If you hold significant real estate investments, tenancy-in-common (TIC) ownership can be a powerful, versatile estate planning tool. A TIC interest is an undivided fractional interest in property. The property isn’t split into separate parcels. Rather, each TIC owner has the right to use and enjoy the entire property.

TIC in action

An individual TIC can’t sell or lease the underlying property, or take other actions with respect to the property as a whole, without the other owners’ consent. But each owner has the right to sell, mortgage or transfer his or her TIC interest. This includes the right to transfer the interest, either directly or in trust, to his or her heirs or other beneficiaries.

Someone who buys or inherits a TIC interest takes over the original owner’s undivided fractional interest in the property, sharing ownership with the other tenants in common. Each TIC interest holder has a right of “partition.” That is, in the event of a dispute among the co-owners over management of the property, an owner can petition a court to divide the property into separate parcels or to force a sale and divide the proceeds among the co-owners.

TIC and estate planning

Here are a couple of the ways TIC interests can be used to accomplish your estate planning goals:

Distributing your wealth. Dividing real estate among your heirs — your children, for example — can be a challenge. If you transfer real estate to them as joint tenants, their options for dealing with the property individually will be limited. What if one child wants to hold on to the real estate, but the other two want to cash out? Transferring TIC interests can avoid disputes by giving each heir the power to dispose of his or her interest without forcing a sale of the underlying property.

Reducing gift and estate taxes. Fractional interests generally are less marketable than whole interests. Plus, because an owner must share management with several co-owners, fractional interests provide less control. As a result, TIC interests may enjoy valuation discounts for gift and estate tax purposes.

Get an appraisal

If you’re considering using TIC interests in your estate plan, it’s critical to obtain an appraisal to support your valuation of these interests. Keep in mind that appraising a TIC interest is a two-step process. It begins with an appraisal of the real estate as a whole. Then an appraisal of the fractional interests follows. In some cases, it may be desirable to use two appraisers: a real estate appraiser for the underlying property and a business valuation expert to quantify and support any valuation discounts you claim. Contact us with questions at 205-345-9898.

© 2018 Covenant CPA

No matter how much effort you’ve invested in designing your estate plan, your will, trusts and other official documents aren’t enough. You should also create a “road map” — an informal letter or other document that guides your family in understanding and executing your plan and ensuring that your wishes are carried out. Your road map should include, among other things:

  • A list of important contacts, including your estate planning attorney, accountant, insurance agent and financial advisors,
  • The location of your will, living and other trusts, tax returns and records, powers of attorney, insurance policies, deeds, automobile titles, and other important documents,
  • A personal financial statement that lists stocks, bonds, real estate, bank accounts, retirement plans, vehicles and other assets, as well as information about mortgages, credit cards, and other debts,
  • An inventory of digital assets — such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, and social media accounts — including login credentials or a description of arrangements made to provide your representative with access,
  • Computer passwords and home security system codes,
  • Safe combinations and the location of any safety deposit boxes and keys,
  • The location of family heirlooms or other valuable personal property, and
  • Information about funeral arrangements or burial wishes.

The road map can also be a good place to explain to your loved ones the reasoning behind certain estate planning decisions. Perhaps you’re distributing your assets unequally, distributing specific assets to specific heirs or placing certain restrictions on an heir’s entitlement to trust distributions. There are many good reasons for these strategies, but it’s important for your family to understand your motives to avoid hurt feelings or disputes.

Finally, like other estate planning documents, your road map won’t be effective unless your family knows where to find it, so it’s a good idea to leave it with a trusted advisor. Contact us at 205-345-9898 to start your road map.

© 2018 Covenant CPA

Now that the gift and estate tax exemption has reached a record high of $11.18 million (for 2018), it may seem that gifting assets to loved ones is less important than it was in previous years. However, lifetime gifts continue to provide significant benefits, whether your estate is taxable or not.

Let’s examine three reasons why making gifts remains an important part of estate planning:

1. Lifetime gifts reduce estate taxes. If your estate exceeds the exemption amount — or you believe it will in the future — regular lifetime gifts can substantially reduce your estate tax bill.

The annual gift tax exclusion allows you to give up to $15,000 per recipient ($30,000 if you “split” gifts with your spouse) tax-free without using up any of your gift and estate tax exemption. In addition, direct payments of tuition or medical expenses on behalf of your loved ones are excluded from gift tax.

Taxable gifts — that is, gifts beyond the annual exclusion amount and not eligible for the tuition and medical expense exclusion — can also reduce estate tax liability by removing future appreciation from your taxable estate. You may be better off paying gift tax on an asset’s current value rather than estate tax on its appreciated value down the road.

When gifting appreciable assets, however, be sure to consider the potential income tax implications. Property transferred at death receives a “stepped-up basis” equal to its date-of-death fair market value, which means the recipient can turn around and sell the property free of capital gains taxes. Property transferred during life retains your tax basis, so it’s important to weigh the estate tax savings against the potential income tax costs.

2. Tax laws aren’t permanent. Even if your estate is within the exemption amount now, it pays to make regular gifts. Why? Because even though the Tax Cuts and Jobs Act doubled the exemption amount, and that amount will be adjusted annually for inflation, the doubling expires after 2025. Without further legislation, the exemption will return to an inflation-adjusted $5 million in 2026.

