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In your heart, you feel good helping a new business owner, a single mother, a start up enterprenuer, or a professional who needs your expertise. You can help me be part of my center of influence. You are God send for you can help me refer me to others who needs to organize their finances.

I help business owners minimize taxes and expenses. I help professionals minimize taxes, reallocate assets, and ensure that their savings and investments can last forever.

Please email me if you want to be an important helper in my life and business at 408-854-1883 motherhealth@gmail.com

401(k) Plans Are Not Just For Big Businesses

A significant portion of the small business market consists of one person businesses. If you have a client whose business is a one person operation, s/he may be a perfect candidate for a Solo 401(k) Plan. A Solo 401(k) plan is a 401(k) plan for a one-person business and may offer your client an opportunity to increase his or her tax-deductible contributions to his/her retirement plan. Additionally, if you have a client who is thinking of establishing a SIMPLE or SEP Plan, a Solo 401(k) may be a better choice that will help enable your client to maximize his or her tax-deductible contributions, and to help meet his/her long range retirement goals.

First, it’s important to understand that Profit Sharing Plans and SEP Plans allow for flexible employer contributions up to 25% of participating payroll. SIMPLE Plans only allow for employee deferral contributions which are limited to $12,000 plus a $2,500 catch-up contribution for participants age 50 or older, as indexed for 2014, but do not allow for flexible employer contributions. Since all 401(k) plans are profit sharing plans with a cash or deferred arrangement (CODA), which allow employees to contribute or defer a portion of their salary into the plan, in addition to the employer profit sharing contribution, a business owner may make both an employer and an employee deferral contribution all in one plan for himself or herself.

This means a business owner with no employees and earning $100,000, could set up a Profit Sharing Plan or SEP Plan, and make a maximum tax-deductible contribution of $25,000. However, since a plain Profit Sharing Plan or a SEP Plan only allows for employer contributions, the business owner may be limiting the amount of money that can be put aside for retirement, as well as the tax savings, with just a plain profit sharing plan or SEP Plan. By adding a 401(k) deferral element to a Profit Sharing Plan, the business owner has just increased the amount that can be contributed on a tax-deductible basis on his or her own behalf.

Let’s look at an example: There is a limit on the overall contribution that can be allocated to any individual in a profit sharing plan or SEP Plan. For 2014, the limit is 100% of compensation up to a maximum of $52,000, as indexed for 2014. The maximum individual deferral amount, as indexed for 2014, is $17,500. In addition, a participant who is age 50 or older, is eligible to make a catch-up contribution of $5,500, as indexed for 2014, for a total salary deferral contribution of $23,000. SEPs do not allow for deferrals nor a catch-up contribution, although a Profit Sharing/401(k) Plan does. So the same business owner described above could establish a solo Profit Sharing/401(k) Plan and increase his contribution amount to $48,000 which is an increase of his or her deductible contribution by 90%. The chart below illustrates a comparison of the maximum contributions applicable to each plan for a 50 year-old business owner at different salary levels.

Business Owner’s Salary ( age 50 or older)	SIMPLE IRA Plan Max. Deferral (Including Catch-up Contrib..)	SEP -IRA Plan Maximum Contrib. of 25%	Profit Sharing/401(k) (Including Deferrals and Catch-up Contrib.)
$100,000	$14,500	$25,000	$48,000
150,000	14,500	37,500	57,500
200,000	14,500	50,000	57,500

Here’s more good news: An existing profit sharing plan may be easily amended to become a Profit Sharing/401(k) plan. In addition, contributions previously made to a SIMPLE or SEP Plan, may be rolled over, in most cases, to a Profit Sharing/401(k) plan. Furthermore, there are no reporting requirements associated with a one-participant plan or a one participant and spouse plan, until the plan assets total $250,000 or more. Even then, only a Form 5500EZ is required to be filed.

Another important benefit to establishing a Profit Sharing/401(k) Plan is that the business owner may purchase life insurance on a tax-deductible basis by purchasing it through the Profit Sharing/401(k) Plan Trust as long as the premiums are within the incidental benefit limits. This is not allowed in a SIMPLE or SEP Plan as the funding vehicle is an IRA. Profit Sharing/401(k) plans also have special rules associated with life insurance limits not available in any other type of qualified plan, such as using rollover or seasoned money to buy life insurance.

The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. You should consult with your tax and legal advisor regarding your individual situation.

Contact Connie Dello Buono 408-854-1883 motherhealth@gmail.com to have a free 30-min chat with a financial advisor.

Info expires Dec 2014

Type of Qualified Retirement Plan for high net income pros and business owners

Owner	Goal	Employees (Non-Owner)	Plan Type	Requirements	Advantages
Older Than Employees	Maximize Contributions, Deductions & Benefits	0-4	Fully Insured Defined Benefit Plan, also known as a 412(e)(3) Plan	Steady Profits: Business generates enough income to support ongoing plan contributions,. Plan funding required each year.	Highest Possible Contribution, Deduction & Benefits. All Plan Assets Held in Guaranteed Annuity/Insurance Contracts. Recession Proof.
Older Than Employees	Maximize Contributions, Deductions & Benefits	5+	Traditional Defined Benefit Plan	Relatively Steady Profits: Business generates enough income to support ongoing plan contributions. Plan funding required each year.	Higher Contribution and Deduction than DC Plans, Lower Deduction than Fully Insured Plan, Investment Fund for Potential Asset Growth.
Older Than Employees& Salary Over $208,000	Flexible Contributions	0	Traditional Profit Sharing Plan	Maximum Total Plan Contribution is 25% of Participating Payroll.	Flexible Contributions, Lower Contribution than a Defined Benefit Plan, Maximum Individual Allocation is $52,000*.
Older Than Employees& Salary Over $208,000	Flexible Contributions	1+	New Comparability Profit Sharing Plan	Maximum Total Plan Contribution is 25% of Participating Payroll.	Flexible Contributions, Lower Contribution than a Defined Benefit Plan, Age-weighted Allocations, Maximum Individual Allocation is $52,000*.
Older Than Employees & Salary Under $208,000	Flexible Contributions	0	Traditional Profit Sharing/401(k) Plan	Maximum Total Plan Contribution is 25% of Participating Payroll Plus Deferrals.	Flexible Contributions, Lower contribution than a Defined Benefit Plan, Maximum Individual Allocation is $57,500*
Older Than Employees & Salary Under $208,000	Flexible Contributions	1+	New Comparability Profit Sharing/ Safe Harbor 401(k) Plan	Maximum Total Plan Contribution of 25% of Participating Payroll Plus Deferrals	Flexible Contributions, Lower contribution than a Defined Benefit Plan, Maximum Individual Allocation is $57,500*, Age-Weighted Allocations
Younger & Salary Under $208,000	Maximize Deductions & Benefits	0	Traditional Profit Sharing / 401(k) Plan	Maximum Total Plan Contribution is 25% of Participating Payroll Plus Deferrals	Flexible Contributions, Maximum Individual Allocation is $57,500*
Younger & Salary Under $208,000	Maximize Deductions & Benefits	1+	Integrated Profit Sharing/ Safe Harbor 401(k) Plan		Flexible Contributions, Maximum Individual Allocation for is $57,500*, Allocations weighted by salary
Younger & Salary Over $208,000	Maximize Deductions & Benefits	0	Traditional Profit Sharing Plan	Maximum Total Plan Contribution is 25% of Participating Payroll	Flexible Contributions, Maximum Individual Allocation is $52,000*
Younger & Salary Over $208,000	Maximize Deductions & Benefits	1+	Integrated Profit Sharing/Safe Harbor 401(k) Plan	Owner’s Salary Higher than Employees’ Salaries, Maximum Total Plan Contribution is 25% of Participating Payroll Plus Deferrals	Flexible Contributions, Maximum Individual Allocation is $57,500*, Allocations are weighted by salary
Any Age	Minimize Cost for Other Employees	1+	Profit Sharing/Safe Harbor 401(k) Plan with Matching Contributions Only	For businesses with employees who do not defer at all or defer very little, No required contributions except for Safe Harbor Matching Contributions which are 100% vested.	No contributions required on behalf of employees who do not defer, Maximum Possible Individual Allocation in 2014 is $33,400**

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Free 30min phone chat with a sr financial advisor at Harding Financial to help you reduce income taxes using a business structure and financial strategies, connie.dellobuono@hardingfinancial.com or conniedbuono@gmail.com 408-854-1883

Make 2014 and 2015 be the year to protect your wealth and secure your retirement.

