I had an interesting discussion with a client the other day about using life insurance for different planning techniques that you would normally perform with a different planning vehicle. For example, many of my clients retain my Firm to create private foundations or public charities so that they can govern the use of those contributed funds and obtain an income tax deduction. Many people use private foundations to accomplish this but then later shut them down when they realize how many rules there are from the IRS and how they are limited in running the organization. This specific client decided that the deduction was not the main goal, but to create a vehicle that could be used for many years by family members to facilitate gifting to other charities.
Based on this idea, we started discussing how an Irrevocable Life Insurance Trust would fulfill these goals, and at the end of the discussion the client said that of the two options where he or his family would retain full control over the assets within the trust, he was leaning towards using an ILIT instead of a private foundation. If the drafting attorney spends some time developing appropriate trustee provisions and ways for other family members to get involved (as co-trustees or on an advisory committee), you can do much of the same things with the proceeds of the life insurance trust (just without the income tax deduction).
If a client decides to be extremely creative, in many situations I will recommend that they consider using a properly drafted ILIT to further those goals or to be the main vehicle to fulfill them. Think about using Life Insurance to create a foundation type organization that is not subject to the rules of private foundations (but not free from tax), planning for death taxes in the traditional ways, using cash value in an ILIT to purchase assets from an estate (best for rapidly appreciating assets), Using insurance to fund a Health and/or educational trust in a jurisdiction like Delaware with a long rule against perpetuities so that the funds will always be available for the purposes in which you set them up for.
The client left my office with a new understanding that insurance is not just for the protection of your family anymore, but it is also a very cost effective way of leaving a legacy for yourself or your family in one or more different ways.
Friday, June 5, 2009
Friday, March 27, 2009
California State Tax Treatment of Ponzi Schemes
Today's release by the Franchise Tax Board:
Date: March 27, 2009
Subject: Franchise Tax Board News Release
tel 916.845.4800 | Public Affairs Office
cell 916.416.6931 | Brenda Voet
Brenda.Voet@ftb.ca.gov
For Immediate Release
03.27.2009
FTB Offers Tax Guidance for Ponzi Scheme Victims
Sacramento - The Franchise Tax Board (FTB) today offered guidance on theft-loss deductions for California taxpayers who had losses from investment schemes.
“Tax remedies are available for victims of Ponzi schemes,” said State Controller and FTB Chair John Chiang.
State and Federal law allow taxpayers to deduct some uncompensated losses on their tax returns. A recent IRS ruling, Revenue Ruling 2009-9, clarifies the treatment of losses from investment schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The IRS also plans to follow a new procedure, Revenue Procedure 2009-20, which provides an optional “safe-harbor” for determining the year in which the losses occurred and a simplified method of computing the amount of the loss. A “safe-harbor” allows taxpayers to avoid later IRS challenges.
California will follow this guidance, and FTB will accept the form provided in Appendix A to Revenue Procedure 2009-20for those taxpayers who choose to participate in the safe harbor provision for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.
State law differs from the Federal law in two key areas. In these areas, State law controls:
· Statute of limitations for filing a claim for refund.
· Deductibility of net operating loss (NOL) carryforwards or carrybacks. (NOL carryforwards are suspended for most taxpayers for 2008 and 2009. Carrybacks are allowable but only for NOLs attributable to 2011 or later.)
FTB will soon offer more detail on the differences in a FTB Taxpayer Notice. Interested taxpayers should check FTB’s website at ftb.ca.gov for updates.
It looks like California will also be giving tax relief to those who are victims of fraudulent Ponzi Schemes. I will update everyone once the Franchise Tax Board offers more details on their treatment.
Date: March 27, 2009
Subject: Franchise Tax Board News Release
tel 916.845.4800 | Public Affairs Office
cell 916.416.6931 | Brenda Voet
Brenda.Voet@ftb.ca.gov
For Immediate Release
03.27.2009
FTB Offers Tax Guidance for Ponzi Scheme Victims
Sacramento - The Franchise Tax Board (FTB) today offered guidance on theft-loss deductions for California taxpayers who had losses from investment schemes.
“Tax remedies are available for victims of Ponzi schemes,” said State Controller and FTB Chair John Chiang.
State and Federal law allow taxpayers to deduct some uncompensated losses on their tax returns. A recent IRS ruling, Revenue Ruling 2009-9, clarifies the treatment of losses from investment schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The IRS also plans to follow a new procedure, Revenue Procedure 2009-20, which provides an optional “safe-harbor” for determining the year in which the losses occurred and a simplified method of computing the amount of the loss. A “safe-harbor” allows taxpayers to avoid later IRS challenges.
California will follow this guidance, and FTB will accept the form provided in Appendix A to Revenue Procedure 2009-20for those taxpayers who choose to participate in the safe harbor provision for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.
State law differs from the Federal law in two key areas. In these areas, State law controls:
· Statute of limitations for filing a claim for refund.
· Deductibility of net operating loss (NOL) carryforwards or carrybacks. (NOL carryforwards are suspended for most taxpayers for 2008 and 2009. Carrybacks are allowable but only for NOLs attributable to 2011 or later.)
