Requirement For Banks & Financial Institutions To Report Beneficial Ownership Information Of Entity Accountholders Put On Hold

The Federal government in its efforts to crack down on illicit finance and enhance transparency on September 29, 2022 issued a final ruling establishing a beneficial ownership information reporting requirement, pursuant to the Corporate Transparency Act (CTA). This rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners – the persons who ultimately own or control the company – to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Law Invalidated Less Than One Month Before Reporting Deadline

On December 3, 2024 Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas issued the injunction at the request of a family-run firearms and tactical gear retailer, called Texas Top Cop Shop Inc., among other co-plaintiff businesses and the Libertarian Party of Mississippi. Their lawsuit alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce because it regulates incorporated entities regardless of whether they engage in commercial activity.

In issuing the Court’s Opinion (Texas Top Cop Shop, Inc. v. Garland, E.D. Tex., No. 4:24-cv-00478, 12/03/2024), the Court agreed that the law’s requirements exceed Congress’s commerce authority.  “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote.

Last week, the government appealed the preliminary injunction granted by the district court that enjoins enforcement of the CTA.  On December 17, 2024, the U.S. District Court for the Eastern District of Texas issued an Order denying the government’s motion to stay the nationwide preliminary injunction.  It is likely that this Order is the last formal decision on the CTA prior to December 31, 2024 that would require filing (at least filing prior to December 31, 2024.

Purpose Of Reporting

Designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, FINCEN stated that this ruling will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

“For too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States,” said Acting FinCEN Director Himamauli Das. “This final rule is a significant step forward in our efforts to support national security, intelligence, and law enforcement agencies in their work to curb illicit activities. The final rule will also play an important role in protecting American taxpayers and businesses who play by the rules, but are repeatedly hurt by criminals that use companies for illegal reasons.”

Reporting Companies

The CTA broadly defines a “reporting company” as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.

Entities Not Required To Be Reported

There are certain entities that are excepted from being reported: (1) entities in certain regulated industries that already are subject to beneficial ownership reporting, (2) publicly traded companies, (3) investment vehicles operated by investment advisors, nonprofits, and government entities, and (4) “qualified exempt entities”.  A “qualified exempt entity” is an entity that (a) employs more than 20 employees; (b) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (c) has an operating presence at a physical office within the United States.

Beneficial Owners and the Information to Report

The CTA defines a “beneficial owner” of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25% equity in the entity. The rule expressly excludes certain individuals from the definition of beneficial ownership, including (1) a minor child (as long as the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).

What Information Gets Reported

In each report to FinCEN, a reporting company must provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).

Effective Date Is January 1, 2024.

The rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

The reporting rule is one of three rulemakings planned to implement the CTA. FinCEN will engage in additional rulemakings to: (1) establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule. In addition, FinCEN stated it continues to develop the infrastructure to administer these requirements, including the information technology system that will be used to store beneficial ownership information in accordance with the strict security and confidentiality requirements of the CTA.

FinCEN Issues Guide to Assist Small Businesses with Beneficial Ownership Reporting: The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf  to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule that became effective on January 1, 2024 under the Corporate Transparency Act.

Penalties for Violating CTA

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine BOI Ownership Information report may be held accountable for that failure. However, the CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. While the law is put on hold for now, you can expect the laws regarding customer due diligence requirements for financial institutions will also be updated to conform to the CTA as the CTA will be providing a new means for a financial institution to verify a customer’s “Know Your Customer” information.  If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. In addition, tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. can complete or update BOI reporting for your business. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

On September 28, 2024 California Governor Gavin Newsom signed Senate Bill 988, the Freelance Worker Protection Act. Senate Bill (SB) 988 provides basic labor protections for freelance workers, such as the right to be paid on time and in full.

Most freelancers lack basic worker protections, most notably, the right to be paid for their work on time. According to the Freelancers Union, 71% of workers experienced late or non-payment. 59% report living paycheck to paycheck. Most do not have written contracts, as only 25% reported that they consistently have written contracts.

What Is In The Freelance Worker Protection Act?

