VCA Panorama Issue 3

VCA Panorama Issue 3

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  Panorama April 2012 VOLUME 1, ISSUE 3 More of the “Fair Share” theme President Obama’s recently released fiscal 2013 revenue proposals would have a dra- In this Issue: matic impact on traditional estate tax reduction planning. Directly targeted in the President’s proposal is the strategy known as an installment sale to an intentionally- More of the “Fair Share” defective grantor trust (“IDGT”). This strategy takes advantage of an anomaly in the Theme tax law that allows an individual to sell an appreciating asset over time to a trust for younger generation family members. The benefit of the strategy is that the value of the Don’t Overlook the appreciating asset is removed from the older generation’s estate because of the sale, but Nanny Tax! for income tax purposes, the older generation continues to be obligated to pay income tax on income earned by the asset. The net effect is that this income tax liability paid by the older generation is essentially a gift to the younger generation, but under current FATCA-Overview of Pro- law it is not treated as a gift subject to gift tax. In addition, the asset sold is not in- posed Regulations Issued cluded in the older generation family member’s estate at his death. by the IRS Under the proposal, when a transfer is made to an IDGT, the gift tax would be applica- ble when there is a distribution from the trust or when the trust ceases to be income taxable to the older generation. To the extent not yet distributed, any amount in the IDGT at the date of the trust creator’s death would be subject to estate tax. The Presi- dent’s proposal would therefore eliminate the transfer tax benefits of sales to IDGTs. Story continues inside ...
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  Story continued fromfront ... Don’t Overlook the Nanny Tax! More of the … It's tough enough to find the right person to care for your Other revenue proposals that would become effective in child in the home, without having to worry about the tax 2013 in the estate tax area would include: complications of becoming a household employer. Al- though the rules have been liberalized in some ways, other • Permanently returning the estate, gift and genera- requirements are just as stringent as they've always been. tion-skipping transfer (“GST”) tax regimes to the Here's a snapshot of what you must do to steer clear of trouble with the IRS when you hire someone to take care of 2009 rules – 45% top tax rate and $3.5 million your children in the home. exemption for estate and GST tax and $1 million for gift tax. Social Security and Medicare tax (FICA). If you have • Making the portability of unused exemption household workers, you are required to withhold and pay amounts between spouses permanent. FICA taxes if cash wages paid in 2012 total $1,800 or more (this amount increased from $1,700 for the 2011 tax year • Requiring consistency in value for transfer and due to inflation). As the employer, you have to report and income tax purposes (effective as of date of en- pay the required employment taxes for these domestic em- actment). ployees on Schedule H (Household Employment Taxes), • Modifying the rules on valuation discounts (for with the tax amount then transferring to the appropriate line transfers after the date of enactment); on your Form 1040 or 1040A. Not paying the "nanny tax" is income tax evasion. • Requiring a minimum 10-year term for Grantor Retained Annuity Trusts (“GRATs”) and a maxi- There is one limited FICA exception for wages paid to do- mum term of the life expectancy of the annuitant mestic employees who are under 18. Social security and plus 10 years—affecting the ability to use Medicare tax doesn't apply at all to these employees if do- GRATs for estate tax planning (applicable to mestic work is not their principal occupation. This excep- tion may help with steady evening and weekend baby- trusts created after the date of enactment); sitters, but otherwise it's not important to those parents who • Limiting the duration of GST tax exemption to need help with children during the day. 90 years (for additions to pre-existing trusts and trusts created after the date of enactment); and Unemployment tax (FUTA). You must pay the FUTA tax • Extending the lien on estate tax deferrals pro- for any household employee whom you pay $1,000 or more in a calendar quarter. The effective FUTA tax rate varies vided under Sec. 6166 (up to 15 years and three state-by-state. We can give you all the details. months from the date of death) (for decedents dying after the effective date and pre-existing Payroll tax paperwork. The FICA and FUTA you owe for unexpired liens on the effective date). any household employee is computed on Schedule H of Form 1040 and paid along with your regular income tax bill. Although you are not required to make estimated tax payments for FICA and FUTA, it might be a good idea to Perspective make quarterly payments to avoid winding up with an un- expectedly large bill at tax return time. Strength Federal income tax withholding. Thankfully, you aren't required to withhold federal income tax from the wages of household employees. But you are required to file a Form W-2 for every domestic employee whose wages are subject to the social security tax. And you will need to get an Em- ployer Identification Number for yourself, which is not the same as your social security number. Although you are not required to do so, your household employee may ask you to withhold federal income tax. If you pay the nanny's share of Social Security taxes in ad- dition to your share rather than have the nanny incur that expense, you or the nanny won't need to pay additional
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  social security taxeson that amount. The nanny, however, counts of others; or (3) is engaged primarily in the business will be considered to have additional income for income of investing, reinvesting or trading securities, partnership in- tax purposes. terests, commodities or any interest (including futures and forward contracts) in the preceding assets. This definition There may be other tax complications as well. For exam- includes foreign private equity funds and foreign hedge ple, depending on state law, many employers who simply funds, as well as banks, deposit-taking institutions and mutual hire household help may have to file and pay state unem- funds. An “NFFE” is any foreign entity which is not an FFI, ployment insurance tax for each quarter in which the state and includes foreign corporations, limited liability compa- wage threshold is reached. And the rules may be some- nies, partnerships and trusts. what different if you have other employees. On Feb. 8, 2012, the Treasury Department and the Internal Revenue Service released proposed regulations under Sec- Integrity tions 1471 through 1474 of the Code, the Foreign Account Tax Compliance Act, known familiarly as “FATCA.” Al- though the proposed regulations provide some long- Innovation anticipated guidance relating to FATCA, there are many questions yet to be addressed. NON-U.S. PRIVATE FUNDS Character A private equity fund or hedge fund (including any feeder fund, master fund, and alternative or parallel investment vehi- cle) organized in a non-U.S. jurisdiction will generally be FATCA—Overview of Proposed classified as a foreign financial institution (an FFI). Unless such a fund is exempt by reason of the rules described below, Regulations Issued by the IRS as an FFI it will be required to enter into an agreement with the IRS to provide to the IRS certain information concerning On February 8, 2012, Treasury and the IRS issued the first its U.S. account holders. If the fund does not enter into such set of Proposed Regulations regarding the Foreign Ac- an agreement, it will be a “non-participating FFI,” and U.S. count Tax Compliance Act ("FATCA") which was in- Withholdable Payments made to it will generally be subject cluded in the Hiring Incentives to Restore Employment to a 30% withholding tax. However, under certain circum- Act of 2010 ("HIRE Act"). The HIRE Act identifies three stances, a U.S. Withholdable Payment made to a non- separate groups that are the subject of its reporting re- participating FFI that is allocable to an account whose benefi- quirements as follows: cial owner is itself a participating FFI or a “deemed compli- ant” FFI as described below, may not be subject to withhold- 1. Foreign financial institutions ("FFIs") with U.S. ing. investments; and The agreement with the IRS will require the fund to report to 2. U.S. financial institutions and other U.S. payors; the IRS certain information with respect to each of its U.S. partners, including the partner’s name, address, and taxpayer 3. Other foreign investors ("NFFEs") with U.S. identification number and the account balance (or value) of investments. the partner’s interests in the fund. The fund would be re- quired to withhold 30% on U.S. Withholdable Payments All U.S. financial institutions and other U.S. payors of made to any partner who does not provide the required infor- U.S. source income are the subject of the HIRE Act and mation. The fund will also be required to withhold the tax on FATCA obligations. The principal obligation of U.S. fi- payments to non-participating FFIs. The fund may eventu- nancial institutions and other U.S. payors under these rules ally be required to withhold the tax on payments to non- is to withhold U.S. tax at the rate of 30% on U.S. source participating FFIs. The fund may eventually be required to income paid to FFIs and NFFEs. close the account of a non-reporting account holder, although The term "FFI" is defined broadly and includes any for- the timing of this and its application to private equity funds eign entity which (1) accepts deposits in the ordinary currently remains unclear. course of banking or similar business; (2) as a substantial portion of its business holds financial assets for the ac-