FTB will soon offer more detail on the differences in a FTB Taxpayer Notice. Interested taxpayers should check FTB’s website at ftb.ca.gov for updates.
It looks like California will also be giving tax relief to those who are victims of fraudulent Ponzi Schemes. I will update everyone once the Franchise Tax Board offers more details on their treatment.
Thursday, March 26, 2009
Introduction to the Asset Protection Society
For those of you who are looking for additional information on asset protection, let me suggest the following resource. The website for the Asset Protection Society is: www.assetprotectionsociety.org . Once a potential client takes the time to review the depth of material on the website, they generally come away with some information that they do not know before visitng the website. From asset protection statutes in the various states to ratings of local advisors who practice in this field, it is a great resource to both the individual and professional.
For Orange County, we are planning the second local Asset Protection Society meeting and details will soon be mentioned on this blog. If you are an individual who would like to hear more about these topics and discuss issues with advisors in a friendly setting, feel free to email me and I will give you information on the meeting.
For Orange County, we are planning the second local Asset Protection Society meeting and details will soon be mentioned on this blog. If you are an individual who would like to hear more about these topics and discuss issues with advisors in a friendly setting, feel free to email me and I will give you information on the meeting.
Ponzi schemes and Federal Tax Treatment
A client called me the other day and mentioned that he and his CPA were having some arguments over the tax treatment of a bad investment. After discussing the issue with the client, it came out that the client had been involved with a Ponzi Scheme and had lost all of his investment in the program. This is not the BIG Ponzi Scheme that came up recently with Bernard Madoff, but the end result was the same.
This topic will not apply to 99.9% of the readers out there, so I will not spend a lot of time on it. Note though that the CPA wanted to be conservative and treat the investment as a long term capital loss (limited to $3,000 deduction per year) and the client wanted to deduct it according to the tax rules regarding theft.
After doing a bit of research, the IRS has come out with two rulings this year to help taxpayers who have been subject to this type of scheme. Revenue Ruling 2009-9 deals with the exact question as to whether these are theft losses or capital losses and goes on to deal with questions such as what year are the deductions available, how is the value of the loss determined, what limits prevent a person from taking the whole amount as a deduction, and other aspects. The IRS also published Revenue Procedure 2009-20, which provides safe harbor treatment for those who were subject to such schemes and report the losses in a certain way. If you were one of the people who were affected by one of them, then you should speak to your CPA and show him or her these two IRS Rulings to ensure that you are able to properly treat the theft that occurred to you.
This topic will not apply to 99.9% of the readers out there, so I will not spend a lot of time on it. Note though that the CPA wanted to be conservative and treat the investment as a long term capital loss (limited to $3,000 deduction per year) and the client wanted to deduct it according to the tax rules regarding theft.
After doing a bit of research, the IRS has come out with two rulings this year to help taxpayers who have been subject to this type of scheme. Revenue Ruling 2009-9 deals with the exact question as to whether these are theft losses or capital losses and goes on to deal with questions such as what year are the deductions available, how is the value of the loss determined, what limits prevent a person from taking the whole amount as a deduction, and other aspects. The IRS also published Revenue Procedure 2009-20, which provides safe harbor treatment for those who were subject to such schemes and report the losses in a certain way. If you were one of the people who were affected by one of them, then you should speak to your CPA and show him or her these two IRS Rulings to ensure that you are able to properly treat the theft that occurred to you.
Registration of foreign business entities in California
I often receive questions about forming limited liability companies, corporations, and limited partnerships in other states besides California. The reason being that California imposes a minimum $800 franchise fee and a gross receipts tax on limited liability companies. Furthermore, many jurisdictions such as Delaware, Nevada and others have preferential corporate codes that would apply to businesses formed in those states. With these facts, many people would say that they should form any and every business entity outside of the state, but California also has rules regarding when a foreign entity (a business entity formed in another state) has to register to do business in the state of California.
If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.
If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.
If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.
If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.
Tuesday, March 17, 2009
2nd Orange County Asset Protection Society Meeting
The date for the second Orange County Asset Protection Society Meeting has been set. It will be on Tuesday, May 12, at 7:00 PM. The website for the Asset Protection Society is here: www.assetprotectionsociety.org . The members are both advisors and individuals who have a desire to learn about and implement various asset protection structures for protection. If you would be interested in attending or have questions about the meeting or the society, contact me to discuss.
Friday, March 6, 2009
First Asset Protection Society meeting in Orange County
For any potential client or advisor who would be interested, we are having the first local meeting of the Asset Protection Society (http://www.assetprotectionsociety.org) in Orange County, California, on Tuesday, March 10, 2009, at 7:00 PM. The location will be at the Law Office of Ferruzzo and Ferruzzo, LLP, which is located at 3737 Birch, Suite 400, Newport Beach, CA 92660. The initial meeting will be to discuss options for having ongoing meetings in Orange County and many of the members of the asset protection society who are in this area have decided to attend. If you are not a member of the asset protection society but would be interested in meeting some of the advisors who are members of the society, please email me for more details and I will give you more information for the March 10 meeting.
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