Connie Dello Buono

Jr Financial Advisor

hardingfinancial.com

Happy Holidays! Take care of your income taxes before the year ends.

Early or Premature Withdrawals from IRAs

Taking money out early from your IRA may trigger an additional tax. Generally, amounts received from a traditional, SEP, or SIMPLE IRA are taxable distributions and must be reported as ordinary income for the taxable year in which they are received. If you are under age 59 1/2, any distributions received are considered early or premature distributions and are subject to an additional penalty tax equal to 10% of the taxable amount of the distribution. (It should be noted that that this penalty tax may be increased to 25% in the case of distributions from SIMPLE IRAs during the first two years of participation in the SIMPLE IRA.) However, the penalty tax does not apply in certain situations. Below is a list of exceptions to the additional penalty tax on early or premature IRA distributions pursuant to IRC Section 72(t).

The exceptions are as follows:

Distributions made to the beneficiary or the individual’s estate in the event of the death of that individual.
Distributions attributable to the individual’s disability.
Distributions made for medical care to the extent allowable as a medical expense deduction for amounts paid during the taxable year which is in excess of 10% of the individual taxpayer’s Adjusted Gross Income (AGI).
Distributions made to unemployed individuals for payment of health insurance premiums provided the individual has received unemployment compensation for at least 12 weeks and the withdrawal is made either in the same year the unemployment compensation was received or in the year immediately following the receipt of unemployment compensation. This exception may also apply to self-employed individuals who would otherwise not be eligible for unemployment compensation because they are self-employed.
Distributions made to pay “Qualified Higher Education Expenses” during the taxable year for the taxpayer, the taxpayer’s spouse, child or grandchild of the taxpayer or the taxpayer’s spouse provided the distribution occurs within the year the expenses were incurred. A “Qualified Higher Education Expense” includes tuition, fees, books and equipment required for enrollment at any “eligible educational institution” which is defined as any college, university, vocational school or other post-secondary educational institution described in the Section 481 of the Higher Education Act of 1965. This also includes special needs services incurred in connection with such enrollment or attendance. Room and board, up to a certain amount, is also included provided the student is enrolled at least half-time. It’s important to note that these expenses are reduced by any scholarships or educational assistance received by the individual.
Distributions that are ‘qualified first-time homebuyer distributions.
Distributions that are part of a series of substantially equal periodic payments made (at least annually) for the life or life expectancy of the individual or the joint lives or joint life expectancy of the individual and his or her designated beneficiary.
Distributions that are qualified hurricane distributions” which may not exceed $100,000.
Distributions that are “qualified reservist distributions” which are distributions made to reserve members of the U.S. military called to active duty for 180 days or more at any time after September 11, 2001. But reservists have the right to return the amount of any distributions for two years following the end of active duty.

It’s important to note that these exceptions only apply to taxable IRA distributions and are different than the exceptions applicable to qualified plans. As always, you should consult your tax or legal advisor as to the best course of action based on your unique circumstances when considering taking an early distribution from an IRA. For more information please refer to IRC Section 72(t) and IRS Publication 590, Individual Retirement Arrangements, or the IRS Web site at www.IRS.gov.

The foregoing information regarding personal, estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. You should consult with your tax and legal advisor regarding your individual situation.

Contact Connie Dello Buono 408-854-1883 motherhealth@gmail.com to have a 30-min chat with a financial advisor.

Conversion of Traditional IRAs to Roth IRAs

Roth IRAs (“Roth”) have been out of reach for many taxpayers because of income limitations imposed by the IRS. These same taxpayers have also been denied the ability to convert a Traditional IRA to a Roth IRA by a separate, but similar, income restriction. But the rules regarding conversion changed over time. Having the option to convert to a Roth may prove to be very desirable if you are a high income earner. It may also appeal to you if you have existing traditional IRA’s or qualified plan balances. Do you fall into either category?

Q1: What is a Roth IRA?

A1: Roth IRA’s were established by the Taxpayer Relief Act of 1997 and were made available to individual taxpayers in 1998. A Roth IRA allows taxpayers to create an IRA that is funded with non-deductible contributions. Roth IRA’s grow tax-deferred, and if basic requirements are met, distributions from the Roth IRA will be tax-free.

Q2: Are there income limitations for contributing to a Roth IRA?

A2: Yes. In order to contribute to a Roth IRA in 2012 there is still a Modified Adjusted Gross Income (MAGI) limitation. For 2012, the phase-out ranges are $110,000 to $125,000 for singles and $173,000 to $183,000 for married couples filing jointly.

Q3: If I complete a conversion, is the converted amount included in my MAGI?

A3: No. The amount converted does not impact the calculation of MAGI. In fact, you can convert to a Roth IRA even if you have no earned income. Note, however, that the conversion amount does impact the calculation for Adjusted Gross Income (“AGI”).

Q4: Is the conversion rule applicable only to Traditional IRAs or are there other types of accounts that can be converted to a Roth IRA?

A4: You can convert to a Roth IRA from a Traditional IRA, SEP-IRA or SIMPLE IRA (generally after 2 years of participation), 403(b) plan, 457 plan, and a qualified employer plan (such as a 401(k)/Profit Sharing Plan).

Q5: If I’m still employed and still covered under my employer’s qualified plan, can I convert part or all of my employer’s qualified plan balance?

A5: Generally, no. A triggering event (i.e. Retirement, Termination, etc.) would have to occur before a distribution could be made. However, if you are over the age of 59 ½, there may be an opportunity depending upon the type of plan under which you are covered. A distribution from a 401k or profit sharing plan to an active employee over the age of 59 ½ is generally permissible under the law, provided that the plan allows for such distributions. However, most plans don’t have this option. In addition, a 401(k) plan is generally prohibited from making any non-hardship distribution until the employee actually separates service from the employer.

Q6: If I convert to a Roth IRA and then my investments in that account go down, is there any way to reverse the conversion so I don’t pay taxes on higher values that are no longer there?

A6: Yes. This is called a “recharacterization.” Recharacterizations allow you to reverse the conversion as if you never did it. The rules around this are complex. Note that you have until October 15^th of the year following the year you did the conversion to re-characterize it back to a traditional IRA.

Q7: If I re-characterize a Roth conversion, can I then RE-re-characterize it back to a Roth IRA?

A7: The answer is yes, but not in the same tax year. You must wait at least 30 days from the time you re-characterize back to a traditional IRA, and it can’t be any earlier than January 1 of the next year. For example, you convert a traditional IRA to a Roth IRA on September 1, 2012. Five months later your investments have dropped 25%. You can re-characterize the IRA as late as October 15, 2013. However, you won’t be able to convert this re-characterization back to a Roth until January 1, 2014.

