Hyden, Miron & Foster, PLLC Law Blog

Friday, January 2, 2015

Can a court invalidate a will or trust?

It is unfortunate, but sometimes an individual goes through the trouble and expense of creating an estate plan only for their beneficiaries to end up in court facing a lawsuit – or contest.  A will or trust contest is a legal proceeding filed to challenge the validity of one of these documents.  If the challenge is successful, the court throws out the document and it is as if it never existed.  

Will and trust contests can be pursued for a variety of reasons.  While each state is different, there are some reasons, which are common across the country.  These include claims that the document was not executed pursuant to state law.  Also, a certain level of mental capacity is required to create a will or trust, so a challenge might include a claim that the person making the will or trust did not have the requisite capacity.  Another common basis for a contest involves a claim that the person making the will or trust was subject to undue influence or was the victim of fraud.  

Although not everyone has this ability, there are various people who can challenge a will or trust.  Beneficiaries, those who have been chosen to inherit from the current will or trust or a previous one, can bring a contest.  Also, heirs at law, or those who stand to inherit pursuant to state law, can challenge a will or trust.  

There is always a possibility that a will or trust may be challenged.  But, there are certain steps an individual can take to lessen the likelihood that this type of conflict will arise.  One way to avoid a contest is to disclose the estate plan to others.  Individuals should not keep the estate plan a secret and should, at the very least, let others know that it exists, without getting into all of the specific details.  Disinheriting a beneficiary is a common cause of conflict, and therefore, an individual might consider options other than cutting them out altogether.  For example, certain stipulations relating to the inheritance can be built right into the will or trust.  It is also important to update an estate plan frequently to ensure that changes to beneficiaries and assets are accounted for. Most importantly, individuals should always consult with an experienced estate planning attorney to have the best chance of avoiding conflicts. Contact the experienced attorneys at Hyden, Miron & Foster, PLLC at 501.376.8222. 

Friday, December 5, 2014

Married Without Children: Estate Planning for Couples With No Kids

When most people think of estate planning what usually comes to mind is passing wealth down to children or grandchildren.    But, more and more couples are getting married and remaining childless for various reasons. These couples, who are not spending money on raising children, sometimes amass large estates.  It is important for couples in this situation to do the appropriate estate planning so that their wealth passes according to their wishes after death.

Married couples without children have two main considerations.  First, they should put some thought into the possibility of incapacity.  Each spouse should think about who will handle his or her financial and medical affairs if he or she cannot.  Most spouses designate each other as a first choice.  But, since either could pre-decease or become incapacitated as well, it is always wise to designate a secondary appointee.  Each spouse should contemplate this and choose someone whom he or she fully trusts such as a niece, nephew, other family member, friend or even a professional.  The attorney will note all of the couple’s choices in the individual powers of attorney and advanced health care directives to be used in the event of incapacity, saving loved ones valuable time and money.

After dealing with incapacity, couples should consider who will receive their wealth after they die.  The problem with having no plan is that when one spouse passes away, his or her wealth will pass to the other spouse.  Then when the surviving spouse dies, all of the assets will pass to his or her family and not to the family of the other spouse. Luckily, planning can be done to avoid this.  One option is to create sweetheart wills where each spouse leaves everything to the other, but then designate who will receive the assets after the surviving spouse dies.  Another option is a joint revocable trust, which accomplishes the same thing as a will, without the time and expense of probate.  The problem with these two options is that they can be changed by the surviving spouse after the first spouse dies.  One way for each spouse to ensure that the assets will be distributed as he or she desires is to create an irrevocable trust.  This trust cannot be changed but has other implications which should be discussed with an attorney such as gift tax consequences.

No two situations are the same so every plan is different.  It is always in the best interest of a couple to seek the advice of an estate planning attorney before executing any documents.  Contact the Arkansas attorneys at Hyden, Miron & Foster, PLLC by calling (501) 376-8222 for a consultation today.

Tuesday, November 25, 2014

Small Business Health Care Tax Credit

By: Carrie E. Bumgardner 

Small business employers providing health insurance coverage to their employees need to check out the small business health care tax credit and then claim it if they qualify. Small business employers are defined as having fewer than 25 full-time equivalent employees and pay an average wage of less than $50,000 per year.