• Mandatory contracts: Any freelancer performing over $250.00 of work for a hiring entity over a four month period is entitled to a contract outlining the scope of the work expected, the rate of pay, and the method of payment.
• 30-day payment terms: Clients must pay their freelancers within 30 days of completion of work unless otherwise specified in the contract.
• Payment agreement protections: Clients cannot require that freelancers accept less than the contract stipulates in exchange for faster payment.
• Anti-retaliation: Clients cannot retaliate against freelancers for pursuing payment.
• Double Damages: Freelancers who are the victim of non-payment are entitled to damages equal to double the payment originally specified in their contract, plus costs and attorney’s fees.

How Is A “Freelancer” Different From An “Independent Contractor”?

Freelancers and Independent Contractors are independent workers who control when, where, and how they work. They are considered self-employed. Both can work remotely unless the job requires the independent contractor to be on-site to perform their services. While they are classified the same for tax purposes, the types of projects and contracts freelancers and independent contractors work on are different.

Freelancers work project-to-project for clients, often balancing multiple contracts and clients at once. The engagement can be a longer-term hourly contract or a “one-off” project. Freelancing may offer less stability but gives talent more flexibility and control of their work. Freelancers are experts who fill skills gaps on a team, working on specific projects rather than a wide scope of work.

Independent contractors are more position-based. They work with clients on fixed-term contracts that could be full or part time.  Duration is usually longer – sometimes for years. Contract roles offer reliable pay for the duration of the contract and could even become full time once the contract ends. Independent contractors typically have a broader skill set than freelancers.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

1. The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;
2. The work performed is outside the usual course of the employer’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

• Translators, appraisers, home inspectors and registered foresters.
• For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
• For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

IRS implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K

If you are using payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to for clients paying for your services, payment app providers will have to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year. The reporting form to use is a Form 1099-K.  A business transaction is defined as payment for a good or service.

Prior to 2024, app providers only had to send the IRS a Form 1099-K if an individual account had at least 200 business transactions in a year and if those transactions combined resulted in gross payments of at least $20,000.  Form 1099-K is used to report certain payments that you received for selling goods or providing services, not making purchases.

The expansion of the reporting rule is the result of a provision in the American Rescue Plan, which was signed into law in 2021 but the implementation by IRS has been delayed to calendar year 2024. The IRS is looking to use this information to uncover unreported income and recover lost tax revenues.

Four tips you should know about how the gig economy might affect your taxes:

1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 57.5 cents per mile for the first 6 months of 2022 and 62.5 cents for the last 6 months of 2022. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

3. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

4. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments for the 2023 tax year are due on April 18, 2023, June 15, 2023, September 15, 2023 and January 15, 2024. Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

If you are a freelancer and the payor of your services is not complying with the Freelance Worker Protection Act, you should contact legal counsel to protect your rights and insure payment.  Also, keep in mind that as the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in freelancers and independent contractors who earn money from their services no matter where they are located. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you need help filing the 1099-K form, taxes, or are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling legal and tax matters for freelancers and independent contractors and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Requirement For Banks & Financial Institutions To Report Beneficial Ownership Information Of Entity Accountholders Put On Hold

The Federal government in its efforts to crack down on illicit finance and enhance transparency on September 29, 2022 issued a final ruling establishing a beneficial ownership information reporting requirement, pursuant to the Corporate Transparency Act (CTA). This rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners – the persons who ultimately own or control the company – to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Law Invalidated Less Than One Month Before Reporting Deadline

On December 3, 2024 Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas issued the injunction at the request of a family-run firearms and tactical gear retailer, called Texas Top Cop Shop Inc., among other co-plaintiff businesses and the Libertarian Party of Mississippi. Their lawsuit alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce because it regulates incorporated entities regardless of whether they engage in commercial activity.

In issuing the Court’s opinion (Texas Top Cop Shop, Inc. v. Garland, E.D. Tex., No. 4:24-cv-00478, 12/3/24.), the Court agreed that the law’s requirements exceed Congress’s commerce authority.  “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote.

