Sharon J Hall

How the Stretch IRA in Estate Taxes, 401k Plans, and Inheritance Affect You

We briefly describe the significant taxes that can be imposed upon a highly appreciated IRA coupled with associated estate taxes compounding the problem of the inherited taxes. The best rescue plan should provide retirement solutions and strategic plans for your assets including real estate assets and stock portfolio in order for you to control how your sizable money will flow to your children and heirs. Implementing a good, solid, strategic retirement plan is the best way to control your assets.

Life is a matter of probabilities. Every time you get into a car, plane, bus, or train, there’s a small, but measurable chance that you will have an accident. It doesn’t take an Einstein to understand the high probability that if you are over the age of 60, and you have an estate tax problem, and you die with an IRA, 77% of your money will go to the government and only 23% will go to your heirs.

This type of disaster is totally avoidable.

Invidual Retirement Account from 401K Plan, Profit Sharing Plan or Defined Benefit Plan

An Individual Retirement Account (IRA) is nothing more than a non-forfeitable Trust. Contributions are legally limited, however there are no limitations on conversion from a 401K or other pension plan to an IRA. If you were an executive of corporate America, upon retirement you most likely converted your 401K plan, or your Profit sharing Plan, or your Defined Benefit Plan to an IRA. If you have a highly appreciated IRA and you have an estate tax problem, here’s what happens if you die with a million dollar IRA. If you have an estate tax problem and you die without a good rescue plan, the Federal and State taxes will be up to seventy-five percent of your inheritance or ,251,800 in total taxes.

In other words, your heirs will inherit as little as twenty-five percent or 8,200.

Stretch IRA Problems

Most advisors cure this problem with the Stretch IRA. In other words, Stretching the IRA distributions over a longer life other than the owner, usually someone younger, i.e. Grandchild.

Stretch IRAs are a good idea for someone who does not have an estate tax problem. They are a bad choice for those who have an estate tax liability.

Why does it not work in these situations? Because when this Stretch IRA passes to a younger heir estate taxes are due. If the younger heir receives a million dollar IRA there would be a ,500,000 estate tax due. Where is the young heir going to get ,500,000 to pay the IRS?

The presumption is that the heir will take the ,500,000 out of the account. When the heir takes out ,500,000 from this account then it’s taxable income and income taxes are due on that money. This creates a vicious cycle that can be avoided with a good rescue strategy.

You can choose a better way to avoid the 77% estate and inherited tax problems.

Disclosure: The exact calculation of income taxes due are complex, and are dependent on your income tax bracket, the composition of your income, and your applicable state taxes where your assets are domiciled. If you have estate tax problems, and you have sizable IRA assets, you can almost guarantee double taxation on your death. You should call a professional who handles such matters for an in-depth analysis of your personal or family’s situation.

This statement is required by IRS regulations (31 CFR Part 10, §10.35): Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

As we approach the end of 2010, annual audits loom for all foreign invested enterprises in China. The State Administration of Taxation employs a fiscal year to denote reporting requirements, and this then makes it an excellent time to consider the future of your business if still using a representative office in China.

Chinas State Council recently issued new regulations to strengthen the administration of resident representative offices (ROs) of foreign enterprises in China. The new regulations require ROs of foreign enterprises to provide audited accounting information on a regular basis, prohibit them from conducting profit activities, and specify the relative penalties for foreign enterprises that violate the rules. As we previously advised in March, tax structuring of ROs has also changed, with ROs now being liable for deemed profit rates of 15 percent. These regulations affect foreign investors setting up representative offices in China, as well as ROs already established on the mainland as they touch on the establishment, management, permitted activities and staffing of ROs.

The main changes as affect existing representative offices are as follows:

Management
Representative offices cannot employ in excess of four foreign staff, including the chief representative.

Taxes
From this year onwards, representative offices will not be permitted to apply for tax exemption as has occasionally been the case in the past. Additionally, the SAT increased the deemed profit tax rate from a fixed 10 percent to a variable 15 percent to 30 percent. This has increased the amount of tax liabilities ROs usually have to pay on the sum of their costs from an average of 8.7 percent to a new minimum rate of 11 percent, depending on the specific case. Additionally, this new variable rate is determinable by the tax bureau and not by the RO, meaning that ROs are potentially at risk of the tax authorities increasing their deemed profit tax rate without prior notice. Although this is dependent upon a number of variant factors on a case by case basis, it is very likely that under the new conditions, an RO with more than 8 to 10 employees involved in quality control and/or market research is now paying more taxes then a service WFOE or a FICE involved in the same activities.

RO operations
It should be remembered that representative offices may also not engage in any profitable activities. This has been rather loosely monitored by the government in the past, however over the course of this year, ROs are being increasingly monitored for trading activities. If you are using your RO illegally for trading purposes, you will get caught. Punishment, which includes the serious category of tax evasion, can be severe. The China tax bureau has the power to fine up to five times any amount due, plus additional penalties for non-compliance. Foreign chief representatives should be aware that amounts due in excess of RMB10,000 in China can be classified as a criminal offense, and be subject to jail time if sufficiently serious or should fines be unpaid. The current regulatory climate in China towards foreign investors also dictates that this is not a time to be playing with the prospect of being hit with fines or jail time. It is the time to be considering getting out of such possibilities by getting into compliance.

The new guidelines for what ROs can actually do come into effect on March 1, 2011. The Regulations on the Administration of Registration of Resident Representative Offices of Foreign Enterprises were issued this year on November 19, and state:

The RO cannot engage in any profit activities except for those activities which China has agreed on in international agreements or treaties. The activities ROs can be involved in include market research, display and publicity activities that relate to company products or services, contact activities that relate to company product or service sales, domestic procurement and investment. ROs will have to pay an RMB50,000 to RMB200,000 penalty for profit activity involvement, and RMB10,000 to RMB100,000 for exceeding the activity scope mentioned above.

The new regulations reveal special concern over the degree of business undertaken by ROs as well as their valid financial records. They call for the availability of RO accounting books and forbid ROs from using the accounts of other enterprises, organizations or individuals.

If you require your China operations to directly buy and sell, have its own import/export license, and legitimately trade in China you will need to change your current RO structure to that of a foreign invested commercial enterprise (FICE) or wholly foreign owned enterprise (WFOE) in order not to fall foul of these new regulations concerning the use of an RO.

There’s a story doing the rounds about a French software engineer called Hervé Falciani who has apparently stolen banking records from HSBC’s private bank in Switzerland.  The alleged ‘offence’ took place three years ago, but the man in question has been taking his time in selling the information on to the likes of HMRC because of facing prosecution in Switzerland.

He has avoided prosecution by moving to the South of France, and is being hailed by some as a modern day Robin Hood.  However, the man is certainly benefitting substantially from his crime in the form of cash paid for data stolen – and so he has not stolen the records for the good of anyone’s health other than his own.

According to the Times, HMRC is about to get its hands on records relating to British customers who hold accounts at HSBC in Switzerland – and I doubt that they are acquiring them for nothing from Hervé Falciani.  So, what does this tell us?  Well, on the one hand, if you’ve been using a private bank account with HSBC in Switzerland to evade taxation you need to be worried – and on the other hand it tells us that our government says that theft is a lesser crime than tax evasion.  Personally I find that very, very hard to stomach…

The argument for supporting Hervé Falciani’s actions is that no one should be allowed to get away with avoiding their duty to pay taxation.  This man allegedly stole the customer records when he worked for HSBC because he felt it was wrong that there are people out there who can use offshore bank accounts, trust and company structures to avoid paying tax that is legitimately owed.  However, this man is no saint.  If you support the alleged reasons for him committing his crime – because come on, when has stealing personal data been anything but a criminal offence – do you also support the fact that he has held the data out like a fat juicy carrot to tax authorities the world over and profited from his crime?

Hervé Falciani has benefitted substantially from his crime.  He is allegedly a money-grabbing criminal – he is no better than those whose data he has stolen.  In fact – he is probably WORSE than many whose data he has stolen because what’s to say that anyone who banks with HSBC’s private bank in Switzerland is evading or avoiding taxation?  Those who bank privately are usually high net worth individuals who require and can afford to pay for a high level of customer service.  They have private bank accounts so that they are treated as they would expect to be for the fees they pay!

Just because you have a private bank account, it does not mean you’re a tax-evading criminal.  However, if you steal private data and then tout it around and get paid for it by the likes of HMRC and the French tax authority, that does make you a criminal of the lowest order!  Data theft is a serious crime – it results in people losing out every day on an international scale.  What Hervé Falciani has done is nothing more than common theft – and just as the government is keen to crack down on those who avoid taxation, I personally think this man should be tried and if found guilty, convicted and sent to prison.  You cannot profit by selling on personal data – it is wrong.  It is a crime.

How can our government say that theft is a lesser crime than tax evasion?  You tell me.

 

QNUPS is a scheme introduced by the HMRC in 2010 that permits investments made in certain offshore funds to be free from taxation under the Inheritance Laws. Any individual can transfer his assets to such a scheme to avoid his heirs being subjected to IHT upon his death.

QNUPS is a relatively new scheme introduced by the HMRC under the IHT regulations in February 2010. It allows an individual domiciled in the UK to transfer his pension or assets to a qualifying offshore scheme to avoid his family having to pay Inheritance Tax on the assets after his death. In addition, the investment can be made in several countries worldwide where the person plans to settle after his retirement. This includes countries with which the UK Government does not have double taxation agreements. Here are some commonly asked FAQs that every investor should know.

What assets can be transferred to QNUPS?
An individual can choose to transfer into this scheme any asset that the wants to save from Inheritance Tax. This can include his pension, residential property and even other assets of an unconventional nature such as old wine or antiques.

Is there a restriction on the amount that can be invested in these schemes?
There is no maximum limit for investment in these schemes. A person can choose to invest any amount that he wants. In addition, there is also no restriction on the type of income that has to be invested. It does not have to be only income from employment as is the case with other pensions. Therefore, individuals who get income from sources other than employment such as gifts or inheritances can transfer such funds into these offshore schemes to protect them from tax on inheritance.

Is there a time period within which the transfer has to be made into QNUPS?
There is no restriction on the time within which funds have to be transferred into these schemes. In fact, a person can also transfer his assets after retirement. This benefits families these days where there is more than one generation who is retired. If the older family member passes away after leaving his funds in a QNUPS scheme, the retired inheritor would not be liable to pay any IHT on his inheritance.

Will tax be levied if the individual relocates to the UK a few years after he retires?
No. Unlike any other overseas schemes, there is no restriction on the number of years that an individual has to reside outside the UK after he retires so as not to be taxed upon his return. With QNUPS, a person can choose to return whenever he likes and still avoid taxation. This does away with the need to change Domicile from the UK or transfer assets before death in order to avoid taxation.

President Bush has proposed a very interesting health care plan.

Employers now get an unlimited deduction for health care. This would change.

Benefit Becomes Regular Income But New Deduction Reduces The Final Tax

The cost, of an employer plan, would become income to the employee but against that, the employee would get a large deduction.

In about 80% of the cases the deduction allowed, would be larger than the income received.

The excess would be applied to taxable income, thus reducing the tax of the recipient .

Mr. Bush’s plan would give every family a “standard deduction” of ,000 and every individual a “standard deduction” of 00.

Most Americans who are privately insured, are covered through their employer. The average cost of family plans provided by employers is ,500. About 80% of employees have plans worth less than the amount of the deduction they would receive.

Those with plans worth more than ,000 would pay a higher tax under the plan.
If a worker has an employer family plan worth, for example, ,000, he would add ,000 to income, subtract ,000 and pay a tax on the ,000 excess.

Most workers with plans worth more than ,000 would be higher income workers.

Those with plans worth less than ,000 would Have Very Nice Options

Some employees with expensive employer sponsored family plans could still benefit as long as the plan was worth less than ,000.

For example, a family plan worth ,500, would add the ,500 to a worker’s income, but would offset it with the full ,000 deduction wiping out the ,500 of income and leaving 0, which would be applied to and reduce taxable income, by the leftover 0.

Even though this employee had an expensive plan, he is still in the 80% group that would save.

It gets better.

If that same employee were to switch from a low deductible plan to a high deductible plan, for example, to a plan costing ,000, he would then have a deduction of ,000 instead of 0.

It is further likely he would make more economical health care choices, which is badly needed to bring down health care costs nationally.

An employee with an employer sponsored family plan worth only 00 would add 00 to income, deduct ,000 from taxable income, thus shave ,000 from taxable income.

