Episode 304: Wills and Trusts: Advantages and Considerations

Episode 304: Wills and Trusts: Advantages and Considerations

Passing on property is anything but simple. Because of this, estate planning is an active field of law. The more property there is to pass on, the more complicated the process gets.

If the process isn’t properly managed, family members may not receive the assets reserved for them. If estate planning isn’t effectively managed, there could be significant delays, unforeseen taxes burdens, or privacy issues.

Legally recognized documentation is the primary tool through which estate owners can name beneficiaries, allocate assets, and ensure their final wishes are carried out. As such, wills and trusts are valuable elements of estate planning that can provide certainty and peace of mind.

To fully leverage the power of wills and trusts, it’s recommended that estate owners work with an experienced estate planning attorney and accountant. Depending on the exact circumstances involved, wills, trusts and other estate planning tools can be a challenge to set up properly. An expert accountant or attorney can ensure the estate owner’s wishes are accurately communicated through all estate planning initiatives.

Will and Trusts: A General Overview

Wills and trusts are used for the same general purpose – to ensure the right people receive the right assets when an estate owner passes away. How they go about this purpose is different, and those differences may dictate which approach – will or trust – makes the most sense for a particular estate holder.

Here’s a brief look at each:

  • Wills – Wills are legally recognized documents submitted to the court when the benefactor dies. The court then has jurisdiction over the will and may make legally binding decisions based off its interpretation of the document.

    Wills can resolve many of the concerns left behind by an estate owner’s death. They are used to name an executor – the person responsible for overseeing the will’s execution – along with naming beneficiaries, allocating estate assets, naming who will care for dependents, specify funeral preferences, and a few other important considerations.

  • Trusts – You can think of trusts like asset containers. They come in a variety of arrangements, but they’re all used to secure a variety of assets for a named beneficiary.

    Trusts can be complicated to set up, but they offer a couple of benefits that wills do not. We’ll go over a few common types of trusts later, as there isn’t a single best option for every estate owner.

Do Wills or Trusts Make More Sense for Texas Estate Owners?

The primary advantage that trusts offer is their probate-free nature. Probate is the court-mandated and court-guided legal process during which an estate’s assets are allocated to beneficiaries. In some states, probate can be a time-consuming, tax-heavy process that estate owners are encouraged to avoid, if at all possible.

In Texas, probate tends to be less burdensome than it is in most other states. For this reason, wills are a perfectly reasonable estate planning vehicle, even if it must pass through probate first. Further, wills are much simpler to set up than a trust, and a simple document may be all that’s required.

For high-value estates, a trust can provide a shield against estate taxes. Though these taxes don’t kick in until an estate is valued at more than $12 million, for estates that exceed this threshold, a trust can offset considerable tax liabilities.

Privacy is another factor that is often overlooked – probate is a matter of public record. For some families, especially those where inheritances may cause conflict, avoiding probate and public scrutiny may be a reason a trust is preferred over a will.

Intervivos vs Testamentary Trust – What’s the Difference?

There are several types of trusts that can be arranged for estate planning purposes. Intervivos and testamentary trusts are two examples. Here is a summary of each:

  • Intervivos trusts – An intervivos trust is another term for a living trust. As the name suggests, intervivos trusts are created while the benefactor is still alive, which offers a few benefits. For one, intervivos trusts are the only trusts that avoid probate. Secondly, the assets used to fund a living trust can still be accessed and utilized by the benefactor. Once the trust’s owner passes away, a new trustee may be named through the benefactor’s will or through court appointment.

    An important note is that a living trust isn’t officially formed until it’s funded. Any assets not protected by the trust upon death (including assets designated to be put in the trust through a will) must pass through probate.

    Intervivos trusts may be revocable or irrevocable – more on that in a bit.

  • Testamentary trusts – Testamentary trusts are trusts that are established through a will. In other words, they do not exist before the benefactor’s death. Testamentary trusts do not avoid probate, but they do allow people to easily assign instructions with the trust’s assets. For example, with a testamentary trust, benefactors can specify that the beneficiary must be of a certain age before they may receive the trust’s assets.

