We are in the heart of tax season, so naturally we have recently been addressing many related issues. We wish we had time to discuss them all on our weekly radio and web broadcast on KDOW 1220 AM, and then write about them here, but we have covered a few we feel are worth mentioning in the limited amount of time we have each week.
On a recent broadcast, we mentioned a testamentary trust, in relation to the recent passing of Whitney Houston, which is an estate planning term that we had not previously discussed here, as we normally focus on creating and managing living trusts.
A testamentary trust, also known as a will trust, is a type of trust that is designated in the will of a “settlor,” but which is not established until the will is executed upon death. Testamentary trusts are frequently created when babies are born as a sort of umbrella protection against worst-case scenarios.
A living trust, also known as inter vivos trust, is created during the settlor’s lifetime and is often establish for the purposes of minimizing estate taxes.
Other points we covered in this segment of the broadcast include:
- The assets of a living trust do not need to be probated, which avoids the potentially large administrative fee of probate.
- Probate is a state law issue, like family law, rather than a matter of federal law, which covers issues such as immigration, national elections and, of course, taxes. Probate court procedures and administrative fees will vary by state.
- The executor of a probated will is entitled to a fee equal to the fee paid to the probate court. (Whitney Houston designated her mother as the executor of her will.)
In this broadcast, we also discussed the revised “Fresh Start” initiative from the IRS, published on March 7, which is intended to provide some relief for many struggling taxpayers who are having difficulty paying their taxes on time, due to being unemployed for 30 days or more during the period covered by this initiative.
As always, we recommend you learn the specific details of any tax initiatives before you believe you qualify, as restrictions and limitations always exist, and you should consult with a professional tax adviser before you make important legal and financial decisions.
In that regard, the Internal Revenue Service has recently reformatted its IRS.gov website home page to help make finding the information you need, especially about filing your taxes, easier to find. You can quickly locate the most popular forms, topics, tools, and filing and payment methods right at the top of the page.
The IRS recognizes that their publications may not be the easiest to find or understand, so they have also expanded their communications to include social networking and video, such as this one about the Fresh Start program:
We briefly discussed the basic types of relief available in this new IRS initiative, which include penalty relief or possible penalty exemption, if you are self-employed.
If you are currently struggling to pay your taxes, be sure you know the facts about the Fresh Start initiative and other related “What Ifs” from the IRS before you act, because the consequences for errors can be significant.
The bottom line is that you must file your taxes, so you and the IRS know what you do or do not owe. Otherwise, the IRS will eventually file for you without any deductions due, based on the W-2 records they have.
Another hot topic we discussed on our broadcast is state residency for tax purposes. When the Facebook IPO takes place, many suddenly-wealthy stockholders, especially in our Silicon Valley area, will be seeking strategies to avoid paying the 9% to 10% California state income tax on their expanded assets.
The points we discussed included:
- When determining residency, the California Franchise Tax Board looks at factors other than just your physical address, which may, for example, be located just across the border in Nevada, where there is no state income tax.
- The factors considered include your behavior, such as where you spend a large portion of your time. If you move across the state border, but still work or go to school in California, you will probably be considered a resident by the Board.
- Other behaviors Franchise Tax Board agents consider include where you go for haircuts and manicures, as well as doctor and veterinarian visits.
- Franchise Tax Board agents also have access to Facebook and other social networking websites, so any mention of your activities posted on these sites becomes easily found evidence of your true lifestyle. Carefully consider your online activity if you are thinking about changing your legal residency for tax-avoidance purposes.
- If you really do not want to be considered a California resident, the best solution is, to put it bluntly, move and don’t come back. If you intend to come back, you are still considered a resident.
- If you must continue to work for a California-based employer, become a telecommuter exclusively, because visits back to the corporate office could be considered as a potential physical tie to the state.
- If you have an LLC based in another state, you only need to pay taxes to California for the income earned in this state.
At the end of this broadcast, we also briefly discussed some tips about setting up an LLC. If you missed the original broadcast, you can listen to this show by directly streaming or downloading the MP3 file in our Radio Show Podcast Archive.
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.