The small business health care tax credit was included in the Affordable Care Act (“ACA”) enacted in 2010. Under the ACA, eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. For 2010 through 2013, the maximum credit is 35% of premiums paid by eligible small businesses and 25% of premiums paid by eligible tax-exempt organizations. In 2014, the maximum credit rate rises to 50% for small businesses and 35% for tax exempt organizations.

Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. The credit is specifically targeted to help small businesses and tax exempt organizations provide health insurance for their employees.

More information is available on the Small Business Health Care Tax Credit

Tuesday, November 18, 2014

Tax Tip Tuesday - Attention Volunteer Firefighters

By: Tiffany Parker Nutt 

Arkansas Act 1452 of 2013 created a state income tax deduction for volunteer firefighters. Volunteer firefighters are now entitled to a deduction for amounts paid and not reimbursed by the fire department for required equipment and for the loss of value of personal property damaged or destroyed (ex. damage to clothing) in the course of participation as a volunteer firefighter. This act is known as the Volunteer Firefighter Tax Protection Act and is effective as of January 1, 2014.

This volunteer firefighter expense deduction is claimed on Form AR 3 Itemized Deduction Schedule, Line 26 under other miscellaneous deductions. This deduction is not subject to the 2% AGI floor. However, the volunteer firefighter expenses deduction is an itemized deduction, which means that the taxpayer’s total itemized deductions must be greater than the taxpayer’s standard deduction of either $2,000 or $4,000, depending on the filing status.

The statute defines “volunteer firefighter” as a member of a fire department or firefighting unit who (1) actively engages in fire suppression, rescue, pump operation, or other firefighting activity and (2) receives less than five thousand ($5,000.00) in total compensation during the taxable year from the volunteer fire department or unit.

This deduction is an itemized deduction and subject to the same recordkeeping requirements as the other amounts listed on the tax return. The Arkansas Department of Finance and Administration recommends keeping receipts from equipment purchases and a memo-style list of items that were damaged in order support this deduction.

Monday, November 17, 2014

Six IRS Tips for Year-End Gifts to Charity

Many people give to charity each year during the holiday season. Remember, if you want to claim a tax deduction for your gifts, you must itemize your deductions. There are several tax rules that you should know about before you give. Here are six tips from the IRS that you should keep in mind:

1. Qualified charities. You can only deduct gifts you give to qualified charities. Use the IRS Select Check tool to see if the group you give to is qualified. Remember that you can deduct donations you give to churches, synagogues, temples, mosques and government agencies. This is true even if Select Check does not list them in its database.

2. Monetary donations.  Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, or bank, credit union and credit card statements.

3. Household goods.  Household items include furniture, furnishings, electronics, appliances and linens. If you donate clothing and household items to charity they generally must be in at least good used condition to claim a tax deduction. If you claim a deduction of over $500 for an item it doesn’t have to meet this standard if you include a qualified appraisal of the item with your tax return.

4. Records required.  You must get an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.

5. Year-end gifts.  You can deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2014. This is true even if you don’t pay the credit card bill until 2015. Also, a check will count for 2014 as long as you mail it in 2014.

6. Special rules.  Special rules apply if you give a car, boat or airplane to charity. For more information visit IRS.gov.

Tuesday, November 11, 2014

Arkansas Landowners Win Victory in Self-Employment Tax Case

In a victory for Arkansas property owners, the Eighth Circuit Court of Appeals has ruled that payments from the Conservation Reserve Program (CRP) are not self-employment income subject to self-employment tax. In Morehouse v. Commissioner, a three-judge panel overturned a decision by the Tax Court that allowed the IRS to assess self-employment tax on landowners who were not engaged in the trade or business of farming but who were enrolled in the CRP.  

In the CRP, landowners sign a contract with the United States Department of Agriculture promising to follow conservation measures on their land.  In exchange, the USDA makes payments to the landowners.  Conservation measures include seeding cover crops and maintaining weeds.  The IRS viewed this activity as farming—a form of trade or business—and required landowners to pay self-employment tax.   

The Circuit Court concluded that, in fact, the payments are rental income, excluded from employment tax.  CRP payments to active farmers are still taxable as self-employment, unless the farmer falls under the protection of the 2008 Farm Bill which exempts farmers receiving social security income from self-employment tax on CRP income. Still, non-farmers and farm landlords who are not "materially participating" in farming may now treat CRP payments as real estate rent.  