    Testamentary trusts can also be modified while the benefactor is still alive, so flexibility is retained. Finally, testamentary trusts can be paid for through the estate’s assets, so they’re a low-cost option, compared to intervivos trusts.

Revocable and Irrevocable Trusts: A Quick Comparison

In addition to living and testamentary trusts, there are also revocable and irrevocable trusts to consider. Both are types of living trusts that sidestep probate – and that’s where the similarities end. Here’s a more detailed breakdown of each:

  • Revocable trusts – Revocable trusts are termed such because they can be modified after the trust documentation is submitted. That means the trust’s owner can change beneficiaries and the controlling trustee as desired. It also means the trust’s owner can access, add, or remove assets placed in the trust.

    There are some downsides with this flexibility, though. One, revocable trusts do not shelter assets from taxation. Income derived from a revocable trust is taxable, and those assets are also subjected to estate taxes following death. Another complication with revocable trusts is that they are not protected from lawsuits or other liabilities if they are levied against the trust’s owner. For individuals in professionals where legal liability is a concern – physicians, accountants, real estate agents – a revocable trust will not protect assets.

  • Irrevocable trusts – An irrevocable trust cannot be modified once the paperwork is submitted, except in extremely rare circumstances. At the minimum, the trust’s creator (if available), all named beneficiaries (both present and future) and the court must all approve any changes to the trust. It’s best to think of irrevocable trusts as set in stone, as once assets are placed in an irrevocable trust, the benefactor gives up all rights to those assets.

    The upside with irrevocable trusts is that the assets contained within are not subjected to estate taxes. Also, irrevocable trusts provide a durable shield against liability and creditors, which ensures beneficiaries receive the assets they are promised.

Estate Planning is Complex and the Stakes are High, so Consider Partnering with a Estate Planning Attorney

Ultimately, there isn’t a single best estate planning solution for every estate. The size of the estate, the assets it contains, the number and nature of beneficiaries, the relationship the benefactor has with beneficiaries, the need for privacy, and many other factors will determine which estate planning tools make the most sense.

The challenge is sorting through all of those estate planning options and determining which ones are the best fit. An estate planning attorney or accountant can provide valuable insight here, guiding their clients through the process and ensuring their client’s final wishes are prioritized following their death.

Episode 303: Foreign Investment and Tax Considerations in the U.S

Foreign Investment and Tax Considerations in the U.S

The U.S. economy attracts more foreign investment than any other, as it is stable and largely trustworthy. In 2021 alone, foreign investors pumped nearly $5 trillion in inward investments, much of this dedicated to real estate development. Opening the economy to so much foreign investment brings certain risks with it, but the truth is that the vast majority of noncitizen investors are just wealthy people looking to further their own interests.

Optimizing those foreign interests in America comes with challenges. Many of them are legal or tax-related, so it’s standard operating procedure for foreign investors to work with domestic parties for investment purposes.

Here, we’ll address how this dynamic works and what steps can be taken to minimize a foreign investor’s U.S. tax liability.

A Foreign Investor and a Domestic Developer: An Ideal (Limited) Partnership

The first step for foreign investors is to connect with a U.S.-based partner to invest in. There are numerous brokerage services that can facilitate this connection and simplify the process for investors. There are, of course, brokerage fees attached to this.

A common tactic for foreign investors is to partner with a domestic developer – if we’re talking real estate investment. Whether it’s a piece of land, a hotel, a golf course or any other piece of commercial real estate, foreign investors frequently partner with U.S. real estate developers in need of a capital infusion. The U.S. partner executes the job on the ground while the foreign partner supplies cash.

Typically, the investor and developer form a limited partnership (LP) to manage this professional relationship. LPs are a favored choice for real estate development for a couple of reasons, including:

  • Limited liability for investors – In an LP arrangement, the domestic partner is considered the “general partner” while any foreign investors are considered “limited partners.” Limited partners are only liable up to the amount of their investment, so foreign investors have a liability shield that protects them.
  • Minimal commitment – Limited partners are not involved with the day-to-day operations tied to their investment. This responsibility falls on the general partner (the U.S. developer), so foreign investors can put their money to work without committing time.

