to sunset, this will likely be cut to about $6,000,000.  Heckerling speakers were generally of the opinion that Congress would not pass legislation extending the increased amounts after 2025.  Clients interested in making substantial gifts should make them prior to 2026 to take advantage of this higher exemption amount.  There should be no concern that gifts made prior to 2026 would be subject to retroactive gift and estate tax due to the IRS 2019 guidance on anti-claw back rules.

Speakers also highlighted the IRS’ helpful guidance in the estate area that came out in 2022 – specifically with respect to the estate portability election and payout requirements for inherited IRA’s. In Rev. Proc. 2022-32 the IRS extended the period for an estate to elect portability of a deceased spouse’s unused exemption (“DSUE”) from 2 years to 5 years. This gives more time for estates that are below the estate tax return filing thresholds, which might be handled by personal representatives or surviving spouses where there is a delay in administering the estate or difficulty obtaining valuations to make the election.

For inherited IRA’s by non-spouses, the payout of required minimum distributions (“RMD”) is now 10 years in most cases. IRS relief, in the form of Notice 2022-53 (and recently extended by Notice 2023-54), now provides that confusion over the timing of the 10 year RMD payment obligation will not result in penalties until after 2023.

The last hot topic at Heckerling this year was a discussion on The Corporate Transparency Act, which is mainly an anti-money laundering law. This act is in regard to the necessary reporting by certain companies to disclose information on their beneficial owners.  Though not affecting trusts directly, if trusts are owners of these reporting companies, then their information will need to be reported as to the beneficiaries, trustees and grantors.   This was enacted on January 1, 2021 and is to become effective January 1, 2024 with a compliance deadline of January 1, 2025.

We are looking forward to seeing what Heckerling will present in January 2024 – updates to these topics and more as we head into an election year. As always, feel free to reach out to Snyder Cohn with any questions.

 

 

Many nonprofit organizations, especially 501c3 exempt organizations, are required to conduct an audit due to state solicitation regulations or sources of funding (federal, state, or private grant) requirements. A first-time audit can be overwhelming, but there are steps you can take to minimize the burden on your Organization’s staff as well as the potential cost of the audit.

Accumulating documentation – As part of the audit process your auditors should provide you with a checklist, preferably electronically, that will list out all the documents needed for the audit. While some documents may not be available until just before the audit fieldwork begins, a significant amount of documentation can be accumulated and retained throughout the year. These include:

• leases and contracts
• organizational documents such as bylaws, employee handbooks and policy documents
• board minutes
• grant agreements and donation letters.

We would also recommend ensuring all documentation for any unusual or extraordinary items is accumulated. If you have any questions on the accounting treatment for these items, it is helpful to discuss those with the auditors before fieldwork commences.

Setting the plan and preparing for the audit – before the audit commences it’s important to set the expected timeline with your external auditors.  You want to ensure that the audit is scheduled with time for your staff to accumulate all the requested information, and for the auditors to meet all deadlines.

The deadlines could include organizational deadlines such as board meetings or external deadlines such as grantor/governmental requirements as well as the Form 990 deadlines (the audit should be prepared before the Form 990 if at all possible).

It also would be helpful to have an audit planning meeting at the start of the engagement so that you can go over any of the pertinent information for the year under audit and the auditors can discuss their audit plan as well as any changes or updates in the accounting guidance for the year. For 2022, the big change is the implementation of the new lease standards.

Audit fieldwork – whether the audit will be conducted remotely or in your office, it is particularly important to remember the following to reduce the time and potential cost of the audit:

1. Provide the auditors ALL of their requested information at the start of fieldwork. If you are unclear about what is being requested, it’s best to reach out to the auditors in advance of fieldwork.
2. Be sure to make all staff that will be responsible for interacting with the auditors available during the week(s) of fieldwork. Auditors interact a lot with staff during fieldwork, so it’s important to provide staff with time to respond to questions and help progress the audit. Some staff duties may need to be delayed or rotated during the audit process.

