In this April 2021 issue, you will find the following articles:
- Robert M. Gray, CTFA, CRPC®, First State Bank and Trust
- Aaron Sundeen, Derrick Building Solutions
- Erik Ordal, Myslajek Kemp & Spencer, LTD.
TRUST BASICS
Whether you’re seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility — many types of trusts exist, each designed for a specific purpose. Although trust law is complex, and establishing a trust requires the services of an experienced attorney, mastering the basics isn’t hard.
What is a Trust?
A trust is a legal entity that holds assets for the benefit of another. Basically, it’s like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust
depend largely on your goals. For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy.
depend largely on your goals. For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy.
When you create and fund a trust, you are known as the grantor (or sometimes, the settlor or trustor). The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually your family and loved ones, but can be anyone, even a charity. Beneficiaries may receive income from the trust, or may have access to the principal of the trust either during your lifetime, or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution, such as a bank, to be the trustee. You can even name more than one trustee if you like.
Why Create a Trust?
Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to:
- Minimize estate taxes.
- Shield assets from potential creditors.
- Avoid the expense and delay of probating your will.
- Preserve assets for your children until they are grown (in case you should die while they are still minors).
- Create a pool of investments that can be managed by professional money managers.
- Set up a fund for your own support in the event of incapacity.
- Shift part of your income tax burden to beneficiaries in lower tax brackets.
- Provide benefits for charity.
The type of trust used, and the mechanics of its creation, will differ depending on what you are trying to accomplish. In fact, you may need more than one type of trust to accomplish all of your goals. And since some of the following disadvantages may affect you, discuss the pros and cons of setting up any trust
with your attorney and financial professional before you proceed:
with your attorney and financial professional before you proceed:
- A trust can be expensive to set up and maintain — trustee fees, professional fees, and filing fees must be paid.
- Depending on the type of trust you choose, you may give up some control over the assets in the trust.
- Maintaining the trust and complying with recording and notice requirements can take up considerable time.
- Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate.
The Duties of the Trustee
The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. For example, the trustee must preserve, protect, and invest the trust assets for the benefit of the beneficiaries. The trustee must also keep complete and accurate records, exercise reasonable care and skill when managing the trust, prudently invest the trust assets, and avoid mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can’t merely delegate responsibilities to someone else.
Although many of the trustee’s duties are established by state law, others are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you set up the trust.
Living (Revocable) Trust
A living trust is a special type of trust. It’s a legal entity that you create while you’re alive to own property such as your house, a boat, or investments. Property that passes through a living trust is not subject to probate — it doesn’t get treated like the property in your will. This means that the transfer of property through a living trust is not held up while the probate process is pending (sometimes up to two years or more). Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate, or if
you want to delay the transfer, you can direct that the trustee hold the assets until some specific time, such as the marriage of the beneficiary or the attainment of a certain age.
you want to delay the transfer, you can direct that the trustee hold the assets until some specific time, such as the marriage of the beneficiary or the attainment of a certain age.
Living trusts are attractive because they are revocable. You maintain control — you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.
Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property.
Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.
Irrevocable Trusts
Unlike a living trust, an irrevocable trust can’t be changed or dissolved once it has been created. You generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust — assets you don’t mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer.
Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors.
There are many different kinds of irrevocable trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.
Testamentary Trusts
Trusts can also be established by your will. These trusts don’t come into existence until your will is probated. At that point, selected assets passing through your will can “pour over” into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. Since you have a say in how the trust terms are written, these types of trusts give you a certain amount of control over how the assets are used, even after your death.
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INSIDER TIPS FOR BUILDING IN 2021
When COVID-19 struck a year ago, the pandemic caused a great deal of uncertainty and issues for businesses everywhere. As vaccines continue to roll out and businesses re-open, positive signs in the commercial construction industry are continuing to grow. Many projects that had stalled out in 2020 are re-starting and businesses are looking beyond COVID-19 to begin talking about new project starts.
There are lingering effects of the pandemic that could cause challenges for construction projects. Material cost increases, supply chain shortages, and labor prices due to high demand are all very real concerns. If you are considering a commercial construction project in the next 12 months, here are some suggestions that will help you avoid pitfalls:
1. Stay Updated on Project Budgets
With construction costs continuing to rise, it is essential to communicate regularly with your builder on the price of your project. This may require your contractor to update your budgets more often than normal, but it will also keep costs from escalating without your control. When your project is bid and final pricing is established, be sure to execute your contract in a timely manner so
pricing can be locked in.
pricing can be locked in.
2. Value Engineering
Be open to different construction methods or design ideas that may save
money and time on your project. Value engineering is the process used to identify and eliminate unwanted costs, while also improving the function and quality of the project. It can be a very useful tool both in the design phase and after bidding to help gain the best possible value for the lowest cost of your project.
money and time on your project. Value engineering is the process used to identify and eliminate unwanted costs, while also improving the function and quality of the project. It can be a very useful tool both in the design phase and after bidding to help gain the best possible value for the lowest cost of your project.
3. Invest Time in Planning
Time is money, and by saving time on your project it can also mean
saving you money in the long run. Spend time up front focusing your attention on a thorough plan and communicating with your design and construction team about your goals. Focusing on the plan can help build a realistic schedule and identify potential problems early in the process. Working together as a team with your architect, engineers, and builder to take control of your project planning early and throughout the building process will help avoid costly delays and change orders.
saving you money in the long run. Spend time up front focusing your attention on a thorough plan and communicating with your design and construction team about your goals. Focusing on the plan can help build a realistic schedule and identify potential problems early in the process. Working together as a team with your architect, engineers, and builder to take control of your project planning early and throughout the building process will help avoid costly delays and change orders.
4. Project Incentives and Loan Programs
With interest rates continuing to stay low, owners have many options for generous financing on their new projects. The U.S. Small Business Administration (SBA) offers loans such as the 504 and 7A programs that offer opportunities to enhance your borrowing power with lower down payment and longer amortization periods. New and growing businesses can find many resources available to help make their building project a reality. Incentive programs such as tax credits and grants are available to support things like job creation, capital investment and training. Tax Increment Financing (TIF) is also a tool that municipalities use to stimulate economic development in a targeted geographic area. Many state and local resources also offer low interest loans which can be used to help close the gaps in financing a project. You should speak to your lending institution about all these possibilities.
No matter the current market challenges, experienced professionals can help you navigate the market and make the best choices for your long-term investment success. It is not necessary to settle for less or pay more. Through prioritizing goals, utilizing thoughtful creative solutions, and planning, you can meet the challenges head on and create the project that you will be proud of.
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GET FAMILIAR WITH THE EMPLOYEE RETENTION CREDIT ("ERC")
The Employee Retention Credit is not new. Until December 27, 2020, any business with a PPP loan was ineligible for the refundable payroll tax credits under the ERC.
Several stimulus bills later, the ERC may now be the hottest ticket in town. Federal legislation not only allows for interplay with forgivable PPP loans, but has made the lucrative credits easier to qualify for in 2021 quarters and extended the window to claim them through December 31, 2021.
What’s most important to acknowledge is that the ERC for 2020 and 2021 are different. Rather than regurgitate guidance, we want to highlight the important aspects of the ERC in both years.
One more thing – these credits can be retroactively claimed over three years by amending payroll tax filings, so we believe it’s more important to “get this right” in most situations, rather than rush the process given the lack of guidance currently available.
2020 ERC CREDITS
> Not Nearly as Lucrative as Credits in 2021 Quarters
MKS: As noted in our comparison chart, credits are limited to 50% of qualifying wages up to $10,000 per employee for the entire YEAR. If you are eligible in Q2, Q3 and Q4 of 2020, you’re only receiving $5,000 maximum for each employee.
