You may think your business has enough insurance already. But if it’s vulnerable to employee theft and fraud — and most businesses are — you may want to consider adding more coverage. Some insurance companies offer policies to protect against loss of money and property due to criminal acts by employees. Here’s how to decide whether your business needs one.

Specialty coverage

Employee dishonesty insurance can cover not only theft of money, property and securities, but also willful damage to property. If, for example, an employee smashes a computer or kicks a hole in a wall, it’s likely covered. And this type of policy covers losses from all employees. However, coverage generally is based on occurrences. So if more than one employee is involved in a single theft, the payout will be based on that single occurrence.

Rates and deductibles typically depend on a business’s level of risk. But separate employee dishonesty insurance policies are likely to have higher loss limits and more customized coverage than is available with coverage offered as part of a business insurance package.

Policy limitations

Employee dishonesty insurance covers only property your business owns, holds for others or is legally liable for. It usually doesn’t cover theft or damages caused by employees of businesses that provide services to your company. (For coverage related to third parties, such as contract workers, you may need to add “endorsements” or buy a broader business crime policy.)

Employee dishonesty insurance also generally won’t cover loss of:

  • Intangible assets such as trade secrets or electronic data,
  • Loss of employees’ property,
  • Damage covered by another insurance policy, or
  • The unexplained disappearance of property.

The burden of proof for employee dishonesty claims is solely on the policy owner. Insurance companies will pay claims only if there is conclusive proof that an employee caused the loss.

Finally, employee dishonesty insurance isn’t a substitute for a fidelity bond if a bond is required by a funding source or other contractual agreement. And such bonds can offer advantages. For example, Federal Bonding Program bonds, intended to encourage employers to hire hard-to-place applicants, reimburse employers with no deductible for loss due to employee theft.

Consider your options

Before buying employee dishonesty insurance, look closely at what your general liability or business owner’s policy covers so that you don’t pay for the same coverage twice. And keep in mind that some businesses — such as restaurants and retail stores, where employees often handle cash — may benefit from it more than others. For help determining what your company needs and finding affordable coverage, contact us.

© 2020 Covenant CPA

The record-high exemption amount currently in effect means that fewer families are affected by gift and estate taxes. As a result, the estate planning focus for many people has shifted from transfer taxes to income taxes. A nongrantor trust can be an effective option to reduce income taxes, and it offers a way around the itemized deduction limitations imposed by the Tax Cuts and Jobs Act (TCJA).

What’s a nongrantor trust?

A nongrantor trust is simply a trust that’s a separate taxable entity. The trust owns the assets it holds and is responsible for taxes on any income those assets generate. A grantor trust, in contrast, is one in which the grantor retains certain powers and, therefore, is treated as the owner for income tax purposes.

Both grantor and nongrantor trusts can be structured so that contributions are considered “completed gifts” for transfer tax purposes (thereby removing contributed assets from the grantor’s taxable estate). But traditionally, grantor trusts have been the estate planning tool of choice. Why? It’s because the trust’s income is taxed to the grantor, reducing the size of the grantor’s estate and allowing the trust assets to grow tax-free, leaving more wealth for beneficiaries. Essentially, the grantor’s tax payments serve as an additional tax-free gift.

With less emphasis today on gift and estate tax savings, nongrantor trusts offer some significant benefits.

How can nongrantor trusts reduce income taxes?

The TCJA places limits on itemized deductions, but nongrantor trusts may offer a way to avoid those limitations. The law nearly doubled the standard deduction to $12,000 for individuals and $24,000 for married couples. (Indexed annually for inflation, the 2019 standard deduction amounts are $12,200 for individuals and $24,400 for married couples.) The TCJA also limits deductions for state and local taxes (SALT) to $10,000.

These changes reduce or eliminate the benefits of itemized deductions for many taxpayers, especially those in high-SALT states. By placing assets in nongrantor trusts, it may be possible to increase your deductions, because each trust enjoys its own $10,000 SALT deduction.

For example, Andy and Kate, a married couple filing jointly, pay well over $10,000 per year in state income taxes. They also own two homes, each of which generates $20,000 per year in property taxes. Under the TCJA, the couple’s SALT deduction is limited to $10,000, which covers a portion of their state income taxes, but they receive no tax benefit for the $40,000 they pay in property taxes.

To avoid this limitation, Andy and Kate transfer the two homes to an LLC, together with assets that earn approximately $40,000 per year in income. Next, they give 25% LLC interests to four nongrantor trusts. Each trust earns around $10,000 per year, which is offset by its $10,000 property tax deduction. Essentially, this strategy allows the couple to deduct their entire $40,000 property tax bill.

Beware the multiple trust rule

If you’re considering this strategy, be aware that the tax code contains a provision that treats multiple trusts with substantially the same grantors and beneficiaries as a single trust if their purpose is tax avoidance.

To ensure that this rule doesn’t erase the benefits of the nongrantor trust strategy, designate a different beneficiary for each trust. Contact us for more information at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA