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How to Disinherit a Child from your Estate?

What do you do when you have a child you’d like to disinherit from your estate? It’s not as easy as you think, so make sure you follow the proper procedures to specifically cut them out. Don’t just leave their name out of things and think that this will accomplish your goals as the laws in most states will presume you intended to have them be an heir unless you specifically state otherwise. Your children, along with your spouse (if you have one), are the presumed heirs to your estate by law in the absence of an estate plan. As a result, it is important to complete an entire list of your children in the estate plan and to specifically mention any child who will not be an heir to your estate by stating something like, “it is the intention of the settlor (you) to disinherit the following child from the estate.” It’s that simple; just make clear writing indicating that you specifically intend them not to be an heir to your estate and they’re out.

If you have a problem child who you still want to provide for but want some strings attached, you can add a lot of excellent restrictions and controls to the estate through a well drafted trust. For example, you could state that the problem child can’t inherit their share of the estate if they have a drug or alcohol addiction. You could also be specific about something in their life. Say you had a child with legal issues or that has creditors chasing them down. You could state that the trust will only distribute once the child has resolved issues in their lawsuit or with creditors. Many trusts will have a spendthrift clause that addresses creditor issues for all heirs but you can also make it specific to an issue an heir may have that you want resolved before they inherit.

It is important to note that a trust (or will) cannot be created and enforced to go against public policy, promote illegal activities, and promote tortuous acts. One of the common problematic clauses is one which requires a child to divorce their spouse in order for them to receive their inheritance. For example, you can’t say, “Johnny doesn’t get anything from the estate so long as he is married to Susie”. Many courts view this as a violation of public policy as it promotes divorce. As a result, avoid clauses such as these and seek the guidance of an attorney when adding clauses which disinherit or significantly restrict a child’s inheritance.

If you completed your estate plan but now you’d like to disinherit a problem child from your estate, consider having a lawyer review your documents. Or, if you know you are in need of a new plan, visit our website to learn more about our Estate Planning Special or simply to set-up an appointment with an Attorney at www.kkoslawyers.com

 

New IRS 1099 Rule for PayPal and Venmo Targets Very Small Businesses and Will Cause Misreporting and Errors

FroMat Sorensen Entrepreneur Articlem my article on Entrepreneur

The IRS recently announced that payment apps such as PayPal, Venmo, and CashApp will be required to issue 1099s to small businesses and self-employed persons. Here’s what you need to know.

New rule is targeted at very small businesses and individuals with a side hustle

Starting in tax year 2022, payment apps will be required to report to the IRS total payments received by a business account in excess of $600 annually. This new requirement is clearly targeted at the smallest of small businesses and at individuals with a side hustle, as the prior rule only required a payment app to report when an account received more than $20,000 and had 200 or more transactions within the year. These micro-businesses that collect less than $20,000 a year previously did not fall under the 1099 rule, but will now be treated like every other business, large or small…

Read the article on Entrepreneur here.

Buying Crypto with an IRA

Buying Crypto with an IRA From my article on Cryptopedia

IRAs can own bitcoin and other cryptocurrencies. Crypto IRAs offer many advantages, the first and foremost reason being that the gains made on selling crypto with an IRA are generally not taxable. And if you have a Roth IRA, the profits come out entirely tax-free at retirement (age 59 ½). For traditional IRAs, the gains are tax-deferred, and owners are taxed as they draw funds out at retirement. These tax outcomes apply to Roth IRAs and Traditional IRAs when buying and selling stocks or mutual funds as well as crypto.

Read the article on Cryptopedia here.

IRA/LLC Owner Faces Distribution After Storing Precious Metals at Home

 

 

A recent Tax Court case, McNulty v. Commissioner, held that a self-directed IRA owners “…[personal] receipt of the AE [American Eagle] coins constituted taxable distributions equal to their purchase price.” In this case, Donna McNulty established a self-directed IRA and invested those IRA funds into an LLC where she was the manager. She then established a bank account for the LLC. The IRA funded this bank account with cash and then the LLC bank account was used to purchase precious metals. The precious metals were then subsequently shipped to and stored at Mrs. McNulty’s personal residence in her personal safe.

The IRS challenged Mrs. McNulty’s personal possession of the precious metals stating that personal possession violated IRC 408 and said that, “Mrs. McNulty’s receipt of the AE coins constituted taxable distributions equal to their purchase price.”

