Even though the value of Facebook’s stock has depreciated considerably since the recent IPO, and many of us have learned some stock market lessons the hard the way, a lot of original investors and Facebook employees have obtained sudden wealth.
We’ll know more about the actual wealth those insiders obtained when the post-IPO lock-up periods expire and those insider shares can be traded. Eventually Facebook’s stock price should stabilize, we suspect and hope, and the value of the stock will convert into significant capital gains for many in Silicon Valley and beyond.
As always, Uncle Sam will want his cut of any capital gains acquired in 2012 comes next April 15, so for those who will eventually reap the profits from their investments or hard work at Facebook, now is the time to construct an estate plan that minimizes the government’s share of your wealth and maximizes your family’s share.
We briefly discussed this topic and a few others on a recent edition of our weekly radio and web broadcast on KDOW 1220 AM, Wealth Management and You with Connie Yi. You can listen to this show and previous broadcasts in our podcast archive.
Private Foundation Provides Tax and Charitable Benefits
One method of wealth management estate planning we endorse is to set up a private foundation, which (1) has tax benefits, (2) provides a vehicle to make charitable donations during your lifetime, and (3) creates a lump sum of money for retirement.
Naturally, many wealth management strategies exist, so establishing a charitable private foundation may not be the right approach for you. We only recommend this as a strategy to consider if about 70% of your intent is charitable giving and only about 30% of your intent is to reduce your tax liability.
Some small private foundations are established to provide beneficiaries with a method of deducting expenses from their taxes, such as allowable meals and entertainment. However, in the end, the money used to fund a private foundation comes out of your pocket, so the tax-saving benefits derived from a foundation are not exactly “free.”
The Internal Revenue Service provides information about starting a private foundation and tax information for private foundations on its IRS.gov website.
Other Charitable Giving Tax Deductions
When you donate clothing or other personal possessions to a charity group and want to itemize your give as a tax deduction, make sure the group is a legitimate registered 501(c)3 charitable organization.
Most legitimate not-for-profit organizations should automatically send you a thank you letter that documents the value of your donations, which you will need when filing your taxes.
The Attorney General of California’s website Charities page provides information to learn more about charitable giving for donors and also links to the state’s searchable database of charities, so you can verify an organization’s not-for-profit status.
Business Expense Deductions
To claim deductible business meeting expenses, you need to itemize and document your out-of-pocket costs, along with what was discussed at the meeting.
For more information about other legitimate deductible expenses, refer to IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.
Two other topics we covered during our broadcast are the different types of deeds for real estate property and how to properly declare an offshore bank account and other overseas assets, which we’ve discussed several times before, because so many people in California still own property and/or other financial assets in their native homelands.
Types of Real Estate Deeds
Two of the types of real estate deeds are (1) Joint Tenancy, frequently used for married couples and legal domestic partners who own property, and (2) Tenancy in Common, frequently used for other types of personal and business partnerships.
The primary aspect of Joint Tenancy deed is that, for example, when one spouse dies the other spouse automatically gains ownership of the deceased’s share of the property.
With a Tenancy in Common deed, when a co-owner of a property dies, that person’s share of the property is transferred to his or her beneficiaries rather than to a partner listed on the title.
The tax basis for an inherited property will be determined by who inherits it under what conditions. For example, children who inherit a parent’s home may have a much higher tax basis for the property than their parents paid, if the house was originally purchased a long time ago for a lot less money than the the current fair market value of the property.
If the property was placed in a living trust prior to the death of the parents, then the old lower tax basis would still apply, if the deed transfer is properly recorded within the allotted time.
Estate Planning for Foreign Assets
If you owned more than $10,000 dollars in foreign assets during 2011, you are required to file a Report of Foreign Bank and Financial Accounts (FBAR) by June 30. This form needs to be submitted to a special U.S. Treasury office in Michigan rather than your normal regional IRS Service Center.
You can determine the value of your foreign assets for tax filing purposes by referring to the Treasury Department End-of-Year Exchange Rates.
If you want to include foreign assets in your estate, the tax laws of the country in which the property resides will apply to those assets. As such, this can be a rather complicated topic, so we recommend that if you have overseas assets, you should be familiar with the IRS Guidance on Foreign Financial Asset Reporting, which links to the Form 8938, Statement of Foreign Financial Assets you will be required to complete.
In such instances, you may only be required to submit a simple beneficiary form, but you may also be required to file separately for each asset. As always, we suggest you use the links above to do the research and/or seek professional assistance to remain in compliance with the IRS foreign asset tax regulations.
Foreign National Property Owners
If you are a foreign national who earns income generated from a property purchased for cash, you may need to file Form W-9 to report that revenue. Real estate brokers who manage such a property need to authenticate and obtain copies of their client’s passport and valid visa, as well as ensure appropriate state and local income taxes are withheld.
If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.
