Review Your Estate Planning Documents!

How Outdated Beneficiary Designations and Property Titling Affect Income Taxes and Other Unintended Consequences

When it comes to estate planning, many people focus on creating wills or trusts to ensure their wishes are carried out according to plan. However, an equally important yet often overlooked aspect is managing the income tax implications tied to your estate plan.

Periodic reviews of beneficiary designations, asset titling, and estate planning documents are crucial for ensuring your wishes are still being carried out while also minimizing the tax burden for your heirs.

Why Beneficiary Designations Matter

Beneficiary designations are used for assets such as retirement accounts (e.g., 401(k)s, IRAs), life insurance policies, annuities, and payable-on-death bank accounts. These designations determine who will receive assets upon your passing, regardless of what your will or trust may say. Over time, life changes such as marriage, divorce, the birth of children, or the death of a beneficiary, can make old beneficiary designations outdated or incorrect.

The Importance of Property Titling

Similarly, the way property is titled (e.g., homes, bank accounts, vehicles) dictates how ownership transfers after death. For example, joint tenancy with rights of survivorship ensures property automatically passes to the surviving owner. While sole ownership or tenancy in common requires assets to pass through probate as directed by your will or trust.

Also, if you own a non-retirement account asset by yourself, its basis will be adjusted to the current market value when you pass away. This is called a full step-up in basis. However, if you own the asset jointly with someone else, only half of its basis will be adjusted. This step-up is important because it allows a business asset to be depreciated again or an investment asset to be sold with little or no gain, reducing the tax burden.

Real-Life Downfalls of Neglecting Reviews

#1 Outdated Beneficiaries After Divorce

John divorced his first wife, Mary, ten years ago and remarried Lisa. However, John never updated the beneficiary designation on his 401(k), which still names Mary as the beneficiary. When John passes away unexpectedly, his ex-wife receives the retirement funds, leaving Lisa with nothing.

Even though John’s will direct that everything is to be left to Lisa, the 401(k)-beneficiary designation overrides the will. In addition, Mary does not enjoy the opportunity for spousal rollover benefits that could have reduced her taxes and extended payouts.

#2 The Birth of a Child Overlooked

Sarah and Mark welcome their first child, Emma, but never update their life insurance policies. Sarah’s policy still reflects her pre-marriage beneficiaries, which are her siblings. When Sarah tragically passes away, her siblings inherit the life insurance proceeds instead of her husband and daughter. Leaving Mark unassisted with the financial duties of raising Emma.

#3 Sole Ownership Versus Joint Ownership

Jane owns a vacation home titled solely in her name, despite sharing it with her husband, Michael. The home is valued at $300,000 at the time of her passing. Although the home needs to go through probate to pass to her husband, Michael receives a full step-up in basis. When he sells the property for $300,000 shortly after Jane’s passing, he pays no capital gains tax.

Let’s say Jane and Michael own the vacation home jointly, with an original purchase price of $100,000. Upon Jane’s passing, the property transfers to Michael without going through probate. Michael receives a step-up in basis on Jane’s half interest only, resulting in a new basis on the vacation home of $200,000 ($150,000 for Jane’s step up, plus $50,000 of Michael’s original cost basis). This will result in a $100,000 taxable gain when Michael sells for $300,000 after Jane’s passing.

Final Thoughts

By making a review of your beneficiary designations and property titles a regular part of your financial checklist, you can protect your estate plan, minimize legal and tax complications, and provide peace of mind for yourself and your loved ones.

Your KT Estate Planning team is here to help with any estate and income tax questions you may have!

January 27, 2025
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Tax Relief Announced for Victims of Southern California Wildfires & Straight-Line Winds

The Internal Revenue Service (IRS) and the State of California have introduced tax relief measures for individuals and businesses impacted by the recent wildfires and straight-line winds devastating southern California.