Q8: Are there any other reasons besides market losses where I would consider a re-characterization?

A8: Yes. The following possibilities may cause you to consider re-characterization:

(a) you were counting on extra funds to be available to pay the taxes but they are not there;

(b) the added income of the conversion could disqualify a child from receiving college financial aid;

(d) an emergency occurs where the funds used to pay the taxes could now help.

Essentially, there are a number of possibilities where a re-characterization may prove helpful or even necessary.

Q9: What are the basic differences between AGI and MAGI?

A9: MAGI is derived from AGI. You would first calculate your AGI and then perform the required calculations as set forth on pages 2-3 of IRS Form 8606. http://www.irs.gov/pub/irs-pdf/i8606.pdf.

Q10: Can I convert an inherited IRA to a Roth IRA?

A10: No, unless you are the decedent’s spouse. However, if you are a beneficiary of a non-spouse’s qualified plan, you may be able to convert the inherited retirement plan assets directly to a Roth (see Q11).

Q11: I am the beneficiary of my uncle’s qualified retirement plan. If he were to pass away, could I convert the inherited retirement plan assets to a Roth IRA?

A11: Generally yes. Non-spouse beneficiaries can convert directly to a Roth IRA. There are other restrictions and rules, discussed below.

Q12. If I want to convert qualified plan balances that I inherit from a non-spouse, what should I be aware of?

A12: The Plan document must have a provision written into it that actually allows the conversion. If it doesn’t, then you will be forced to roll the qualified plan assets to a Traditional IRA first. Unfortunately, in that case, the conversion option will be lost because under current law, the conversion can only happen if it is a direct transfer (a/k/a “trustee-to-trustee” transfer) from the qualified plan. If you actually receive the distribution and then attempt to invoke the 60-day rollover rule, you won’t be able to roll those assets anywhere, let alone a Roth. You will have to pay taxes and possibly penalties on the amount received and you will have lost any opportunities to keep the account as any type of IRA. The law is very strict here. Barring a change in the law, your best chance if the Plan does not allow for this is to wait to see if either the Plan will be amended or if the law changes.

Q13: We currently file our income tax return as “Married, filing separately.” Will we be able to convert a traditional IRA to a Roth in 2012?

A13: Yes. Prior to 2010, married taxpayers who filed separately were not permitted to convert to a Roth IRA regardless of income.

Q14: Is there a “best time” to convert to a Roth?

A14: That would depend on your specific situation. If you want to lock-in your conversion now because of what you feel are depressed asset values, then it may make sense to convert to a Roth IRA. Additionally, if you convert early in the year and your assets drop significantly in value during the year, then you could re-characterize those assets back to a traditional IRA later in the year. A good time for that re- characterization may be around November of a given year so that if you wanted to then re-re-characterize back to a Roth IRA, you would only have to wait to January 1^st of the following year. Also, you would probably have a good idea by then if there are any changes in the tax laws pending.

Q15: If I convert qualified plan assets to a Roth, whether they are my own or I inherited them, can I convert them into an existing Roth IRA that I have already established for myself? Does that make sense?

A15: You can do that but it may make more sense to create a separate Roth for these assets. A separate Roth IRA for qualified plan assets should make it easier to identify assets that came from particular sources. It should also prove to be less confusing if any questions regarding distributions arise. It may also give you greater distribution flexibility. In addition, if you are under age 59 ½ or aren’t disabled, it probably makes more sense to open a separate Roth IRA for each conversion you do (see next question).

Q16: After I convert to a Roth, how soon can I access the funds without penalty?

A16: The rules are different with conversions than they are with contributions. In general, for a Roth IRA that holds only contributions and investment income, you can always get your contributions distributed to you without tax or penalty (first in, first out). In order to access the earnings income tax-free and penalty tax-free, the Roth IRA must be at least 5 years old and you must be age 59 ½ or older (or disabled). Note that even if you have a Roth 401(k) and no other Roth account, the 5-year holding period doesn’t begin until a Roth IRA is established. With distributions from conversions, however, unless you are over age 59 ½, and the converted Roth IRA is over 5 years old, then you would pay a 10% penalty on the distribution – even though the distribution is not included in gross income. You may pay income taxes, as well, if part of the distribution consists of any gain. Essentially, each conversion creates its own 5-year window and thus must be treated separately from a traditional Roth IRA funded with just contributions.

Q17: I have a traditional IRA that has tax-deductible contributions and also post-tax contributions. I would like to convert just the post-tax portion to a Roth IRA. Can I do that?

A17: Unfortunately, no. The IRS says that you must consider the entire IRA for purposes of the tax effect of the conversion. For example, let’s suppose that your traditional IRA has a total balance of $100,000. Of that, $20,000 is from post-tax contributions and the balance is from tax-deductible contributions and investment gains. If you converted the $20,000 portion because you thought you could, the rules state that the conversion would be considered 20% tax-free ($20,000 divided by $100,000) and 80% taxable. In this case, you would have to report $16,000 of taxable income (80% of the $20,000 conversion).

Q18: Assume the same facts as the previous question but that I have 2 separate IRA’s: one IRA that was funded only with post-tax contributions and one IRA that was funded only with tax-deductible contributions. Can I convert just the post-tax IRA to a Roth IRA?

A18: Again, you cannot. You must look at all IRA balances – deductible and non-deductible – for determining the amount that you must include in taxation. So, even if the non-deductible IRA had exactly $20,000 (your contribution) and no investment gain, you still couldn’t convert that IRA only and escape income taxation. You would still have to report $16,000 of taxable income.

Q19: If I do take a distribution from a Roth IRA prior to the 5-year period, and if that Roth IRA holds converted amounts as well as original contributions and investment gains, is there any way I can avoid having to pay taxes or penalties on a distribution?

A19: Yes, but it depends on your age and the amount of the distribution you take. Distributions from a Roth IRA come first from contributions, then from conversion amounts, and finally from investment earnings. Let’s look at an example. In 2004, at the age of 35, you opened a Roth IRA with regular contributions. You proceeded to make contributions fairly regularly over the years. In 2012 you convert an existing traditional IRA worth $50,000 to a Roth IRA and you commingle it with your existing Roth IRA. In 2016, at age 47, your Roth IRA balance is $100,000 and is comprised of $25,000 of contributions, $50,000 of conversions, and $25,000 of investment gain. At that time you wish to take out $35,000 from the Roth IRA. What taxes would be due? First, there would be no income tax due. That is the result of the ordering process of how distributions are treated. The first $25,000 is a return of your contributions (no income taxes because contributions are made with after-tax dollars), and the next $10,000 is a return of your converted amount (also no income taxes because you paid income tax on the conversion). But, since the converted amount began its own 5-year window in 2013, and since 2016 is only 3 years after conversion, any amount taken from the conversion is subject to a 10% penalty tax (but no income taxes). So, even though you are taking a distribution of money that isn’t included as income, you are still going to pay a penalty because you are under age 59 ½ and because the converted amount isn’t at least 5 years old.

Q20: I’m over age 70 ½ and have already begun taking required minimum distributions (“RMDs”) from my traditional IRA. Am I eligible to convert a portion or all of my traditional IRA?

A20: Yes. The one thing to be aware of here is that the RMD for the year of conversion – if not yet taken – cannot be converted. Thus, many people take their RMD for the year and then convert.

Q21: A significant amount of my assets consist of qualified plans and tax-deductible IRA’s. If I convert any of these accounts to a Roth IRA, can I pay the taxes from those accounts as well?

