Offer In Compromise – Is it too good to be true?
By Jessica Grace, Grace Law Offices, LLC
If you have watched television in the past 5 years, you have probably seen a commercial that shouts “Settle your IRS debt for pennies on the dollar!!” Do these businesses have a magic wand or a secret contact within the IRS that allows them to negotiate your IRS debt down to a fraction of its original value? In reality the remedy these commercials are referring to is Offer In Compromise and it is accessible to the general public.
What is an Offer In Compromise?
Like any creditor, the IRS prefers a partial payment to no payment at all. Thus, the IRS is sometimes willing to settle a tax liability for less than the full amount. This process is called an Offer In Compromise.
There are three types of Offers In Compromise; the IRS will consider a settlement if:
(a) the taxpayer is unable to pay the full amount due to long term financial hardship;
(b) there is doubt as to how much the tax liability is, or
(c) compelling public policy or equity considerations exist, and due to the exceptional circumstances IRS's collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered.
Who is a good candidate for a successful Offer In Compromise?
Not everyone with an IRS debt is a good candidate for a successful Offer In Compromise. Contrary to the implications in the television commercials mentioned above, the settlement amount is not determined by the size of your IRS debt. Instead it is determined by the facts of your case.
For example, an acceptable Offer amount for an Offer in Compromise based on financial hardship is figured by a mathematical equation involving your assets and your disposable monthly income. Of course, any other facts that make your case sympathetic will increase your likelihood of an accepted Offer.
If you choose to submit an Offer In Compromise based on your ability to pay, the following characteristics will increase your chances of an accepted Offer:
(a) Few or no assets of value (houses, cars, boats, etc.);
(b) Little or no disposable income each month. Disposable income is determined by taking your monthly income less your allowable monthly expenses as determined by IRS guidelines; and
(c) Circumstances which would prevent your income from increasing dramatically in the future.
What are the general steps of an Offer In Compromise?
The taxpayer starts the settlement process by submitting an Offer In Compromise application which contains an offer of a dollar amount the taxpayer is willing to pay in lieu of the full amount of his or her tax liability. If the Offer is grounded on any reason other than doubt as to how much the tax liability is; financial information must be submitted along with the Offer. This financial information includes documents such as three months of paystubs, three months of bank statements, and three months of bills showing housing expenses. If an Offer In Compromise is grounded on doubt as to the liability, the IRS is not permitted to request a financial statement.
The taxpayer is required to make partial payments to IRS while the offer is being considered by IRS. For lump-sum offers (which include single payments as well as payments made in five or fewer installments), taxpayers must make a down payment of 20% of the amount of the offer with the application. For periodic payment offers, the taxpayer must comply with the taxpayer's own proposed payment schedule while the offer is being considered. However, if the taxpayer meets the low-income threshold set by the IRS, this partial payment will be waived (along with the $150.00 application fee which is usually required).
If my Offer In Compromise is accepted am I free and clear?
Except where the offer is based only on doubt as to liability, the taxpayer must agree to comply with all tax law rules on filing returns and paying taxes for five years after acceptance or until the offered amount is paid, whichever period is longer. If these requirements are not met, the compromise terminates and IRS can seek collection of the original liability amount.
Is an Offer In Compromise right for you?
While the Offer In Compromise process is not a magic bullet; if IRS is after you to collect a tax liability that's beyond your capacity to pay, you should be aware of this remedy which may allow you to settle your tax debt for an amount that is within your ability to pay. This process is open to any person who is willing to put in the time and effort to prepare a complete Offer In Compromise application. However, given the nuances to the law surrounding the Offer In Compromise process, anyone considering an Offer In Compromise can benefit from the practiced hand of an experienced representative.
4 Uses for Life Insurance in Estate Planning
by Jessica Grace
Grace Law Offices, LLC
1. Replace your income for your family
Life insurance can work with estate planning tools such as trusts to provide your family with income over an extended period of time. This can help your family maintain their current standard of living.
2. Create equality in your bequests.
Life insurance can be used to equalize inheritances between several heirs. For example: If you have two children and would like to pass a large asset (such as a family cabin) to one child. You could purchase a life insurance policy with a benefit of comparable value and name the other child as the beneficiary of this policy. This would create some equality in inheritances without necessitating the sale of the large asset (the cabin) to create equal gifts.
3. Create liquidity in your estate.
Every estate needs some liquid assets in order to pay potential administrative costs and taxes. If there are too few liquid assets, assets such as family heirlooms, artwork, jewelry, and land may have to be sold to cover these expenses. Life insurance can provide a lump sum of cash to cover these expenses and prevent the necessity of selling assets.
