A Dynasty Trust Provides for Future Generations

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When creating estate plans, people generally take their children and grandchildren into consideration and will organize accordingly. For those who would like to prepare beyond that, a dynasty trust provides for future generations and may be a viable option. Let’s look at some of the specifics of this long-term trust.

A dynasty trust can preserve substantial amounts of wealth—and potentially shelter it from federal gift, estate, and generation-skipping transfer (GST) taxes—for generations to come. Plus, it can provide various other benefits and protections for families over an extended time period (perhaps forever).

Establishing and Funding a Dynasty Trust

A dynasty trust can be established during your lifetime, as an inter-vivos trust, or part of your will as a testamentary trust. With an inter-vivos transfer, you’ll avoid estate tax on any appreciation in value from the time of the transfer until your death. Generally, though, with an inter-vivos transfer, the assets won’t be eligible for step-up in basis at your death.

Because the emphasis is on protecting appreciated property, consider funding the trust with securities, real estate, life insurance policies, and business interests. Ensure you retain enough assets in your personal accounts to continue to enjoy your lifestyle.

Factoring in Taxes

Previously, dynasty trusts were primarily used to minimize transfer tax between generations. Without one, if a family patriarch or matriarch leaves assets to adult children, the bequests are subject to federal estate tax at the time of the initial transfer to the second generation. They are then taxed again when the assets pass from the children to the grandchildren, and so on. Although the federal gift and estate tax exemption can shield the bulk of assets from tax for most families, the top federal estate tax rate on the excess is 40 percent—a hefty amount.

Furthermore, the GST tax applies to certain transfers made to grandchildren, thereby discouraging transfers that skip a generation. The GST tax exemption and 40 percent GST tax rate are the same as they are for regular gift and estate tax.

With a dynasty trust, assets are taxed just once, when they’re initially transferred to the trust. There’s no estate or GST tax due on any subsequent appreciation in value. This can save some families millions of tax dollars over the durations of their trusts.

When the assets are subsequently sold, any gain will be taxable. Note that the basis of the assets will be determined at the time of the initial transfer, although depending on the circumstances, the “step-up in basis” rules may help reduce the taxable amount.

Recognizing Nontax Benefits

Regardless of the tax implications, there are many nontax reasons to set up a dynasty trust.

For example, you can designate the trust’s beneficiaries spanning multiple generations. Typically, you might provide for the assets to follow a line of descendants, such as your children, grandchildren, great-grandchildren, etc.

You can also impose certain restrictions. For example, you may limit access to funds until a beneficiary graduates from college.

We Can Help You Plan for Your Family’s Future

A dynasty trust provides for future generations by creating a legacy that will live on long after you’re gone. Be aware, however, that a dynasty trust is irrevocable. In other words, you can’t undo the arrangement if you have a sudden change of heart. If you’re going to chart the course for future generations, you must have the courage of your convictions. The professional team at Ramsay & Associates is here to answer questions about estate planning and other tax concerns. Contact us for guidance.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

5 Estate Planning Pitfalls to Avoid

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If you’re taking the first steps on your estate planning journey, congratulations. No one likes to contemplate their mortality, but having a plan in place can provide you and your loved ones with peace of mind should you unexpectedly become incapacitated or die. Keep reading to learn five basic estate planning pitfalls you want to avoid.

Pitfall 1: Failing to Coordinate Different Plan Aspects

Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts, and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them to be components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.

Pitfall 2: Not Updating Beneficiary Forms

Your will spells out who gets what, where, when, and how. But it’s often superseded by other documents, such as beneficiary forms for retirement plans, annuities, life insurance policies, and other accounts. Therefore, much like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.

Pitfall 3: Improperly Funding Trusts

Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated, which will expose them to public inspection and subject them to delays. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.

However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.

Pitfall 4: Mistitling Assets

Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.

Not only is titling assets critical, but you should review these designations periodically. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.

Pitfall 5: Failing to Regularly Review Your Estate Plan

It’s critical to consider an estate plan as a “living” entity that must be nourished and sustained. Don’t allow it to gather dust in a safe deposit box or file cabinet. Consider the impact of major life events such as births, deaths, marriages, divorces, and job changes or relocations, just to name a few.

We Can Help You Avoid Pitfalls

These five estate planning pitfalls are just some of the dangers to watch for when planning your legacy. To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to the professionals at Ramsay & Associates. We can help ensure that you’ve covered all the estate planning bases.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Plan for Assets with Sentimental Value

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As a formal estate planning term, “tangible personal property” likely won’t elicit much reaction from you or your loved ones. However, the items that make up tangible personal property, such as jewelry, antiques, photographs, and collectibles, may be the most difficult to plan for because they hold significant emotional worth. We can offer tips to help ensure you have a plan for assets with sentimental value.

Without special planning on your part, squabbling among your family members over these items may lead to emotionally charged disputes and even litigation. Let’s take a closer look at a few steps you can take to ease any tensions surrounding these specific assets.

Communication is Key

There’s no reason to guess which personal items mean the most to your children and other family members. Create a dialogue to find out who wants what and to express your feelings about how you’d like to share your prized possessions.

Having these conversations can help you identify potential conflicts. After learning of any disputes, work out acceptable compromises during your lifetime.