Purpose Of Reporting

Designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, FINCEN stated that this ruling will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

“For too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States,” said Acting FinCEN Director Himamauli Das. “This final rule is a significant step forward in our efforts to support national security, intelligence, and law enforcement agencies in their work to curb illicit activities. The final rule will also play an important role in protecting American taxpayers and businesses who play by the rules, but are repeatedly hurt by criminals that use companies for illegal reasons.”

Reporting Companies

The CTA broadly defines a “reporting company” as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.

Entities Not Required To Be Reported

There are certain entities that are excepted from being reported: (1) entities in certain regulated industries that already are subject to beneficial ownership reporting, (2) publicly traded companies, (3) investment vehicles operated by investment advisors, nonprofits, and government entities, and (4) “qualified exempt entities”.  A “qualified exempt entity” is an entity that (a) employs more than 20 employees; (b) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (c) has an operating presence at a physical office within the United States.

Beneficial Owners and the Information to Report

The CTA defines a “beneficial owner” of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25% equity in the entity. The rule expressly excludes certain individuals from the definition of beneficial ownership, including (1) a minor child (as long as the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).

What Information Gets Reported

In each report to FinCEN, a reporting company must provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).

Effective Date Is January 1, 2024.

The rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

The reporting rule is one of three rulemakings planned to implement the CTA. FinCEN will engage in additional rulemakings to: (1) establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule. In addition, FinCEN stated it continues to develop the infrastructure to administer these requirements, including the information technology system that will be used to store beneficial ownership information in accordance with the strict security and confidentiality requirements of the CTA.

FinCEN Issues Guide to Assist Small Businesses with Beneficial Ownership Reporting: The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf  to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule that became effective on January 1, 2024 under the Corporate Transparency Act.

Penalties for Violating CTA

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine BOI Ownership Information report may be held accountable for that failure. However, the CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. While the law is put on hold for now, you can expect the laws regarding customer due diligence requirements for financial institutions will also be updated to conform to the CTA as the CTA will be providing a new means for a financial institution to verify a customer’s “Know Your Customer” information.  If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. In addition, tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. can complete or update BOI reporting for your business. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Bush Estate Tax Cuts expire December 31, 2025 – Here is what you need to know.

In 2001 and 2003 under President Bush temporary tax cuts were enacted through through two pieces of legislation: the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). Both measures were renewed in 2012 and 2017. Some of these tax cuts that have been enacted over the past 20 plus years are set to expire December 31, 2025, such as the Estate and Gift provision from the Tax Cuts and Jobs Act (TCJA) of 2017.

Estate and gift taxes – current law

The estate and gift provision in the TCJA of 2017 had a major impact on many people who may have a taxable estate in the future. The TCJA doubled the federal lifetime gift tax exemption amount, from $5.49 million in 2017 to $11.18 million in 2018 per individual. Under the TCJA, this higher exemption amount was then indexed for inflation in each subsequent each year.

In 2024, each individual has a combined federal estate and gift tax exemption of $13,610,000 (less any prior gifts made during life). This means that for federal tax purposes, in 2024 an individual can make lifetime gifts totaling up to $13,610,000 to anyone or transfer at death up to $13,610,000 (less any gifts made during life) to anyone without triggering the imposition of the federal estate and/or gift taxes. Married couples have a combined exemption, allowing them to make gifts during their lifetimes totaling $27,220,000. Any gifts during life or transfers at death with a value in excess of the available exemption amount will be subject to a federal estate and/or gift tax at a rate of 40%.

Estate and gift taxes – consequence of expiration of current law

After December 31, 2025 exemptions from estate and gift taxes will revert to pre-TCJA levels of around $5 million, adjusted for inflation. The lifetime gift and estate tax exemption, which was more than doubled by the 2017 tax reform bill, will go up with inflation in January 2025, then go down to near-2017 levels in January 2026 unless and until Congress steps in. If no action is taken by Congress by the end of 2025, then under the current law, on January 1, 2026, the federal lifetime exemption amount will be reduced to approximately one-half of the current value. Based on the rate of inflation, the exemption as of January 1, 2026 will be approximately $7 million per person.

We recommend that you review your assets, income and living expenses, then project those numbers out for your expected lifetime. Any excess assets remaining after your projected lifetime expenses is what you should consider to include in a revised estate plan that will not be burdened by a decrease in the estate and gift tax exemption.  Not taking full advantage of the gift tax exemption before it drops in two years could result in a much smaller estate for your heirs.

