Thoughts on the recent IRS mess

No one likes the IRS, and they are under the gun right now. But why? Is it really any different than it has been historically, or could we just be paying more attention in this digital media age?

Let's break down the "scandals".

1. Alleged audit targeting of "tea party" affiliated groups.

What happened:

Allegedly the IRS delayed/denied/targeted at a higher rate tea party affiliated groups who applied for tax exempt 501(c)4 status. This means, in a nutshell, that conservative pseudo lobbying groups had a tougher time getting their agendas across than liberal ones did, because they were stuck in a tax audit limbo that prevented them spending their money in the way other 501(c)4 groups could.

What is that and what does that mean in English:

A 501(c) entity is just the designation for tax-exempt status in the tax code. There are many types, (501(c)3 are your churches/religious organizations,  501(c)7 are your country clubs, and it goes on,  (including 501(c)21 black lung benefits trusts ) but 501(c)4 groups are supposed to be:

501(c)(4):

(A)Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

 

(B)Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

 

Translate this to: volunteer firefighters and civic organizations. The trick is that they CAN contribute to political lobbying/activism/campaigns, as long as this is not their "primary" purpose. The real trick is that donors to these groups do not have to be reported to the IRS like political parties and Political Action Committees (or PACs or SUPER PACs). These groups outspend the PACs by a 3 to 2 margin, allegedly.

Analysis:

This targeting is obviously not ok, on any level, by a neutral government entity. It doesn't matter if it is the tea party or the toga party, this just stinks, as it seems "the Man" is targeting opposition groups, ala every dictatorship/oppressive regime we read about elsewhere in the world (see, Syria).

However, I just cannot believe this has not happened before, it was just exposed this time. If you have ever been audited, you might know how one works. If you have not, know that they are a pain. I don't think this was just a couple of "rogue agents," that is just not how the IRS works. Usually, the IRS targets a group or groups because they want to encourage litigation, with the ultimate result of getting court cases that mean more tax revenues for them. A few years ago, it was Family Limited Partnerships, as they were getting big deductions and the IRS didn't like it. It is cyclical, and its just the way it is. You just hope the taxpayer wins in court.

If you were President, would you use the powers at be to exert a little pressure in whatever way you could, on the people who spend all day every day trying to take your job or worse, going as far to say you lied about where you was born.  So maybe there was a memo, but who's to say.  You want to

The real quagmire is that both conservative and liberal groups use the 501(c)4 gimmick to influence elections. Requiring disclosures of the donations like they do for political parties and PAC's might fix it, or just scrap the political influence ability of the nonprofits all together. It is just not that hard:clean up the ability of the big money power brokers to buy elections. Campaign finance reform seems to crawl along at a snail's pace, so don't hold your breath on this one. Instead of ceremonially firing a top official who was about to retire anyway, hopefully the IRS will fix this at the source.

2. IRS Spends $50 million on 220 employee conferences over 3 years.

This one looks pretty bad, in the times of people hurting and growing distrust of where our tax money goes, and rocketing national debt. But was it?

What happened:

Reports have come out detailing these events, including a video of employees line dancing, lavish hotel rooms, and other perks. The IRS admitted to it and says it fixed the problem.

Analysis:

C'mon man. Who cares? I get it, "It is our tax dollars!" The math is not that bad though. This expenditure from an IRS budget that runs about $12 billion a year comes out to, wait for it, 0.139%. The same story claims they have already slashed this, and cut back on expenses.

The real problem comes with our perception of the IRS. Nobody likes paying taxes, but we all like roads, hospitals, schools, etc. Some of us cheat on our taxes, others do not, and we all suffer for those who do not pay their fair share. This means tax rates go up, because we must factor in the cost of those who just will not pay.  The IRS reports this "tax gap", what should be collected from what actually is, at $385 million as of 2006, while others report it could be as high as $600 billion. Makes $12 billion look like a pretty small number to throw at that big of a problem, and $50 million to make these tax collectors happy and motivated a small drop in the bucket. Companies have conventions. They have motivational speakers. They have conga lines. They go into the woods and do trust falls.

