Tax Planning and Preparation

You die “intestate” if you die without a will. This means that the laws of the state where you reside will determine who gets your assets after you are gone. This may be straightforward if you are married, or a widow or widower with children. However, it can escalate in difficulty quickly. To learn more, check the Massachusetts Degrees of Kindred chart at https://www.mass.gov/doc/massachusetts-degrees-of-kinship-chart-mpc-960/download#:~:text=Degrees%20of%20kinship%20are%20used,brothers%2Fsisters%20and%20their%20descendants. You also may lose the opportunity to do tax planning or leave assets in a trust for minors if you die intestate.

Communicating with your estate planning attorney is number one. Share your concerns, desires and goals for leaving a legacy for your children and grandchildren. From there a series of documents may be custom drafted to take care of assets when you die, and for your beneficiaries when you are gone. This may include a Will, a Trust, a Durable Power of Attorney, a Health Care Proxy and a Living Will.

In Massachusetts, a creditor of an estate has nine months from the date of death of the decedent to make a claim against his/her/their estate. Therefore, a prudent executor will wait until that time has expired before making a complete distribution. However, interim distributions may be made along the way, particularly if there are assets that need timely action.

Estate Planning” is the general term given to the preparation of documents that allow you to pass along the assets your have accumulated during your life to family, friends or charity in an orderly, low-cost manner. Failure to plan an estate can result in significant expense, frustration at delays and court proceedings, and the possibility that assets will not end up where you really want them to go, and when.

Think of it as the difference between fast food and a nice restaurant meal. You get nutrients with both but there is no comparison between the type, timing, presentation, taste and enjoyment of the latter. The latter is like a well-drawn estate plan.

No! You can file the half dozen or so forms for probate yourself. The forms are available for download at https://www.mass.gov/lists/probate-and-family-court-forms-for-wills-estates-and-trusts . However, this can be complicated, and is not to be managed without care. We recommend retaining an attorney with experience in probate administration.

This will depend on the size of your estate passing through the jurisdiction of the probate court where you reside. At a minimum, probate will probably cost about $375.00 in filing fees plus a few thousand dollars in legal fees in Massachusetts, with additional fees for additional filings.

A revocable trust – or living trust, or inter vivos trust, or loving trust – is a device for managing assets during the life of a grantor for his/her/their benefit, usually with the grantor also serving as trustee. The main benefit of a revocable trust is that assets held in the trust are not subject to probate, and pass to beneficiaries without the need for the court proceedings

The basic premise of a trust is that assets formerly owned by a grantor are now held by a third party (trustee) for the benefit of a person (beneficiary) under the terms the grantor has determined best for the beneficiary. This might mean holding assets left to a child until then reach the age of majority, or for a spend thrift until later in life.

Revocable means that it can be changed or abandoned if it no longer meets the needs of a grantor. Irrevocable means that the terms are “fixed in stone” and for the most part cannot be changed. As you can imagine, they serve different purposes for those reasons. Revocable trusts usually are created to avoid probate, and irrevocable trusts are usually created to make lifetime gifts or transfers to a beneficiary, but not typically the grantor.

A trustee has a great deal of responsibility, from managing assets and making distributions to filing legal documents and tax returns. They may serve for an extended period of time and may have to make tough decisions in the care of beneficiaries. There are professional trust companies who can be hired, or your trusted attorney or accountant may be a suitable candidate. You can choose a relative, but remember that choosing a member of the family to make decisions involving the money of other members of the family can be a recipe for disaster

It was Benjamin Franklin who write that the only certain things in life are death and taxes. Given this certainty, you may want to do more than file an income tax return every year. Instead, why not meet with a professional who can advise the best times to take income, expend funds, make payments or other important tax planning advice. A visit to an accountant or tax attorney in the last quarter of the year is a great way to plan for the tax filings in the next year.

Gifts, estates and some trusts are subject to Federal and State Gift Tax, Federal Estate tax and State Estate or Succession tax. However, there are thresholds before a tax is assessed, so careful planning can save a great deal of taxes. For example, Massachusetts’ threshold for Estate Tax is just $1,000,000.00 per person, so assets should be titled properly to gain the maximum benefit of this threshold.

According to current information, the IRS audits fewer than .25 percent of income tax returns filed each year. That number goes up substantially for estates, as about 11 percent of all estates of $1 million are audited, and nearly half of all estates over $5 million are audited as well. Carefully prepared tax returns with strong record keeping are needed for an IRS examination, so ask yourself if you have the time and effort to ensure that you get no nasty surprises if you are tapped for an audit.

A limited liability company is owned by its members and operated by its managers. The members have ownership interests in the entity, which gives the members personal protection against creditors for the debts of the LLC. A corporation is owned by its shareholders and operated by its officers and directors. The shareholders own shares of stock in the entity and are also protected against creditors for the debts of the corporation. Depending on the nature of your activity, the number of owners and operators, and the desired income tax outcome, either may be appropriate for you.

There are number of different decisions to be made before choosing an LLC or a corporation as the entity to do business. Once you do, the forms are few and can be downloaded from the Secretary of State of your state or filled out online. It’s the planning before the filing that is important, and for that you need an experienced attorney.

A corporation or LLC can elect to be taxed as an ”S Corporation,” meaning that the income and loss of the corporation or LLC is not taxed to the corporation or LLC, but rather to the shareholders or members in proportion to their ownership interests. This may be a valuable tax savings device but has some limitations in use (there can only a maximum of one hundred shareholders, which may prevent a business from going public or getting outside investors).

Doing business is more than picking an entity type and paying taxes. There are contracts and leases to be drawn and signed, employees to be hired, and the daily grind of any business can bring a wide variety of problems both large and small. A businessperson will choose an attorney experienced in corporate law to serve as corporate counsel early in the game, so that issues can be addressed promptly and decisively in the best interests of the business.

When someone does business without creating an entity, it is called a “sole proprietorship” or sometimes referred to as a “dba” because someone is “doing business as” a name other than their own. This is quick and easy and has few income tax issues. However, the sole proprietor is personally liable for all debts of his sole proprietorship, a possibly dangerous situation when there are leases, contracts and other actions performed in business.

That depends on the tax elections made by the LLC or the Corporation. A sole proprietor does not file a separate income tax return, instead filing a Schedule C on his/her/their individual federal income tax return (1040) and reporting all income and loss there. A corporation or LLC can elect to pay tax at their level and file a separate tax return where all income and loss are indicated. They can also elect to be taxed as a “pass through” entity like an S Corporation, where net income or loss is not taxed at the corporation level but is reported on the owner’s federal income tax return via a K-1 form, passing through in proportion to the amount of the entity each owner has.