Financial Planning

Read This Before Listing Your Property as a Vacation Rental

Read This Before Listing Your Property as a Vacation Rental
Read This Before Listing Your Property as a Vacation Rental 850 500 smolinlupinco

Whether you own a lakefront cottage, vacation beach home, or ski chalet, renting out your property for part of the year can have significant tax impacts.

Here’s what you need to know.

Your level of personal use impacts your taxes

The number of days the property is rented has a direct impact on your taxes.

However, there are certain scenarios that don’t count towards this total since your official “personal use” of the property includes more than your own vacations. It also includes vacation use by your relatives—even if you charge them market-rate rent. It also includes use by nonrelatives if you don’t charge them a market rate rent.

This is important because if you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all.

Under these circumstances, you could see significant tax benefits since even a significant amount of rental income received won’t be included in your income for tax purposes. However, you also won’t be able to deduct operating costs or depreciation﹘only property taxes and mortgage interest. 

(Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you do rent the property out for nonpersonal use for more than 14 days, the rent received must be included in your income and you will be able to deduct operating costs and depreciation (subject to several rules). To do this, you’ll need to allocate expenses between rental days and personal use days.

For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc. costs to rental. Additionally, you would allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. If the personal use exceeds the greater of 14 days or 10% of the rental days, the personal use portion of interest on a second home will also be deductible. In this case, though, depreciation on the personal use portion isn’t allowed.

Income and expenses

When rental income is greater than allocable deductions, you’ll need to report both in order to determine how much rental income you should add to your other income for tax purposes. 

When you may claim a loss

If the income is lower than the expenses and you don’t use the property personally for more than 14 days or 10% total percent of rental days, you could be able to claim a rental loss.

When calculating the loss, though, you must allocate your expenses between the rental and personal portions. It’s also important to keep in mind that the loss will be considered “passive” and may be limited under the passive loss rules.

When you cannot claim a loss

If rental income is higher than expenses or if the house is used personally for 10% of rental days or more than 14 days total (whichever is greater), you won’t be able to claim a loss. However, you’ll still be able to use your deductions to balance out rental income. Any unused deductions will be carried forward. This could be usable in future years.

While there are still multiple deductions up to the amount of rental income you can claim, you must use them in this order: 

  • Interest and taxes
  • Operating costs
  • Depreciation

Questions? Ask Smolin

Tax rules for vacation rentals can be complicated. If you plan to rent out your property, it pays to plan ahead. Contact your Smolin accountant to learn how you may be able to maximize deductions in your unique situation.

Estate Planning Don’t Forget the Generation-Skipping Transfer (GST) Tax

Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax
Estate Planning? Don’t Forget the Generation-Skipping Transfer (GST) Tax 850 500 smolinlupinco

Would you like to include grandchildren, great grandchildren, or nonrelatives who are significantly younger than you in your estate plan? If so, you’ve got more to consider than gift and estate taxes. The generation-skipping transfer (GST) tax may also apply.

GST Tax Basics

One of the harshest taxes in the Internal Revenue Code, the GST tax is a flat 40% tax on asset transfers that “skip persons”. For example, the tax may apply if you plan to leave assets to grandchildren or other family members who are more than one generation below you. (For non-family members, the tax applies when the heir in question is more than 37 ½ years younger than you.)   

Because this tax is calculated in addition to estate and gift taxes, it can significantly impact the amount of wealth you’re able to leave to future generations. 

GST Tax Exemption Under the Tax Cuts and Jobs Act

A generous GST tax exemption may fortunately offer some relief. For persons dying after December 31, 2017 and before January 1, 2026, the Tax Cuts and Jobs act adjusts the GST tax exemption amount to an inflation-adjusted $10 million. That totals $13.61 million for 2024.

Unless congress takes action before this time frame ends, the exemption will shrink back to an inflation-adjusted $5 million starting on January 1, 2026.