Next, we have to come to terms that the IRS is a company, with people working there. I don't like a lot of the IRS folks I have dealt with, but my disdain is probably rooted in the same emotions that caused me not to like my childhood dentist (you know who you are). On the flip side, I have had some great experiences with IRS agents, and I have friends and colleagues who work there. My point is, like google, apple, or any company, to attract and retain talent, not to mention keep workers happy, you need a little line dancing once in a while. If baseball tickets equal higher tax compliance, I'll share the collective bill. Presidential suites are pushing it, so IRS don't get carried away. Would anyone care if this was a report on Goldman Sachs or Amazon? Didn't think so.

Conclusion:

To have the society as we know it, we have to collect taxes. There are good ways to do this, and bad, depending on who you ask. Yes, the IRS has some straightening up to do. Should we cut them so slack? Noway. However, we can also think about the task they have, how important it is for all of us, and remember there are people behind the mask too.
 

What happens in a probate hearing

We have talked about the P-Word before, but I still have clients that are scared of it. The root of that fear is often THE HEARING. IN COURT.

 

Let's dispel some myths.

 

If you're the executor or executrix of a will, or the adminstrator/adminstratix of an adminstration, this is what you can expect.

 

Scenario #1: Everyone gets along, and there is a valid Will.

Proate hearing in a Courtroom

 

Venue: First off, the proper county is where the person lived for the last bit of their life, or where they had some property (see TX Probate code Sec. 6.).

 

In some counties, (like Dallas, Fannin, Tarrant, and Hunt, to name a few), the hearings are held in a crowded courtroom, and dozens of cases are heard one after another.

 

Informal, office probate hearing

 

 

In other counties (Grayson, Collin, mostly the smaller counties but it really depends on the judge and if there is a statutory probate court), the hearing is often less formal, with the judge often shaking your hand at the door to his or her office, and then showing you to a chair right there in the office. You are still giving sworn testimony, but just from a comfy chair instead of a in a courtroom. Either way, its no big deal.

 

Proceedings: At the hearing, you will be sworn in, just like you are giving any other testimony in any court. This makes some people scared. Don't be. Next, you essentially say "yes" or "no" to a list of facts about your deceased relative or friend. "Did they live in this county when they died.... Yes." "Did they have any children born after this will was written...Yes or No (tell the truth). "Is this their last will and testament, and does this appear to be their signature...Yes (it better be)." Easy stuff. Next,  judge will then sign an order admitting the will to probate, and you sign several pieces of paper including an "Oath" which is you just swearing that you will do the right thing as the executor or administrator.

 

After the hearing, you go to the clerk's office and get Letters Testamentary or Letters of Administration which will allow you to go to banks, financial institutions, and other places in order to handle the business of the estate. You will also sign a required notice to creditors, that must be published so that anyone who things the deceased person owes them money can make a claim.

 

Final Steps:  Within 90 days of qualifying as executor or administrator, you must file an inventory with the court. If you need extra time, the court will usually let you have it. The inventory lists all the assets which pass under the decedent's will or estate, and not those that are directly distributed out (like POD accounts or insurance to others). After the inventory is filed, the judge will sign an order approving the inventory. Then you're pretty much done with the formal work, all that is left is paying the bills, filing a final income tax return (and an estate tax return if necessary) and distributing the estate. Remember that creditors have 1 year to come back and request you pay them debts, so it is usually a good practice to leave some funds in an account for that.

 

Note: Small estate administrations and muniments of title are similar to this, with less requirements.

 

 

 

Scenario #2: Everyone gets along, and there is no will.

 

Venue: Always the same, unless its contested, then it might get sent to District Court.

