How to Avoid Probate

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Few estate planning subjects are as misunderstood as probate. But circumventing the probate process is usually a good idea, and several tools are available to help you do just that. Keep reading to learn how to avoid probate and why it’s beneficial to do so.

Why You Want to Avoid Probate

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs.

Depending on applicable state law, probate can be expensive and time consuming. Not only can probate reduce the amount of your estate due to executor and attorney fees, but it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.

Is probate ever desirable? Sometimes. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

How to Avoid Probate

There are several tools you can use to avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The right strategy depends on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, you should be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and IRAs, and other retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind, though, that while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

What If You Have a Complicated Estate?

For larger, more complicated estates, a revocable trust (sometimes called a living trust) is generally the most effective tool for avoiding probate. A revocable trust involves some setup costs, but it allows you to manage the disposition of all your wealth in one document while retaining control and reserving the right to modify your plan. It also provides a variety of tax-planning opportunities.

To avoid probate, it’s critical to transfer title to all your assets, now and in the future, to the trust. Also, placing life insurance policies in an irrevocable life insurance trust can provide significant tax benefits.

The Bigger Picture

Figuring out how to avoid probate is just part of estate planning. The knowledgeable team at Ramsay & Associates can help you develop a strategy that minimizes probate while reducing taxes and achieving your other estate planning goals. Contact us today to learn more.

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.

The Best Time to Make Medical Decisions is Now

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Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones during your life. In this regard, it’s important to have a plan in place for making critical medical decisions in the event that you’re unable to make them yourself. And, as with other aspects of your estate plan, the best time to make medical decisions is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it’ll be too late. Keep reading to learn more.

Health Care Documentation

To ensure that your health care wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes:

  1. To guide health care providers in the event you become terminally ill or permanently unconscious, and
  2. To appoint someone you trust to make medical decisions on your behalf.

A Living Will

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

Living wills often contain a do not resuscitate order, which instructs medical personnel to not perform CPR in the event of cardiac arrest.

An HCPA

An HCPA authorizes a surrogate — your spouse, child, or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

We Can Help Put Your Plan into Action

Planning is essential, and right now is the best time to make medical decisions in the event you’re unable to do it later. No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where they are. Also, keep in mind that health care providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically. If you have questions, the team at Ramsay & Associates is here to help. 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.

How to Survive an IRS Audit

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The IRS recently released its audit statistics for the 2022 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them. Keep reading to learn how to survive an IRS audit.

Tax Return Statistics

Overall, just 0.49 percent of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5 percent of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022.

However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones.

Be Ready

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return.

Tax Return Complexity

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.

In FY 2022, most examinations (78.6 percent) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices.

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Ask the Professionals for Help

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

The Ramsay & Associates team is here to answer questions and help you better understand how to survive an IRS audit. Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping.

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.

Tips for Deducting Meal and Auto Expenses

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If you’re deducting meal and auto expenses for business, there are some things you should know. The IRS will closely review those deductions, so be sure your recordkeeping is accurate. Keep reading to find out about specific cases and to learn more about what to do and what not to do when deducting expenses.

IRS Review

In some instances of expense deductions, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions, and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.

Vehicle Expenses: Facts of the Case

In this case, a married couple claimed $13,596 in car and truck expenses, supported only by mileage logs that weren’t kept contemporaneously and were made using estimates rather than odometer readings. The court disallowed the entire deduction, stating that “subsequently prepared mileage records do not have the same high degree of credibility as those made at or near the time the vehicle was used and supported by documentary evidence.”

The court noted that it appeared the taxpayers attempted to deduct their commuting costs. However, it stated that “expenses a taxpayer incurs traveling between his or her home and place of business generally constitute commuting expenses, which … are nondeductible.”

A taxpayer isn’t relieved of the obligation to substantiate business mileage, even if he or she opts to use the standard mileage rate (65.5 cents per business mile in 2023), rather than keep track of actual expenses.

The court also ruled the couple wasn’t entitled to deduct $5,233 of travel, meal, and entertainment expenses because they didn’t meet the strict substantiation requirements of the tax code.