Those Who Buy Their Own Insurance

Those 17 million Americans who pay for their own health care insurance would have no insurance income to declare, therefore they would just take the full deduction, for their appropriate filing status.

Other Features

The deduction could also be taken against payroll taxes.

Middle income families could save thousands under this plan; singles could also do very well.

This plan would increase taxes on upper incomes and decrease taxes on lower incomes.

Congress’s Joint Committee On Taxation (JCT) has recently reported that this health care plan would save the government 3 billion dollars over ten years. The function of the JCT is to “score” tax policy changes.

Democrats dismissed and derided this plan when it was proposed. They should look more closely. Estimates run as high as 10 million for lower income individuals who would gain coverage. Finally, benefits to millions of others and the nation seem to be very positive.

In this article Lee Byers is going to examine ways in which expatriates can avoid certain taxation entirely legitimately.  Lee Byers is not suggesting you start laundering money, rather Lee Byers is going to draw your attention to hidden taxes and show you ways you can perhaps reduce your overall annual tax burden by making use of annual tax allowances.

The information imparted herein is generic – it may not apply to you and your personal circumstances at the current time, so if in doubt, speak to your accountant or a financial adviser to find ways in which you can manage your money most effectively.  The following tips should at least give you a starting point for thinking about ways in which you can perhaps save money.

Avoiding Capital Gains Tax

As you’re probably aware, in the UK you’re liable for capital gains tax when you sell certain assets and realise a profit from the sale.  The tax is not applied if you sell your main residence and you do have an annual exemption.  You can also gift assets to your spouse for example, and in so doing also make use of their annual tax exemption allowance.  So, if you have UK based assets to sell, look carefully at when you sell them in a tax year and how much profit you will realise.  Perhaps with careful planning you can offset any losses you have made against the gain, perhaps you can also sell assets across multiple tax years and thereby make use of your allowance and perhaps even your spouse’s too.

It’s also well worth knowing that as an expatriate who is living abroad and no longer a tax resident in the UK you may not be liable for UK CGT at all depending on how long you have been living abroad for and also, in some cases, whether there is a double taxation agreement in place between your new nation of residence.  It is well worth looking into this entire situation carefully before you dispose of any assets that may realise a gain, because if you can legitimately avoid paying CGT, so much the better.

Now a word of warning for those living abroad or who live in the UK but who have assets abroad such as a property – remember that CGT is not a tax exclusive to the UK.  Many nations have their very own version of it, so you must understand the new tax rules in your chosen country as well!

Can You Avoid Income Tax?

Income tax was only introduced in the UK in 1799 – and then only as a temporary tax.  You never know, this may mean that one day the government decides it no longer needs to collect it!  But until then, are there ways you can avoid paying income tax?  Well, yes and no!  If you’re UK resident you can make use of a pension as a way to reduce your taxable income as pension contributions attract tax relief at your highest rate.  You should also look at ISAs as a way of reducing tax on interest earned by you.  However, if you’re an expat living abroad you will not necessarily be able to benefit from either option…but the good news is, you may be able to make use of the taxation saving benefits of offshore saving, investing and even banking.

You need to look at your entire financial situation with the help of an independent financial adviser to see if there are ways you can save tax by going offshore, or at least benefit from greater compound interest earned thanks to taxation deferral.

Inheritance Tax Dodge

Inheritance tax is the most unfair tax of all – you pay tax all your life, you work hard to build up an estate that consists of perhaps your home and personal belongings, you plan to leave it all to your heirs to help them along in life when you die, and then along comes the tax man to take it all away.  Well, to take up to 40% of it away anyway.  And you know what, moving abroad for even many, many years and being tax resident somewhere other than the UK will probably have no impact on this event occurring at all – this is because the UK tax man looks at your estate based on your country of domicile, not your country of residence.

The good news is that there is a healthy nil-rate band on which no tax is levied – but if your estate is worth over this figure, (£325,000 for the tax year 2009/2010), then 40% of the extra value becomes the tax man’s take.  Transfers between spouses are exempt, and there are all sorts of ways you can legitimately dodge this horrible tax – you can look at making lifetime transfers for example, and perhaps even placing assets in a trust.  Speak to a financial adviser about the best way to go forward to protect your estate, your wishes and your heirs from IHT.