Qualified Personal | Residence Trust Continuing Care Facility | 457 Plans | EECO Issues New Guidance for Staffing Agencies and Their Clients | Partner's 401(k) Contribution | Prenuptial Agreements | 401(k) Interest | Beneficiary Reaches 30 Years of Age | Family Business | Adoption Expenses | Welfare-To-Work Credit | Employees or Independent Contractors | Business Succession Plan | Conservation Easement
The primary objective of estate planning is to minimize the total amount of estate and gift taxes. One strategy for reducing the size of an estate and for transferring future appreciation of assets to beneficiaries is to establish a "qualified personal residence trust" (QPRT). It can be used to transfer a primary or secondary residence to beneficiaries, and unlike an outright gift, the donor does not lose control of the property. Thus, an individual can transfer a personal residence or a vacation home to a QPRT and continue living in the dwelling for a specified period. Then, at the end of the term, title to the residence passes to the beneficiary (usually the grantor's children). The grantor can continue to live in the residence beyond the QPRT term but must pay market rate rent to the beneficiaries. QPRTs are usually Grantor Retained Annuity Trusts (GRAT), which are "flow-through" trusts specifically designed for primary and secondary residences, in which all the income and expenses flow to the grantor over the term of the trust, so that the mortgage interest and real estate taxes paid by the trust can be deducted on the grantor's personal tax return. The transfer of property to a QPRT is considered a taxable gift to the trust beneficiaries equal to the Fair market value of the property at the time of transfer, but this is discounted using IRS interest rates, to give effect to the grantor's use for the term of the trust. For example, a home with a fair market value of $1 million that is gifted via a QPRT with a term of 15 years might have a discounted value of roughly $250,000. In effect, the trust grantor can remove property with a value of $1 million out of the estate via the QPRT, avoiding gift tax if the $625,000 exclusion is available. The beneficiaries, in turn, obtain the property at the same cost basis as the grantor at the conclusion of the trust, and would have to recognize capital gain on the property's sale. In the event a property is sold during the term of the QPRT, the grantor would have to recognize capital gain. These gains can frequently be excluded from taxes because of the liberalized exclusion of gain on the sale of a principal residence which now is $250,000 on a single return and $500,000 on a joint tax return. Also, if the grantor dies during the term of the trust, the property would have to be included in the estate of the grantor, but here, estate taxes can usually be avoided or deferred by leaving the property to the surviving spouse by means of a reversionary interest that is provided through the QPRT. Qualified Personal Residence Trusts can produce significant estate planning benefits which any owner of appreciated property should carefully evaluate with his or her professional tax advisor in overall estate planning.
Seniors who intend to move into a "continuing care" facility are usually required to maintain a large deposit in an account with the facility to cover their entry fee. If a portion of the fee is refundable, the amount kept on account may be treated as a loan to the facility and even though no interest is received, interest on the loan may have to be imputed and treated as taxable interest. (Interest imputation is not applicable to entrance fees that are refundable on a declining pro rata basis over a relatively short number of years. However, where the refund period covers a long term, interest must be imputed, but there is an inflation indexed exemption for a resident or spouse who is at least 65 years old. The IRS has announced that the exemption for 1998 is $134,800, so that there is no imputation of interest income on refundable loan that do not exceed this amount.
(IRS, Int. Rev. Bull. 1997-42, Rev. Rev. Rul. 97-57, p. 16; J.K. Lasser's Monthly Tax Letter, Feb. 1998, p. 3; CCH, Taxes On Parade No. 1, Dec. 31, 1997, p. 6)
Here is a reminder that contribution limits to 401(k) and 403(b) plans were raised $500 per participant for 1998, so that payins can be as much as $10,000 this year, There was also a $500 increase for "457 plans," raising the contribution limit to $8,000. Finally, benefit limits for defined benefit pension plans were increased $5,000 for inflation, bringing the limit up to $130,000 for 1998.