Recordkeeping Dos and Don’ts

This case is an example of why it’s critical to maintain meticulous records to support business expenses for vehicle and meal deductions. Here’s a list of “DOs and DON’Ts” to help meet the strict IRS and tax law substantiation requirements for these items:

DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees whom you reimburse for meals and auto expenses, make sure they’re complying with all the rules.

DON’T reconstruct expense logs at year-end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.

DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.

DON’T be surprised if the IRS asks you to prove your deductions. Vehicle and meal expenses are a magnet for attention. Be prepared for a challenge.

We Can Help

With organization and guidance from the business tax professionals at Ramsay & Associates, your tax records can stand up to inspection from the IRS. There may be ways to substantiate deducting meal and auto expenses that you haven’t thought of, and there may be a way to estimate certain deductions (called “the Cohan rule”), if your records are lost due to a fire, theft, flood, or other disaster. Contact us to learn more.

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.

Benefits of a Living Trust for Your Estate

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When it comes to estate planning, everyone’s situation is different. Having a plan in place, though, helps ensure your assets end up where you want them. In addition, establishing a living trust can also be helpful. Keep reading to learn the benefits of a living trust for your estate.

Avoid Probate

You may think you don’t need to make any estate planning moves because of the generous federal estate tax exemption of $12.92 million for 2023 (effectively $25.84 million if you’re married). If you have significant assets, though, you should consider establishing a living trust to avoid probate.

Probate is a court-supervised legal process intended to make sure a deceased person’s assets are properly distributed. However, going through probate typically means red tape, legal fees, and your financial affairs becoming public information. You can avoid this with a living trust (also commonly called a family trust, grantor trust, and revocable trust).

How a Living Trust Works

Once you establish the living trust, you then transfer to it legal ownership of assets — such as your main home, a vacation property, antique furniture, etc. — for which you wish to avoid probate.

In the trust document, you name a trustee to be in charge of the trust’s assets after you die and specify which beneficiaries will get which assets.

You can be the trustee while you’re alive. After that, you can designate your attorney, CPA, adult child, sibling, faithful friend, or financial institution to be the trustee.

Because a living trust is revocable, you can change its terms at any time, or even unwind it completely, while you’re alive and legally competent. That’s why it’s called a living trust.

For federal income tax purposes, the existence of the living trust is ignored while you’re alive. As far as the IRS is concerned, you still personally own the assets that are in the trust. So, you continue to report on your tax return any income generated by trust assets and any deductions related to those assets, such as mortgage interest on your home.

For state-law purposes, however, the living trust isn’t ignored. Done properly, it avoids probate. And that’s the goal.

When you die, the living trust assets are included in your estate for federal estate tax purposes. However, assets that go to your surviving spouse aren’t included in your estate, assuming your spouse is a U.S. citizen — thanks to the so-called unlimited marital deduction privilege.

As explained earlier, you probably don’t have to worry about a federal estate tax bill with today’s huge exemption. But the exemption is scheduled to go down drastically in 2026 unless Congress extends it. If Congress fails to do so, you may need to revisit your estate plan.

Keep an Eye on the Details

A living trust has several benefits, but mind these details or you won’t get the expected probate avoidance:

  • When you fill out forms to designate beneficiaries for life insurance policies, retirement accounts, and brokerage firm accounts, the named beneficiaries can automatically cash in upon your death without going through probate. If the distribution provisions of your living trust are different from your beneficiary designations, the latter will take precedence. So, keep beneficiary designations current because your living trust’s provisions won’t override them.
  • If you co-own real estate jointly with right of survivorship, the other co-owner(s) will automatically inherit your share upon your death. It makes no difference what your living trust says.
  • You must transfer legal ownership of assets to the living trust for it to perform its probate-avoidance magic. Many people set up living trusts and then fail to follow through by transferring ownership. If so, the probate-avoidance advantage is lost.

Some Additional Planning

Living trusts do nothing to avoid or minimize the federal estate tax or state death taxes. If you have enough wealth to be exposed to these taxes, additional planning is required to reduce or eliminate them. Nevertheless, one of the biggest benefits of a living trust is that it can help you avoid probate. Just be sure you’re aware of the finer details as well. Contact the estate planning professionals at Ramsay & Associates for more information.

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.