The IRS has been of the opinion, and we have long communicated to our clients, that home storage of precious metals via an IRA owned LLC violates the IRA rules under IRC 408. See the IRS Announcement and my article from 2016 on the subject, here. Some IRA custodians and non-licensed companies promoting precious metals IRAs have argued that you can have personal possession and can personally store specifically approved coins, such as American Eagle Gold Coins, by using an IRA/LLC structure (aka, checkbook IRA). This argument for specifically approved coins was based on some ambiguity in the law surrounding storage requirements for precious metals and IRAs in IRC 408(m). We’ve always believed IRA precious metals home storage was an aggressive strategy and one we advised against for the reasons the IRS and the Tax Court expressed in the McNulty case.

I have seen some providers of solo 401(k)s and other alternative strategies claim that, “checkbook IRAs are illegal.” This is great clickbait – but terrible content and advice as the court did not say that checkbook IRAs (aka, IRA/LLCs) are illegal. That was not part of their holding nor was it a part of the case from the IRS.  The holding in the case was specific to a distribution of precious metals stored personally by the IRA/LLC owner.  Please talk to your attorney, CPA, or licensed tax professional at to the details of the case and its impact on your IRAs investments. For our clients, our advice remains the same – don’t personally store your IRA or IRA/LLC precious metals at your home or in your personal possession.

The Court’s opinion can be found at the link below.

McNulty V Commissioner Precious Metals Storage and IRA owned LLC Checkbook IRA

Non-Wealthy IRA Savers Who Invested IRAs Into Small Business, Startups and Real Estate LLCs Targeted in ‘Build Back Better’ Plan

Non-Wealthy IRA Savers From my article on Entrepreneur

The proposed $3.5 trillion budget-reconciliation package still working its way through Congress contains two provisions that will restrict IRA investments into startups, small businesses, and real estate LLCs. These provisions came as a surprise to the over one million IRA investors who already invest a portion of their IRA into these non-publicly traded assets. The problematic sections, 138312 and 138314, change more than 40 years of IRA laws and practice, which have allowed IRAs to invest into publicly traded companies as well as privately held small businesses, LLCs, real estate, and startups…

Read the article on Entrepreneur here.

Everyday IRA Savers Who Self-Direct Will Lose Big Under House Tax Bill

 

There are over one million IRA accounts that invest into real estate, small businesses, start-ups, LLCs, crowdfunding offerings, and private companies. Contrary to news headlines, these savers are not the ultra-wealthy and 98% of them have accounts less than $1M. Current legislation passed in the House Committee on Ways and Means would significantly limit investment choices for these savers who choose to diversify their retirement holdings in assets they value and believe in. The bill will effectively cut off IRA investments into small businesses, start-ups, real estate (using an IRA/LLC), and crowdfunding. Any IRA investor who is already invested into these assets, there are hundreds of thousands, will be forced to sell their asset prematurely or will be forced to distribute it. Early distribution will result in taxes and penalties for most IRA investors that aren’t yet at retirement age.

The proposed House Tax bill has several provisions that affect IRAs but most of them will only affect the very wealthy, cap IRA account balances at $10M (Section 138301), or those who have violated the IRA rules (Section 138313, Section 138315). The policy and political objectives on these provisions makes sense as the bill is designed to curb abuses and raise revenue from the wealthy. Unfortunately, two additional sections added into the bill are going to hurt everyday IRA savers who choose to invest into small businesses, start-ups, crowdfunding offerings, and real estate with an IRA owned LLC. My experience after 15 years in the industry is that those who self-direct their IRA aren’t “wealthy”. They are hard-working Americans trying to catch up to the wealthy by investing in assets and companies they know and believe in.

Two Sections Will Drastically Impact Savers with Small Accounts Who Are Trying to Catch Up to The Wealthy

Unfortunately, the bill contains two sections that will affect everyday IRA savers who choose to self-direct their IRAs into real estate (using LLCs or private funds), small businesses, start-ups, and crowdfunding offerings. It appears that the bill was intended to curb investments made by Peter Theil in growing his Roth IRA to $5 billion. Mr. Theil’s account was reported on by ProPublica and followed closely by democrats in Congress. The bill will curb Peter Theil’s $5B Roth IRA with the $10M cap, but these two problematic provisions are going to harm hundreds of thousands of everyday IRA investors who are only trying to get an IRA to an amount they can retire on. Congress needs the help of self-directed IRA investors and savers to understand that investment choices (not just Wall Street) are important to their IRA and that investing in small businesses, private companies and funds, real estate with an IRA/LLC, and crowdfunding offerings isn’t just something the ultra-wealthy do.