4. Provide continuity for your business.
Business owners can use life insurance in additional ways, for example:
- To provide your business partner with the means to purchase your business interest from your estate;
- To provide your business with working capital to use through the transition. ♦
4Revocable Living Trust Myths
Jessica A. Grace, Attorney at Law
1. Revocable Living Trusts Reduce Estate Tax
A revocable living trust does not reduce estate tax by itself. Provisions must be added to a revocable living trust to address estate tax issues (usually by creating a credit shelter trust at the death of the first spouse or giving the surviving spouse the option of Disclaimer).
2. Revocable Living Trusts Shelter Assets from Creditors at Death
A revocable living trust does not shelter assets from creditors at the settlor’s death. Minnesota (following the Restatement of Trusts) allows creditors to reach the assets of a trust at death of the settlor.
3. Revocable Living Trusts Are Only for People with Large Estates
Any size estate can utilize a revocable living trust. Benefits such as probate avoidance and incapacity planning can be had regardless of the size of the estate.
4. Having a Revocable Living Trust Means the Whole Estate will Avoid Probate
Only property that is transferred into a revocable living trust will avoid probate. Probate will not be avoided completely if there is property in the estate that has not been transferred into the trust (if that property is of the type that would normally go through probate)
Is a revocable living trust for you?
Jessica A. Grace, Attorney at Law
The term living trust is widely known and often talked about as a probate avoidance tool, but there are benefits and drawbacks to revocable living trusts that go far beyond probate avoidance.
What is a trust?
The first step in understanding revocable living trusts is learning what a trust is. A trust is a relationship (usually formalized by a legal document) through which property is managed by one person for the benefit of another person.
There are three important roles in the trust relationship: The person who creates the trust is called the settlor. The person who manages the property in the trust is called the trustee. And the person who receives the benefits of the property is called the beneficiary. There can be one person or multiple people in each role and one person can hold multiple roles.
A trust is created through the execution of the trust document and through the funding of the trust. The trust document sets out standards of how the trust property will be managed by the trustee while it is in the trust. The trust document also dictates where the trust property will go when the trust ends.
After this document is executed, property must be transferred into the trust or the trust is empty. Transferring property into the trust is called funding the trust. Through this process the trustee is given legal title to the property.
What is a revocable living trust?
There are two things that make a trust a revocable living trust: (1) the trust is created during the lifetime of the settlor; (2) the trust can be revoked by the settlor, meaning it can be changed or ended at any time by the settlor.
There are three phases of a revocable living trust: (1) during the lifetime of the settlor while the settlor is competent; (2) during the lifetime of the settlor while the settlor is incompetent; (3) after the death of the settlor. The trust document can set out any number of provisions for each phase of the trust; in this article I will only discuss the most common provisions.
During the lifetime of the settlor while the settlor is competent: most settlors choose to name themselves as the trustee and beneficiary. This way the settlor can still have complete control over his or her property now held in trust. The settlor can manage their assets as they always have: through the help of a financial planner or other professional or simply on their own.
During the lifetime of the settlor while the settlor is incompetent: at this time a trustee other than the settlor steps in to manage the assets, but the settlor remains the beneficiary. The trust also provides provisions for determining when the settlor is considered incompetent.
After the death of the settlor: the trust contains provisions that dictate what trust property goes to whom. These provisions are similar to will provisions, but do not require the involvement of probate court to distribute the assets.
Benefits of a revocable living trust
Probate avoidance is one of the main reasons revocable trusts are created. But, to decide whether avoiding probate is important to you, you must understand what the benefits of avoiding probate are.
1. Privacy in administration – the distribution process of trust property is private, whereas the probate process is public
2. Quicker administration – probate proceedings typically take a year or more
3. Less costly administration - it is common for the probate process to cost at least $2,000
Another important benefit of a revocable living trust is incapacity planning. As discussed above, when the settlor becomes incompetent a new trustee, named in the trust document, steps in. If there is no trust in place, a court will appoint a conservator to manage the incapacitated person’s affairs. If this happens the incapacitated person has no say as to who becomes conservator.
Draw-backs of a revocable living trust
Just as probate avoidance can be seen as a positive, it can also be seen as a negative. Factors to consider:
1. Not a public administration – family members and other interested parties may not have access to the details of the distribution proceedings
2. No court supervision – if it is likely there will be disputes between family members or other beneficiaries it may be beneficial to have the authority of a court behind important decisions
3. Trustee has broad power – if the settlor does not have a person (or bank) in mind who they trust with broad power over their estate, they may prefer to have the supervision of the probate court in the administration of their estate
A revocable living trust is a more complicated document than a will; therefore the cost of having a living trust drafted is higher.