Of course, taking advantage of this exemption requires careful planning.

For an exemption to apply in some cases, it’s necessary to allocate the exemption to particular assets on a timely filed gift tax return. This is called an affirmative election.

In some cases, the exemption may be allocated automatically unless you opt out. If you prefer to allocate your exemption elsewhere, this can lead to unwanted results.

Reviewing each transfer for potential GST tax liability is a great way to avoid costly mistakes and ensure your exemption is allocated as advantageously as possible.

What transfers are taxable under the GST?

In addition to direct gifts that skip persons, GST tax applies to two types of trust-related transfers: 

  1. Taxable terminations

Trust assets pass to your grandchildren when your child dies and the trust terminates.

  1. Taxable distributions

Trust income or principal is distributed to a skip person.

Note: Gifts covered by the annual gift tax exclusion aren’t currently subject to the GST tax. 

Protections offered by automatic allocation rules

While the automatic allocation rules can be unfavorable if you prefer to allocate your exemption elsewhere, they’re ultimately intended to protect you against unintentional loss of GST tax exemptions.

For instance, your unused GST tax exemption may be automatically applied to a gift to a grandchild or other “skip person” that exceeds the annual gift tax exclusion ﹘without the need to make an allocation on a gift tax return. 

The rules’ impact on “GST trusts” are complex. A trust is considered a GST trust if it will likely benefit skip persons or your grandchildren in the future.

In most cases, these automatic allocation rules work favorably and ensure your GST tax exemption is applied where it’s most needed. However, they can also lead to unintended and potentially expensive﹘results in other cases.   

Questions? Smolin can help

For many people, the GST tax might not be top of mind right now. After all, the exemption amount is currently high enough that it doesn’t impact most families’ estate plans. 

However, the GST tax exemption rate is expected to decrease significantly after 2025 without action from congress. 

To avoid unexpected costs and to protect your wealth, contact your Smolin advisor.

Stressed About Long-Term Care Expenses Here’s What You Should Consider.

Stressed About Long-Term Care Expenses? Here’s What You Should Consider
Stressed About Long-Term Care Expenses? Here’s What You Should Consider 850 500 smolinlupinco

Most people will need some form of long-term care (LTC) at some point in their lives, whether it’s a nursing home or assisted living facility stay.  But the cost of unanticipated long-term care is steep.

LTC expenses generally aren’t covered by traditional health insurance policies like Social Security or Medicare. A preemptive funding plan can help ensure your LTC doesn’t deplete your savings or assets.

Here are some of your options.

Self-funding

If your nest egg is large enough, paying for LTC expenses out-of-pocket may be possible. This approach avoids the high cost of LTC insurance premiums. In addition, if you’re fortunate enough to avoid the need for LTC, you’ll enjoy a savings windfall that you can use for yourself or your family. 

The risk here is that your LTC expenses will be significantly larger than what you anticipated, and it completely erodes your savings.

Any type of asset or investment can be used to self-fund LTC expenses, including:

  • Savings accounts
  • Pension or other retirement funds
  • Stocks
  • Bonds
  • Mutual funds
  • Annuities

Another option is to tap your home equity by selling your house, taking out a home equity loan or line of credit, or obtaining a reverse mortgage.

Both Roth IRAs and Health Savings Accounts (HSAs) are particularly effective for funding LTC expenses. Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed. 

HSAs, coupled with a high-deductible health insurance plan, allow you to invest pre-tax dollars that you can later use to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, which makes an HSA a powerful savings vehicle.

LTC insurance

LTC insurance policies—which are expensive—cover LTC services that traditional health insurance policies typically don’t cover. 

It can be a challenge to determine if LTC insurance is the best option for you. The right time for you to buy coverage depends on your health, family medical history, and other factors. 

The younger you are, the lower the premiums, but you’ll be paying for insurance coverage when you’re not likely to need it. Many people purchase these policies in their early to mid-60s. Keep in mind that once you reach your mid-70s, LTC coverage may no longer be available to you, or it may become prohibitively expensive.

