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Mentor RIA Consulting

Allowing you to focus on what you do best

My Blog


Reviewing Casualty and Liability Insurance Coverage

Posted on June 20, 2020 at 10:20 AM Comments comments (0)
In the context of financial planning, much attention is properly given to life insurance as well as to health, disability and long term care coverages for the clients we serve. The recent – and ongoing – pandemic and related issues have highlighted the need to understand and perhaps update coverage for business property damage or loss, premises liability, business interruption and event cancellations, as well as residential real and personal property coverages including loss of use.  This applies not only to ourselves and our businesses but to the wide variety of clients we advise.

An unexpected event, such as the destruction of premises or the loss of inventory, equipment and records, can completely upset an otherwise solid financial plan. Businesses and individuals often have some form of insurance concerning potential loss events but most will not have insurance including coverage of losses occasioned by a pandemic or a government mandated lockdown of a business operation. If one is fortunate enough not to have experienced a significant loss thus far this year, then updating and adding such coverage (if available) would seem to be a logical next step. After all, we do not have any clear idea of whether there will be a resurgence of the pandemic, further lockdowns and potential for other disturbances and damage over the course of the year.

When negotiating for expanded coverage, including specific types of events, evaluate the amount and type of coverage you would anticipate needing in various circumstances and be sure you understand the costs of different coverage levels as well as the conditions and requirements for that coverage to apply. You probably won’t want to insure against all possible losses in the worst case analysis since costs likely will be prohibitive and the odds should be somewhat lower for that worst case scenario occurring.  

A Good Time for Roth Conversions

Posted on June 11, 2020 at 1:46 PM Comments comments (0)
A common technique for taxpayers with large IRAs and relatively lower income is to engage in conversion of traditional IRA funds to Roth IRAs. A conversion requires the taxpayer to declare as income the amount converted in the year the funds are removed from the taxable IRA and transferred to a Roth IRA. The obvious benefit to this technique is that under current law future appreciation in the Roth IRA is not subject to income taxation while distribution of principal from the Roth IRA is likewise not taxed.

This year – 2020 – presents a special opportunity for many taxpayers to consider whether to engage in Roth conversions. Tax rates currently are fairly low for many taxpayers and the burden of RMDs has been removed for the calendar year. Even younger taxpayers may benefit since the CARES Act removes the 10% penalty on early withdrawals of up to $100,000 from an IRA. In addition, for many taxpayers income will be lower this year due to interruption, reduction or loss of employment connected to the pandemic and the related lockdowns.

Things to consider when evaluating a Roth conversion include current income and tax brackets, anticipated future income levels, the anticipated uses for future RMDs and other distributions from the existing IRA, how the tax on a conversion will be paid (from the IRA or from other sources), and more. Of course, we can’t really know what the future hold in terms of the markets and their performance, the government and their constantly changing tax laws, and even our personal situations. Your financial adviser or tax professional will be able to help you work through the advantages and disadvantages of a conversion and to understand the immediate impacts of such a decision. The unusual situation this year may be an incentive to take another look at the Roth.  

Life Insurance Demutualization and Tax Impact

Posted on May 20, 2020 at 8:48 AM Comments comments (22)
In the last twenty or so years, several major life insurance companies, owned by their policy holders as a group, determined to change the format to become a shareholder owned business. This process is called a demutualization. Members receive either a cash payment or shares in the company in exchange for their voting and liquidation rights, while retaining their life insurance policies.  

The receipt of cash or shares will be considered taxable income to the extent the value received exceeds the former member’s cost basis in the property – rights – exchanged for the cash or shares. The receipt of cash would be income at the time received. When a member received shares, that in and of itself was not a taxable event until the member decided to sell the shares and thereby realize the income. That is all basic tax law and seems straightforward enough.  

