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July 12, 2017
© 2017 by Michael Gray, CPA
ISSN 1931-2768
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Time is sneaking by us again! How is 2017 going for you? Is there any way we can help you reach your goals? How is your tax picture shaping up this year? Call Dawn Siemer at 408-918-3162 or Michael Gray at 408-918-3161 to make a planning appointment now.
If you need help preparing your income tax returns for which you have filed an extension, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.
With today’s estate tax rules, a married couple can leave close to $11 million to their heirs without being subject to the federal estate tax. (The Trump administration has proposed repealing the estate tax. The following strategy is also a method of shifting income to family members in lower income tax brackets.)
Some public offerings result in stock for which the owners made a minimal investment becoming enormously valuable, far surpassing $11 million. Employees and shareholders holding stock with that potential should consider estate planning strategies to shift the increase in value to other beneficiaries.
I described some ways to do that in the last newsletter.
Another strategy where the stock holder doesn’t have to give the total investment away is a “grantor retained annuity trust” or GRAT.
One form of this strategy is called a “zero-out” GRAT, often for a short term, like two years.
In this case, an “annuity” just means a regular payment, and can be thought of as a note with equal payments made at least annually. Stock is transferred to an irrevocable (can’t be changed) trust in exchange for an annuity with an equivalent value to the stock transferred. Since an equivalent value is received in the exchange, the amount of the gift is zero.
This exchange should still be reported on a gift tax return in order to have the statute of limitations run on the transaction.
The remainder of the trust after the annuity is paid is distributed to other named beneficiaries, with the grantor’s tax basis and holding period.
When the stock isn’t publicly traded, it must be appraised. If cash isn’t generated to make the annuity payments, they can be made in property, such as a return of the stock. Another appraisal will have to be done when the payments are made when they are made with stock.
For income tax purposes, the person who created the trust, called the “grantor,” is treated as the owner of the trust. Any income or deductions of the trust will be reported on the grantor’s income tax return.
If the grantor dies before the annuity is paid, the present value of any unpaid annuity payments is included in the grantor’s taxable estate.
To avoid estate inclusion, GRATs are often made for short terms, and multiple GRATs may be set up with different maturity dates, or “rolling GRATs.”
Short-term GRATs are a target for tax reform. A minimum of a 10-year term for GRATs has been proposed. This would increase the risk the grantor could become subject to income tax if the company is acquired before the term of the trust expires, and that some or all of the GRAT could be included in the grantor’s taxable estate.
This is a greatly simplified explanation. There are many alternative structures for GRATs. Be sure to get good professional advice when creating and operating a GRAT.
Certain taxpayers who aren’t U.S. citizens or permanent residents use an individual tax identification number, or ITIN, to file their income tax returns. (This requirement doesn’t apply to taxpayers who have social security numbers.) These identification numbers generally have to be renewed when they aren’t used for three consecutive years. ITINs issued before 2013 will expire according to a certain schedule, even when the taxpayer has filed tax returns using the number during the last three years.
The IRS is allowing renewals for filing 2018 income tax returns now. ITINs with the middle digits 70, 71, 72 or 80 currently need to be renewed using Form W-7. Most of these taxpayers should receive a notification from the IRS that they must renew their ITIN with instructions. ITINs with the middle digits 78 and 79 expired last year and should also be renewed, if it has not already been done.
Families have also been given the option to renew ITINs for the entire family at the same time. The family includes the tax return filer, spouse and dependents claimed on the income tax return.
(IR-2017-109.)
Michael Gray, CPA will give a lunchtime presentation, “Estate Planning without an estate tax”, on July 20, 2017 for the Estate & Trusts discussion group, Silicon Valley San Jose Chapter, California Society of Certified Public Accountants (CalCPA.) Locatioin is Abbott, Stringham & Lynch, 1530 Meridian Ave., San Jose. This is an introductory-level presentation focusing on providing for the support of the family and key planning issues. The investment, including lunch, is $20 for CalCPA members and $30 for nonmembers. You can register here www.calcpa.org/events-and-programs/event-details?id=a795efd2-3325-43c6-8f6e-42e0137cf1db or call Susie Riffel at 650-522-3168.
A federal district court ruled that, although the IRS can require tax return preparers to use preparer tax identification numbers (PTIN), it can’t charge them for issuing or renewing the numbers.
The IRS temporarily closed its PTIN site, and has reopened it. It has stopped charging a fee to issue PTINs.
(Steele v. United States, 2017-1 U.S.T.C. 50,238, June 5, 2017.)
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Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.
Here are the scheduled interviews for July and August:
Financial Insider Weekly is also broadcast as follows:
Broadcast on the internet at the same time as streaming video at www.mhat.tv
Past episodes are available at https://www.youtube.com/user/financialinsiderweek.
Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.
Hope you can watch or record the show. Please tell your friends about it!
Michael Gray regrets he can no longer answer emails personally. He will answer selected questions in this newsletter. Email your questions to mgray@stockoptionadvisors.com.
See the books mentioned at www.employeestockoptionsecrets.com or the Special Report, Nonqualified Stock Options – Executive Tax and Financial Planning Strategies at www.stockoptionadvisors.com/stock/nqso-faq/.
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We are now offering our real estate tax newsletter, Michael Gray, CPA’s Real Estate Tax Letter, free of charge. Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. To subscribe and read a sample issue, visit realestatetaxletter.com.
For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment.
Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.
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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)