Hybrid insurance

Hybrid policies combine LTC coverage with traditional life insurance. Often, these policies take the form of a permanent life insurance policy with an LTC rider that provides tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.

Compared to stand-alone LTC policies, hybrid insurance provides less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that the more you use LTC benefits, the fewer death benefits available to your heirs.

Potential tax breaks

If you buy LTC insurance, you may be able to deduct a portion of the premiums on your tax return.

If you have questions regarding LTC funding or the tax implications, please don’t hesitate to contact us.

Questions? Smolin can help. 

If you’re concerned about planning for long-term care, don’t put it off any longer. We’re here to help! Contact your Smolin accountant to learn more about your options for LTC expenses so you can rest easy.

sole proprietor business tax impacts

Starting a Business as a Sole Proprietor? Here’s How It Could Impact Your Taxes
Starting a Business as a Sole Proprietor? Here’s How It Could Impact Your Taxes 850 500 smolinlupinco

It’s not uncommon for entrepreneurs to launch small businesses as sole proprietors. However, it’s crucial to understand the potential tax impacts first.

Here are 9 things to consider. 

1. The pass-through deduction may apply

If your business generates qualified business income, you could be eligible to claim the 20% pass-through deduction. (Of course, limitations may apply.)

The significance of this deduction is that it’s taken “below the line”. It reduces taxable income, as opposed to being taken “above the line” against your gross income.

Even if you claim the standard deduction instead of itemizing deductions, you may be eligible to take the deduction. Unless Congress acts to extend the pass-through deduction, though, it will only be available through 2025. 

2. Expenses and income should be reported on Schedule C of Form 1040

Whether you withdraw cash from your business or not, its net income will be taxable to you. Business expenses are deductible against gross income, rather than as itemized deductions.

If your business experiences losses, they’ll be deductible against your other income. Special rules may apply in relation to passive activity losses, hobby losses, and losses from activities in which you weren’t “at risk”. 

2. Self-employment taxes apply

In 2024, sole proprietors must pay self-employment tax at a rate of 15.3% on net earnings from self-employment up to $160,600. You must also pay a Medicare tax of 2.9% on any earnings above that. If self-employment income is in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns, or $200,000 in other cases, a 0.9%
Medicare tax (for a total of 3.8%) will apply to the excess. 

Self-employment tax is charged in addition to income taxes. However, you may deduct half of your self-employment tax as an adjustment to income. 

4. You’ll need to make quarterly estimated tax payments

In 2024, quarterly estimated tax payments are due on April 15, June 17, September 16, and January 15. 

5. 100% of your health insurance costs may be deducted as a business expense

This means the rule that limits medical expense deductions won’t apply to your deduction for medical care insurance. 

6. Home office expenses may be deductible.

If you use a portion from your home to work, perform management or administrative tasks, or store product samples or inventory, you could be entitled to deduct part of certain expenses, such as: 

  • Mortgage
  • Interest 
  • Rent 
  • Insurance
  • Utilities 
  • Repairs 
  • Maintenance 
  • Depreciation

Travel expenses from a home office to another work location may also be deductible. 

7. Recordkeeping is essential

Keeping careful records of expenses is key to claiming all of the tax breaks to which you’re entitled. Special recordkeeping rules and deductibility limits may apply to expenses like travel, meals, home office, and automobile costs. 

8. Hiring employees leads to more responsibilities 

If you’d like to hire employees, you’ll need a taxpayer identification number and will need to withhold and pay over payroll taxes. 

9. Establishing a qualified retirement plan is worth considering

Amounts contributed to a qualified retirement plan will be deductible at the time of the contributions and won’t be taken into income until the money is withdrawn.

