Financial Planning

  • Noelle Merwin
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Can you turn business losses into tax relief?
Can you turn business losses into tax relief? 1200 1200 Noelle Merwin

Even well-run companies experience down years. The federal tax code may allow a bright strategy to lighten the impact. Certain losses, within limits, may be used to reduce taxable income in later years.

Who qualifies?

The net operating loss (NOL) deduction levels the playing field between businesses with steady income and those with income that rises and falls. It lets businesses with fluctuating income to average their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

  • Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
  • Casualty and theft losses from a federally declared disaster, or
  • Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

  • Capital losses that exceed capital gains,
  • The exclusion for gains from the sale or exchange of qualified small business stock,
  • Nonbusiness deductions that exceed nonbusiness income,
  • The NOL deduction itself, and
  • The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

What are the changes and limits?

Before the Tax Cuts and Jobs Act (TCJA), NOLs could be carried back two years, forward 20 years, and offset up to 100% of taxable income. The TCJA changed the landscape:

  • Carrybacks are eliminated (except certain farm losses).
  • Carryforwards are allowed indefinitely.
  • The deduction is capped at 80% of taxable income for the year.

If an NOL carryforward exceeds your taxable income of the target year, the unused balance may become an NOL carryover. Multiple NOLs must be applied in the order they were incurred.

What’s the excess business loss limitation?

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships and S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2025, that threshold is $313,000 ($626,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years through 2028. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Plan proactively

Navigating NOLs and the related restrictions is complex, especially when coordinating with other deductions and credits. Thoughtful planning can maximize the benefit of past losses. Please consult with your Smolin advisor about how to proceed in your situation.

  • Noelle Merwin
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Still have tax questions? You’re not alone
Still have tax questions? You’re not alone 1200 1200 Noelle Merwin

Even after your 2024 federal return is submitted, a few nagging questions often remain. Below are quick answers to five of the most common questions we hear each spring.

1. When will my refund show up?

Use the IRS’s “Where’s My Refund?” tracker at IRS.gov. Have these three details ready:

  • Social Security number,
  • Filing status, and
  • Exact refund amount.

Enter them, and the tool will tell you whether your refund is received, approved or on the way.

2. Which tax records can I toss?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return.

So you can generally get rid of most records related to tax returns for 2021 and earlier years. (If you filed an extension for your 2021 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years to be on the safe side.)

3. I missed a credit or deduction. Can I still get a refund?

Yes. You can generally file Form 1040-X (amended return) within:

  • Three years of the original filing date, or
  • Two years of paying the tax — whichever is later.

In a few instances, you have more time. For instance, you have up to seven years from the due date of the return to claim a bad debt deduction.

4. What if the IRS contacts me about the tax return?

It’s possible the IRS could have a problem with your return. If so, the tax agency will only contact you by mail — not phone, email or text. Be cautious about scams!

If the IRS needs additional information or adjusts your return, it will send a letter explaining the issue. Contact us about how to proceed if we prepared your tax return.

5. What if I move after filing?

You can notify the IRS of your new address by filling out Form 8822. That way, you won’t miss important correspondence.

Year-round support

Questions about tax returns don’t stop after April 15 — and neither do we. Reach out to your Smolin advisor anytime for guidance.

  • Noelle Merwin
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Members of the “sandwich generation” face unique estate planning circumstances
Members of the “sandwich generation” face unique estate planning circumstances 1200 1200 Noelle Merwin

Members of the sandwich generation — those who find themselves simultaneously caring for aging parents while supporting their own children — face unique financial and emotional pressures. One critical yet often overlooked task amid this juggling act is estate planning.

How can you best handle your parents’ financial affairs in the later stages of life? Consider incorporating their needs into your estate plan while tweaking, when necessary, the arrangements they’ve already made. Let’s take a closer look at four critical steps.

  1. Make cash gifts to your parents and pay their medical expenses

One of the simplest ways to help your parents is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion. For 2025, you can give each parent up to $19,000 without triggering gift taxes or using your lifetime gift and estate tax exemption. The exemption amount for 2025 is $13.99 million.

Plus, payments to medical providers aren’t considered gifts, so you can make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amounts.

