Dec. 5, 2017

In This Edition
Educate Employees on Required Minimum Distribution Rules
DAPTs Offer a Homegrown Approach to Asset Protection
Tax Planning: Improve Your Financial Position
5 Common Mistakes When Applying for Financial Aid

Educate Employees on Required Minimum Distribution Rules
The deadline for taking 2017 required minimum distributions (RMDs)   is  rapidly approaching: December 31, 2017. If you own a business and offer a 401(k) plan, it's a good time to think about how you can make sure your older employees are aware of the RMD obligations, including how the rules differ for IRAs vs. 401(k) plans.

IRAs vs. 401(k)s
To avoid a huge penalty, individuals must take RMDs from their IRAs (other than Roth IRAs) on reaching age 70.5. However, the first payment can be delayed until April 1 of the year following the year in which the individual turns 70.5. (Beware: Different RMD rules apply to inherited IRAs.)

Distributions from 401( k)s  are different; current employees don't have to take 401(k) RMDs. Although the regulations don't state how many hours employees need to work to postpone 401(k) RMDs, they must be doing legitimate work and receiving W-2 wages.  
There's an important exception, however: Owner-employees (if they own at least 5% of the company) must begin taking RMDs from the 401(k) beginning at 70.5, regardless of work status.  

If someone has multiple IRAs, it doesn't matter which one he or she takes RMDs from so long as the total amount reflects their aggregate IRA assets. In contrast, RMDs based on 401(k) plan assets must be taken specifically from the 401(k) plan account.

Calculating RMDs
RMD amounts change each year as the retiree ages, based on the applicable IRS life expectancy table.  

For example, at age 72, the "distribution period" is 25.6, meaning that the IRS life expectancy table assumes that the account holder will live about another 25.5 years. Thus, someone age 72 must withdraw 1/25.6 of his or her IRA or 401(k) account. Percentage-wise, that is 3.91%.

If someone lives to age 90, the distribution period would be 11.4, resulting in an 8.77% RMD. Although the percentage amount increases over time, the IRS rules don't force retirees to zero out their accounts. Still, if an account holder lives long enough, he or she isn't likely to have a lot of funds remaining in the account at death.

Informed and Happy
Remember, informed employees are happy employees, which can lead to more engaged, productive employees. We'd be happy to assist you in providing the most current, accurate information.

Contact: Randy Juedes, CPA
DAPTs Offer a Homegrown Approach to Asset Protection
Your assets face many potential threats to their value, such as market volatility and inflation. Another threat, especially if you're at high risk for lawsuits, is creditors. The most effective way to protect assets from such a threat may be to transfer them to children or other family members, either outright or in trust, with no strings attached. So long as the transfer isn't fraudulent, that is, intended to delay or defraud  known  creditors, creditors won't be able to touch the assets.

If you wish to retain some control over your wealth, however, consider an asset protection trust. For affluent families with significant liability concerns, foreign asset protection trusts probably offer the greatest protection. But if you prefer to avoid the complexity and expense of these arrangements, look into a domestic asset protection trust (DAPT).  

How Does It Work?
A DAPT is an irrevocable, spendthrift trust established in one of the 16 states that currently authorize this trust type (Alaska, Colorado, Delaware, Hawaii, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming). Unlike trusts in other jurisdictions, a DAPT offers creditor protection even if you're a discretionary beneficiary of the trust.

You don't necessarily have to live in one of the previously listed states. But, to set up a trust in a state where you don't reside, you'll typically need to move some or all of the trust assets there and engage a bank or trust company in the state to administer the trust.

DAPT protection varies from state to state, so it's important to shop around. For example, different jurisdictions have different statute of limitations periods, which determine how long you'll have to wait until full asset protection kicks in. (During the limitations period, creditors can challenge transfers to the trust.) Also, most of the DAPT laws contain exceptions for certain types of creditors, such as divorcing spouses, child support creditors and pre-existing tort creditors.