A21: Yes, but it is generally not advisable. First, the withdrawal itself will be taxable. If you are under 59½, you’ll now owe penalties, as well. Also, the withdrawal will lose its ability to compound tax-deferred inside the plan or IRA. Conversion to a Roth IRA works best when the money needed to cover the taxes comes from sources other than the retirement plans or IRA accounts that were converted.

There is a significant opportunity for effective income tax and retirement planning by converting traditional IRAs and qualified plans to Roth IRAs. However, there are many rules and restrictions that must be understood and complied with. This memo is intended to educate you on some of these rules and restrictions. You should consult with your personal advisors and tax professionals before taking any action with regard to conversions or re-characterizations.

Contact Connie Dello Buono 408-854-1883 motherhealth@gmail.com for a free 30 min chat with a financial advisor.

Hi,

I’m Connie, financial advisor with Harding Financial helping doctors and business owners save $70k or more in income taxes per year via a financial strategy and business structure. I can schedule a phone chat with you and our sr financial advisor this week. Please email me at conniedbuono@gmail.com or connie.dellobuono@hardingfp.com

Regards,

Connie Dello Buono

Harding Financial

hardingfp.com

Financial Advisor

408-854-1883

Naming a Trust as Beneficiary of an IRA or Qualified Retirement Plan

As a participant in a qualified plan or the owner of an IRA you have many options in naming a beneficiary upon your death. Most often we think of our families – our spouses and/or children as the natural beneficiaries of our retirement assets. And much can be said in favor of naming your spouse as beneficiary, and perhaps your children. But is it the only way to leave your retirement assets for your family? Is it the best way? Many advisors suggest naming a trust as beneficiary. Others suggest to the contrary. Who is “right”?

Many participants in qualified retirement plans and owners of Individual Retirement Accounts (IRAs) have these thoughts in mind when designating a beneficiary – “how can the distribution be ‘stretched’ over the longest period of time, with minimum tax consequences and maximum benefit to my loved ones?” In most family situations, naming a spouse as the primary beneficiary and the children as secondary or contingent beneficiaries can accomplish those goals. A spouse, for example, may roll over the assets into his/her own IRA and possibly defer taxes and distributions for many more years, naming children beneficiaries so that on the death of the spouse, distributions are stretched over the life expectancies of the children.

I am married and want to name a trust as beneficiary of my retirement plan. May I?

Whenever a married individual wants to name someone other than his or her spouse as beneficiary of the employer sponsored retirement plan, the plan participant, in many cases, must obtain written spousal consent, signed and notarized. That consent is usually not required for IRAs. Defined benefit plans always require spousal consent and in the case of IRAs, although not required, financial institutions as custodians, may require consent.

When might naming a trust as beneficiary be recommended?

Significant amounts of wealth are invested in retirement plans and IRAs. Since distributions from these accounts may occur over the lives of several generations, some of whom may be minors, immature adults or financially unsophisticated individuals, a trust may provide the management expertise and discretion required. The trust plays the same role as it does in many other estate planning applications – to establish a trust as a protective vehicle for minor beneficiaries, spendthrifts, and to ensure inheritances to children from a previous marriage. In the latter case, leaving the IRA or qualified plan to a trust can provide income for the spouse, and continue for the children without having to be concerned that your spouse, if he or she received the money directly, might name someone else as beneficiary (e.g., a new spouse) to the detriment of your children.

For example, Susan is Paul’s second wife. Paul has a son John from his first marriage, If Paul names Susan the beneficiary of his IRA account, she can do a spousal rollover and name her own beneficiaries, to the exclusion of John. On the other hand, if Paul names a trust that meets IRS qualifying criteria, distributing required minimum distribution (RMD) income to Susan during her life, with the remainder to John, Paul can be sure that John will inherit the balance of his retirement account after Susan has passed away or remarried.

Some advisors express concern that using a trust may expose your retirement assets to immediate income taxation. Is that a legitimate concern?

It is a concern but adverse tax consequences can be avoided provided great care is given to drafting the trust to ensure that it is a “qualified” trust.

How does one name a trust as beneficiary yet qualify the IRA or retirement plan for IRA rollover treatment?

A trust is not considered a “designated beneficiary.” Only individuals may be a designated beneficiary. However, beneficiaries of a qualified trust may qualify as designated beneficiaries. The IRS has spelled out the criteria for a trust beneficiary to be treated as a designated beneficiary:

The trust must be valid under state law.
The trust must be irrevocable or will, by its terms, become irrevocable on the death of the plan participant or IRA owner.
The trust’s beneficiary (ies) must be identifiable by the trust or the will terms.
The IRA owner or plan participant must provide the trustee or custodian, whichever the case, with a copy of the trust instrument or will, or the beneficiaries must provide it upon demand.

These requirements must be satisfied by October 31^st of the year following the year of the death of the owner/participant.

Must the trust be created during my lifetime or can it be in my will?

You can create a qualifying trust that meets the above criteria during life, known as a living or inter vivos trust, or you can create a qualifying trust in your will, known as a testamentary trust. As long as the trust satisfies the IRS criteria, it does not matter when it was created.

My minor children would be the beneficiaries of a trust that would be the beneficiary of my IRA or qualified retirement plan. I want income accumulated for them until they reach the age of majority. Can I do that?

This type of trust design can result in unforeseen consequences. In order to qualify the trust for distributions based on the children’s ages, it must be a “conduit” trust – all income received by the trust must be distributed by the trust to its named beneficiaries. If minor children are involved, the distribution can be made to their guardian or a custodial account and accumulated outside the trust for distribution to them when they attain the age of majority.

I have an IRA and want to leave it to a trust for my three children. How will it be “stretched”? Assuming the trust meets all the other qualifications, the age of the oldest beneficiary is used to calculate the time over which Required Minimum Distributions are calculated, meaning the RMDs will be highest and the children taxed on them quicker. For example, if you have three children ages 20, 15, and 10, the distribution would be based on the life expectancy of the 20-year old.

How can I ensure that each child is distributed their share based on their age?

If the account is a qualified retirement plan, you should create separate trusts for each child and name each trust as beneficiary for each respective child. If the account is an IRA, you should split the IRA into three separate IRA’s and, again, have three separate trusts, one for each child. Then each child’ life expectancy will be used to calculate their RMDs.

I have an IRA and want to leave half to a charity and the other half to my children. Can I name a trust as beneficiary, with half for the benefit of a charity and half for the benefit of my children?

A beneficiary of a trust that is other than an individual person (such as a charitable organization) will cause an IRA or qualified retirement plan to be treated as having no designated beneficiary. The lack of a designated beneficiary requires full distribution of the IRA or qualified retirement plan within 5 years of the date of death of the participant/owner, or over the remaining life expectancy of the participant/owner if the participant/owner is over age 70 ½ at death. For example, if the trust provided 30% each to your three children and 10% to a charity, the distributions could not be stretched over the life expectancies of the children.

Okay, I understand. So how would I accomplish my goal?

During life, if you were to split the IRA 50/50 and leave the children’s 50% portion to a qualifying trust, and the other 50% to the charity, then the children’s interest would not be tainted by the non-designated beneficiary charity, and would be distributed to them based on the oldest child’s age.

I understand that my IRA is protected from my creditors. When I die and my children inherit my IRA, will it still be protected from their creditors?

On June 12, 2014, the Supreme Court of the United States issued a decision in the case of Clark v. Rameker. The Court held that Inherited IRA’s were not “retirement funds” and therefore, inherited IRA’s are not protected assets in the case of a bankruptcy proceeding.

The Court defined “retirement funds” as sums of money set aside for the day an individual stops working. In support of its position, the Court said there are three legal characteristics of an Inherited IRA that provide evidence that these funds are not retirement funds.