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  U.S. PRIVATE FUNDS ANNUAL REPORTING A domestic private fund is not required to enter into any If an FFI has one or more U.S. accounts, and has entered into special agreement with the IRS in order to comply with an agreement with the Secretary, then the institution must FATCA. However, a domestic fund does need to deter- provide certain information annually to the IRS. The required mine if its limited partners are subject to FATCA with- information includes the name, address and TIN for each ac- holding. The fund is a withholding agent, and thus would count holder who is a specified U.S. person or of each sub- generally be required to withhold 30% on U.S. Withhold- stantial U.S. owner of a U.S.-owned foreign entity, the ac- able Payments made to any partner that fails to provide the count number, the account balance or value and, except as fund with the documentation needed to determine whether provided for by the Secretary, the gross receipts and gross such partner is a U.S. person, an exempt or deemed- withdrawals and payments from the account. The requirement compliant foreign person, or a participating FFI. U.S. to provide information as to the gross receipts and gross with- withholding agents are also required to meet certain docu- drawals and payments is likely to require many institutions to mentation requirements to determine whether an existing develop computer programs specifically to comply with these or a new account is beneficially owned by a U.S. per- new U.S. reporting requirements. son. The IRS intends to issue revised withholding certifi- cates (e.g., IRS form W-8) to include additional FATCA The Proposed Regulations phase in the following reporting related information. requirements: Payments made to certain persons may be exempt from • In 2014 and 2015, an FFI needs to only report the withholding provided that the withholding agent receives name, address, TIN, account number and account appropriate documentation as to the entity’s classifica- balance for U.S. accounts; tion. Among the entities classified as exempt owners are • Income earned by the account will be reported by foreign governments (including political subdivisions, and FFIs starting in 2016 for the 2015 calendar year; and wholly owned instrumentalities and agencies), interna- • Beginning in 2017, full reporting (including reporting tional organizations, foreign central banks, and certain of information on gross proceeds from broker trans- foreign retirement plans. actions) is required. NON-U.S. PORTFOLIO COMPANIES Alternatively, the FFI can elect to instead provide the infor- mation that a U.S. financial institution would be required to Payments made to a foreign person that is not an FFI – provide the IRS if the account holder were a natural U.S. per- referred to in FATCA as an NFFE – may also be subject to son. This effectively substitutes the Form 1099 filing require- withholding. Although NFFEs are not required to enter ments for those discussed above. into an agreement with the IRS to avoid FATCA with- holding, absent an applicable exemption they must certify The FATCA Proposed Regulations provide some helpful their status as compliant with certain reporting require- guidance, but it is unclear whether they will be enacted in ments designed to ensure that they have no significant their current form. U.S. owners. The proposed regulations include an expanded list of NFFEs that are exempt from FATCA withhold- ing. Among the entities that are exempt are certain public companies and members of its expanded affiliated group, active business entities, certain non-financial holding com- panies, and certain start-up companies. A non-U.S. portfolio company may be an FFI or an NFFE. In that case, unless it is exempt or compliant, it may also be subject to withholding U.S. Withholdable Payments it receives from third parties.
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  View Capital Advisors,LLC was founded in 2004 by its principals with the mission of providing sophisticated Contributing to this issue: investment asset management and financial and estate planning to our U.S. and Non-U.S. clients. R. Craig Brubaker I. Michael Goodrich We seek to bring wealth planning best practices and a wide range of non-proprietary solutions to our clients. We also conduct our own research and diligence on 2000 McKinney Avenue, Suite 600 world markets and investment alternatives. Dallas, TX 75201 For further information, please contact your investment 214-855-2550 representative or one of our wealth planning specialists: www.view-cap.com R. Craig Brubaker 214-855-2556 [email protected] I. Michael Goodrich 214-855-2552 [email protected] To ensure compliance with requirements imposed by U.S. Treasury Regulations, View Capital Advisors, LLC, and its affiliates, informs you that any U.S. tax advice contained in this communication was 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. View Capital Advisors, LLC provides asset allocation and investment advisory services through its affiliated registered invest- ment advisor, View Capital RIA, LP and provides trade execution services through its affiliate, VCA Securities, LP.