 

Proceedings: Since there is no will, an Attorney Ad Litem will have been appointed to do background research and determine the heirs. They will be at the hearing, and the estate has to pay them (think of this as the I HAD NO WILL tax). The Probate Code requires that you have witnesses if there is no will, think of these as close friends who knew the family, but are not inheriting anything. Some courts will let you get away with 1, many require 2. Sometimes you can have this done by an affidavit, so just check with the specific court. Everything else is the same.

 

Final Steps: Same as above.

 

Scenario #3: No one gets along, and there is a valid Will

 

Venue: Same as above, if there is not a contest to the will.

 

Proceedings: If the will names an independent executor, and this is not challenged, all is the same. Else, you have a fight on your hands, and this is where things get messy. Make sure your lawyer knows their stuff. Else, if you can actually get it to the probate hearing, its all the same.

 

Final Steps: Same, and good luck getting your family to agree on who gets Dad's old boots or Mom's favorite china.

 

Scenario #4: No one gets along, no will.

 

Venue: Same as above, depending on the county.

 

Proceedings: Now you are stuck in Dependent Administration land, which we have discussed before. This means you will be in court, a lot, and your legal bills will be high. Can't we all just get along?

 

Final Steps: Dependent administrations require annual accountings as well as a final. There are also some more paperwork to deal with, as well as dealing with creditors claims.

 

 

Final Thoughts

Most of probate is easy, and not scary. If you have a fight, it is no different from any other lawsuit, and those can be scary. Just make sure you know what you are getting yourself into before you show up at the courthouse unprepared.

For the Moms

Mother's day is coming up. All of us, whether we know them or not, have one.  If they are in your life, wonderful. If not, I'm sure you either know of a mom out there somewhere who could use a nice word of encouragement, or just an afternoon of help in her mom-duties.

For those of you who are still trying to scramble for a last minute mother's day gift, skip the flowers or the card. It's time you gave the gift of some estate planning and tax advice to the mother in your life.

Here is a list of some of the great gifts you could give that special mom out there:


1.  Designation of Guardian of a Child Advance- In Texas, a competent adult guardian of a minor child can designate a backup guardian in case they become disabled or pass away. You can also do this in a Will, but in the event there is not Will, this is a good safety valve. This allows mom to rest easy, knowing that who she wants to take care of her child, will.

2. Help her make a Will- Beat the person who offers just number 1, and help her actually make a will. You can combine the designation of a child guardian, and this way you can set up an estate plan or a trust that will provide the comfort that knowing your children will be taken care of provides.

3. Educate her about Tax Savings- The more kids you have...the more you get child tax credits! Educate the mom in your life to make sure she is getting all the appropriate income tax credits and deductions. See here.

4. Educate Mom about Life Insurance, and Savings Accounts- If your mom has work sponsored or even just a life insurance policy, make sure it is left to the right person(s), or in a way that it will take care of their loved ones. Also, tell them to make sure and check any bank, savings, or investment accounts, to that the proper beneficiary designations are made.

OR, scrap all this, and get her some cupcakes or chocolate covered strawberries.

Special thanks to all you moms out there. I, and the rest of us wouldn't be here without you.

Elder Abuse: How to Spot it, What to do About it

Just typing the words "child abuse" makes me sick, and just plain mad. As I'm assuming it does for most. But what about "elder" abuse? Do you even know what it is?

We treat children specially because we have determined, as a society, that they are not responsible enough to be left alone, make their own decisions on important matters, or handle finances. Thankfully, the Texas Department of Family and Protective Services is there for the old folks too.

The department offers services for "any adult who has a disability or who is age 65 or older over that is in a state of abuse, neglect, or exploitation." Lets break this down into what this means, and how to look for it.


Scenario 1.
You have a (neighbor/friend/family member/parent hereafter "Papa") who is getting on in years and/or suffering from a disability. As a result, they require home health care. You have never really paid attention to Papa's finances, but have noticed that home health care attendant (hereafter "Anna Nicole") is coming around more often, and Papa is speaking about them more. You notice one day that Anna Nicole is driving a new, different car, and generally looks like she has new jewelry.

