Michael Gray, CPA’s Option Alert #147

An irregular alert for issues relating to employee stock options

July 6, 2016

© 2016 by Michael Gray, CPA

ISSN 1931-2768

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The year is half over!

Time is sneaking by us again! How is 2016 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.

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Our schedules

Michael Gray will be away from the office starting July 1, returning July 19 and starting July 29, returning August 3. Dawn Siemer has changed her hours and will be working Mondays, Wednesdays and Fridays again. She will be away from the office starting July 25, returning August 8. We won’t be available for telephone calls or emails during our absences. While Dawn is away, please call Michael Gray directly at 408-918-3161.

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‘Tis the season for extensions

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.

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IRS issues new deferred compensation guidelines.

The IRS has issued proposed regulations clarifying previous final regulations for nonqualified deferred compensation plans (including nonqualified stock options) under Internal Revenue Code Section 409A. The regulations will be effective when final regulations are issued, but may be relied upon by taxpayers on or after June 22, 2016.

  • The new regulations clarify that certain entities (foreign corporations and partnerships) subject to separate deferred compensation rules under Internal Revenue Code Section 457A are also subject to the Section 457A rules.
  • The short-term deferral rule requiring that payments be made by the 15th day of the third month after an entity’s year end is modified to allow a current deduction when the payment is made at such time as it would not violate federal securities laws or other applicable laws.
  • The definition of an “eligible issuer of service recipient stock” is modified so that it includes a corporation or other entity for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right.
  • The new regulations clarify that a stock right will continue to be exempt from Section 409A where the amount payable is reduced for cause upon an involuntary separation and is less than fair market value.
  • The new regulations clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the change in employment status, the level of services reasonably expected to be provided after the change would result in a separation from service under the rules that apply to employees.
  • The new regulations clarify that a service provider can be an entity as well as an individual.

See your tax advisor for more details.

(REG-123854-12, June 22, 2016.)

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Should you consider using a Grantor Retained Annuity Trust to shift appreciation to other family members?

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.

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.

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. The Obama administration would prefer to have a minimum of a 10-year term for GRATs. 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 have good professional advice when creating and operating a GRAT.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as “How I created a public access television show broadcast on eleven Bay Area stations.” To make arrangements, call Michael Gray at 408-918-3161.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm<. Some of the sites where you can share your experiences include yelp.com and siliconvalley.citysearch.com.

We use Angie’s List to assess whether we’re doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly broadcast schedule for July and August.

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:

July 1 and 8, G. Scott Haislet, attorney at law and CPA, “1031 Exchanges”
July 15, G. Scott Haislet, attorney at law and CPA, “Real estate professionals and passive activity losses”
July 22 and 29, G. Scott Haislet, attorney at law and CPA, “Sale of a principal residence”
August 5, Charles H. Packer, attorney at law, Hopkins & Carley, “Should you terminate a family trust considering recent tax law changes?”
August 12, Charles H. Packer, attorney at law, Hopkins & Carley, “Tax planning for real estate change of ownership in California”
August 19 and 26, Charles H. Packer, attorney at law, Hopkins & Carley, “Succession planning issues of family businesses”

Financial Insider Weekly is also broadcast as follows:

  • Sundays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Sundays at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Sundays at 10:00 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Mondays at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Mondays at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Mondays at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Tuesdays at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Tuesdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Tuesdays at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill Broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Wednesdays at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Thursdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Fridays at 11:00 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.
  • Fridays at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Fridays at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • Fridays at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, “public access TV”
  • Fridays at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Saturdays at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Saturdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Saturdays at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

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!

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Question and Answer

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/non-q_stock.shtml.

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Follow me on Twitter, Facebook or LinkedIn!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I’m also on Facebook and Linked In. You can also follow me on other social media sites, www.facebook.com and www.linkedin.com/in/michaelgraycpa.

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA’s Tax & Business Insight.

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.

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Consult with a tax advisor

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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Subscribe to Michael Gray, CPA’s Option Alert!

To receive the next issue of Michael Gray, CPA’s Option Alert with more employee stock option tax developments and answers to questions from our readers automatically via email, subscribe by filling out the form below.

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(Michael Gray is the author of Secrets of Tax Planning For Employee Stock Options, Stock Grants and ESOPs.)

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