Usually, DAPTs are incomplete gift trusts, which give you some flexibility to change beneficiaries or otherwise control asset disposition. But it's also possible to structure a DAPT as a completed gift trust, thereby removing the assets (and any future appreciation of those assets) from your taxable estate.

What's the Primary Risk?
A DAPT's main disadvantage is the uncertainty over whether it will withstand a court challenge. Although they've been around since 1997, DAPTs haven't been widely tested in court.

Most experts agree that, if you live in one of the states with a DAPT statute, a properly designed and funded DAPT will likely be effective. But some uncertainty surrounds trusts established by nonresidents.  

Is It the Right Move?
There are other ways to protect your assets from creditors, such as through insurance or use of various business entity structures. We can help you decide whether a DAPT is the right move.

Contact: Jay Kramer, CPA

Tax Planning: Improve Your Financial Position
Although 2017 is rapidly coming to a close, there is still time to utilize strategies that reduce your tax liability for this year. Depending on your individual situation, the following are examples of a few simple strategies to act on today:
  • Take advantage of your marginal tax brackets. If you expect a higher income next year, it may be advantageous to postpone deductions this year or accelerate income into this year.
  • Harvest losses on stocks. If you have stocks with losses, offset stock gains you realized during the year.
  • Make deductions. Business owners can deduct eligible new and used equipment in the year of purchase within the IRS purchase and expense limitations.
  • Take advantage of Minnesota tax changes. You may be able to take advantage of credits and deductions on your Minnesota tax return as a result of the Minnesota Omnibus tax bill signed earlier this year.   
Our country is currently in the midst of a potential overhaul of our tax system. Regardless of all the potential changes, do not wait until new laws are put in place to establish a tax plan.  Tax planning can minimize your overall tax liability, resulting in an improved financial position. 

The professionals at Hawkins Ash CPAs help privately held businesses and individuals achieve their maximum bottom line, save taxes and preserve wealth. We are committed to partnering with you to navigate the ever-changing business and legislative environment. Please contact a member of our team to schedule a free consultation

Contact: Lance Campbell, CPA

5 Common Mistakes When Applying for Financial Aid
Given the astronomical cost of college, even   well-off  parents should consider applying for financial aid. A single misstep, however, can harm your child's eligibility. Here are five common mistakes to avoid:
  1. Presuming you don't qualify. It's difficult to predict whether you'll qualify for aid, so apply even if you think your net worth is too high. Keep in mind that, generally, the value of your principal residence or any qualified retirement assets isn't included in your net worth for financial aid purposes.
  2. Filing the wrong forms. Most colleges and universities, and many states, require you to submit the Free Application for Federal Student Aid (FAFSA) for need-based aid. Some schools also require it for merit-based aid. In addition, a number of institutions require the CSS/Financial Aid PROFILEĀ®, and specific types of aid may have their own paperwork requirements.
  3. Missing deadlines. Filing deadlines vary by state and institution, so note the requirements for each school to which your child applies. Some schools provide financial aid to eligible students on a first-come, first-served basis until funding runs out, so the earlier you apply, the better. This may require you to complete your income tax return early.
  4. Picking favorites. The FAFSA allows you to designate up to 10 schools with which your application will be shared. Some families list these schools in order of preference, but there's a risk that schools may use this information against you. Schools at the top of the list may conclude that they can offer less aid because your child is eager to attend. To avoid this result, consider listing schools in alphabetical order. 
  5. Mistaking who's responsible. If you're divorced or separated, the FAFSA should be completed by the parent with whom your child lived for the majority of the 12-month period ending on the date the application is filed. This is true regardless of which parent claims the child as a dependent on his or her tax return.
The rule provides a significant planning opportunity if one spouse is substantially wealthier than the other. For example, if the child lives with the less affluent spouse for 183 days and with the other spouse for 182 days, the less affluent spouse would file the FAFSA, improving eligibility for financial aid.

These are just a few examples of financial aid pitfalls. Let us help you navigate the process and explore other ways to finance college.

Contact: Leslie Smith