Many business owners prefer a SEP plan since it requires minimal paperwork. A SIMPLE plan may also be suitable because it offers tax advantages with fewer restrictions and administrative requirements. If neither of these options appeal to you, you may still be able to save using an IRA.

Questions? Smolin can help.

For more information about the tax aspects of various business structures or reporting and recordkeeping requirements for sole proprietorships, please contact your Smolin accountant. 

A hybrid DAPT may offer the asset protection you need

A Hybrid DAPT May Offer the Asset Protection You Need
A Hybrid DAPT May Offer the Asset Protection You Need 850 500 smolinlupinco

Asset protection is a vital part of estate planning. Chances are you want to pass on as much of your wealth to family and friends as possible. To do this, you may need to shield your assets from frivolous creditors’ claims and lawsuits.

One option available to you as you plan your estate is to establish a domestic asset protection trust (DAPT).

What is a DAPT?

A DAPT is an irrevocable self-settled trust that empowers an independent trustee to manage and distribute trust assets to beneficiaries. This unique structure enables the trust’s creator (known as the “settlor” or “trustor”) to enjoy the advantages of both asset protection from external creditors and the beneficial use of trust assets. 

Domestic asset protection trusts can offer creditor protection even if you’re a trust beneficiary, but there are risks involved. Bear in mind that DAPTs are relatively untested, so there’s some uncertainty over their ability to repel creditors’ claims.

Not all states currently recognize the DAPT. Those that do include: Alabama, Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. 

Keep in mind that you don’t necessarily have to live in one of those states to qualify; what matters most is where the asset is located. So you can explore the possibility even if your state doesn’t currently participate.

A hybrid DAPT in action

A “hybrid DAPT” may offer the best option to the person planning their estate and to the beneficiary. In this arrangement, you’re not initially named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds down the road, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

A hybrid domestic asset protection trust is initially set up as a third-party trust, meaning it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t considered a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the risks mentioned above.

Alternatives to a hybrid DAPT

Before forming a hybrid domestic asset protection trust, you should determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children, or other family members, either outright or in a trust, without retaining any personal control.

If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children, provided your relationship with them remains in good standing.

Questions about hybrid DAPTs? Contact Smolin.

The hybrid domestic asset protection trust can add flexibility while offering significant asset protection. It also minimizes the risks associated with DAPTs, while retaining your ability to convert to one should the need arise. 

Consult with your accountant today to assess whether a hybrid DAPT is right for you.

Higher Interest Rates Spark Interest in Charitable Remainder Trusts

Higher Interest Rates Spark Interest in Charitable Remainder Trusts
Higher Interest Rates Spark Interest in Charitable Remainder Trusts 850 500 smolinlupinco

If you wish to leave a charitable legacy while still generating income during your lifetime, a charitable remainder trust, or CRT, could be a viable solution. 

In addition to an income stream, CRTs offer an up-front charitable income tax deduction, as well as a vehicle for disposing of appreciated assets without immediate taxation on the gain. Plus, unlike certain other strategies, charitable remainder trusts become more attractive if interest rates are high. You may be considering this option as interest rates have been climbing. 

How these trusts work

A charitable remainder trust is an irrevocable trust to which you contribute stock or other assets. The trust pays you, your spouse, or other beneficiaries income for life or for a term of up to 20 years, then distributes the remaining assets to one or more charities. 

When you fund the trust, you’re entitled to a charitable income tax deduction (subject to applicable limits) equal to the present value of the charitable beneficiaries’ remainder interest.

Types of charitable remainder trusts

There are two types of CRTs, each with its own pros and cons. A charitable remainder annuity trust (CRAT) pays out a fixed percentage of the trust’s initial value, ranging from 5% to 50%. CRATs do not allow additional contributions once it’s funded.

A charitable remainder unitrust (CRUT) pays out a fixed percentage of the trust’s value, also ranging from 5% to 50%, but the value is recalculated annually, and you will be allowed to make additional contributions.