> More Difficult to be Eligible in 2020 vs. 2021
MKS: Quarterly gross receipts have to be down 50% in a 2020 calendar quarter compared to that same quarter in 2019, whereas in 2021, this bright line receipts test changes to a 20% decline. The other eligibility option is a full or partial government shutdown of your operations in a nominal way (at least 10% of your business). We won’t dive too deep, but this hurdle is more difficult to meet than you may think.
> Wages Paid with Forgiven PPP Dollars During a Covered Loan Period in 2020 Are Not Eligible for the ERC
MKS: Lots of businesses received PPP loans and elected a 24-week covered period in 2020. With most covered periods running from April to October, it’s likely that payroll costs in Q2 and Q3 of 2020 were allocated to this program and are unusable for ERC purposes.
We Advise the Following Steps for Looking into 2020 ERC Credits:
- Determine the quarters in 2020 you were eligible, if any.
- Remove any wages paid that were used on a PPP forgiveness application.
- Remove any wages paid to:
- Individuals who own more than 50% of the entity, and those related to said individual.
- This includes spouses, children, immediate family and in-laws.
- This includes spouses, children, immediate family and in-laws.
- Individuals who own more than 50% of the entity, and those related to said individual.
- Quantify any remaining wages paid to employees in eligible quarters.
2021 ERC CREDITS
> Every Calendar Quarter in 2021 is Now in Play
MKS: Recall that there are two ways to qualify for 2021 ERC credits – full or partial government shutdown order, or gross receipts decline of 20% or more in any calendar quarter in 2021 compared to 2019. Yes, the reference period will continue to be the corresponding quarter in 2019, not 2020 (note: there appears to be a “prior quarter election” to compare the most recent calendar quarter against the corresponding reference period…technically a stand alone qualification in Q1 of 2021 would then automatically qualify you for Q2 2021 as well).
> The 2021 Credits Are Now 70% of Qualified Wages Up to $10,000, and This Resets Each Quarter
MKS: Instead of $5,000 per employee, the maximum credit per employee is $7,000, and this cap resets at the end of each quarter. If your business continues to suffer from the effects of the pandemic and you qualify for the ERC in each calendar quarter this year, any employee that makes roughly $40,000 annually could yield a refundable credit of $28,000 to your business. This is an extreme example, but helps illustrate the potential benefits.
> PPP Loans Issued in 2021 Have a Flexible Covered Period at the Borrower's Choosing (Between 8-24 Weeks)
MKS: 2020 PPP loans gave borrowers two choices for a covered period, 8 or 24 weeks. Under the resurrected PPP loan guidelines in 2021, a borrowing entity could exhaust the PPP funds in as little as 8-12 weeks, freeing up qualified wages to claim the ERC. We strongly encourage any business owner in possession of a PPP loan to maximize eligible non-payroll costs with those funds (40% of the loan amount).
We Advise the Following Steps for Looking into 2021 ERC Credits:
- Ask your payroll provider to set up a new code in the payroll system to tag potential wages outside of a PPP loan covered period – it will benefit PPP borrowers to be strategic about the allocation of funds in 2021.
- Review eligibility each quarter before completing the quarterly payroll tax filing (Form 941).
- Remove any wages paid to:
- Individuals who own more than 50% of the entity, and those related to said individual.
- This includes spouses, children, immediate family and in-laws.
- Individuals who own more than 50% of the entity, and those related to said individual.
It’s important to be aware of these credits and review eligibility, but we believe it’s prudent to tread carefully when claiming credits right now. Our dedicated pandemic assistance team is frequently researching authoritative guidance and comfortable strategies, and we have begun engaging with our clients on this process.
We are happy to help with any questions or consult with interested business owners regarding the Employee Retention Credit or any other pandemic assistance program. Contact Erik Ordal at Erik.Ordal@myslajek.com or visit www.myslajek.com and our COVID-19 resource page for more details and information.