  1. Set up trusts

There are many trust-based strategies you can use to assist your parents. For example, if you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.

Another option is to set up trusts during your lifetime that leverage your $13.99 million gift and estate tax exemption. Properly designed, these trusts can remove assets — together with all future appreciation in their value — from your taxable estate. They can provide income to your parents during their lives, eventually passing to your children free of gift and estate taxes.

  1. Buy your parents’ home

If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home’s equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses.

To avoid negative tax consequences, pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.

  1. Plan for long-term care expenses

The annual cost of long-term care (LTC) can easily reach six figures. Expenses can include assisted living facilities, nursing homes and home health care.

These expenses aren’t covered by traditional health insurance policies or Social Security, and Medicare provides little, if any, assistance. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.

Don’t forget about your needs

As part of the sandwich generation, it’s easy to lose sight of yourself. After addressing your parents’ needs, focus on your own. Are you saving enough for your children’s college education and your own retirement? Do you have a will and power of attorney in place for you and your spouse?

With proper planning, you’ll make things less complex for your children so they might avoid some of the turmoil that you could be going through.

If you have questions about estate planning strategies tailored to the needs of the sandwich generation, reach out to your Smolin advisor.

Secure Your Business Partnership with a Buy-Sell Agreement
Secure Your Business Partnership with a Buy-Sell Agreement 150 150 smolinlupinco

Buying a business with co-owners or already sharing the reins? A buy-sell agreement isn’t just a smart move–it’s essential. It gives you a more flexible ownership stake, prevents unwanted changes in ownership, and avoids potential IRS complications. 

The basics

There are two main types of buy-sell agreements: cross-purchase and redemption agreements (also known as liquidation agreements).

  • Cross-purchase agreements. This contract between co-owners specifies what happens if one co-owner leaves due to a trigger event, like death or disability. In these cases, the remaining co-owners are required to purchase the departing owner’s interest in the business.
  • Redemption agreements. This is a contract between the business and co-owners which outlines that if one co-owner leaves, the business itself buys their stake.

Triggering events

Co-owners work together to outline what triggering events to include in the buy-sell agreement. Common triggers like death, disability, or reaching retirement age are standard but you can also opt to include other scenarios like divorce.

Valuation and payment terms

Make sure your agreement includes a solid method for valuing ownership stakes. This could be a set price per share, an appraised fair market value, or a formula based on earnings or cash flow. It should also spell out how amounts will be paid out–whether a lump sum or installments–to withdrawing co-owners or their heirs upon a triggering event.

Using life insurance to fund the agreement

The death of a co-owner is a common triggering event, and life insurance is often used to fund buy-sell agreements. 

In a basic cross-purchase agreement between two co-owners, each buys a life insurance policy on the other. If one co-owner dies, the survivor uses the payout to buy the deceased co-owner’s share from the estate, surviving spouse or another heir (s). These insurance proceeds are tax-free as long as the surviving co-owner is the original purchaser of the policy.

Things get complicated when there are more than two co-owners because each co-owner must have life insurance policies on all the other co-owners. In this scenario, the best decision is often to use a trust or partnership to buy and maintain one policy on each co-owner. 

That way, if a co-owner dies, the trust or partnership collects the death benefit tax-free and distributes it to the remaining owners to fund the buyout.

In a redemption agreement, the business buys policies on the co-owners and uses the proceeds to buy out the deceased’s share.

Be sure to specify in your agreement what to do if insurance money does not cover the cost of buying out a co-owner. By clearly outlining that co-owners are allowed to buy out the rest over time, you can ensure some breathing room to come up with the needed cash instead of having to fulfill your buyout obligation right away.

Create certainty for heirs 

If you’re like many business owners, your business is likely a big chunk of your estate’s value. A buy-sell agreement ensures that your heirs can sell your share under the terms you approved. It also locks in the price for estate tax purposes, helping you avoid IRS scrutiny. 

A well-drafted buy-sell agreement protects you, your heirs, your co-owners, and their families. But remember, buy-sell agreements can be tricky to handle on your own.

Reach out to your Smolin advisor to set up a robust agreement that protects the interests of everyone involved.