The auditors will focus on the following areas:  understanding the procedures and internal controls of the organization, conducting fraud interviews, testing detail transactions for year-end account balances as well as revenue and expense transactions, and inquiring about significant changes in account balances from year to year. It is also essential that all supporting documentation provided agree to the trial balance of the Organization.

There are some common trouble spots worth mentioning for initial nonprofit audits:

1. Revenue and net assets – all revenue and net assets should be properly classified as donor restricted vs. without restrictions. There should also be documentation to support the releases from restrictions.
2. Functional expenses – have you properly allocated all expenses across the program/G&A/fundraising categories either in your accounting system or a separate schedule? The auditors will ask questions about this allocation including the methodology and salary allocations
3. Grants/contributions receivable – the auditors will look into whether the receivables have been collected after year-end. If not, there needs to be an evaluation as to whether or not they are truly collectible and an allowance should be recorded.

Audit wrap-up process – after audit fieldwork the wrap-up stage consists of multiple levels of review within the audit firm (detail/manager, partner, and quality control review). Depending on open items at the end of fieldwork, this process can take 3-6 weeks after the end of fieldwork. The auditors should provide you draft financial statements, as well as a governance letter and possibly an internal control letter.  It’s imperative for you to thoroughly review these drafts and ask questions as it is required for you to take responsibility for these statements. The internal control letter includes suggestions for improvements in processes and procedures. These should be discussed and addressed before the next year’s audit.

At the end of the audit it’s best practice (though not required) for the auditors to meet with the audit/finance committee to go over the results of the audit.  Given the Board’s governance responsibilities, it’s important for them to be aware of the audit results and help enact any significant changes if they are needed.

While an audit can be a scary and challenging prospect, following these guidelines can lead to an easier process and a positive experience. While the audit may be a required process, it can also be a way to maintain and even elevate the financial credibility of the Organization. Please feel to reach out to Snyder Cohn if you have any questions regarding the audit process.

 

Are you a commercial real estate owner who is concerned about a higher-than-expected real estate tax bill? It may be time to review your real estate assessment.

As a real estate owner or investor, you know that property values directly impact real estate taxes, and those values are based on assessments. This means that the assessment process is a significant factor in determining the amount of taxes you pay each year to your state or municipality. Although each state and municipality may have unique nuances in their assessment process, the macro-level assessment process is similar. As a commercial real estate owner, it’s important to consider these questions and understand the assessment process to effectively manage your tax liabilities.

To provide some background, real estate is often valued using one of three commonly known methods:

1. Direct Capitalization / Income Approach – under this approach market rent, capitalization and expenses are used in a calculation to derive a valuation
2. Sales Comparison Approach – under this approach comparable market sales are used to determine valuation
3. Cost Approach – this approach is commonly used for new buildings and are not yet producing income and value is determined based on cost

In many cases real property is assessed using general metrics that are applicable to a particular jurisdiction without much in depth knowledge on property specifics. Some property specific data such as vacancy rate, net leasable area, or other property characteristics could play a role in how the real property is valued. It is important to understand that general valuation metrics do not always accurately represent the value of each property – the one size fits all, rarely ever fits all.

It is always beneficial to analyze comparable sales or going market value to establish a baseline for what your property value may be. Then you can look at property specific items that could impact the assessed value of the property. Has there been a drastic change in vacancy rate percentages of the property in the near term? Is there an industry trend that is a contributor to such change? Has there been a locality specific impact that is driving the change? Have characteristics within the property changed which reduced the portion of the property that is available for lease? What were the contributing factors that lead to the decreased leasable area? These are just a few items to consider when analyzing your real property assessment.

If you haven’t had your property assessment reviewed by a professional advisor in the last few years, it might be beneficial to do so. There are advisory and consulting firms that specialize in property assessment review, consultation, or appeal services. These firms provide in-depth analysis and consultation for when it is appropriate to challenge an assessment and what steps to take throughout the process.

Our real estate clients frequently utilize appeal services to ensure that their assessments are accurate and equitable every year. If you have any inquiries or concerns, please do not hesitate to contact us.