The holder of an inherited IRA may never invest/add additional money to the account.
The holder of an inherited IRA is required to withdraw money from the account(s), no matter how far they are from retirement.
The holder of an inherited IRA may withdraw money at any time, for any reason, without penalty.

What added protection would a trust provide?

A spendthrift trust, one which prohibits the beneficiary from any access to the principal, prevents the beneficiary’s creditors from accessing trust assets under state law. In addition, under Federal Bankruptcy Code Section 541(c)(2), assets in a spendthrift trust are exempt from creditors. Since a qualifying trust must be a conduit trust, once any distributions are made to your heirs, those distributions would be reachable by creditors.

From these questions and answers it should be clear why naming a trust as beneficiary of your qualified retirement plan or IRA, can be an effective planning tool for the long term benefit of your family. However, doing so involves careful planning and drafting of a trust document, whether in a living trust or in your Will. In the end, though perhaps legally challenging, naming a trust can provide your loved ones not only the security of required minimum distributions for life, but important protections that would not otherwise be available to them if they were named outright beneficiaries.

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Make 2014 and 2015 be the year to protect your wealth and secure your retirement.

Connie Dello Buono

Jr Financial Advisor

hardingfinancial.com

Maximum Total Deductible Contribution to Both Defined Benefit and Profit Sharing/401(k) Plans

Generally, employers that adopt both a defined benefit plan and a defined contribution plan (including a profit sharing plan with or without 401(k) salary deferral contribution features) are able to make the maximum contribution to both plans. However, that’s not always true. In some cases, there is a lower maximum deduction that may be applicable to certain employers on the total combined contribution to both plans.

Closely held businesses often want to adopt and maintain both a defined benefit plan and a defined contribution plan in order to maximize the company’s total deductions and to maximize retirement contributions. Aside from traditional defined benefit plans, fully insured plans and cash balance plans are also types of defined benefit plans. While there are also several types of defined contribution plans, profit sharing plans and/or 401(k) plans are the more popular types.

A defined benefit plan can be designed to provide maximum retirement benefits and a 401(k)/profit sharing plan may allow employees to maximize salary deferral contributions. However, some employers may have defined benefit plans that may not be insured by the Pension Benefit Guaranty Corporation (PBGC). In those cases, the total combined deductible contribution to both a defined benefit plan and a defined contribution plan (including a profit sharing/401(k) plan) may be limited. PBCG insurance may not be available if:

the only employee(s) who will be participating in the plan are only the owner/employees (including the spouses, as may be applicable), or

the employer is a professional service company (e.g., dentists, doctors, lawyers, public accountants, architects, pharmacists, etc.) with no more than 25 employees.

In those cases, the Internal Revenue Code provides that the employer’s aggregate total maximum deductible contribution to a defined benefit plan and a defined contribution plan (including a 401(k)/Profit Sharing plan) may not exceed the greater of:

31% of the total compensation of all eligible employee(s) in both plans if the contribution to the defined benefit plan is less than 25% of total compensation; or

The sum of the contribution to the defined benefit plan, and the contribution to the defined contribution plan (excluding any employee salary deferral contributions to the 401(k) portion of the plan) not exceeding 6% of the total compensation of all eligible employee(s) if the contribution to the defined benefit plan is more than 25% of the total compensation.

Please note that for qualified plan purposes including in the determination of deductible contributions, the maximum compensation that may be used for any plan participant, may not exceed the maximum amount allowed by the Internal Revenue Service for a given year. For 2013, the maximum annual compensation that may be considered for a plan participant may not exceed $255,000.

The foregoing rule may be illustrated by the following example:

Assume a professional service practice with 3 employees including the owner and spouse:

Owner, 52 years old
Owner’s Spouse, 42 years old
Employee, 40 years old

The employer is considering adopting a profit sharing plan to which employee 401(k) contributions may be made, and a defined benefit fully insured plan with a normal retirement age of 62, designed to provide the maximum retirement benefit primarily for the owner/employee and the maximum deductible contribution. Based on some specific plan designs, as shown below, the annual contribution to the defined benefit fully insured plan for all participants of $262,425 exceeds 25% (i.e., 77.18%) of total compensation. Consequently, the total maximum employer contribution to the profit sharing plan for all participants (consisting of a profit sharing contribution and a 3% safe harbor contribution) is limited to 6%.

Employee	Annual Compensation	Annual Contributions
		Fully Insured 412(e)(3) Plan	Profit Sharing/401(k) Plan
		Fully Insured 412(e)(3) Plan	Profit Sharing	Safe Harbor	Total ER Contribution	EE 401(k)

Owner	$ 255,000	$ 227,941	$ 9,800	$ 7,650	$ 17,450	$ 17,500
Spouse	$ 45,000	$ 20,142	$ 313	$ 1,350	$ 1,663	$ 17,500
Employee	$ 40,000	$ 14,342	$ 87	$ 1,200	$ 1,287	$ 0
TOTAL	$ 340,000	$ 262,425	$ 10,200	$ 10,200	$ 20,400
% of Compensation		77.18%			6%

Contact Connie Dello Buono 408-854-1883 motherhealth@gmail.com to have a chat with our team of financial advisors.

Married Same-Sex Spouses and Qualified Retirement Plans IRS Notice 2014-19

In Notice 2014-19, the Internal Revenue Service provided guidance to clarify the retroactive implications of the U.S. Supreme Court’s decision in United States v. Windsor and Rev. Rul. 2013-17 regarding qualified retirement plans for married same-sex couples. The Notice generally requires qualified retirement plans to be administered in accordance with the Windsor decision decided on June 26, 2013, but does not require retroactive application of Windsor prior to that date. Before reviewing Notice 2014-19, let’s briefly review Windsor and Rev. Rul 2013-17.

Background

On June 26, 2013, the Supreme Court decided in United States v. Windsor that Section 3 of the Defense of Marriage Act or “DOMA” was “unconstitutional as a deprivation of the liberty of the person protected by the Fifth Amendment of the Constitution.” Generally, the court based its holding on the equal protection element of due process guaranteed by the Fifth Amendment. The result of the Windsor decision gave same-sex couples whose marriages were legally recognized in their state the right to over 1,138 Federal benefits which were previously denied to them.

However, Windsor did not address the treatment of same-sex couples who were married in a state that recognized same-sex marriages, yet resided in a non-recognition state. Would they also be entitled to these Federal rights and benefits? The Internal Revenue Service answered this question on August 29, 2013 by issuing Rev. Rul. 2013-17.

Rev. Rul. 2013-17 set forth two distinct conclusions. First, the Internal Revenue Code is to be read in a gender neutral manner to include same-sex spouses. Second, the state where legally married same-sex couples reside is not relevant. Rather, effective September 16, 2013, marital status for Federal tax purposes would be determined based upon the law of the state or jurisdiction where the

marriage was performed, or what became known as the “place of celebration” rule. So, a same-sex couple married in a state that recognized same-sex marriages would now be entitled to all Federal rights and benefits, even if they were domiciled in a non-recognition state. Many of these Federal rights and benefits involve the treatment and administration of qualified retirement plans.

After the Windsor decision and Rev. Rul. 2013-17, it became clear how qualified retirement plans were going to be treated on a prospective basis. However, it was still not clear how to apply Windsor on a retroactive basis, at least as it applied to certain employee benefits and employee benefit plans. Specifically, the ruling held that:

The Service intends to issue further guidance on the retroactive application of the Supreme Court’s opinion in Windsor to other employee benefits and employee benefit plans and arrangements. Such guidance will take into account the potential consequences of retroactive application to all taxpayers involved, including the plan sponsor, the plan or arrangement, employers, affected employees and beneficiaries. The Service anticipates that the future guidance will provide sufficient time for plan amendments and any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise qualify.