(The Kiplinger Tax Letter, Jan. 9, 1998, p. 4; Tax Hotline, Jan. 1998, p. 1; Kiplinger's Personal Finance Advisor, Dec. 1997, p. 1)
by Vicki Snyder, President
Human Resource Group, Inc.
Employers using staffing agencies, including professional employer organizations (PEOs) for either temporary workers or employee leasing need to be aware that they may have created additional employment liability for themselves as "co-employers" in many situations when workers complain of discrimination or harassment on the basis of race, color, religion, sex, national origin, age, or disability according to the "user friendly" 30 page guidance issued by the Equal Employment Opportunity Commission (EECO) on December 3, 1997.
The EEOC said the guidance was necessary in light of the explosive growth in the contingent workforce in recent years. Also, both the staffing agencies and their clients may assume they are not responsible for discrimination or harassment that agency workers confront at client work sites. The focus of the guidance is on temporary agencies and their clients as well as client companies that lease temporary workers and supervisors. EEOC's guidance applies equally to staffing agencies and their clients.
Staffing agencies have marketed their services to employers as a way to save money and to remove the burden of liability related issues, reporting requirements, and the offering of better health care benefits and retirement saving plans. Some staffing agencies state they deliver these services by establishing and maintaining an employer relationship with the workers assigned to their clients by contractually assuming substantial employer rights, responsibilities and risks. However, assuming such liability is often not adequately disclosed. In fact, according to EEOC such workers are considered employees of the client the majority of the time even if these workers are not on the company payroll, or if the contingent workers are labeled as independent contractors in a staffing agency contract. Regardless of which company is considered the employer, the EEOC states both can be held liable for discrimination or harassment. The law prohibits organizations from interfering with a worker's employment opportunities even with another employer. This means the client can no longer call the staffing agency and say, "Get this person out of there" without giving a nondiscriminatory explanation. The guidance points out that welfare-to-work employees are covered under the anti-discrimination laws in the same context as other workers are covered.
Employee status as defined in the guidance depends on whether the employer retains the right to control the means and manner of the person's work, rather than the worker. If both the staffing agency and its client have the right to control the worker, they are both liable as "joint employers", as long as both have the statutory minimum number of employees. The guidance also discusses 16 other factors that should also be taken into consideration as well as a Supreme Court case in deciding whether a worker is an employee or an independent contractor. One exception would be a staffing agency that provides the job equipment and uses on site managers to retain exclusive control over the details of work.
When a staffing agency learns that its client has discriminated against one of the staffing firm's employees, it must take "immediate and appropriate corrective action" including a prompt investigation; otherwise the agency will be held liable. If the proper corrective action is not taken and another worker is reassigned to that client at a later date and is subjected to similar misconduct, both the agency and client will be held liable. A staffing agency and client found to be liable of discrimination or harassment can be subjected to severe penalties. Penalties include back pay, front pay, and compensatory damages. Additionally, both are liable for punitive damages which are individually assessed against each - depending on the "degree of malicious or reckless misconduct". These damages are designed to punish the respondent, not just to compensate the victim.
It is also important to point out that the Internal Revenue Service and the Department of Labor also have some issues of concern with the 401(k) plans and health care plans covering contingent workers which have not been resolved yet at the agency level or through federal legislation. At the state level, Maryland passed a law during the 1997 legislative session that requires temporary staffers and employee leasing firms providing health care coverage to offer the Comprehensive Standard Health Benefit Plan (CSHBP) to their clients in the 2-50 employee market. the CSHBP was mandated with the passage of Maryland's Health Care and Insurance Reform Act in 1993.
Temporary staffing agencies can provide quality workers and services if utilized for the right reasons. The following are recommendations and actions employers can take to help comply with the EEOC guidelines; (1) Both parties (the employer and client) need to review their employment practices to make certain that they are in compliance with federal, state and local employment regulations for the locations they have employees; (2) The employer and staffing agency needs to understand clearly their respective equal opportunity responsibilities up front when entering into a contractual relationship, and to put in writing whether the companies are sharing joint employer responsibilities; (3) The contract should have specific indemnification language, spelling out who must pay any losses that result from inappropriate conduct; and (4) The contract should spell out who is responsible for training and who will instruct workers of discrimination and other company policies, as well as disciplinary and grievance procedures.