CRATs offer the advantage of uniform payouts, regardless of fluctuations in the trust’s value. 

CRUTs, on the other hand, allow payouts to keep pace with inflation because they increase as the trust’s value increases. CRUTs have the advantage of allowing you to make additional contributions, but you may want to consider the potential disadvantage that your payouts shrink if the trust’s value declines.

CRTs and a high-interest rate environment

To ensure that CRTs are used as legitimate charitable giving vehicle, the IRS requires that the present value of the charitable beneficiaries’ remainder interest be at least 10% of the trust assets’ value when contributed. 

Calculating the remainder interest’s present value is complicated, but it generally involves estimating the present value of annual payouts from the trust and then subtracting that amount from the value of the contributed assets.

The calculation is affected by several factors, including the length of the trust term (or the beneficiaries’ ages if you choose to make payouts for life), the size of annual payouts, and an IRS-prescribed Section 7520 rate. If you need to increase the value of the remainder interest to meet the 10% threshold, you may be able to do so by shortening the trust term or reducing the payout percentage.

In addition, the higher the Sec. 7520 rate is at the time of the contribution, the lower the present value of the payouts and, therefore, the larger the remainder interest. 

In past years, rock-bottom interest rates made it difficult, if not impossible, for many CRTs to qualify. But as interest rates soared, it has become easier to meet the 10% threshold and increase annual payouts or the trust term without disqualifying the trust.

Is now the time for a CRT? Smolin can help.

If you’ve been exploring options for satisfying your charitable goals while generating an income stream for yourself and your family, now may be an ideal time to consider a charitable remainder trust. Contact us if you have questions.

Will your court awards and out-of-court settlements be taxed

Will your court awards and out-of-court settlements be taxed? 
Will your court awards and out-of-court settlements be taxed?  850 500 smolinlupinco

Courts grant monetary awards and settlements for a range of reasons. 

For example, you may receive compensatory and punitive damage payments for personal injury, discrimination, or harassment. In this situation, some of the awarded amount you receive may be taxed by the federal government, and perhaps some will be taxed by your state government. 

Hopefully, you’ll never need to know how payments for personal injuries are taxed, but here are the basic rules if you or a loved one receive an award or settlement and need to understand the tax implications.

Under current tax law, you’re permitted to exclude from your gross income the damages received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Exceptions: Emotional distress, punitive damages, back pay

Emotional distress isn’t considered a physical injury or physical sickness and is excluded from the tax exemption. So, for example, you would need to include an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment in your gross income. However, if you require medical care for treatment of the consequences of emotional distress, then you may exclude the amount of damages not exceeding those expenses from gross income.

Punitive damages for any personal injury claim, whether physical or not, aren’t excludable from gross income unless the court awards it under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages you may receive under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Therefore, if you receive an award for back pay and liquidated damages under the ADEA, you must include those awards in your gross income.

Court case examples

As you may suspect, the IRS and courts often decide that awards and settlements are taxable even if the recipient feels they should exclude them from taxable income. 

In one case, a taxpayer sustained an injury while at a hospital. She sued for negligence but lost her case. She then sued her attorney for legal malpractice, and the court awarded her $125,000. The IRS said the amount was taxable because her award wasn’t for any physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed. (Blum, 3/23/22)

In another case, the Tax Court ruled that married taxpayers weren’t entitled to income exclusion for a settlement the husband received from his former employer in connection with an employment discrimination and wrongful termination lawsuit. Although the settlement agreement provided for payment “for alleged personal injuries,” there was no evidence to support that it was paid on account of physical injuries or sickness. (TC Memo 2022-90)

Legal fees

You aren’t allowed to deduct attorney fees you incur to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving certain employment-related claims are currently deductible from gross income to determine adjusted gross income.