Extended Filing and Payment Deadlines

Those located within the designated disaster area now have until October 15, 2025, to file certain tax returns and make payments originally due between January 7, 2025, and October 15, 2025. This extension applies to a variety of filings and payments, including:

  • Individual income tax returns and payments typically due on April 15, 2025.
  • Calendar-year partnership and S corporation returns originally due on March 17, 2025.
  • Corporation and fiduciary returns and payments for the calendar year, due April 15, 2025.
  • Tax-exempt organization returns for calendar-year entities, due May 15, 2025.
  • Quarterly estimated tax payments for 2024 and 2025, including:
    • January 15, 2025 (2024 Q4 payments)
    • April 15, June 16, and September 15, 2025 (2025 Q1, Q2, and Q3 payments)

Who Qualifies?

Currently, residents and businesses in Los Angeles County are included in the designated tax relief area. However, individuals outside the designated area may also qualify for relief under certain circumstances.

Major Disaster Declaration

President Biden’s Major Disaster Declaration for California authorizes additional support for affected taxpayers. Those who suffered uninsured or unreimbursed disaster-related losses can claim these losses on either:

  • The prior year’s tax return (2024), or
  • The year the disaster occurred (2025).

This flexibility allows taxpayers to optimize their financial recovery by choosing the year that provides the greatest tax benefit.

Need More Information?

For personalized guidance on whether you qualify for tax relief related to the California wildfires and straight-line winds, contact your KT representative today.

January 13, 2025

Estate Tax Exemption to Sunset

We’re all familiar with the age-old saying that only two things are certain in life: death and taxes. It’s safe to say that for most, discussing either topic isn’t exactly a delightful dinner conversation with your family. However, when these two inevitabilities in life intersect, the result can be financially painful. Failing to address the topic of death taxes through proper estate planning can result in a significant portion of your estate going to Uncle Sam rather than remaining within your family.

Since 2018, the estate tax has been a minor concern for taxpayers, thanks to the historically high exemption put in place by the Tax Cuts and Jobs Act of 2017. For 2023, the exemption is set at $12.92 million for individuals, and $25.84 million for married couples if a proper portability election is made. However, beginning in 2026, the estate tax exemption is scheduled to sunset to around $7 million for individuals and $14 million for married couples, once adjusted for inflation. With this lower estate tax exemption threshold, the dreaded death tax may affect many more families.

Here is an example to illustrate the potential impact of this estate tax exemption sunset:

You and your spouse have a combined net worth of $20 million. Under the current exemption, there would be no estate tax due since your combined net worth is below the $25.84 million estate tax exemption for married couples (with portability election). However, under the expected 2026 sunset exemption of $14 million, you would owe a 40% estate tax on the $6 million of net worth exceeding the exemption, resulting in $2.4 million in taxes. Yikes!

If you believe that the estate tax exemption sunset may affect you and your family, the time to start planning is now. There are many planning techniques that can be put into place in your estate planning prior to 2026 that would “lock in” the more generous estate exemption before it expires. Legislation put into place between now and 2026 could stop the exemption from sunsetting, but it’s best to be proactive and have a plan in place in case it does not.

KT’s estate and gift planning team is eager to assist you in safeguarding your wealth for the benefit of future generations, rather than paying it to Uncle Sam. Don’t wait! Contact our team to discuss your estate planning today.

October 9, 2023

Deadline Change to Portability Election on Form 706

The IRS has released a new simplified method for obtaining an extension of time to make a portability election. Making a portability election allows a surviving spouse to use the deceased spouse’s unused exclusion amount in addition to their own exclusion amount against their own lifetime gifts or at death.

Under the old rules the estate had two years from the date of death to make a portability election to “port” the deceased spouse’s unused exclusion to the surviving spouse. Under the new Revenue Procedure, an estate now has 5 years from the descendant’s date of death to make the portability election.

In order to make this election, the deceased must not have had a filing requirement for an estate tax return. For example, if the taxpayer were to pass away in August 2022 and he or she has an estate over $12,060,000, they are required to file an estate tax return, and the due date for that tax return will be nine months from the date of death plus an allowed six-month extension. Instead, if the taxpayer had an estate worth $5,000,000, then the taxpayer is not required to file an estate return unless the executor chooses to, in order to elect portability. If that is the case, the executor has until August of 2027 to prepare the Form 706. 

Reach out to your Ketel Thorstenson tax advisor for any questions.

