Section 529 plans are a popular education-funding tool because of tax and other benefits. Two types are available: 1) prepaid tuition plans, and 2) savings plans. And one of these plans got even better under the Tax Cuts and Jobs Act (TCJA).

Enjoy valuable benefits

529 plans provide a tax-advantaged way to help pay for qualifying education expenses. First and foremost, although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing in the form of deductions or credits.

But that’s not all. 529 plans also usually offer high contribution limits. And there are no income limits for contributing.

Lock in current tuition rates

With a 529 prepaid tuition plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.

Fund more than just college tuition

A 529 savings plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

In addition, the Tax Cuts and Jobs Act expands the definition of qualified expenses to generally include elementary and secondary school tuition. However, tax-free distributions used for such tuition are limited to $10,000 per year.

The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.

But each time you make a contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.

Picking your plan

Both prepaid tuition plans and savings plans offer attractive benefits. We can help you determine which one is a better fit for you or explore other tax-advantaged education-funding options. Contact us at 205-345-9898.

© 2018 Covenant CPA

Your company has landed a lucrative new account, and the customer has already placed several small orders, paying in full, on time. Now the customer wants to place a larger order, but has requested that you first expand its credit account. Warning! There’s a chance that you could become a victim of bankruptcy fraud. Your new customer may be planning a “bust-out” — a common bankruptcy-related scam.

Bust-out scams

In a bust-out, fraudsters create a bogus company — often with a name similar to that of an established, reliable business — to order goods they have no intention of paying for. In fact, they plan to sell the products for fast cash, file for bankruptcy and leave you, the supplier, holding the empty bag.

In a variation of the scheme, bogus operators buy an existing company and use its good credit to order the goods. Either way, they sell the products they order below cost, for cash, and then file for bankruptcy, writing off the amounts of the supplier’s bill.

You can avoid becoming a bust-out victim by carefully vetting businesses that were formed only recently. Also be wary of established companies with new ownership — particularly if the new owners seem to want to keep their involvement under wraps. And pay particular attention to customers that have:

  • Warehouses stuffed with high-volume, low-cost items,
  • Disproportionate liabilities to assets,
  • No corporate bank account, and
  • Principals previously involved with failed companies.

Fraudulent conveyance schemes

Bust-outs are far from the only bankruptcy-related scams. In fact, the most common type of bankruptcy fraud is concealing assets — or fraudulent conveyance. This scheme involves hiding or moving assets in anticipation of a bankruptcy. The owner of a business on the brink of collapse may, for example, transfer property to a third party — most commonly, a spouse — for little or no compensation. The third party holds the property until bankruptcy proceedings have concluded, and then transfers it back to the business owner.

Alternatively, the business owner files for bankruptcy and then, with the court’s approval, sells property below value to a straw buyer. The owner’s relationship with the buyer isn’t disclosed, but the buyer holds the property until the owner is ready to reclaim it at an agreed-upon price.

In either case, the goal is the same: to keep property and monetary compensation out of the hands of creditors.

Prevention first

Fighting bankruptcy fraud typically requires professional legal and financial help. The best protection is prevention, but if you suspect one of your customers is trying to pull a fast one, contact us at 205-345-9898.

© 2018 Covenant CPA

To head off employee theft, businesses need to know what crooked employees are most likely to steal. The number one preference is cash. But if that’s off limits, the next choice is something expensive that they can use outside work. And, of course, the most costly and useful items in most offices are laptop and desktop computers and other technological devices.

Mark equipment

How can your company protect its technology assets from theft? First, consider adding security plates and indelible markings. These additions can help you track stolen equipment, inhibit resale and discourage thieves from ever trying to steal.

Security software also can track a stolen computer online. As soon as the thief connects to the Internet, its software contacts the security firm’s monitoring system, which traces the machine’s current IP address. To locate a physical address, firms use GPS and Wi-Fi tracking. However, there can be legal obstacles to obtaining the actual address of a thief.

Most computers and mobile devices can also be tracked by sites and apps such as Google, Facebook and Dropbox, which capture the IP addresses of users when they log into their accounts. Apple products can be tracked using iCloud.

Fasten it down

To keep laptop and desktop computers where they belong, you can lock them down with cables and attach motion sensor alarms. If you store numerous laptops on your premises, consider locking them in heavy-duty cabinets or carts when not in use.

To deter desktop computer theft, consider a locked steel case bolted to the desktop. If you prefer not to drill holes in furniture, you can attach super-strength adhesive security pads to desks or other furniture to prevent thieves from lifting the equipment off the surface.

Keep it safe

It’s worth the effort to add extra security and keep your company’s assets where they belong. Also make sure that your business insurance provides adequate coverage for computer losses. Contact us for more information at 205-345-9898.

© 2018 Covenant CPA

If you’ve worked a lifetime to build a large estate, you undoubtedly would like to leave a lasting legacy to your children and future generations. Educating your children about saving, investing and other money management skills can help keep your legacy alive.

Teaching techniques

There’s no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level.

If your kids are old enough, consider sending them to a money management class. For younger children, you might start by simply giving them an allowance in exchange for doing household chores. This helps teach them the value of work. Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.

For families that are charitably inclined, a private foundation may be a great vehicle for teaching children about the joys of giving and the impact that wealth can make beyond one’s family. For this strategy to be effective, older children should have some input into the foundation’s activities. When the time comes, this can also be a great way to get your grandchildren involved at a young age.

Timing and amount of distributions

Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children — either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.

Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk.

Introduce incentives, but remain flexible

An incentive trust is a trust that rewards children for doing things that they might not otherwise do. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices. A trust that’s too restrictive may incite rebellion or invite lawsuits.

Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course. A so-called “principle trust,” for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. But no matter how carefully designed, an incentive trust won’t teach your children critical money skills.

Communication is key

To maintain family harmony when leaving a large portion of your estate to your children, clearly communicate the reason for your decisions. Contact us for more information at 205-345-9898.

© 2018 Covenant CPA

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