Are You a Member of the Sandwich Generation?
Rob Swenson, CPA, MST
If you are currently taking care of your children and your elderly parents, count yourself among those of the Sandwich Generation. Although it may be personally gratifying to be able to help your parents, it can be a financial burden.
How can you best handle the financial affairs of parents in the later stages of life? Incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they have already made. Here are five critical steps:
1. Identify Key Contacts
Just like you have done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.
2. List and Value their Assets
If you are going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. It would be wise to keep a list of their investment holdings, IRA and retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits. When all is said and done, do not be surprised if their net worth is higher or lower than what you (or they) initially thought. You can use this information to formulate the appropriate planning techniques.
3. Open the Lines of Communication
Before going any further, have a frank and honest discussion with your elderly relatives, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish. Understandably, they may be hesitant or too proud to accept your help initially.
4. Execute Documents
Assuming you can agree on how to move forward, develop a plan incorporating several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some elements commonly included in an estate plan are:
Your parents’ wills control the disposition of their possessions, such as cars and jewelry, and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you are the one lending financial assistance, you are probably the optimal choice.
- Living Trusts
A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust does not have to go through probate, so this might save time and money, while avoiding public disclosure.
- Powers of Attorney
These documents authorize someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.
- Living Wills or Advance Medical Directives
These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies so they can act according to their wishes.
- Beneficiary Designations
Undoubtedly, your parents have filled out beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it is important to keep them up to date.
5. Spread the Wealth
If you decide the best approach for helping out your parents is to give them monetary gifts, it is relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $14,000 without paying any gift tax. Plus, payments to medical providers are not considered gifts, so you may make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amount.
As you grow older, so do your responsibilities. If you are part of the Sandwich Generation, those responsibilities can include raising your children while also taking care of your aging parents. To help ease the financial burden, discuss all of your options with your financial advisor.
Timing Compensation in a Changing Tax Climate:
All Eyes on Sec. 409A
Rob Swenson, CPA, MST
Many people expect to see significant tax reform in the near future now that Republicans are in control of Congress and President Trump is in office. Among the changes being discussed are reduced marginal tax rates for individuals, lower corporate tax rates and the elimination of the surtax on net investment income. It is uncertain, however, when (and if) such changes will be implemented and how long reduced tax rates will last.
Assuming that tax rates are reduced, and that favorable rates won’t last forever, what does this mean for compensation programs? Many executives and business owners will want to take advantage of this window of opportunity by deferring or accelerating compensation so that it is received while rates are low. As you consider strategies for timing compensation payments, however, it is critical to be mindful of Internal Revenue Code Section 409A.
Sec. 409A in a Nutshell
Sec. 409A is designed to prevent executives, other employees and certain independent contractors from using non-qualified deferred compensation arrangements, including bonus plans, supplemental executive retirement plans and discounted stock options, to defer income taxes while retaining control over the timing of benefits. Violations result in immediate taxation of vested benefits and a 20% excise tax, plus interest.
Certain arrangements are exempt from Sec. 409A, including qualified retirement plans and “bona fide” vacation, sick leave, compensatory time, disability and death benefit plans.
Sec. 409A is complex, but in a nutshell, it restricts an employee’s ability to manipulate the timing of income as follows:
- An election to defer income must be made before the year in which the compensation is earned. For example, if you wish to defer a portion of your 2018 compensation to 2019, you must make the election by the end of 2017. There are exceptions for new employees, certain qualifying performance-based compensation and certain bonus plans. (See Sidebar below.)
- Deferred compensation must be paid (a) on a specified date or according to a fixed payment schedule, or (b) after the occurrence of a specified event, such as death, disability, separation from service, change in ownership or control of the employer, or an unforeseeable emergency.
- Once scheduled, payments may be deferred further, provided an election is made at least 12 months in advance and the new payment date is at least five years after the originally scheduled date.
Generally, once an election is made to defer compensation, payments cannot be accelerated except, as discussed below, in limited circumstances.
Sec. 409A generally prohibits companies from paying deferred compensation earlier than scheduled. This prohibition makes it difficult to accelerate payments to take advantage of tax cuts. There are, however, 13 limited exceptions to the anti-acceleration rule. Most of the exceptions involve extraordinary circumstances, such as payments needed to comply with a domestic relations order, pay employment taxes or meet certain other obligations. However, one exception (for plan termination) may create tax-planning opportunities for some businesses.
Under this exception, an employer may accelerate deferred compensation payments without violating Sec. 409A, provided the payments are made in connection with termination and liquidation of the plan and:
- The plan is not terminated because of a downturn in the employer’s financial condition;
- All similar non-qualified deferred compensation plans are also terminated;
- No payments are made within 12 months after termination;
- All payments are completed within 24 months after termination; and
- The employer does not adopt any similar plans within 36 months after the termination was initiated.
Terminating a plan is one option for taking advantage of lower tax rates. However, before choosing this strategy, it is important to consider its impact on your company’s compensation programs.
Accelerating and deferring income is a tried-and-true strategy for making the most of fluctuating tax rates. However, when non-qualified deferred compensation plans are involved, it is important to plan carefully to avoid running afoul of Sec. 409A.
Sidebar: Limited Exception Allows Deferral of Bonus Payments
Internal Revenue Code Section 409A generally requires you to make an election to defer compensation in the year before you earn it. This makes it difficult to defer compensation to take advantage of declining tax rates. Suppose, for example, that lawmakers enact a tax cut that takes effect in 2018. To defer a portion of your 2017 income to next year, an election would have been required by the end of 2016.
Sec. 409A contains a limited exception for short-term deferrals that allows a business to defer certain bonus payments to the following tax year. A bonus plan is deemed to comply with Sec. 409A if 1) It provides for bonuses to be paid no later than 2½ months after the end of the tax year (or, if later, the employer’s fiscal year) in which bonuses become fully vested, and 2) Recipients do not have the power to designate the year of payment.