Which brings us to Notice 2014-19.

Notice 2014-19

Notice 2014-19 was issued to provide guidance on the application, including retroactive application, of the Windsor decision and Rev. Rul. 2013-17 to qualified retirement plans under Section 401(a) of the Internal Revenue Code. Specifically, the Notice provides that qualified retirement plans must recognize same-sex spouses effective no later than June 26, 2013. The Notice permits, but does not require, recognition of same-sex spouses prior to this date.

Since plans do not require retroactive application of Windsor prior to June 26, 2013, plans should not be liable to pay qualified pre-retirement survivor annuities or death benefits to same-sex spouses prior to this date. In addition, unless a plan sponsor voluntarily amends its plan documents to include same-sex spouses prior to June 26, 2013, generally, plans should not have to reissue election paperwork or obtain spousal consent for benefits paid prior to that date.

Does this mean that there are no administrative issues for qualified retirement plans prior to June 26, 2013? Not necessarily. For example, any existing beneficiary designations may automatically be invalid without a same-sex spouse’s consent. Clearly, this can present issues for both plan administrators and plan participants who will no longer have a valid beneficiary designation for the commencement of future benefits. So, while the IRS does not require plan administrators to specifically communicate the Windsor decision to plan participants, it may be prudent for plan administrators to remind participants to review their beneficiary designations.

Plan Amendments

Whether a plan must be amended to reflect the outcome in Windsor, Rev. Rul. 2013-17 and Notice 2014-19 depends upon a number of factors. For example, if the terms of the plan define a marital relationship by specific reference to Section 3 of DOMA or the terms are otherwise inconsistent with Windsor or the guidance provided in Rev. Rul 2013-17 and Notice 2014-19, the plan must be amended. An amendment is also required if a plan sponsor applies the rules in a manner that reflect the outcome of Windsor during a period prior to June 26, 2013. The deadline to adopt a plan amendment under Notice 2014-19 is the later of “(i) the otherwise applicable deadline under section 5.05 of Rev. Proc. 2007-44, or its successor¹, or (ii) December 31, 2014. In most cases, the deadline will be December 31, 2014. Other rules apply in the case of governmental plans.

As a same-sex married couple, you should inquire whether your plan sponsor has reviewed their retirement plan documents to determine if specific plan amendments are required to clarify same-sex spouse’s rights to benefits under the plan. Even if plan documents do not require amendment, other administrative documents such as the summary plan description, election forms, beneficiary designation forms and QDRO procedures may need to be updated to reflect the Windsor decision and other guidance issued by the IRS.

Contact Connie Dello Buono to chat with a financial advisor 408-854-1883 motherhealth@gmail.com

Issues With Defined Contribution Plans That Have Less Than $250,000 in Plan Assets

Small plans are plans that have less than $250,000 in assets and have been recently implemented. The Internal Revenue Service (IRS) issued a report in late 2013 after an examination of approximately fifty Form 5500 returns of defined contribution plans with:

assets valued between $100,000 and $250,000;
a plan effective date of January 1, 1997 (or earlier); and
disclosed plan distributions,

and found issues with these plans.

If you’re a business owner and your company sponsors a defined contribution plan that fits the description of a small plan outlined above, you should read this memo and contact your Connie Dello Buono, financial planner 408-854-1883 motherhealth@gmail.com.

Generally, the two most common issues uncovered were:

not timely amending the Plan to comply with current law, and
not having adequate fidelity bonding.

Plans must adopt amendments for changes in laws and regulatory guidance, as well as discretionary amendments, on a timely basis. Failure to timely amend the plan affects the qualified status of the Plan.

In addition, Section 412 of the Employee Retirement Income Security Act of 1974 (ERISA) generally requires plans with more than one

participant to have a fidelity bond in the amount of 10% of plan trust assets with a minimum bond of $1,000 and a maximum bond of $500,000.

Other issues uncovered:

not timely filing Form 1099-R for plan distributions,
not allocating contributions and forfeitures according to the plan terms,
top-heavy failures, including top-heavy minimum contribution failures,
not securing joint and survivor annuity waivers,
making distributions not allowed by the plan terms,
not fully vesting participants upon a complete discontinuance of contributions, and
not including defaulted loans in income.

In addition, almost one third of the 401(k) plans examined revealed:

failure to properly run the discrimination tests, and
failure to timely deposit elective deferrals into the trust.

How you, the Plan Sponsor, may avoid errors:

As we mentioned, mistakes such as the failure to properly and timely amend the Plan could be costly because the qualified status of the Plan may be adversely affected. Yet generally, the mistakes are avoidable.

Large plans generally have teams of experts overseeing the plan operation. However, issues may arise more frequently in smaller plans due to less oversight and weaker internal controls. That’s not uncommon because you’re too busy running your business. Setting up operating procedures and appropriate internal controls for the Plan is an important first step. One of these procedures should include an annual review of the Plan’s fidelity bonding compared to the the value of the trust assets.

The examination project conducted by the IRS is clear – you cannot do it alone. Employers must count on professionals who have an expertise in these areas.

At least annually, you should talk with your Plan’s Third Party Administrator (TPA) to determine if the Plan is currently up-to-date with law changes.

You should also, on an annual basis, conduct a self-audit of your retirement plan. Generally, all of your retirement planning programs, both employer sponsored and personal plans should be reviewed annually. If you discover that you did not timely amend the Plan to comply with the laws and regulatory requirements, or that you did not follow the terms of the plan in operation (i.e., you are not following the terms of the Plan as you designed it), you should strongly consider correcting the errors under the IRS’ Employee Plans Compliance Resolution System (EPCRS).

If this self-audit discloses that the fidelity bond does not meet the requirements of ERISA, simply contact the vendor to adjust the amount of the bond.

As the audit points out – you cannot do it alone. Your Guardian Financial Representative can assist you in this process and identify possible problem areas.

It is beneficial for you to uncover potential problems with your own Plan rather than having the IRS uncover them for you in an audit.

Inherited IRAs are Not Protected in Bankruptcy as “Retirement Funds”

On June 12, 2014, the U.S. Supreme Court decided the case of Clark v. Rameker. The Court held that Inherited IRA’s were not “retirement funds” and therefore, not protected assets in bankruptcy.

Background

The petitioners in the case had filed for Chapter 7 bankruptcy and were seeking to exclude approximately $300,000 from the bankruptcy estate held in an IRA that the wife had inherited from her deceased mother, claiming the “retirement funds” exemption. The Bankruptcy Court held that an Inherited IRA does not have the same characteristics as those in a Traditional IRA and thus, disallowed the exemption. This decision was reversed by the District Court which held that the exemption covers any account in which funds were originally accumulated for retirement purposes. The Seventh Circuit Court disagreed and reversed the District Court’s decision. The Seventh Circuit’s decision created a conflict because the Fifth Circuit had previously held in an earlier case that inherited IRAs were protected. Therefore, the U.S. Supreme Court decided to hear the case to resolve the split.

Decision

The Court defined “retirement funds” as sums of money set aside for the day an individual stops working. In support of its position, the Court said there are three legal characteristics of an Inherited IRA that provides evidence that these funds do not contain retirement funds.

The holder of an inherited IRA may never invest/add additional money to the account.
The holder of an inherited IRA is required to withdraw money from the account(s), no matter how far they are from retirement.
The holder of an inherited IRA may withdraw money at any time, for any reason, without penalty.