As discussed above, to reap the benefits of a revocable living trust, property must be transferred into the trust. Re-titling assets can be somewhat costly and time consuming.
Is a revocable living trust for you?
Revocable living trusts aren’t for everyone, but the information above should give you the background needed to have an informed conversation with an attorney about this estate plan tool. v
3Benefits of Incapacity Planning
Jessica A. Grace, Attorney at Law
1. Put your family’s mind at ease
By using tools such as a health care directive and a financial power of attorney, you can give your family piece of mind in the event you become incapacitated. Because the documents outline your wishes and names the persons you wish to make decisions on your behalf, your family will know that they are caring for you and handling your finances in a way that you would approve.
2. Save your family court costs
If you become incapacitated without having an incapacity plan in place your family would have to go through a court proceeding to appoint a guardian to manage your affairs. This process can be time consuming, expensive and emotionally trying. If an incapacity plan is in place no court proceeding is required because you will name the persons you want to manage your affairs in the incapacity planning documents.
3. Keep your affairs in order continuously
With the correct incapacity plan in place, the transition from you managing your affairs to another person managing your affairs can achieved smoothly in the event of incapacity. The person who manages your financial transactions or makes your health care decisions will be ready to step in. And with the correct documents in place, institutions such as banks and hospitals will recognize that person’s decisions making authority.
Should I Have an Estate Plan?
Jessica A. Grace, Attorney at Law
It is a common misconception that estate plans are only for wealthy or elderly persons. In fact, anyone who wants to plan for the “what ifs” of the future should have an estate plan.
Having an estate plan in place can put your mind at ease in several ways.
v First, it can make a plan to care for people who depend on you.
v Second, it can dictate where important property will go.
v Third, it can provide a plan for your financial and medical care in the event you become incapacitated.
What Type of Estate Plan is Right for Me?
This is a complicated question and one that cannot be answered briefly. However, there are three common types of estate plans.
Simple Estate Plan
This plan works well for persons with small estates (under $1,000,000). A simple estate plan includes a will, a financial power of attorney and a health care directive.
The basic will is a very versatile document. It can provide a plan for the care of minor children in event that a parent dies (through appointment of guardians and the creation of trusts to hold money until children reach a certain age). It also specifies who should get what property.
The financial power of attorney is an essential document to plan for incapacity. This document gives another person the authority to manage your finances in the event you are unable to do so. This is much simpler and more comprehensive than adding another person to your checking account to manage your funds.
The health care directive is also an important document to plan for incapacity. This document is a statement of your wishes as to when, where and how you wish to receive medical treatment. The document also appoints a health care representative to make health care choices on your behalf if you are unable to do so.
Estate Plan to Reduce Estate Tax
This type of estate plan is intended for a person who has a large estate (over $1,000,000). An estate plan to reduce estate tax also includes a financial power of attorney and a health care directive, but it also utilizes estate planning tools to reduce estate tax.
Some tools that can be used are: gifting plans, irrevocable trusts and disclaimer wills and trusts. One or a combination of these tools can significantly reduce or avoid estate tax paid to the state or federal government.
Estate Plan to Avoid Probate
This type of estate plan can be used by anyone who wants to avoid the cost and time consuming nature of the probate process. An estate plan to avoid probate again includes a financial power of attorney and a health care directive, but it also utilizes estate planning tools to avoid probate.
Some tools that can be used are: revocable living trusts, irrevocable trusts and re-titling of assets. If used correctly these tools can avoid probate. These tools can be used in combination with estate planning tools to reduce estate tax or on their own.
Each person and each estate plan is unique and some do not fit neatly into the categories listed above. Still, the above information is a must have for anyone considering creating or revising their estate plan. v
4Reasons to Create an Estate Plan
Jessica A. Grace, Attorney at Law
1. You Are the Parent of a Minor Child
Using the appropriate estate planning tools you can designate who will care for your minor children if you become unable to care for them. An estate plan can also dictate how your money will be held for the benefit of your children should you die before they reach adulthood.
2. You Have Property that You Care About
Having an appropriate estate plan will help ensure that your money and other assets go to the people you choose. Without a plan, state laws will determine your beneficiaries.
3. You Care About Your Health Care Treatment
Certain estate planning tools can help you make your wishes clear as to what kind of health care you receive and the manner in which you receive it.
4. You Have a Large Amount of Assets
The right estate planning tools can help minimize estate taxes and other transfer taxes. Though the law of federal estate tax is currently in flux, there is a Minnesota estate tax on estates over $1,000,000.