The problem, of course, is determining the value of those rights given up by the member in return for those shares or cash. Not surprisingly, the IRS has taken the position that the member has a zero tax basis in the cash or shares received. This disregards the fact that some portion of premiums paid by a member for insurance was in return for the rights the member held and over and above the actual cost of insurance itself. Of course, the premium payments themselves were not broken out into specific aspects reflecting the cost of insurance, the amount allocated to voting and other rights and any other item. This makes it more difficult for the member, as taxpayer, to establish a cost basis.

In litigation with the IRS, the courts have taken a variety of viewpoints and results on the cost basis issue. If you, like many other folks, have been holding onto shares received in a demutualization, it may be helpful to consult not only with the insurance company itself regarding the issue but also with a tax professional who may shed light on what your courts are likely to decide. For some of us, this issue can result in either a large tax saving or a large tax bill. It is worth looking into to understand the possible outcome. 

Pandemic: Time to Update Estate Plans

Posted on May 15, 2020 at 3:54 PM Comments comments (0)
It is always important to periodically review one’s estate planning to ensure that it stays up to date with client goals, changing circumstances, current tax law and more. This spring, with the enormous impact of the pandemic on most of us, is certainly a time to consider our planning and how we are protecting our loved ones. The task may seem daunting, but it is worthwhile to make sure a plan is in place no matter where you are or the state of your health.

Of course, if you are in one of the riskier categories for the pandemic, it is imperative to take a look at your situation and to be sure that things will be taken care of appropriately if you become ill, or worse. The process is more than simply reviewing your beneficiary designations or the dispositive provisions of your will or revocable trust. Understanding how your assets will flow, the estate and income tax consequences of the plan, any friction or complication in valuation or transfer of assets and more should all be understood.

Further, identifying and naming trusted persons to act in a fiduciary capacity – personal representative, executor, trustee, holder of your power of attorney – may be critical to the success of your planning. The same consideration should apply to naming a health care surrogate or the holder of your health care power and to completing items such as your living will and any health care directives. In naming anyone for these tasks, make sure they understand your intent and are (at least presently) willing and able to undertake those tasks if necessary.

For all of these aspects of your planning, professional advice and drafting of the required documents is necessary. This may also involve taking special steps to ensure proper execution, notarization and witnessing in a time when social distancing and restrictions on movement may impact the process. 

Taxes: Extensions, Suspensions and Deferrals

Posted on April 16, 2020 at 9:19 AM Comments comments (80)
Another of the many outcomes of the pandemic has been the stream of advisories coming from the IRS regarding the relaxing of various tax requirements. The usual date of April 15 for filing and paying one’s 2019 income tax return has been extended all the way to July 15. This extension also includes the timing of IRA contributions counting towards the 2019 tax year. If you owe taxes and need time to get things in order to file and pay, this is a blessing. However, if you are expecting a refund, the extension has little, if any, value to you and you likely would not wish to delay your filing. Similar extensions apply to the filing and payment of gift tax returns, generation skipping tax returns and the like.
No special forms or filings are required to obtain the extensions. That said, these extensions DO NOT apply to obligations to file and pay state income taxes. So it would be wise to check with your state to ascertain whether any extension may be available. Also note that the IRS presently is NOT accepting paper filings so it is important to use online filing if you are concerned about getting it done anytime soon.
For older taxpayers facing required minimum distributions, the IRS has suspended that requirement for this tax year and there is no need to take such a distribution and no penalty will be assessed for the failure to do so. If a distribution has been taken, the IRS permits the taxpayer to roll the funds back into the qualified plan from which they took the withdrawal. There is an extended period beyond the usual 60 days available for the roll back as well.
Employers, including the self-employed, may take advantage of a provision deferring the deposit and payment of the employer’s share of social security taxes. To avoid penalty, the deferred amounts must be deposited on specified dates: 50% of the total deferred amount by December 31, 2021 and the remaining amount by December 31, 2022. This can be a substantial benefit to employers and the self-employed for the amount of these taxes originally due in 2020.
These are some of the most relevant adjustments applicable to individuals and there are more items you may wish to explore with your tax professional. 