Thus, taxpayers with estates in roughly the $6 million to $11 million range (twice that for married couples), whose estates would escape estate taxes if they were to die while the doubled exemption is in effect, still need to keep potential post-2025 estate tax liability in mind in their estate planning.

3. Gifts provide nontax benefits. Tax planning aside, there are other reasons to make lifetime gifts. For example, perhaps you wish to use gifting to shape your family members’ behavior — for example, by providing gifts to those who attend college. And if you own a business, gifts of interests in the business may be a key component of your ownership and management succession plan. Or you might simply wish to see your loved ones enjoy the gifts.

Regardless of the amount of your wealth, consider a program of regular lifetime giving. We can help you devise and incorporate a gifting program as part of your estate plan, contact us at 205-345-9898.

© 2018 Covenant Consulting CPA

A common estate planning mistake is to designate a minor as beneficiary — or contingent beneficiary — of a life insurance policy or retirement plan. While making your young child the beneficiary of such assets may seem like an excellent way to provide for him or her in the case of your untimely death, doing so can have significant undesirable consequences.

Not per your wishes

The first problem with designating a minor as a beneficiary is that insurance companies and financial institutions generally won’t pay large sums of money directly to a minor. What they’ll typically do in such situations is require costly court proceedings to appoint a guardian to manage the child’s inheritance. And there’s no guarantee the guardian will be someone you’d choose.

For example, let’s suppose you’re divorcing your spouse and you’ve appointed your minor children as beneficiaries. If you die while the children are still minors, a guardian for the assets will be required. The court will likely appoint their living parent — your ex-spouse — which may be inconsistent with your wishes.

Age of majority

There’s another problem with naming a minor as a beneficiary: The funds will have to be turned over to the child after he or she reaches the age of majority (18 or 21, depending on state law). Generally, that isn’t the ideal age for a child to gain unrestricted access to large sums of money.

A better strategy

Instead of naming your minor child as beneficiary of your life insurance policy or retirement plan, designate one or more trusts as beneficiaries. Then make your child a beneficiary of the trust(s). This approach provides several advantages. It:

  • Avoids the need for guardianship proceedings,
  • Gives you the opportunity to select the trustee who’ll be responsible for managing the assets, and
  • Allows you to determine when the child will receive the funds and under what circumstances.

If you’re unsure of whom to name as beneficiary of your life insurance policy or retirement plan or would like to learn about more ways to provide for your minor children, please contact us.

© 2018 Covenant Consulting

Just in time for tax season, DCL interviewed local tax accountant, Ray Dyer Jr., CPA and Managing Member of Covenant Consulting Group, about tax changes that will impact 2018. Mr. Dyer explains three important changes he will address this year in his practice.

 

Changes in the Estate Tax Exemption

It might make sense to give to grandmother rather than the kids.

The Estate Tax exemption amount has effectively doubled from approximately $12.5 million per married couple to approximately $25 million per married couple. Over the years plans have been put in place to move assets from the “parents” to the “children” to minimize future estate tax on growth assets.

Now there may be an opportunity to transfer assets to parents – who may likely be the first to die – to get a tax free “stepped up basis”. The tax impact will be noticed when the beneficiaries dispose of the the appreciated assets – any gain is potentially reduced by the stepped up amount. Taking into account future growth, this strategy would likely be most effective for joint estates in the $8 million to $18 million estate range.

 

Expensing Changes

Like-Kind exchanges are limited to Qualifying Real Property. Personal property no longer qualifies for like-kind exchange treatment. 

Under pre-Tax Cuts and Jobs Act law, depreciable tangible personal property could have been exchanged for like-kind property if the relinquished property and replacement property were of a like class if the properties were either within the same general asset class or within the same product class. In light of the increased and expanded expensing under the cost recovery system (ie, depreciation expense) and Section 179 expense for tangible personal property and certain building improvements, Congress believed that the like-kind exchange rules under Code Section 1031 should be limited to exchanges of qualifying real property. Thus, exchanges of machinery, equipment, vehicles, patents and other intellectual property, artwork, collectibles, and other intangible business assets do not qualify for nonrecognition of gain or loss as like-kind exchange.

 

Interest Expense Changes

New rules may change the best method for structuring business debt

Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. Any interest expense limited under this rule can be carried forward and used at a later date. This may cause certain businesses to evaluate how such business debts are structured.

Click to go to the Article in Druid City Living

Ray Dyer Jr., CPA, writes, speaks and teaches on various subjects in addition to his private practice. He is a native of Tuscaloosa and attended the University of Alabama where her received his BS in Accounting and Master of Tax Accounting degrees. His first 10 years of college were spent in Dallas, TX with international accounting firms and as a Controller/Treasurer a national real estate syndication firm.

His emphasis is working with businesses that are going through changes such as entity selection, partnership formation or dissolution, syndication or equity raising.

Covenant Consulting Group provides Accounting, Assurance, Auditing, Valuation, Business Advisory, and Litigation Support services to businesses and families. For more information, please go to www.covenantcpa.com