Section 138312 Should Be Removed from the Bill – This section prohibits investments in IRAs when the investment is permitted based on asset or income levels of the investor. This prohibition would effectively ban crowdfunding offerings under federal and state crowdfunding laws (investment amounts under these offerings is based on income or assets, and it’s not just accredited investors). Most crowdfunding investors who use their IRA to invest will invest $5K or $10K at a time and will invest their IRA in companies, people, and innovations they believe in. These retirement savers are everyday working Americans, many of whom make less than $100K a year but will likely be restricted under the legislation as crowdfunding investment amounts are based on income or assets.

This section, if enacted, will also hurt small businesses and innovating start-ups who raise money from accredited investors. Accredited investors are only permitted to invest into private companies, private funds, start-ups, and small businesses because they qualify under securities laws based on their income or assets. If enacted, the IRA laws will say the exact opposite and will say if you qualify to invest under securities laws then you can’t invest under IRA laws. I know, it doesn’t make sense but that’s how the law will be applied. Most IRA savers who we work with and who have invested as an accredited investor into a private offering or fund are working Americans who have saved and who have been able to obtain $1M in total assets over a decade of working and saving and who wish to build their retirement account by investing and diversifying into small businesses, start-ups, and private companies.

Section 138314 Should Be Removed from the Bill – This section prohibits several activities but the most destructive would affect retirement savers who buy real estate with their IRA. The most common real estate investment for an IRA saver is a single-family rental property. There are hundreds of thousands of single-family rentals owned by IRA savers and most of them use a structure known as an IRA/LLC, whereby their IRA owns an LLC 100% and the LLC in turn owns the single-family rental. The IRA owner is typically the manager (officer) of said LLC. Some IRA providers require their account holders to use an LLC when their IRA is buying real estate as they don’t want liability as the IRA provider in holding the asset directly. Under current law, the IRA owner cannot be compensated and cannot work on the property and has zero personal ownership interest but serves in an administrative and management function to sign on things for the LLC that owns the property. This section, it appears, would prohibit an IRA owner from serving as an officer of a company (LLC) that their IRA owns more than 10% of. If this provision passes, IRA savers will be forced to hire financial advisors, tax lawyers, or other professionals to manage (service as officer) their IRA owned LLCs that own real estate. This is something the ultra-wealthy already do and as a result it will only harm working Americans doing these actions for themselves who are trying to build an IRA they can retire on. If passed, the only other method for IRA real estate savers, or others who use an IRA/LLC, is they will need to give control back to their IRA companies to manager the real estate asset. This will increase fees and expenses, further hurting hard-working Americans and will take investment control away from the IRA saver.

What Can I Do to Save My IRA?

The entire industry is working diligently to educate Congress on how these two sections will disproportionately harm IRA savers, 98% of whom have IRAs less than $1M, and 80% who have IRAs less than $300k. I have spoken to multiple members of Congress, Senator staffers, and industry groups this past week. Industry efforts will not be enough. The only way these two sections will be removed is if Congress hears from IRA savers who will be affected. Congress needs to hear from you, their constituents, on how these two sections of the bill impact you.

This is moving fast, write and call your Senators and House member today.

Contact Your House Representative by phone, e-mail, and/or mail? You can look up your representative at the House of Representatives link below and then will need to go to their office’s specific page to get their e-mail, phone, and mailing address.

https://www.house.gov/representatives/find-your-representative

Contact Both of Your Senators by phone, e-mail and/or mail? If you don’t know your Senators (contact both), you can look them up at the link below and then go to their office’s specific page to get their e-mail, phone, and mailing address.

https://www.senate.gov/senators/senators-contact.htm

Once you select your state your two senators should pop-up and there will be a hyperlink called Contact next to each Senator that will take you to their office’s page to make contact by e-mail, web-form, or phone.

Remember, the two problematic sections of the House Tax Bill are sections 138312 and 138314.

FAQs

1. What Should I tell my House Representative or my Senator?

Ask them to save your IRA and to oppose Sections 138312 and 138314 in the House Tax Bill as those provisions take away investment choices for your IRA. It is critical that you let them know the following.