Your Need-to-Know Tax Guide for Inherited IRAs
Your Need-to-Know Tax Guide for Inherited IRAs 850 500 smolinlupinco

A 2019 change to tax law ended the “stretch IRAs” strategy for most inherited IRAs. This means that beneficiaries now have 10 years to withdraw all of the funds. Since then, there’s been a lot of confusion about required minimum distributions (RMDs).

Thankfully, the IRS has now issued final regulations clarifying the “10-year rule” for inherited IRAs and defined contribution plans, like 401(k)s. In a nutshell, the final regulations largely align with proposed rules released in 2022.

The SECURE Act and 10-Year Rule

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, most heirs except surviving spouses must withdraw the entire balance within 10 years of the original account owner’s death. In 2022, the IRS proposed regulations to clarify the rule. It outlines that beneficiaries must take their taxable RMDs over the course of the 10-year period after the account owner dies. 

They are not permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement significantly limits beneficiaries’ tax planning flexibility and, depending on their situations, could push them into higher tax brackets during those years.

Confused beneficiaries reached out to the IRS trying to determine when they needed to start taking RMDs on recently inherited accounts. The uncertainty posed risks for both beneficiaries and the defined contribution plans. 

This is because beneficiaries could have been assessed a tax penalty on amounts that should have been distributed but weren’t. And the plans could have been disqualified for non-compliance.

In response, the IRS waived penalties for taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs due to the death of the account owner in 2020 or 2021, respectively. 

The waiver guidance also stated that the IRS would issue final regulations no earlier than 2023. When 2023 rolled around, the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022.

As of April 2024, the IRS again extended the relief, this time for RMDs in 2024. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs for these years, and plans will be safe from disqualification based solely on the missed RMDs.

2024 final regulations

The final regulations require certain beneficiaries to take annual RMDs from inherited IRAs or defined contribution plans within ten years following the account owner’s death. These regulations will take effect in 2025.

If the deceased hadn’t begun taking their RMDs before their death, beneficiaries have more flexibility. They can take annual RMDS or wait until the end of the 10-year period and take a lump-sum distribution. Ultimately, the IRS eliminated the requirement to take annual distribution, allowing beneficiaries greater tax planning flexibility. 

For instance, if Ken inherited an IRA in 2021 from his father, who had already begun taking RMDs, under the IRS-issued waivers, Ken doesn’t need to take RMDs for 2022 through 2024. Under the final regulations, he must take annual RMDs for 2025 to 2030, with the account fully distributed by the end of 2031.

If Ken’s father had not started taking RMDs, Ken could have waited until the end of 2031 to take a lump-sum distribution. As long as the account is fully liquidated by the end of 2031, Ken remains in compliance with the rules.

Contact us with questions

If you’ve inherited an IRA or defined contribution plan in 2020 or later, it’s understandable to feel confused about the RMD rules. Reach out to your Smolin advisor for help understanding these regulations and developing a personalized tax-saving strategy.

Tax Implications of Disability Income
Tax Implications of Disability Income 850 500 smolinlupinco

If you are one of the many Americans who rely on disability benefits, you might be wondering how that income is taxed. The short answer is it depends on the type of disability income you receive and your overall earnings.

Taxable Disability Income

The key factor is who paid for the benefit. When the income is paid to you directly from your employer, it’s taxable like your ordinary salary and subject to federal income tax withholding. Depending on your employer’s disability plan, Social Security taxes may not apply. 

Often, disability income isn’t paid by your employer but rather from an insurance policy that provides the disability coverage. Depending on whether the insurance is paid for by you or by your employer, the tax treatment varies. If your employer paid, the income is taxed the same as if it was paid directly to you by the employer as above. But if you paid for the policy, payments received are usually tax-free.

Even if the insurance is offered through your employer, as long as you pay the premiums instead of them, the benefits are not taxed. However, if your employer pays the premiums and includes that amount as part of your taxable income, your benefits may also be taxable. Ultimately, tax treatment of benefits received depends on tax treatment of paid premiums.

Illustrative example

Scenario 1: 

If your salary is $1,050 a week ($54,600 a year) and your employer pays $15 a week ($780 annually) for disability insurance premiums, your annual taxable income would be $55,380. This total includes your salary of $54,600 plus $780 in disability insurance premiums. 