Helping Your Small Business with Emergency EIDL Grants

Posted on April 8, 2020 at 1:50 PM Comments comments (98)
The coronavirus pandemic, with its accompanying shutdowns, has dramatically and negatively impacted small business (as well as large). Among the legislative enactments intended to help deal with the pandemic, the CARES Act includes provision for Emergency EIDL Grants which legislation allows qualifying small businesses to receive grants of up to $10,000. If you are a small business owner, affected by the pandemic, it may well be worth applying for a grant.
Covered businesses include those with fewer than 500 employees, sole proprietors, independent contractors and the like. The funds may be utilized for specific purposes, including: meeting payroll to retain employees; paying rent or mortgage for business property; covering paid sick leave for employees unable to work due to illness due to the pandemic; addressing increased costs due to interrupted supply chain; and repaying obligations that cannot be met due to revenue losses.
Although the grant may seem like no more than a drop in the bucket for larger businesses, many small businesses will find this a lifesaving (business saving) sum. Furthermore, the grant, though limited, is only one part of the legislation which permits much more substantial loans to the small business community of amounts up to $2,000,000. The receipt of an EIDL grant may affect an application for assistance under the related legislation for the payroll protection program. That program (PPP) carries with it the possibility of loan forgiveness but the receipt of an EIDL grant will reduce the potential amount of such forgiveness.
As you can see with this brief overview, the legislation is both complex and interrelated and so applicants should be certain to seek professional advice to make sure they make the most of the offerings. If your small business is suffering today, don’t delay obtaining advice and applying for the various forms of assistance available. 

Why You Should Be Worried

Posted on March 19, 2020 at 2:38 PM Comments comments (0)
The seemingly endless market drops that have been a feature of the so-called pandemic have many investors and some advisors in a panic. For those investors it is not a question of simply rebalancing and investing cash at the bottom of the market (since we don’t know where or when that is). Many are so fearful that they may abandon common sense and their investment plan to hope for a magic bullet that will restore their investments. This generally doesn’t work.
More importantly, though, one should be concerned about where things are going with our extremely unprepared and overleveraged governments. Government spending is, at least in part, based on expected tax revenues which in turn are premised on economic activity and our earnings. When that activity drops precipitously, surprise – sales and use tax receipts drop as well, not to mention income and the taxation thereof. This means that all those rosy projections concerning tax receipts are for naught and the governments, which almost uniformly lack the will to cut spending, will seek to increase taxes even further. A tax increase will encourage a downward spiral that will not be easy to turn around even when the market begins to recover and rebound.
Finally, what about your own job? Whether you run a business or are an employee, the general shutdown we are experiencing in many areas and business sectors is already having an impact. Even if you have an emergency reserve and don’t currently live paycheck to paycheck, the longer the restrictions and limitations are in place, the harder it will be to pay one’s regular bills. The ongoing costs of utilities, internet access, rent, food, household goods and more won’t go away entirely, and may not be reduced much at all. How long before you experience the personal pain for daily living, let along the pain of destruction of retirement savings and ultimately a future of even greater government overreach?   