July 14, 2022

Tax Tips: Business Loss Limitation

Business loss limitation rules are back in play for the tax year 2021. This means that if you have total business losses in excess of $262,000 (unmarried) or $524,000 (married) your deductions will be limited to that threshold even if you are active, at risk, and have sufficient tax basis in the business.

Business losses are the total amount in which your deductions from a trade or business exceed your gross income from that trade or business. Gross income and deductions from a trade or business consist of net income generated from Schedule C, Schedule F, and other business activities reported on Schedule E. Business gains or losses reported on Form 4797 are also used when computing the business loss limitation. Any excess business losses you have over the threshold that are disallowed in the current year are carried forward to be deducted in future years.

Business loss limitation rules were put into place as part of the Tax Cuts and Jobs Act in 2018. However, in an effort to relieve taxpayers of financial difficulty during the COVID-19 pandemic, these rules were suspended. Up until 2021, you were able to take the full amount of your business loss to offset other income you may have had.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning tax return preparation, and tax legislation affects or questions.

March 15, 2022

Financial Tips for Your Side Hustle

In need of some extra cash? Consider starting a side hustle. Creating a side hustle is one of the most popular ways to bring in extra cash flow. A side hustle is defined as activities undertaken outside of one’s main job to earn additional income. Common side hustles include food delivery services, ridesharing, or tutoring.  Once your side hustle is up and running, you will need to know how this extra cash flow will affect your finances. Keeping track of your side hustle finances can be a large task.  Here are some helpful tips to make the most sense out of your side hustle cash flow.

Open a Separate Bank Account

Opening a separate bank account allows you to keep your side hustle income and expenses separate from your personal income and spending. You don’t want your side hustle to cost you more money than you make, having a separate bank account will allow for easy tracking.

Stay Up to Date on Bookkeeping

Now that you have a separate bank account, you can use the bank statements to create a financial picture of your side hustle. Using software such as QuickBooks or Excel to categorize your income and expenses, you can see where your money is coming from, and to what expenses you are allocating that money. It is recommended to do this monthly to have a clear picture of how your business is doing on a month-to-month basis.

Taxes

Keep in mind that along with extra cash flow, comes the need to pay some of that to Uncle Sam. That’s right, you will need to pay taxes on the net income you make. The net income is calculated by starting with the income and deducting the expenses incurred for the side hustle during the year against this income. It is recommended that you save 20-30% of your net income for taxes due when you file your tax return or to pay your estimated tax payments throughout the year.

Estimated Tax Payments

Since your side hustle income doesn’t have withholding deducted from it when you receive it like your paycheck does from your employer, you may be required to pay estimated tax payments. To avoid penalties, you are generally required to make estimated tax payments if (1) you expect to owe at least $1,000 in tax for the current year after withholdings and refundable credits are subtracted and (2) you expect your withholding and refundable credits to be less than the smaller of 90% of the tax shown on your current year tax return or 100% tax shown on your prior year return. There are some special exceptions to these rules in some cases.

Savings

Now that you are keeping track of your side hustle finances and allocating some for taxes, what should you do with the remaining cash?! Allocate the remaining amount so you don’t find yourself spending it on items you don’t need. Saving for retirement, paying down debt, creating an emergency fund, or planning a vacation are all great ways to allocate your additional cash flow from your side hustle.

Creating a successful side hustle takes hard work and keeping track of your finances can be overwhelming and timing consuming. Do not be afraid to reach out to your local CPA for help. Your trusted friends at Ketel Thorstenson are here to assist you in reaching your financial goals!

June 28, 2021

Claiming the ERC Credit on Form 941/943 Filing

The Consolidated Appropriations Act (CAA) of 2021 has greatly expanded the Employee Retention Credit (ERC), which was originally signed into law with the CARES Act in 2020. As a result of this, it is important not to rush filing your Form 941 or 943 to be sure you are claiming your allowable ERC properly.

With the expansion of the ERC to include taxpayers that received a PPP loan, more taxpayers are eligible to claim the credit for both 2020 and 2021 on Form 941 and 943. The qualifications for the credit are different for both 2020 and 2021.