The insurance premiums are considered paid by you so any disability benefits received under that policy are tax-free.

Scenario 2:

If the disability insurance premiums are paid for by your employer and not included in your annual wages of $54,600, the amount paid is excludable under the rules for employer-provided health and accident plans.

The insurance premiums are considered paid for by your employer and any benefits you receive under the policy, are taxable income as ordinary income.

If there is permanent loss of a body part or function, special tax rules apply. In such cases, employer-paid disability might be tax-free, as long as they aren’t based on time lost from work.

Social Security disability benefits 

Social Security Disability Insurance (SSDI) benefits have their own tax rules. Payments are generally not subject to tax as long as your annual income falls under a certain threshold. 

For individuals if your annual income exceeds $25,000, a portion of your SSDI benefits are taxable. The threshold for married couples is $32,000. 

State Tax Implications

Though federal law treats disability payments as taxable income as outlined above, state tax laws vary. It’s wise to seek out professional support to determine if disability payments are taxed or exempt in your state. 

As you determine your disability coverage needs, remember to consider the tax implications. If you purchase a private policy yourself, the benefits are generally tax free since you are using your after-tax dollars to pay the premium. 

On the other hand, if your employer pays for the benefit, you will lose a portion of the benefits to taxes. Plan ahead and look at all your options. If you think your current coverage will be insufficient to support you should the unthinkable happen, you might consider supplementing any employer benefits with an individual.

Reach out to your Smolin advisor to discuss your disability coverage and how drawing benefits might impact your personal tax situation.

Understanding Taxes on Real Estate Gains
Understanding Taxes on Real Estate Gains 850 500 smolinlupinco

If you own real estate held for over a year and sell it for a profit, you typically face capital gains tax. This applies even to indirect ownership passed through entities like LLCs, partnerships, or S corporations. You can expect to pay the standard 15% or 20% federal income tax rate for long-term capital gains.

Some real estate gains can be taxed at even higher rates due to depreciation deductions. Here are some potential federal income tax implications of these gains.

Vacant land

Specifically for high earners, the current maximum federal long-term capital gain tax on vacant land is 20%. For 2024, the 20% rate kicks in for 

  • Single filers with taxable income exceeding $518,900
  • Married joint-filing couples with taxable income exceeding $583,750
  • Head of household with taxable income exceeding $551,350. 

If your income is below these thresholds, you’ll only owe 15% federal tax on vacant land gains. Remember that you may also owe the 3.8% net investment income tax (NIIT) on some or all of the gain.

Gains from depreciation

Depreciation-related gains from real estate, also known as unrecaptured Section 1250 gains, are generally taxed at a flat 25% federal rate. However, if the gain would be taxed at a lower rate without this special treatment, this 25% rate does not apply. However, you could owe the 3.8% NIIT on some or all of the unrecaptured Section 1250 gain.

Gains from qualified improvement property

Qualified improvement property or QIP, refers to improvements to the interior of nonresidential buildings after being placed in service. QIP excludes enlargements such as elevators, escalators, and structural changes.

You can claim tax deductions for QIP through Section 179 deductions or bonus depreciation. When you sell QIP for which you’ve claimed Section 179 deductions, part of the gain may be taxed as ordinary income at your regular tax rate rather than the lower long-term capital gains rate. This is known as Section 1245 recapture. You may also owe the 3.8% NIIT on this portion of the gain.

If you sell QIP for which first-year bonus depreciation has been claimed, part of the gain might be taxed as ordinary income at your regular tax rate via Section 1250 recapture, rather than lower long-term gain rates. This applies to the portion of the gain that exceeds the depreciation calculated using the applicable straight-line method. Again, you may still owe the 3.8% NIIT on some or all of the recapture gain.

Tax planning point: Choosing straight-line depreciation for real property, including QIP, there won’t be any Section 1245 or Section 1250 recapture. You will only have unrecaptured Section 1250 gain from the depreciation taxed at a federal rate below 25%. The 3.8% NIIT on all or part of the gain may still apply.