After-tax recovery

Keep in mind that while you want the best tax result possible from any settlement, lawsuit, or discrimination action you’re considering, non-tax legal factors, together with the tax factors, will determine the amount of your after-tax recovery. Consult with your attorney on the best way to proceed, and we can provide any tax guidance that you may need.

Questions? Smolin can help.

This article provides a basic overview of the tax implications of court awards and out-of-court settlements. If you need tax information about your award or settlement, the best course of action is to consult with your accountant.

11 Scenarios Avoid 10% Penalty Tax Early IRA Withdrawals

11 Scenarios Where You Can Avoid the 10% Penalty Tax on Early IRA Withdrawals
11 Scenarios Where You Can Avoid the 10% Penalty Tax on Early IRA Withdrawals 850 500 smolinlupinco

When financial challenges arise, it can be tempting to take an early withdrawal from your traditional IRA. However, making the decision without understanding the tax implications is risky.

Here’s what you need to know, including your options for avoiding the 10% early withdrawal penalty tax.

First off, the penalty doesn’t always apply.

A withdrawal from a traditional IRA will almost always constitute taxable income. The percentage of the withdrawal that will be considered taxable is dependent on whether you’ve made any nondeductible contributions to the account.

If you have made nondeductible contributions, each withdrawal consists of a proportionate amount of your total nondeductible contributions. This portion of the withdrawal is tax-free. The proportionate amount of each withdrawal that consists of deductible contributions and accumulated earnings is taxable.

Of course, 100% of a withdrawal is taxable if you’ve never made any nondeductible contributions.

Exceptions to the 10% penalty tax

If any of these 11 exceptions are met, you may be able to avoid paying the 10% early withdrawal penalty tax on the taxable amount of your withdrawal.

1. The withdrawal is a substantially equal periodic payment (SEPP)

These annuity-like withdrawals must be taken for at least five years—or until you turn 59½. The rules for SEPPs are complicated, though, so it’s best to meet with an accountant before deciding to proceed with this route. 

2. The withdrawal is for qualified medical expenses

Medical expenses are a common reason to make an early withdrawal. If your qualified medical expenses exceed 7.5% of your adjusted gross income, the amount of excess won’t be subject to the tax.

3. The withdrawal is to cover higher education expenses

If you make the withdrawal and pay qualified higher education expenses in the same year, an equivalent amount of the withdrawal will be penalty-free. 

4. The withdrawal will cover health insurance premiums during a period of unemployment

If you have received unemployment compensation for 12 consecutive weeks or longer from the state or federal government during the current or previous year, you can use the withdrawal to cover health insurance premiums without a penalty. 

5. There is a birth or adoption in your immediate family

For each eligible birth or adoption, you may make a withdrawal of up to $5,000 penalty-free. 

6. You’re purchasing your first home

You may make a penalty-free withdrawal within 120 days of the purchase to cover qualified principal residence acquisition costs. However, this type of tax-exempt withdrawal is subject to a $10,000 lifetime limit.

7. You are a qualifying military reservist

If you are a military reserve member called to active duty for at least 180 days (or an indefinite period), your early withdrawal will be exempt from the penalty. 

8. You’re making the withdrawal after a qualifying disability

If you become mentally or physically disabled to the extent that you can no longer do your job or a similar gainful activity, your withdrawal will be exempt from the penalty tax IF the disability is expected to lead to death or be of long/indefinite duration.

9. The IRS makes a withdrawal to cover debt

If the IRS makes a withdrawal to levy against the account, the tax won’t be charged.

10. Withdrawals after death

In most cases, withdrawals taken from an IRA after the account owner’s death are exempt from the 10% penalty. If, however, the funds are rolled over into the surviving spouse’s IRA or the surviving spouse elects to treat it as their own account, the penalty will still apply.

11. A personal or family emergency is expected

Starting in 2024, a new exception for withdrawals used for unforeseeable or immediate financial needs relating to personal or family emergencies will be available thanks to the SECURE 2.0 law. Only one distribution of $1,000 is allowed per year, and you may repay it within three years. 