Additionally, the Court stated that allowing debtors to protect funds in a Traditional or

Roth IRA ensures that they will be able to meet their basic needs during retirement. But there is nothing about an Inherited IRA’s characteristics which prevent or discourage an individual from using the entire balance immediately after bankruptcy for any purpose.

The Court rejected the claim that the funds in the Inherited IRA were “retirement funds” because they could be set aside, at some point, for retirement. The Court said that the possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an Inherited IRA bears the three legal characteristics of “retirement funds.” Accordingly, the Court upheld the Seventh Circuit Court’s decision.

Planning Opportunity:

Considering the Supreme Court’s decision, how might someone protect an Inherited IRA from a spendthrift child? The answer could be naming a trust as beneficiary of the IRA for the benefit of the child, with spendthrift language that satisfies state law.

In order to have an inherited IRA you must have a designated beneficiary. Typically, only an individual may be a designated beneficiary. A trust cannot be the designated beneficiary unless four requirements are satisfied:

The trust must be a valid trust under state law,
The trust must be irrevocable or will, by its terms become irrevocable on the death of the IRA owner,
The beneficiary of the trust must be identifiable,
The IRA owner must provide the IRA Trustee or custodian a copy of the trust instrument, or a list of all beneficiaries, and agree to provide a copy of the trust instrument to the IRA trustee on demand, and provide the IRA trustee or custodian with any amendments to the trust in the future.

However, Section 541(c)(2) of the Bankruptcy Code (11 U.S.C. § 541(c)(2)) provides:

(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non bankruptcy law is enforceable in a case under this title.

What does this section mean in the context of spendthrift trusts which may have language similar to the following?

“No part of the income or principal of this trust shall be subject to anticipation, alienation, or assignment by any beneficiary.”

This provision, and others like it, is often used in situations where a beneficiary may not have financial acumen; be unable to manage money or assets; might have a substance abuse problem; may be naïve or easily susceptible to deception or fraud; or might easily spend themselves into debt with creditors. These provisions are intended to protect trust property from a beneficiary’s actions or inactions and/or to protect assets from the beneficiary’s creditors. The trust therefore restricts access to the trust principal by the beneficiary, and thus his/her creditors. Once funds are distributed from the trust, of course, it then becomes subject to creditor claims.

So, if you’re concerned about this Supreme Court decision and potential creditors of your heirs having access to your hard earned IRA, name a spendthrift trust as beneficiary of your IRA, and your heirs can be beneficiaries of the trust.

The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. I do not provide tax or legal advice tax. You should consult with your tax and legal advisor regarding your individual situation.

Contact Connie Dello Buono, financial planner for 30min free phone chat with a financial advisor 408-854-1883 motherhealth@gmail.com CA Life Lic 0G60621

CPA Seminar serving business owners

My financial service office in San Ramon is a CE Service provider to the bay area CPA community. We provide weekly seminars/webinar for CPAs in the bay area. Contact Connie Dello Buono motherhealth@gmail.com to get dates and times or call 408-854-1883

Business succession issues. Estate planning techniques. CPA helping business owners deal with things that matters to them the most, asset protection, exempt assets, and financial strategies to minimize taxes, reduce risks, leverage qualified retirement plans, decrease monthly business expense, and earn a good return to their liquid assets and long term assets. Financial tools and advisors accessible to their clients for wealth protection and accumulation to provide retirement income to last forever. And any topics you want to be included in the seminar designed for CPAs.

Min attendees: 25

Location: San Ramon

Asset Protection Introduction For Small Business Owners

This article is intended for every small business owner/entrepreneur who left behind Corporate America for the opportunity and dream of starting their own business.

This entrepreneurial spirit is what made this country what it is today. However, this dream could be shattered very quickly without taking into consideration adequate asset protection plan. The notes below were prepared by a lawyer in Florida.

Before we can continue, we need to define what asset protection is. In very simple terms asset protection is the protection of assets from creditors. In fact asset protection is part of a bigger concept of risk management. Risk management is planning that seeks to protect business owners from potential future losses (i.e., avoid liability). Unfortunately today most small business owners are not structuring or operating their businesses to avoid liability. Thus, the primary goal of asset protection is to allow business owners to protect themselves from creditors’ claims while retaining a substantial, if not all, portion of their assets.

This article will briefly discuss four different areas of asset protection: (1) – protection from personal and business creditors; (2) – the most common corporate entities for protection: (3) – the operational and holding entities concept; and (4) – exempt personal assets in Florida.

Please remember that in no way should asset protection planning ever aid in protecting criminal activity. Asset protection involves implementing a plan to legally protect wealth. Please also note the use of asset protection planning is subject to the Uniform Fraudulent Transfer Act that was incorporated in Chapter 726 of the Florida Statutes and other states rules that are applicable. It is important that you seek the assistance of an attorney before seeking any kind of asset protection plan.

Separating your personal creditors from your business creditors. It is very important that you separate your personal creditors from your business creditors. Personal creditors are creditors for which you are “personally” responsible for, whether from a debt or a judgment. This means you will need to satisfy any debt or judgment with your personal assets rather than business assets. On the other hand, business creditors are creditors for which your “business entity” is responsible for, whether from a debt or a judgment. Thus, assets placed within the business entity are vulnerable to the business creditors, but protected, for the most part, from the owner’s personal creditors. Likewise, assets kept outside of the business entity are vulnerable to the owner’s personal creditors, but protected from the business’ creditors.

The majority of small business owners mistakenly believe that assets within a business entity are not subject to any type of liability. However, remember that your business entity, if a corporation or a Limited Liability Company is a separate “legal person” from you and is subject to liability from vendors, clients, employees and others. Likewise, assets within your corporate entity are only shielded from liability from your personal creditors. Regardless of this limited protection it is important that you at least separate these two kinds of creditors. It is important that as a small business owner you conduct business as a separate business entity. It is equally important that you follow all the business entity formalities and avoid commingling funds. If you conduct business as a separate business entity, in a correct and formal matter, then you can achieve the first level of asset protection which is the separation of your personal from business creditors. You could significantly reduce the pool of assets available to creditors when you separate your personal from business creditors.

Choosing the proper business entity. There are various possible business entities options for your small business. However, most small business owners should opt to form the business as a Limited Liability Company (“LLC”) or a Corporation (either a “C” or an “S” Corporation). The reason is very simple, for most small business owners the LLC or Corporation offer far superior liability protection than other business entities such as partnerships or sole proprietorships. Yet, the LLC and Corporation are different from each other.

Both the LLC and Corporation offer limited liability protection for the owners. However, usually the LLC, rather than the Corporation, is a better option for the small business owner. This is because the statute that governs the operation of Corporations is more complex and burdensome than what is imposed to LLC when it comes to “corporate formalities”. The rules regarding directors, officers, meetings, etc. are stricter for Corporations than for LLCs. These stricter rules are really detrimental to small business owners that are preoccupied trying to run a successful business and basically performing as a “jack of all trades”. Please note that the failure to comply with the applicable formalities could allow a court to “pierce the corporate veil”. Thus, from an asset protection point of view the small business owners will most likely form an LLC rather than a Corporation because of the less stricter “corporate formalities” that LLCs offer. A court will then be less willing to “pierce the corporate veil” and exposing the small business owners to unlimited liability for personal and business creditors with a Limited Liability Company. In addition, you will see below how useful an LLC is in more complex asset protection structures.

But please remember that asset protection planning is just one area of your overall risk and business strategy. There are other areas where a corporate structure is more beneficial than an LLC structure. Thus, it is important to consult with an attorney first before deciding what type of business entity to create. An attorney will let you know the pros and cons of each business entity and the consequences of switching from one business entity to another.