Handling the complexities

The federal income tax rules for real estate gains are obviously very complex. There’s a lot to consider: different tax rates applied to different categories of gain, the possibility of owing the 3.8% NIIT, and potential state income tax. 

Our team of skilled tax advisors can help you understand the intricacies and minimize the tax liability of capital gains. Contact a Smolin advisor to discuss your specific situation.

Six Tax Issues to Consider During a Divorce
Six Tax Issues to Consider During a Divorce 850 500 smolinlupinco

Divorce is a complex legal process, both financially and emotionally. Taxes are likely the farthest thing from your mind. But, you need to keep in mind the tax implications and consider seeking professional assistance to minimize your tax bill and navigate the separation process more smoothly. 

Here are six issues to keep top of mind as you move through the divorce process.

1. Planning to sell the marital home 

When a divorcing couple chooses to sell their home, they can possibly avoid paying tax on up to $500,000 of gain if they owned the home and lived there for two of the previous five years. If the living situation is such that one spouse continues living in the home while the other moves out, as long as they both remain owners, they might be able to avoid gains on future sale of the home for up to $250,000 each. In this instance, there may need to be special wording in the divorce decree or separation agreement to protect this exclusion for the spouse who moves out.

If the couple doesn’t meet strict two-year ownership and use requirements to qualify for the full $250,000 or $500,000 home sale exclusion, they might still be eligible for a reduced exclusion due to unforeseen circumstances.

2. Dividing retirement assets

Pension benefits often represent a significant portion of a couple’s marital assets. To ensure fair division of property, a “qualified domestic relations order” or QDRO is typically necessary. A QDRO is a legal document that outlines how pension benefits will be split between divorcing parties and whether one former spouse has the right to share in the benefits.

Without a QDRO, the spouse who earned the benefits remains solely responsible for associated taxes, even though they’re paid to the other spouse. A QDRO essentially transfers a portion of the pension benefits to the non-earning spouse along with the tax liability for their share. 

3. Determining your filing status

If you’re still legally married as of December 31st, you still need to file taxes as married jointly or married separately, even if you are in the process of getting divorced. However, if you’ve finalized your divorce by year-end, you could potentially qualify for “head of household” status if you meet certain requirements, such as having dependent children reside with you for more than half the year. 

4. Understanding alimony and spousal support 

The Tax Cuts and Jobs Act of 2017 made significant changes to the way alimony and spousal support are treated regarding taxes. For divorce or separation agreements executed after December 31, 2018, alimony and support payments are no longer deductible by the payer and are not taxable income for the recipient. This means alimony and spousal support are now treated similarly to child support payments for tax purposes. 

It’s important to note that divorce or separation agreements executed before 2019 generally still follow the old tax rules, where alimony is deductible for the payer and taxable for the recipient.

5. Claiming dependents

Unlike alimony, regardless of when the divorce or separation agreement was executed, child support payments are neither tax-deductible for the payer nor taxable income for the recipient. 

Determining which parent claims the child as a dependent or tax purposes often depends on standing custody agreements. Generally the custodial parent —the one the child lives with the majority of the year—can claim the child as a dependent; however, there are a few exceptions.

For instance, if the non-custodial parent provides more than half of the child’s support, they may be able to claim the child. It’s essential to coordinate with your ex-spouse to determine who will claim the child and thus access any related tax breaks.

6. Dividing business assets 

Divorcing couples who own a business together face unique tax challenges. The transfer of business interests in connection with divorce, can trigger significant tax implications.  For instance, if one spouse owns shares of an S corporation, transferring the shares could result in loss of valuable tax deductions such as forfeiting suspended losses ie. when losses are carried over into future tax years rather than being deducted for the year they’re incurred. 

Similarly, transferring a partnership interest can lead to even more complex tax issues  involving partnership debt, capital accounts, and valuation of the business. 

Seeking professional guidance

These are just some of the tax-related issues you may face when getting a divorce. You may need to adjust your tax withholding to reflect your new filing status. Be sure to also notify the IRS of any address or name changes. You likely also need to re-evaluate your estate plans to align with your new circumstances.

Proper planning is essential to ensure a fair division of assets while minimizing your tax liability. Our skilled team of Smolin advisors can help you navigate the complex financial issues involved with your divorce.