  • That you are their constituent. Give your address or leave your City and State so they know they represent you (e.g. I’m Sally Jones from Glendale, AZ).
  • There is a misconception in Congress that self-directed IRAs are only something the wealthy do and that this only hurts the wealthy. It’s helpful to be straightforward about who you are and about the size of your account. They need to know that this bill is going to disproportionately hurt IRA savers with IRAs less than $1M. Here are some examples but it may help to put it into your own words and situation explaining how you’re not an ultra-wealthy person using their IRA to invest in hedge funds (that’s what they presume).
    • I’m a working American with a $X IRA just trying to get to an account balance I can retire on. Sections 138312 and 138314 in the House Tax Bill will harm my IRA and my ability to grow a retirement account that I can retire and live on.
    • I’m a pilot, nurse, retired firefighter, realtor, etc. (insert profession or job so Congress doesn’t think this is just CEOs, doctors, lawyers, and wealthy heirs), and I have diligently contributed to my retirement account. I choose to invest some of my IRA into real estate, small businesses, start-ups, and crowdfunding offerings. These provisions will force me to sale my assets prematurely for a loss or will force me to distribute them where I will be subject to taxes and penalties. Please oppose Sections 138312 and 138314 as they will cause drastic tax consequences for my IRA ,and they will take away future investment choices that are important to growing my account to an amount I can retire on.
    • If you think the $10M cap is reasonable, say that so Congress doesn’t presume you’re an ultra-rich person with a $10M plus IRA (like some in Congress presume anyone opposing this bill is). We’re not opposing the $10M cap in our efforts as it effects very few account holders who self-direct.

2. This bill came from the Democrats in the House, Should I contract Republicans or Democrats?

Contract members of Congress from both parties in both the House and Senate. Since this is a democrat-controlled bill (they have majority in the house and senate), it is critical that you write and call your members who are democrats as they are the ones that will negotiate this bill in the end. Republicans have already come out in opposition to the bill in its entirety. It is still helpful to contact Republican members though as they may have a say or may have democratic colleagues who they can help understand this issue in a bipartisan way.

3. How Quickly is this Bill Moving and When Should I Write or Call my Representative or Senator?

You must reach out today. Right now. Take the time now to call, e-mail, and/or mail your Representative and Senator. This bill is being negotiated and voted on now. It could all be wrapped up in one to two weeks but if Congress doesn’t start hearing from self-directed IRA owners now, they won’t understand the issue and how it is going to affect their constituents.

4. What should I do if I am already invested into a LLC I manage without compensation or if I have invested into a private company, small business, private fund or crowdfund offering?

As the bill is currently written, you will be forced to distribute these assets (IRA/LLCs, private company or fund, small business, crowdfunding investment) within two years. We don’t want that to happen as we know it will cause losses, taxes, and penalties to distribute or sell these assets prematurely. The best thing to do is make your voice heard and contact your members of Congress and ask them to save your IRA and not take away investment choices from your IRA.

We are working to educate Congress on how these two sections will disproportionately harm IRA savers, 98% of whom have IRAs less than $1M, and 80% who have IRAs less than $300k. We need you to get engaged and the best method for Congress and their Staffs to understand a bills impact is to hear it from their constituents. This is moving fast, write your Senator or House member today.

5. What if I am looking to invest in a private company, small business, or crowdfunding offering, or use an IRA/LLC for a real estate deal?

You’ll want to seek our your own legal or tax advice but should consider the current bill and how it will affect your future investment options. If the bill passes you will have two years to sell, distribute, or change you investment structure to comply with the new law. We are working hard to get these two provisions out of the bill but won’t know until it is fully considered by the House and Senate.

The best thing you can do now is to write your Representative and Senator today to tell them to oppose Sections 138312 and 138314 so that you can have investment choices off wall street for your IRA.

6. Do you have any resources to share when writing or speaking to members of the House and Senate (and their staff)?

Yes, please see the resource below which is a quick summary of how the bill hurts IRA savers and the economy. We will be adding more resources and information as the bill develops.

Everyday IRA Savers Hurt by IRA Provisions

7. Will There be More Information Coming, How Do I Stay Up to Date?

My partner Mark J. Kohler and I will have a live broadcast this Thursday, Sept 23rd at 4 MTN. Sign-up for our newsletter (see sign up at bottom of page) or follow our social channels for updates and information.

8. Where Can I Read the Bill and the Summary from Congress?

House Tax Bill Summary From Ways and Means Committee (IRA Sections are138301 to 138315) House Ways and Means Tax Title Section-by-Section Explanation

House Bill Full Text House Ways and Means Neal Tax Bill

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