The Disconnect between Cost & Service

Posted on March 10, 2020 at 11:04 AM Comments comments (0)
Most types of insurance involve an annual premium and renewal to ensure continuity of the coverage. One should review the terms of the renewal offer with care and an open mind as to whether it is preferable to take the easy course and renew or to update what coverage you may require. Although many of you won’t have experienced this, years ago insurance renewals – home, auto – were not fraught with double digit increases, non-renewal or changes in terms. In fact, in cases where the insured did not experience any claims or problems, it was not uncommon to see a decrease in premium at renewal time. This seemed to give credence to the idea that the insurance company considered the individual policy holder as well as other circumstances in determining the renewal offer terms.
Today, with the constant loud competition for customers and claims of how much one might save by choosing a particular insurance company over another, the relationship of the insured and insurer has become much more transactional and much more impersonal. Today, when renewal time comes, the insurance companies behave more like governments than service businesses. The one certainty at renewal is an increase in cost that bears no relation to any objective factor – increases always much higher than inflation, no consideration to claims history or lack thereof, no connection to the benefits or service, no explanation of why an increase is occurring and so on.
Of course, times have changed and with extravagant and extreme settlements and verdicts along with devastating wildfires, floods and hurricanes and the ever-rising costs of replacement, insurance companies have had to factor their increased risks into the equation. Even so, insureds should be aware that they will be charged not based on their particular history and situation with the insurance company but without consideration of those factors. Case in point: one client received their annual auto renewal offer – following a year without claims, tickets, or other change beyond an aging vehicle and owner – and found it included a 26% increase in annual premium without any increase in coverage or other benefit offered. How does that make sense? It is a great approach to drive customers away and my advice was to seek an insurer that actually wanted the client’s business. 

Choosing a Spousal Lifetime Access Trust

Posted on February 26, 2020 at 5:56 PM Comments comments (0)
A central goal of much estate planning is ensuring that assets pass to and are available for a person’s loved ones. One such method is the spousal lifetime access trust (SLAT), an irrevocable trust created by a lifetime gift to the trust which provides for the grantor’s spouse and children as beneficiaries. Using a portion of the lifetime exemption of the grantor for the transfer to the SLAT allows this trust to avoid gift tax when created and estate taxation in both the grantor’s and spouse’s estates at death. The trust also avoids the potential costs and complexity of probate. 
This trust allows the beneficiaries access to funds during the grantor’s lifetime and after his or her death. The distributions may be made on a preset schedule, under specified circumstances or at the sole discretion of the trustee. The trust provides a level of protection against creditors since assets in the trust are not reachable by most creditors. It is important to understand the typical SLAT is designed as a grantor trust meaning that the income tax obligations of the trust are borne directly by the grantor during his or her lifetime. Planning for this income tax burden will be necessary.
Many states do not have a state estate or inheritance tax and in such case other techniques may be equally or more favorable for transfer tax planning purposes. An alternative to this approach is the typical revocable trust which funds irrevocable trusts for surviving spouse and children at the grantor’s death instead of currently as a SLAT would provide. Consulting with your tax professional should help you determine if the SLAT will work in your estate plan. 

Burden of the Net Investment Income Tax

Posted on February 11, 2020 at 10:05 AM Comments comments (159)
Speaking of fears of investing, investors may encounter the burden of the 3.8% net investment income tax in addition to many other potential taxes on income. Though the percentage may not seem very high when we consider the top regular income tax brackets, it is important to remember that it is a separate tax stacked on top of federal income tax, state and local income tax (where applicable), not to mention consideration of the other additional costs of investing such as advisory and other professional fees.
Investment income is broadly defined for this tax, including not just interest, dividends, rents, royalties, annuities and gains from the disposition of property but also reaching gross income from a trade or business. The threshold for the imposition of the tax is based on a taxpayer’s modified adjusted gross income – much broader than net investment income, of course – but applies only to the net investment income portion. The threshold for a single taxpayer is $200,000; for married taxpayers filing separately it is $125,000 while married taxpayers filing jointly face a threshold of $250,000. As you can see, the tax will apply to a significant group of taxpayers even if their net investment income is not substantial.
The tax also applies to estates and certain trusts, with some exceptions. Interestingly, the threshold for imposition of the net investment tax is much lower as the top bracket for these entities begins at only $12,950 of income. This is much, much less favorable than the rates for individuals.
The bottom line here is that in addition to other income taxes, the net investment income tax may be applicable to many taxpayers and is a burden not to be ignored. Even where a taxpayer is otherwise entitled to income tax credits, they will not apply to reduce the net investment income tax liability.