Does a FAST Fit into Your Estate Plan?
Does a FAST Fit into Your Estate Plan? 850 500 smolinlupinco

Traditional estate planning often focuses on minimizing gift and estate taxes while protecting your assets from creditors or lawsuits. While these are important considerations, many people also hope to create a lasting legacy for their family.

Dovetailing with the “technical” goals of your estate plan, such “aspirational” goals might include preparing your children or grandchildren to manage wealth responsibly, promoting shared family values and encouraging charitable giving. A Family Advancement Sustainability Trust (FAST) is one way to ensure your estate plan meets your objectives while informing your advisors and family of your intentions. 

FAST funding options

A well-structured estate plan can protect your assets while aligning with your family values and goals. Establishing a FAST can bridge the gap between those objectives.

A FAST typically requires minimal up-front funding, instead being primarily funded with life insurance or a properly structured irrevocable life insurance trust (ILIT) upon the grantor’s death. This lets you maximize the impact of your trust without depleting your current assets. 

4 decision-making entities

FASTs are typically created in states that 1) allow perpetual, or “dynasty,” trusts to benefit future generations, and 2) have directed trust statutes, making it possible to appoint an advisor or committee, making it possible for family members and trusted advisors to participate in the governance and management of the trust.

To ensure effective management and decision-making, a FAST often includes four key roles:

  1. An administrative trustee oversees day-to-day operations and administrative tasks but doesn’t handle investment or distribution decisions.
  2. An investment committee typically consists of family members and an independent, professional investment advisor who collaboratively manage the trust’s investment portfolio.
  3. A distribution committee which determines how trust funds are used to support the family and helps ensure that funds are spent in a way that achieves the trust’s goals.
  4. A trust protector committee essentially takes over the role of the grantor after death and makes decisions on matters such as the appointment or removal of trustees or committee members and amendments to the trust document for tax planning or other purposes.

Bridging the leadership gap

In many families, the death of the older generation creates a leadership vacuum and leads to succession challenges. A FAST can be particularly beneficial for families looking to help avoid a gap in leadership and establish a leadership structure that can provide resources and support for younger generations.

Consult with a Smolin advisor to discuss if including a FAST in your estate plan is the right choice for your family.

Self-Directed IRAs: A Double-Edged Sword
Self-Directed IRAs: A Double-Edged Sword 850 500 smolinlupinco

Traditional and Roth IRAs are already powerful tools for estate planning, but a “self-directed” IRA can take their benefits to the next level. They can allow you to invest in alternative assets that might offer higher returns but they also come with their own set of risks that could lead to unfavorable tax consequences. 

It’s important to handle these investments with caution.

Exploring alternative investments

Unlike traditional IRAs, which usually offer a narrow selection of stocks, bonds, and mutual funds, self-directed IRAs allow for a variety of alternative investments. These can include real estate, closely held business interests, commodities, and precious metals. However, they can’t hold certain assets like S corporation stock, insurance contracts, and collectibles (like art or coins).

From an estate planning perspective, self-directed IRAs are particularly appealing. Imagine transferring real estate or stock into a traditional or Roth IRA and allowing it to grow on a tax-deferred or tax-free basis for your heirs.

Risks and tax traps

Before diving in, it’s crucial to have an understanding of the significant risks and tax traps of self-directed IRAs:

  • Prohibited Transaction Rules. These rules restrict interactions between an IRA and disqualified persons, including yourself, close family members, businesses you control, and your advisors. This makes it challenging for you or your family members to manage or interact with business or real estate interests within the IRA without risking the IRA’s tax benefits and incurring penalties.
  • Unrelated Business Income Taxes. IRAs that invest in operating companies may face unrelated business income taxes, payable from the IRA’s funds.
  • Unrelated Debt-Financed Income. Investing in debt-financed property through an IRA could create unrelated debt-financed income, leading to current tax liabilities.

Proceed with caution

Remember, if you’re considering a self-directed IRA, it might offer increased flexibility, but it also demands a higher level of due diligence and oversight. 

Assess the types of assets you’re interested in carefully and weigh the potential benefits against the risks. Reach out to your Smolin advisor to determine if a self-directed IRA is right for you.

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