Be proactive

As you can see, exceptions to the 10% penalty tax are quite specific. As such, most or all of your early traditional IRA withdrawals will likely be subject to the tax. This can push you into a higher federal income tax bracket. This can possibly lead to you paying both a 10% early withdrawal penalty and higher state and federal tax payments.

Plan your finances accordingly if you plan to make a withdrawal. 

Questions? Smolin can help.

This article provides only general information, and many penalty tax exemptions have additional requirements we haven’t covered. If you’re considering making an early withdrawal from your traditional IRA account, the best course of action is to consult with your accountant.

Providing Beneficiaries Power Remove Trustee

Consider Providing Your Beneficiaries With the Power to Remove a Trustee
Consider Providing Your Beneficiaries With the Power to Remove a Trustee 850 500 smolinlupinco

Appointing a trustee who is, well, trustworthy is crucial to ensuring a trust operates as intended. As such, you may invest a large amount of time and mental energy in selecting the right person for the job. 

But what happens if your carefully chosen trustee fails to carry out your wishes? 

Your beneficiaries may want to remove or replace your trustee in this circumstance, but they won’t be able to without facing a lengthy and expensive court battle—that is, unless you grant them the power to remove a trustee.  

A trustee’s role and responsibilities 

A trustee holds the legal responsibility to administer a trust on behalf of its beneficiaries. This person’s authority may be broad or extremely limited, depending on the terms of the trust.

There are certain fiduciary duties to the beneficiaries of the trust that a trustee must uphold. For example, a trustee is expected to treat all beneficiaries impartially and fairly. They must also manage the funds in the trust prudently.

It sounds simple, but when beneficiaries have competing interests, a trustee’s role can quickly become complicated. When it comes to making investment decisions, the trustee must find a way to balance the beneficiaries’ variable needs.

In some ways, choosing an executor and naming a trustee are somewhat similar. Both roles require financial acumen, dedication to the beneficiaries and the deceased person, and great attention to detail. 

Since investment expertise is important to the role, many people opt to choose a professional trustee rather than a friend or family member. Those who don’t should encourage their trustee that they can—and should—consult with financial experts as appropriate.   

“Cause” for removing a trustee 

If you don’t grant your beneficiaries the option to replace or remove a trustee, they would have to petition a court to remove the trustee. For a petition to be considered, the beneficiaries must be able to prove “cause” for the removal or replacement.

While the definition of “cause” isn’t the same in every state, there are some common grounds for removal, such as: 

  • Bankruptcy or insolvency that impacts the trustee’s ability to manage the trust 
  • Conflict of interest between the trustee and at least one beneficiary 
  • Fraud, misconduct, or other mismanagement of funds  
  • Legal incapacity 
  • Poor health 

While cause isn’t always difficult to prove, going to court can be expensive and time-consuming. Plus, many courts are hesitant to remove a trustee who’s been chosen by the trust’s creator.

With this in mind, it may be wise to include a provision in the trust document that empowers beneficiaries to remove or replace a trustee without cause if they’re dissatisfied with their management of the trust.

As an alternative, you might choose to list specific circumstances in the trust document under which your beneficiaries may remove a trustee. 

Alternative options to limit beneficiaries’ power

If you’re concerned about your beneficiaries having too much power over your trust, you might choose not to have them elect a removed trustee’s successor. Instead, you could opt to list a succession of potential trustees within the trust document.

If one trustee is removed, the next person on the list automatically becomes the trustee, instead of the beneficiaries choosing the next one.

Appointing a “trust protector” may also be a viable option. A trust protector is a person you grant power to make certain decisions regarding the management of your trust, including whether to remove or replace trustees.

Questions? Smolin can help.

For additional information on the role a trustee plays—and what your beneficiaries can do in the event that your person of choice fails to perform the job—contact a knowledgeable Smolin accountant.

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