Bequeath Assets to Specific Beneficiaries

Some people have their beneficiaries choose the items they want or authorize their executors to distribute personal property as they see fit. For some families, these approaches may work. But more often than not, they invite conflict.

Generally, the most effective strategy for avoiding costly disputes and litigation over personal property is to make specific bequests — in your will or revocable trust — to specific beneficiaries. For example, your will might leave your art collection to your son and your jewelry to your daughter.

Specific bequests are particularly important if you wish to leave personal property to a nonfamily member, such as a caregiver. The best way to avoid a challenge from family members on grounds of undue influence or lack of testamentary capacity is to express your wishes in a valid will executed when you’re “of sound mind.”

If you use a revocable trust (sometimes referred to as a “living trust”), you must transfer ownership of personal property to the trust to ensure that the property is distributed according to the trust’s terms. The trust controls only the property you put into it. It’s also a good idea to have a “pour-over will,” which provides that any property you own at your death is transferred to your trust. Keep in mind, however, that property that passes through your will and pours into your trust generally must go through probate.

Create a Personal Property Memorandum

Spelling out every gift of personal property in your will or trust can be cumbersome. If you wish to make many small gifts to several different relatives, your will or trust can get long in a hurry.

Plus, anytime you change your mind or decide to add another gift, you’ll have to amend your documents. Often, a more convenient solution is to prepare a personal property memorandum to provide instructions on the distribution of tangible personal property not listed in your will or trust.

In many states, a personal property memorandum is legally binding, provided it’s specifically referred to in your will and meets certain other requirements. You can change it or add to it at any time without the need to formally amend your will. Alternatively, you may want to give items to your loved ones while you’re still alive.

Have a Plan for All Assets

Your major assets, such as real estate and business interests, are top of mind as you prepare your estate plan. But don’t forget about tangible personal property. These lower-monetary-value assets may be more difficult to deal with, and more likely to cause disputes, than big-ticket items. So, make sure you have a plan for assets with sentimental value. Contact the professionals at Ramsay & Associates if you have questions or need help with estate planning.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Tax Tips When Buying the Assets of a Business

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After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

  1. Buy the assets of the business, or
  2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership, or LLC.

Here, we’ll focus on the former. Keep reading to learn useful tax tips when buying the assets of a business.

Asset Purchase Tax Basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, and software and intangibles like customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset Purchase Results with a Pass-Through Entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes, or an S corporation. In those cases, post-acquisition gains, losses, and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset Purchase Results with a C Corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21 percent.

A Tax-Smart Purchase Price Allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

  • Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
  • Assets that can be depreciated relatively quickly (such as furniture and equipment), and
  • Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan Ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. The tax professionals at Ramsay & Associates can help you get the former instead of the latter. Getting your advisor involved early, preferably during the negotiation phase, is beneficial. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Pros and Cons of Turning Your Home into a Rental

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If you’re buying a new home, you may have thought about keeping your current home and renting it out. But how much have you thought about this? Keep reading to learn some of the pros and cons of turning your home into a rental.

Becoming a Landlord

In April, average rents for one- and two-bedroom residences in the Twin Cities area were $1,150 and $1,792, respectively, according to the latest Zumper National Rent Report.

In other parts of the country, though, rents can be much higher or lower than the averages in this area. Becoming a landlord and renting out a residence comes with financial risks and rewards. However, you should also know that it carries potential tax benefits and pitfalls.

You’re generally treated as a real estate landlord once you begin renting your home. That means you must report rental income on your tax return. But you are also entitled to offsetting landlord deductions for the money you spend on utilities, operating expenses, incidental repairs, and maintenance (for example, fixing a leaky roof). Additionally, you can claim depreciation deductions for the home. And you can fully offset rental income with otherwise allowable landlord deductions.

Passive Activity Loss Rules

However, under the passive activity loss (PAL) rules, you may not be able to currently claim the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won’t affect your converted property for a tax year in which your adjusted gross income doesn’t exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don’t exceed $25,000.

You should also be aware that potential tax pitfalls may arise from renting your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for home sellers if you finally sell the home at a profit. In general, you can escape tax on up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of your principal home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So, renting your home out for an extended time could jeopardize a big tax break.

Even if you don’t rent out your home long enough to jeopardize the principal residence exclusion, the tax break you would get on the sale (the $250,000/$500,000 exclusion) won’t apply to:

  • the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997, or
  • any gain allocable to a period of nonqualified use (any period during which the property isn’t used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse) after December 31, 2008.

A maximum tax rate of 25 percent will apply to this gain (attributable to depreciation deductions).

Selling Your Home at a Loss

What if you bought at the height of a market and ultimately sell at a loss? In such situations, the loss is available for tax purposes only if you can establish that the home was, in fact, converted permanently into income-producing property. Here, a longer lease period helps. However, if you’re in this situation, be aware that you may not wind up with much of a loss for tax purposes. That’s because basis (the cost, for tax purposes) is equal to the lesser of actual cost or the property’s fair market value when it’s converted to rental property.

So, if a home was purchased for $300,000, converted to a rental when it was worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.

We Can Help

As with most things, there’s a lot to consider when weighing the pros and cons of turning your home into a rental. The details can be complicated, but the tax professionals at Ramsay & Associates are here to help. We can answer your questions and explain any tax implications to help you make the best and most informed decision. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.