Which Tax Structure Makes Sense for a Domestic Company Working with a Foreign Investor?

The foreign and domestic parties are usually tied together through an LP, but there’s still the matter of corporate tax structure.

When an LP is formed between a foreign investor and U.S.-based developer, the next step is usually to set up a domestic company that serves as the LP’s business instrument. In other words, a new corporation is formed to ensure tax and legal compliance, and to simplify the distribution process when it’s time to pay foreign investors.

In most cases, a C-corporation provides the desired tax structure for the new company. This company is formed in a state that has stable, corporation-friendly laws in place – Delaware, Nevada and Texas are three examples.

Why is a C-Corporation Tax Structure Preferred for Foreign Investment?

C-corporations are not pass-through entities. They are required to pay corporate taxes on top of capital gains, which are added to the company’s income. As such, they do not enjoy the same tax benefits as a pass-through organization. Further, loss and depreciation, which can offset corporate tax burdens, are usually not relevant during the initial years following the C-corp’s founding. With all this in play, what makes C-corps the optimal choice for foreign investors?

First, domestic developers often provide an increased rate of return to foreign investors to offset the increased tax burden.

Second, when leveraging a C-corp tax structure, certain withholding and reporting requirements are not triggered until distributions are paid out to investors. This simplifies tax planning and usually gives foreign investors additional flexibility in managing their investment instruments. Further, C-corporations have a long, well-established legal history that makes it easier for non-U.S. parties to invest in. In fact, foreign investors may not own stock or assets in some corporations, including S-corps. Tax laws prohibit it.

As such, C-corps provide an ideal mix of accessibility and planning advantages that foreign investors can fully leverage.

Why Foreign Investors are Better Served with a U.S.-Based Attorney and Accounting Expert

Unsurprisingly, tax laws and accounting procedures are complex where foreign investors are concerned. If not properly planned and reported, foreign investors may be on the hook for a deep tax cut or may be barred from investing altogether. Given the complexity involved, it’s necessary for investors to hire an attorney in their home country and a U.S.-based attorney. Ideally, this attorney has accounting expertise and experience working with real estate investors.

There are a few important advantages to working with a U.S. attorney, including:

  • Helping resolve any language or cultural barriers – There’s a great deal of paperwork associated with managing a foreign investment, and this can pose a language barrier that leads to costly mistakes. Cultural issues can also be in play, as the investor’s expectations may not align with what the developer is experiencing on the ground.

A U.S. attorney can smooth these issues over and work directly with the investor’s home attorney to ensure all parties are moving in the same direction.

  • Establishing a clear accounting trail for security law purposes – The U.S. has standing economic sanctions against a handful of nations, including Russia, Iran and others. Investment flowing from these countries is barred under U.S. securities law, so it may be necessary to create a clear accounting trail for certain investors. This is done to confirm that a particular investor is indeed allowed to seed a project with capital.
  • Helping avoid, or mitigate, double taxation – Double taxation is a widespread concern among foreign investors, as both the U.S. and the investor’s home country will both attempt to take a bite out of any distributions.

A U.S. attorney specialized in accounting practices will be aware of any tax provisions, such as tax treaties, that can be used to avoid or reduce the impact of double taxation, ensuring foreign investors are able to secure more of their distributions.

  • Planning around FIRPTA for taxation purposes – FIRPTA is a federal tax law created specifically for foreign real estate investments. Under FIRPTA, there are certain withholding and taxation requirements that property investments must follow if they are tied to a foreign investor.

For example, when a real estate property connected to foreign investment is sold, a certain portion (10 to 15 percent, depending on the sale price) must be withheld for tax purposes. There are exceptions to some of these taxation and withholding requirements, and an attorney knowledgeable in FIRPTA law can leverage them for foreign investors.

There are Major Complications Involved with Foreign Real Estate Investment, But They Can Be Managed with the Right Legal and Accounting Team in Place

Trillions in foreign investment are dumped into the U.S. every year, much of it allocated to real estate development. America’s excellent reputation as a safe investment haven means this trend isn’t going anywhere.