For 2020, taxpayers need to show a reduction in revenues of at least 50% compared to the same quarter in 2019. The allowable credit is equal to 50% of qualifying wages up to $10,000, resulting in a maximum credit of $5,000 per employee for the year. Qualifying wages include cash compensation paid to employees from March 12, 2020 to December 31, 2020. Wages paid to related parties and commodity wages do not qualify for the ERC. Wages used in calculating the ERC must be reduced by wages used to qualify for PPP loan forgiveness. 

Since the ERC is now allowed for taxpayers that received a PPP loan, those that filed 941 forms for the first three quarters of 2020 may have been eligible to claim the ERC on those returns.  Rather than filing an amended return to claim the credit on those returns, the credit for the entire year can be claimed on the fourth quarter Form 941.

The ERC credit is available for the first and second quarters of 2021.  The difference for the 2021credit is that the 50% revenue reduction is reduced to a 20% reduction when comparing the gross revenue to the same quarter in 2019.  In addition, the credit allowed is increased to 70% of qualifying wages up to $10,000 per quarter, resulting in a maximum credit allowed of $14,000 per employee for the year.

With the expansion of the Employee Retention Credit into 2021, taxpayers may want to consider planning opportunities to defer income later into 2021 to maximize their ERC allowed for the period of January 1, 2021 to June 30, 2021. Reach out to your KTLLP advisor to discuss these opportunities.

January 7, 2021

Related Party Transactions

It is often common for individuals to make transactions with family members or businesses owned by family members. Did you know those transactions could have a negative tax consequence for you?

Related party transactions in most cases will re-characterize what would normally be a long-term capital gain or loss to an ordinary gain or loss. The property sold between parties must be depreciable to fall under the related party rules. If the sale includes both depreciable and non-depreciable property, the gain will be allocated between the properties and only the depreciable property will be re-categorized from capital gain to ordinary gain. Capital gain tax rates for the 2019 filing season could be as low as 0% or as high as 20% depending on your taxable income level. For example, if your taxable income for 2019 was $78,000 and you file a married filing joint tax return, your tax bracket would be 12% and your long-term capital gains tax rate would be 0%. If you sold $50,000 worth of raised cows to your brother, resulting in a $50,000 long-term capital gain it would be taxed at 0% according to your taxable income, but since it is a related party transaction, that $50,000 long-term gain will instead be taxed at 12%.

What family members fall under the related party transaction rules? Family members included in the related party transaction rules include siblings (including half siblings), spouses, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). A sale between a taxpayer and their nephew would NOT fall under the related party transaction rules.

In addition to sales between individual taxpayers, sales between entities could also fall under the related party transaction rules and result in unfavorable tax consequences. Related party rules can apply when there is a sale between a taxpayer and a controlled entity or a sale between multiple controlled entities. Controlled entities include a corporation or partnership in which the taxpayer owns directly or indirectly more than 50% of the stock or capital or profits interest. Controlled entities would also include two corporations or partnerships in which the same taxpayers own more than 50% of the outstanding stock or capital and profits interest.

For example, let’s say Taxpayer A is in a partnership named XYZ Partnership with Taxpayer B and they are brothers. They both share profits and capital at 50% each. XYZ Partnership sells $100,000 of raised cows to ABC Corporation for breeding purposes. ABC Corporation is owned by the two brothers and Taxpayer C, an unrelated taxpayer. Each taxpayer owns one third of the outstanding stock in ABC Corporation. Since Taxpayer A and B are brothers and both own one third of ABC Corporation, due to related party rules, they are considered to directly or indirectly own two thirds of ABC Corporation. The sale of $100,000 of raised cows from XYZ Partnership to ABC Corporation for breeding purposes would be considered a related party transaction because 50% or more of XYZ Partnership and ABC Corporation is owned by related parties. The $100,000 will be taxed as an ordinary gain to XYZ Partnership and flow through on the partners K1s to be taxed at their regular tax rate rather than the lower capital gains rate.

Related party transactions can be quite technical and complex. If you think you might fall within the related party rules or would like to know more about them, contact the KTLLP Tax Team for more information.

January 13, 2020