Whether treating the income from a farm as rental income instead of self-employment income is advantageous is something that property owners and farm landlords must weigh after consulting with their tax advisors. There may be tax considerations that go beyond the issue the Court resolved.

Whether you are a passive landholder or actively engaged in a trade or business, our attorneys can advise you on how to reduce your tax exposure in the short- and long-term.  The expert Arkansas attorneys at Hyden, Miron & Foster, PLLC can advise you on practical and legal aspects of tax strategy in all types of business activities and investment.  Call (501) 376-8222 for a consultation today.

Monday, November 3, 2014

WARNING: IRS Scam Phone Calls Continue

The IRS has unveiled a new YouTube video to warn taxpayers not to be fooled by impostors posting as tax agency representatives. Scammers may demand money or tell you that you have a refund due to try to trick you into sharing your private information. The scam callers are quite sophisticated. They may know a lot about you and even have an altered caller ID to make it look like the IRS is calling you.

The IRS wants to remind taxpayers of five things are tell-tale signs of a scam. Scammers often use these methods to get you to divulge information. However, the IRS will never:

  1. Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

  • If you know you owe taxes or think you might owe, call the IRS at 1.800.829.1040. The IRS workers can help you with a payment issue.
  • If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 or at www.tigta.gov.
  • If you’ve been targeted by this scam, also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.

Remember, too, the IRS does not use email, text messages or any social media to discuss your personal tax issue. For more information on reporting tax scams, go to www.irs.gov and type “scam” in the search box.

Thursday, October 30, 2014

Do I need to file an FBAR?

By: Tiffany Parker Nutt 

A United States person that has a financial interest in or signature authority over foreign financial accounts must file the Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The new FBAR form is FinCEN Report 114. Form 114 supersedes previous years’ form TD F 90-22.1. The new form is only available online through the BSE filing system. The FBAR Form 114 filing deadline is June 30. Unlike income tax returns, an extension to file cannot be obtained for Form 114.

The definitions of the bolded key terms are very important to determine whether or not you are required to file an FBAR.

Financial Account - A financial account includes, but is not limited to, securities, brokerage, savings, demand, checking, deposit, time deposit or other account maintained with a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.

Foreign Financial Account - A foreign financial account is a financial account located outside of the United States.

United States Person - A United States person includes United States citizens and United States residents. Even if you are not living in the U.S. and are a U.S. citizen, you are still considered a United States Person and can be subject to the FBAR filing rule if the other requirements are met.

If you are uncertain of your filing obligations or have missed the filing deadline contact the attorneys at Hyden, Miron & Foster, PLLC. Call (501) 376-8222 for a consultation.

Tuesday, October 28, 2014

Cleaning Up A Client's Estate—Literally

Trusts and estates lawyers often develop closer personal ties with clients than lawyers in other specialties.  A recent episode dramatically illustrates how close.

It began when a lawyer received a call from the son of a client.  The client had passed away and his son had sifted through his late father's possessions, taking the ones he valued.  However, the son lived and worked abroad and needed to return there.  Would it be possible, he asked, for the lawyer to dispose of the rest of his father's possessions so that his father's house could be sold?

The lawyer, who provides legal services for over 100 families and oversees $50 million in assets, didn't refuse.  Instead, she found volunteers to help and they went through the fully furnished home.  She called nonprofit organizations and asked if she could donate the appliances and furniture.  She personally rented a truck and delivered the items to the nonprofit organizations and needy families.  

The recipients were grateful for the donations and her client was grateful that she had been able to distribute the items in a charitable way.  What's more, the client was able to deduct the charitable donations on his father’s final tax return.  

This episode is an unusual one, but the personal relationship between lawyer and client can often take both down surprising paths.  Estate planners often help clients at all stages of their lives, and trust and estate administration and estate planning involves much more than just taxes and probate.

With offices located in Little Rock, Conway and Hot Springs Village, Arkansas, the attorneys at Hyden, Miron & Foster, PLLC have a long history of providing clients with expert personal and professional service in tax law, trust and estate administration, and estate planning.  Call us at (501) 376-8222 for a consultation.