The bottom line is an employer is never free of employer-employee liability issues. Failure to know the employment regulations will not limit your responsibilities or obligations. Good employment practices provide a workplace environment for employers and employees to stay focused on achieving the goals of the business and to take advantage of opportunities for growth.
The information provided in this article is not to be misconstrued as rendering legal advice or replace the actual language of EEOC's guidance. Vicki Snyder is a consultant with Human Resource Group, Inc., located in Severna Park, Maryland, providing human resource management services to small and medium sized businesses. Ms. Snyder can be reached at (410) 544-7800.
Beginning in 1998, the new tax law makes 401(k) plans more appealing to partnerships by increasing the amount a partner may save by participating in them. The law overrides IRS regulations which limited matching contributions made by the partnership to a partner's 401(k) account to the dollar limitation on elective deferrals, which is $10,000 in 1998. Instead, matching contributions may now be made to the 401(k) account in addition to the elective deferrals. Therefore, a partner may save the full permissible amount from income and receive a matching contribution. This makes the rule for partners identical to that for non-partner employees of the partnership. Congress made the change in the hope that now more partnerships will establish 401(k) plans for the benefit of all employees.
(Tax Hotline, Nov. 1997, p. 8)
As people accumulate greater wealth and pension plans become a major source of assets, an increasing number of individuals decide to enter into prenuptial agreements to protect their assets in the event the marriage ultimately fails. In most states a spouse can gain an interest in the other spouse's pension in the event of divorce. However, the spousal interest can be waived by the other spouse, which will allow pension plan benefits to flow directly to children or other beneficiaries of the owner. The error in using a prenuptial agreement for this purpose is that the parties to such an agreement are engaged and not married and only a spouse can waive his or her legal rights to pension benefits. In effect, the pension right waiver in a prenuptial agreement would have no validity. The proper way to deal with this situation is to devise a prenuptial agreement to deal with property the parties are bringing into the marriage, and indicating that after the wedding, a pension waiver will be executed. Then, subsequent to the wedding, execute a separate pension waiver agreement. Incidentally, we find that frequently, tax considerations are totally ignored in prenuptial agreements. Unless full consideration is given to the tax carryovers and tax liabilities of each party, the tax effect of home sales, and the tax consequences of property arrangements established by these agreements, the ultimate division of wealth may be far different than was contemplated by the parties.
(Tax Hotline, Jan. 1998, pp. 1 & 2)
More than two-thirds of 401(k) plans contain provisions permitting participants to borrow against the plan, and to make it more enticing, charge relatively low interest rates. We'd like to point out that this should not be done lightly. Some of the negative aspects of borrowing from a 401(k) are:
(J.K. Lasser's Monthly Tax Letter, Jan. 1998, p. 4)
When Congress wrote the recent tax law it indicated that any funds remaining in education IRA accounts must be paid out once a beneficiary reaches 30 years of age. At that point the balance would be subject to income taxes at ordinary income tax rates and to a 10% excise tax penalty. Recently, the IRS indicated that there is a loophole by which these taxes can be avoided. This would be the case if the remaining funds were rolled over to an education IRA for another family member.
(Medical Economics, Dec. 22, 1997, p. 20)
If you are engaged in a family business you may enjoy many productive years with other family members that result from your combined efforts. It's also possible that at some future time because of marriage, health problems, desire to do something else, or disagreement about future business plans, that you may wish to strike out on your own. This can cause acrimony over the price to be paid for your business interest or over the sale to an outside party, and lead to litigation that may permanently damage family relationships. To prevent this, it is highly desirable for the owners of a family business to establish buy-sell agreements that establish the terms and conditions for the transfer of the business interest of a participant who no longer wants to or is unable to stay on. Typically, buy-sell agreements:
There are many variations to buy-sell agreements, and there are many possibilities for arriving at the valuation of a departing shareholder's interest, and, of course, tax considerations must also be incorporated into the structure of the arrangement. However, regardless of the manner in which buy sell agreements are set up, they establish the means for one of the parties to dissociate him or herself from the business in an equitable manner and without the need for creating serious family rifts.