Leverage 2024 gifting limits

Based on the 2024 gifting limits a direct gift of cash, securities or other assets with a value up to the lifetime exemption is a simple was to gift money or part of inheritance. Furthermore, you can use the annual gift tax exclusion — $18,000 in 2024, $36,000 for couples — to make yearly gifts to as many people as you like. For example, you can make a payment directly to a school to cover a child’s or grandchild’s tuition, or to a medical provider for health expenses, without incurring taxes. Neither “free” nor annual exclusion gifts count toward your lifetime gifting limit, and these rules are not slated to change in 2026.

Family Limited Partnerships or LLC’s

For estates that have substantial real estate holdings, it is beneficial to have such real estate owned by a limited liability company (“LLC”) and then all of the LLC interests owned by a Family Limited Partnership (“FLP”).  As the owner of an FLP, you can then make gifts of limited partner interests in the FLP to family members at gift tax values that are discounted for lack of marketability and minority interests.  These discounts essentially provide a great mechanism by which you can leverage your gift tax exemption to reduce your taxable estate.  As the general partner of the FLP, you still control the management of the LLC’s.

Irrevocable Trusts

Rather than gifting cash or assets, alternatively, an irrevocable trust permits withdrawals based upon a schedule and conditions that you determine. This allows you to maintain a level of control over how and when the beneficiaries will receive distributions. When choosing which assets to gift or place in a trust it is important to look at what assets or gifts you expect will keep growing. When you gift assets using your lifetime gift tax exemption, the assets are transferred at today’s value, and there’s no tax to the beneficiaries. You can gift these assets using your lifetime gift tax exemption, allow heirs to have the current benefit and the gift or asset may experience appreciation in future years. It is important to have a skilled trusts and estates attorney draft documents, such as trust, so there are no issues with your estate.

How Can You Modify Estate Plan Documents For An Incapacitated Person?

If you have an incapacitated parent who has not done any estate planning including not having executed a will or a revocable living trust or his or her documents are outdated, getting his or her estate in order is extremely important. In California, there is a special law available in regard to setting up an estate plan for an incapacitated parent. Under California Probate Code §2580, the Courts have the power to create a “Substituted Judgment”.  Under such law, an interested party may file a petition to take a proposed action to: (1) benefit the conservatee or the estate, (2) minimize taxes or expenses of administration of the conservatorship estate or of the estate upon the death of the conservatee, or (3) make gifts to likely donees if the conservatee had capacity. Using this law could help avoid probate and save heirs on estate taxes when one’s incapacitated parent dies.

There are many factors for the Court to consider when determining whether to approve a petition for substituted judgment.  California Probate Code §2583 lists some factors, but the Court may consider other factors not listed in the Probate Code.  Some of these factors include whether the conservatee has capacity to carry out the proposed transaction, the wishes of the conservatee, prior estate planning documents, changes in the law that the conservatee may have considered in making changes to his estate plan, and the likelihood that the conservatee would have taken the proposed action.  The petition has to address all of the relevant factors listed in the Probate Code and any others that it is believed the court may consider. Furthermore, any trust created under a substituted judgment order is subject to the California Rules of Court that govern court created trusts. These rules include the trustee obtaining a bond, filing accountings with the court just like in a conservatorship of the estate, and requiring court approval of any modification or amendment.

What Should You Do?

When it comes to being ready for changes in the tax laws – two years may seem like a lot of time to adjust an estate plans, however, unless you’re simply making large cash gifts, developing a new plan will involve detailed conversations and analysis. Whether your existing estate plan was created recently or a while ago having a conversation with your estate attorney now can help you make better-educated decisions about your family’s future. Furthermore, drafting of documents and trusts can be done by a professional tax and estate attorney who can guide you through the complexities, nuances, and changes in estate and gift tax law.

That is why it is worth reaching out to a Trusts and Estates and/or Probate Attorney such as the at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. Whether or not a will exists, the expertise of a skilled lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. is needed to help protect the interests of the parties involved. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.