Separating Operating and Holding Entities. We have discussed so far that it is important to separate your personal and business creditors. You can do that by creating the appropriate business entity and following the appropriate formalities. In addition, we discussed that for the most part a Limited Liability Company will be the entity of choice for small business owners. However, you should consult with an attorney before creating an LLC or converting your current business entity to an LLC because of all the other ramifications (i.e., tax, etc) besides asset protection that are important to every small business owner.

Now we will discuss a more complex asset protection structure, including the creation of operating and holding entities. Again, we discussed so far that assets placed within the businesses entity are vulnerable to the business creditors, but protected, for the most part, from the owner’s personal creditors. In addition, assets kept outside of the business entity are vulnerable to the owner’s personal creditors, but protected from the business’s creditors. So, can we further isolate creditors from our business entity? The answer is yes, with the proper funding and structuring of the business.

You accomplish this by creating an operating entity, which has possession of the assets, but does not own the assets (unless encumbered in favor of the holding entity), and a holding entity, which actually owns the business’ assets. With this structure, the small business owner can eliminate, or at the very least substantially limit, liability for both the personal and business debts.

In summary, the operating entity conducts all of the business’s activities and, thus, bears all the risk of loss. The operating entity liability is limited because the operating entity contains a limited amount of assets. The holding entity holds the majority of the assets but it is not responsible for the operating entity’s debts. This strategy is more effective when done with LLCs rather with Corporations or other business entities because of the “charging orders” limitations in Florida.

The holding entity is where the majority of the assets of the business are located. But because the holding company conducts no business activities, it has almost no exposure to liability, and therefore these assets are protected. Thus, the business most valuable assets should be owned by the holding entity who then leases these assets (i.e., warehouse, equipment, etc) to the operating company, who then provides a way of taking vulnerable cash out of the operating entity in the form of lease payments. In addition, the holding entity can loan money to the operating entity to buy assets, after which it would secure the loan with liens that run to the holding entity. This strategy is even more important when assets carry an especially high risk of injury.

When done properly this structure could help in isolating creditors. However, it very important that the proper formalities and structure are followed to avoid successful court challenges. Again, you should consult with an attorney to avoid the pitfalls of improper structure.

Exempt Assets. A good rule of thumb is to never, whenever possible, transfer exempt assets to a business entity. This is because exempted property is considered unreachable by your creditors. However, asset exemptions are available only to “natural persons” and not to business entities. Thus, these assets inside a business entity are fully subject to the claims of business creditors.

Every state has a list of exempt assets. For example, Florida has over thirty (30) separate exemptions. The most popular being the homestead exemption. The Florida Constitution provides that the homestead of a natural person is exempt from a forced sale or seizure by a creditor. In order to qualify for the homestead exemption, the property, located in Florida, must serve as a residence of the owner or his family. There are some rules that you should consider in relation to size, liens and bankruptcy law but for the most part this is the general rules for homestead property in Florida.

As a general rule, in states like Florida where the homestead is “unlimited”, ideally, you should pay-off your mortgages and other liens secured by the property. You should do this because the cash used, non-exempt for asset protection purposes, to make the payments will be converted to exempt property by reducing the mortgages and liens encumbering the homestead.

For example, assume John Doe, a Florida resident, owns a home in Florida worth $400,000 that is subject to a $250,000 mortgage. John’s homestead protection of $400,000 is ineffective against the $250,000 mortgage. A mortagee can foreclose your homestead to collect the unpaid mortgage. Now, let assume John Doe has $250,000 in cash. Cash is a non-exempt asset and is subject to your creditors. If John Doe can afford paying off the $250,000 mortgage with the cash he will effectively convert a non-exempt asset (cash) to an exempt asset. First, John eliminates the $250,000 encumbrance in the homestead. Second, the cash ($250,000) is now unavailable to his creditors.

Effective Asset Protection. Asset protection planning is meant for the worst-case scenario. It is important that as a small business owner you take asset protection seriously. small business owners lack the unlimited resources of big corporations and even the smallest of the judgment could wreck the dreams and limited resources of the small business owner.

It is important also that your asset protection plan offers flexibility. Most asset protection plans are meant to last for a long time. Inevitably changes in the law and your factual situation (i.e., divorce) will occur. Also, in developing an asset protection strategy there should be an answer for “What if this happens?” and “How my plan protects me against X or Y?”

The final goal of asset protection planning is cost efficiency. We only discussed the tip of the iceberg is asset protection planning. There are more complex plans that are beyond the scope of this article (i.e., offshore trust, etc). A cost effective plan will increase the possibility of a well maintained plan that would translate in a more effective plan.

Finally, you should have your asset protection plan in advance of any legal difficulty. The poorest candidate for planning is the small business owner in the midst of a crisis. Even here, however, steps can be taken, albeit cautiously, to protect assets. It is very important in situation like this one you should seek the advice of an attorney.

This is a four parts article and it is intended for every small business owner/entrepreneur who left behind Corporate America for the opportunity and dream of starting their own business. This entrepreneurial spirit is what made this country what it is today. However, this dream could be shattered very quickly without taking into consideration adequate asset protection plan.

Please remember that in no way should asset protection planning ever aid in protecting criminal activity. Asset protection involves implementing a plan to legally protect wealth. Please also note the use of asset protection planning is subject to the Uniform Fraudulent Transfer Act that was incorporated in Chapter 726 of the Florida Statutes. It is important that you seek the assistance of an attorney before seeking any kind of asset protection plan.

Choosing the proper business entity. There are various possible business entities options for your small business. However, most small business owners should opt to form the business as a Limited Liability Company (“LLC”) or a Corporation (either a “C” or an “S” Corporation). The reason is very simple, for most small business owners the LLC or Corporation offer far superior liability protection than other business entities such as partnerships or sole proprietorships. Yet, the LLC and Corporation are different from each other.

Call Connie Dello Buono for financial advisors and other experts 408-854-1883 motherhealth@gmail.com CA Life Lic 0G60621 for financial strategies, financial tools, opening exempt assets, risk protection and tax efficient ways of financial plan to serve your current and future finance needs. I work with team of estate planners, CPA, lawyers and insurance agents.

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401(k) Plans Are Not Just For Big Businesses

Early or Premature Withdrawals from IRAs

Conversion of Traditional IRAs to Roth IRAs

Naming a Trust as Beneficiary of an IRA or Qualified Retirement Plan

Maximum Total Deductible Contribution to Both Defined Benefit and Profit Sharing/401(k) Plans

Married Same-Sex Spouses and Qualified Retirement Plans IRS Notice 2014-19

Issues With Defined Contribution Plans That Have Less Than $250,000 in Plan Assets

Inherited IRAs are Not Protected in Bankruptcy as “Retirement Funds”

CPA Seminar serving business owners

Asset Protection Introduction For Small Business Owners

Asset Protection Introduction For Small Business Owners

This article is intended for every small business owner/entrepreneur who left behind Corporate America for the opportunity and dream of starting their own business.

This entrepreneurial spirit is what made this country what it is today. However, this dream could be shattered very quickly without taking into consideration adequate asset protection plan. The notes below were prepared by a lawyer in Florida.

Financial strategy keeps business owners in the black

408-854-1883 starts at $30 per hr home care

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Soon

Goal

Employees

Plan Type

Advantages

This article is intended for every small business owner/entrepreneur who left behind Corporate America for the opportunity and dream of starting their own business.

This entrepreneurial spirit is what made this country what it is today. However, this dream could be shattered very quickly without taking into consideration adequate asset protection plan. The notes below were prepared by a lawyer in Florida.