(CMA Magazine, Dec.-Jan. 1998, pp. 23-5)
Parents can now get a tax credit for adoption expenses of up to $5,000 ($6,000 for a child with special needs). There has been some confusion about when the credit may be claimed, and the IRS recently issued a notice to clarify the rules. Accordingly:
The adoption credit is subject to phaseout when adjusted gross income exceeds $75,000 and is fully phased out once it reaches $115,000. If you need help or further information, we can be of service.
(IRS, Int. Rev. Bull. 1997-49, Notice 97-70; J.K. Lasser's Monthly Tax Letter, Jan. 1998, p. 3)
Don't overlook the opportunity to take advantage of the Welfare-to-Work Credit for hiring long-term welfare recipients, including those who received Aid to Families with Dependent Children. The credit can be claimed for eligible workers who began work on or after January 1, 1998 and before May 1, 1999. The maximum credit is 35% of up to $10,000 in wages paid in the first year of employment and 50% of up to $10,000 of wages paid in the second year, for a total maximum credit of $8,500 per eligible worker.
(Compensation & Benefits Report, Jan. 7, 1998, p. 2)
April-May, 1998 - Page
The IRS has streamlined its approach to determining whether a company has properly classified its workers as employees or independent contractors. Once it identifies businesses selected for employment tax examination, it mails them a one-page document, Publication 1976, "Independent Contractor or Employee." It outlines three safe-harbor requirements employers must satisfy to comply with independent contractor rules. They are:
Employers who fail to meet the safe-harbor requirements are subject to a more rigorous IRS audit to determine whether the independent contractor arrangements are legitimate or merely designed to lower withheld income taxes, social security taxes, workers' comp insurance premiums, unemployment taxes and fringe benefits. Obviously, it pays to meet the IRS independent contractor safe harbor requirement, although this does not assure that workers treated as independent contractors may not be reclassified. The IRS and state auditors can go back at least one year, and reclassify workers and impose back taxes as well as penalties if the worker classifications were improper based on an extensive 20 factor test that is used to determine the workers' status. This is a subject that is regularly on the minds of clients, anxious for our assistance in evaluating their independent contractor arrangements and determining whether IRS will approve.
(Nation's Business, Feb. 1998, p. 25)
Although most business owners get involved in estate planning to lower their taxes, almost 60% have done nothing to protect their biggest single asset - their business. The reason, is that they fail to get involved in business succession planning. Preparation of a succession plan requires:
Of course, the talents and interests of children will have to be considered in devising a succession plan, and considerable attention must be given to the tax consequences of various options. However, once the plan is developed and adopted, efforts can be made to groom future business managers by providing them with priority assignments, familiarizing them with confidential business matters, introducing them to key business associates and sharpening their skills in specific areas.
(Estate Planning, Jan. 1998, pp. 22-25; Journal of Accountancy, Oct. 1997, p. 100)
The bargain sale of a conservation easement to a government can pay off in a number of ways, as shown by a recent case. Here, in order to preserve open space, a county offered to pay farmers less than full value for granting easements that would restrict use of their land to farming. The arrangements were structured as installment sales with most of the payments due after 30 years, while the government entity paid interest at the rate of 8% on notes it gave to secure the debt. According to the Tax Court, the farmers would get three tax breaks. First, they can take a tax deduction equal to the decline in the property's value, less the sales price the county paid for giving the conservation easement. Second, they can defer most of the gain on the sale of the easement for 30 years because most of the payments were deferred for that period, and third, they are not taxed on the interest paid by the county because it is tax-exempt municipal interest. Finally, contrary to the IRS position, the value of these tax benefits is ignored, according to the Court, in determining the amount of the charitable deduction the farmers may take.
(Browning v. Commiss. 109 TC No. 16; The Kiplinger Tax Letter, Dec. 12, 1997, p. 2)
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