Then you ask Papa, and he tells you they are getting married.

What to do:

You can take a guardianship out on Papa to control his finances, but they are expensive. If he is competent, get a Power of Attorney over Papa. You likely just need to sit Papa down, tell Anna Nicole to get lost, and hope she hasn't done too much damage. Check Papa's bank accounts, insurance policies, and any brokerage or financial accounts, and see if Anna Nicole's name is there or if she has somehow become a beneficiary. Tell the police, but usually the best bet is to get Papa away from the damage and stop the bleeding. Also, report Anna Nicole to the Texas DFPS at 1 800 252 5400 so they will have her on record.

Scenario 2.

You have a (neighbor/friend/family member/parent hereafter "Nani") who lives alone and has no kids. Nani passes away, and leaves you, the favorite niece, in charge of the estate. You start going through Nani's finances and realize that something is amiss. You find in her personal papers, amongst her will, is a Power of Attorney naming someone you are not familiar with (hereafter, "John"). You do a little more digging and check the banking records, and realize that John has cleared out a significant amount of money from Nani's accounts. For a real life example, see here.

What to do:

Call the police. They prosecute this stuff. Hopefully you can try and get some of the money back, but you never know. The best way to fight it is prevention: talk with your elderly friends and make sure they have their estate and powers of attorney in order. You can't stop all fraud and exploitation, but you can prepare and try to limit the potential damage.


Conclusion:

I try and bring levity to most topics, but elder abuse is not funny on any level. Often, the above scenarios are much worse, and physical abuse, threats, and emotional abuse are going on as well. The point is that abuse is abuse, and we all deserve a voice. There are resources out there to stop this terrible practice. Lets educate ourselves, know the warning signs, and do something about it.
 

Its all about Trust

Who can you trust?  What can you trust? Can you trust your assets to a Trust?

People hear the word "trust" and think lots of things. Trust me. Trust fund. Trust fund baby. Bank and trust. Trust account.

I have previously written on the perils of the probate avoidance "living trust" and how people get scammed into making one.

So I will not belabor that. What I will focus on is a growing problem of choosing your trustee.

Scenario 1.
You are your own Trustee.

Ok, you out smarted the system. Who needs to trust anyone except themselves? Well, the government has figured that one out. They look at someone who created a trust, for their own benefit, who named themself as a trustee...as a nothing. You just put your wallet from your back pocket to the front, as you still have control. Your trust is pointless, and you probably were convinced you needed one by someone who didn't know what they were talking about.

Also, as an individual taxpayer, you have to earn $400k in 2013 dollars to hit the top, 39.6% tax rate. Got your business in a trust? You get there at $11,950.  That is a huge, huge tax hit, and that applies to all of these scenarios.

Scenario 2.
You pick a close family member as Trustee.

Ok, a little better. Don't pick a beneficiary, or their share loses any creditor protection like in scenario 1. Further, if you picked your wife/brother/son, what happens if they get mad at you? What if they get too busy? What if, they decide to invest all your assets in a great stock tip they heard, only to have it turn out to be a bust? Do you have any recourse? Are you going to sue your wife/son/brother? I didn't think so. Choose wisely here, and make sure they are not a beneficiary of the trust.

Scenario 3.
You pick a bank or institutional Trustee.

A pro trustee, banks are a safe bet. They are insured, know what they are doing, and have access to investment leverage and knowledge that most do not. However, they do not know your family (likely) and are not emotionally invested, so you might not be able to call them at midnight or on the weekend for an emergency. Also, they cost.

Conclusion:

Picking a trustee, like picking an executor for your will, is a big decision. If you are in over your head and know a family member or friend would be too, then trust a professional. If it doesn't make financial sense to pay someone, then pick someone whom you trust, who has the time, and will do a good job. Finally, unless you have talked to a professional about the limited instances you should be trustee over your own trust, don't. Just don't.