If you’re a non-U.S. investor looking to take advantage of this trend, a proven way to optimize your investment is to have experienced advisors and experts facilitating the process. This includes working with a U.S. attorney and accounting team that knows the ins and outs of U.S. tax law.

Episode 302: Taxes for Internet Content Providers

Taxes for Internet Content Providers

As millions of people now have a presence on the internet and receive income for that presence, it is increasingly important for them to enlist the services of a CPA or tax preparer that understands taxes for internet content providers. Failure to document income and expenses through official channels in a timely manner could result in serious consequences for internet content providers of any size.

What Is an Internet Content Provider?

Internet content providers are considered to be people or entities that provide content for the internet to generally either:

  1. Help generate ad revenue for a specific content providing platform that they then get a percentage of revenue from
  2. Establish subscription services that the content providing platform then gives them a percentage of revenue

Taxes for Internet Content Providers

Some internet content providers have the potential to make a lot of money on various platforms. For example, a person may be providing content regarding clothes such as taking pictures in clothes from certain designers. The clothing manufacturer may then figure out how many sales are attributable to a content provider’s website and then will pay the content provider money for that service. Depending on the rate of success, this could result in potentially significant income for an internet content provider.

Many of these people tend not to be traditional businesspeople who are intimately familiar with accounting and tax compliance. This is a mistake. Payments to an internet content provider are considered income and are taxable. In other words, it requires that these individuals keep detailed records of expenses and that they file annual tax returns. Failing to do so can create significant headaches and potentially serious consequences that could yield adverse effects for the individual themselves as well as their occupation as an internet content provider.

What Internet Content Providers Need to Know About Their Taxes

With the rise of a growing population of internet content providers, the Internal Revenue Service is taking notice. To ensure that these individuals do not fly under the radar and are not exempt from tax regulation, they are developing standards for auditing these individuals and platforms. Currently, the IRS is sending out 1099 forms to content providers to gather accurate information. Platforms and content providers are expected to comply with the criteria set forth by the IRS, such as:

  • Filing tax returns in a timely manner
  • Paying the appropriate amount of taxes

A Real World Example of Tax Issues for Internet Content Providers

Recently, OnlyFans creators were contacted by IRS criminal investigators. This platform is said to have a lot of different things, but much of their revenue comes from thousands and thousands of adult actors or content providers who have subscribers. As a result, the platform is making an impressive amount of money, which has attracted the attention of the Internal Revenue Service, which is now resulting in investigations and subpoenas for some of the top earning content providers.

The people being subpoenaed are then faced with having to figure out what to do. In general, some of the actions these individuals should consider taking are:

  • Enlisting the help of a reputable and experienced lawyer. Criminal investigations typically require legal representation, especially when it comes to the protection of fifth and sixth amendment rights. Ultimately, they will most likely end up having to share at least some bank account information and tax return documentation. Even if the person had a CPA handle the tax returns, that information may still end up being scrutinized.
  • Including all their income in documentation. This can require extensive legwork to gather all the information pertaining to the income an internet content provider has received.
  • Filing tax returns. Ideally, the content provider should have already filed a tax return. However, if they haven’t, they will need a professional’s guidance on when to do so and how to handle it. If the tax returns are incorrect, they may need amending and professionals can provide guidance on how to do this.

While these actions can be helpful for those on the OnlyFans platform, they may also be useful for any internet content provider.

 

The above includes good warnings to those who are internet content providers. The IRS is getting more sophisticated about recognizing this population of earners and the income they are bringing in. The government agency is taking active steps to ensure that these individuals are documenting their income and tax returns in a proper way.

This can look like keeping track of the money a person earns and the expenses they incur as a result of providing internet content. Their income and expenses must be accounted for and in the right way. This is true for content providers of any size.

Internet content providers need to have professionals that know how to prepare tax returns, comply with tax laws, and protect them from adverse tax or legal consequences from their otherwise legitimate business.

If you are an internet content provider and have questions about documenting your income with the Internal Revenue Service or filing tax returns, it can be a good idea to reach out to both an attorney and professional tax preparer today.