By: Dustin Cutlip

On December 29, 2022, President Biden signed into law what is commonly called The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0.  This Act builds upon the original SECURE Act that was passed at the end of 2019.  Both Acts have created changes to enhance and encourage long-term retirement savings. While the SECURE Act 2.0 has many provisions that are set to become law over the next few years, this discussion will focus on the changes that will affect 2023.

Change to RMD Rules and Excise Tax Rate

The initial SECURE Act raised the Required Minimum Distribution (RMD) Age from 70½ to 72 and now the Secure Act 2.0 is raising it again.  Beginning January 1, 2023, the RMD age is now 73, and starting January 1, 2033, it will be 75.  For 2023, this is on all qualified plans (Traditional and Roth 401(k)s) and Traditional IRAs.  Roth IRAs do not follow the RMD rules and beginning in 2024 Roth 401(k) accounts will no longer have an RMD requirement either.

In addition to the change in age for the RMD, the excise tax that is charged if there is a failure to take an RMD has been reduced from 50% to 25%.  This is in effect for tax years beginning after December 29, 2022.

Additional Roth Options Available

Prior to the SECURE Act 2.0, the only option for employer matching and non-elective contributions were for them to be contributed on a pre-tax basis.  Now the employee has the option to have the employer match be contributed as a Roth contribution after-tax.  If this option is utilized, the employer match or non-elective contributions would result in additional compensation to the employee for the year the match is made.

In the past, SIMPLE and SEP IRAs did not have a Roth option available to them.  Beginning in 2023, these types of plans can now be Roths.

Solo 401(k) Establishment Date Extended

Solo 401(k) plans now can be setup for the tax year up until the filing deadline (without extensions) of the tax return.  In the past these plans had to be established by December 31^st of the first plan year. This did not allow for post year-end tax planning with regards to retirement options for the small business owners for which this type of plan may apply.  With the newly established deadline, it allows the small business owners to decide if a solo 401(k) would be beneficial after their year-end books have been closed.  This section of the Act is effective for plan years beginning after December 29, 2022.

Penalty-Free Early Withdrawal Exceptions

Generally, to take distributions or withdrawals from a retirement plan, the participant must be at least 59 ½ years old or a 10% penalty is imposed on top of any tax that is calculated.  There are a few new penalty-free withdrawal exceptions in the Act, that will become effective over the next few years.  In 2023, these exceptions include federally declared disasters, terminal illness, expanded public safety officers, and corrected distributions of excess contributions.

The SECURE Act 2.0 provides permanent relief for early withdrawals that are taken by participants that are effected by federally declared disasters that occurred on or after January 26, 2021.  As such, this provision is retroactive.  The taxpayer must have their primary home in the declared area and have sustained economic loss as a result of the disaster.  The withdrawal must be taken within 180 days of the disaster.  The provision allows for distributions of up to $22,000 per participant, per disaster to be taken out without penalty and can be included in taxable income over three years.  These amounts can also be recontributed to a tax preferred plan within three years.  Another relief provided under this portion of the Act is an increase of the participant loan limit to $100,000, up from $50,000, for those taking out loans because of the federally declared disaster.

An additional penalty-free withdrawal provided by the Act is for terminally ill taxpayers.  This is effective for distributions made after December 29, 2022 to participants that are deemed terminally ill.  The participant must provide a certification by a physician that indicates the taxpayer has an illness or physical condition that is expected to result in death within 84 months of the certification.

Qualified Charitable Distributions

The 2.0 Act provides that the annual IRA Qualified Charitable Distribution amount, currently limited to $100,000, will be indexed for inflation going forward.  In addition, there is now a one-time gift opportunity available to make a qualified charitable distribution to a split-interest entity, such as a Charitable Remainder Unitrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity in the amount of $50,000.

Takeaways

SECURE Act 2.0 has numerous provisions that affect employees, employers, and plan administrators.  Understanding how this Act impacts your specific situation will be beneficial in planning for retirement savings and tax treatment both now and in the future.  Please contact your tax advisor and/or your financial advisor with questions on how these changes could affect you.

 

By Suzanne Miller