Tuesday, October 14, 2014

Court Affirms New Estate Tax Strategy for Art Collectors

Collectors of valuable artifacts face a quandary when it comes to estate planning.  Their collections often appreciate substantially over time, so that, at death, their value may exceed state and federal estate tax exemptions.  The estate might then be taxed at a rate as high as 40%.  But giving away the art to avoid estate taxes would prevent collectors from enjoying their collections during their lifetimes.

Banker James A. Elkins pursued a strategy of giving away fractional shares of his art to his children.  He retained possession of the paintings, gradually relinquishing small amounts of ownership.   His estate planning involved a number of different tax avoidance tools, including a Grantor Retained Interest Trust (GRIT).  At the time of his death in 2006, he owned a 50% interest in three works of art and 73% interest in 61 others.  His children owned the rest.

Using calculations based on carefully documented appraisals, his estate discounted the value of his art collection by 44.75% because of his fractional ownership.  The IRS sent a deficiency notice, refusing to accept the discounted valuation.  Estate tax discounts on the value of assets because of partial ownership are often permitted, but they usually involve real estate or business holdings.  The IRS rejected the idea of fractional ownership of art, claiming there was no real market for a fraction of a work of art.

The Tax Court ruled against the IRS and said some discount should be allowed.  However, it rejected the 44.75% discount proposed by the Elkins estate, choosing, instead, a flat 10% discount.

The Court of Appeals for the Fifth Circuit rejected that approach and handed the Elkins estate a victory.  It scolded the IRS for offering no data to justify its position, in contrast to the Elkins estate, which offered extensive support for its valuation.  It permitted the 44.75% discount and awarded the estate a tax refund plus interest.

The Elkins decision could have far-reaching implications for art collectors in every state, who can now reduce the size of their estates by transferring fractional shares of art to their survivors.

The case demonstrates the importance of expert trust and estate planning advice, careful documentation, and advocacy in the event of a dispute with the IRS.  Whether you have a valuable art collection or seek to reduce estate taxes, the experienced Arkansas tax lawyers at Hyden, Miron & Foster, PLLC can help.  Call (501) 376-8222 for a consultation.

Friday, September 26, 2014

Passive Income Leads to Active Battles with IRS

Business and investment activities inevitably involve complex tax laws and regulations, none more so than "passive" and "non-passive" activities.  Generally, losses from passive investments cannot be offset against non-passive gains. Taxpayers often try to characterize their activities as non-passive to use losses as freely as possible when filing their tax returns.

Labeling investment activity as “passive” or “non-passive”, however, can be problematic.  Internal Revenue Code Section 469 and IRS regulations there under leave ample room for interpretation by taxpayers.  Passive income generally comes from real estate rental activity, from a limited partnership, or from a business in which the taxpayer does not "materially participate."  The ultimate determination can be highly fact-specific.

There are at least seven factors that courts may consider when determining whether a taxpayer is materially participating in an investment.  Meeting just one of them may be sufficient for an activity to be deemed non-passive.

1. The taxpayer spends more than 500 hours annually working on the activity. 

2. Few other individuals are involved—the taxpayer’s involvement represents virtually all of the work done on an activity.

3. The taxpayer works on the activity for more than 100 hours annually, and no one else works more. 

4. The activity is a "significant participation activity" (SPA) in which the taxpayer works for more than 100 hours during the year, and the taxpayer’s annual work on all SPAs is more than 500 hours.
5. The taxpayer materially participated in the activity for any five of the ten preceding tax years.

6. For a personal service activity, the taxpayer materially participated for any three tax years preceding the current tax year.

7. Based on all the facts and circumstances, the taxpayer participates on regular, continuous, and substantial basis during the year.

While these criteria offer many ways to have income considered non-passive, they can also lead to disagreements with the IRS and a tax deficiency notice.  We believe that careful tax planning and expert legal representation during an IRS audit can help you avoid disputes over this and other aspects of your tax return.  

On occasion, a dispute with the IRS cannot be avoided or resolved amicably and vigorous advocacy in court is the only viable option.  Arkansas taxpayers seeking experienced, effective guidance on tax planning and representation in IRS audits should contact the tax lawyers at Hyden, Miron & Foster, PLLC.  Call (501) 376-8222 for a consultation about such tax issues. 

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