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Effective January 31st, 2023, New York State has implemented new changes to the rules and regulations concerning Notary Publics which imposes additional important requirements on all notaries whether they are performing traditional notary services, or electronic notary services.
The most significant new change is the requirement that all types of notaries keep a journal documenting all notarial acts performed for a period of ten years. The journal must track the following required pieces of information:
In addition to the five above categories, notaries performing electronic notarization must also document:
While these requirements apply to all notaries performing all types of notarial services, real property transactions are especially vulnerable to fraud, and the notary public is the first line of defense in preventing such crimes. Fraud involving notaries typically occurs in one of two ways, and diligently adhering to the above-described process significantly helps to eliminate both.
The most obvious way that fraud is committed is when someone tries to get a document notarized and they are not the principal that they are claiming to be. This type of circumstance can present itself a few different ways, such as by presenting a forged document that has already been signed outside the presence of a notary, and the individual is now seeking to have it notarized after the fact. Or in a similar situation, the fraudster could be trying to get you to notarize a document without presenting a valid form of identification with a signature to compare to.
By routinely following a patterned behavior whenever you notarize a document you can avoid being implicated in this type of fraud entirely. The requirements of the journal set forth core pieces of information that will eliminate many types of fraud just by carefully collecting this information in a methodical way. While there are different credentials and/or personal knowledge which can be used to comply with item 4 in the journal list above, the gold standard would be a government issued photo ID or driver’s license. If an individual is asking you to notarize without providing this particular document, that should trigger a red flag in your mind, and cause you to take a pause and re-evaluate the circumstance to make sure you are being compliant with the requirements above. A notary may always refuse to provide a notarization service if they are not satisfied with the proof of identity, or if there is concern that the principal lacks capacity to execute a record, or if the notary suspects it is done so under duress.
The second type of fraud is less preventable on the part of the notary, but the impacts and inconveniences are also able to be greatly diminished by diligent journal keeping. This type of fraud occurs when someone forges your notary stamp/seal using publicly available records. In this scenario, your seal may be used to complete documents for recording with the county clerk that you will have never seen before, let alone have been in the same room as the person claiming to be the principal. It is in this circumstance that being able to point to a meticulously kept journal that adheres to a consistent process will enable you to prove that you were not involved in the fraudulent notarization process and help you clear your name more efficiently than any other preventative measure.
In addition to the above described journal keeping requirements, New York has also clarified the current rules concerning electronic notarization. Previously during the height of the pandemic, notaries were able to provide services via programs such as Zoom and Skype, this program was known as Remote Ink Notarization. Although this program has since been removed, New York is seeking to replace it with Electronic Notarization. The key difference between these two programs is that electronic notarization requires the use of specialized commercial software which allows the notary to perform identity proofing and credential analysis. Although New York has not provided significant guidance on recommended programs to use for this purpose, we can anticipate that many reputable companies such as title companies will begin to rollout New York compliant programs that provide the above services, and allow for the recordation and storage of audio and video. Until and unless this program and software is in place, the important takeaway is that no notaries should be providing services through programs such as Skype or Zoom in New York without such additional software features. Electronic notarization is an additional program on top of traditional notarization, and must be applied for separately.
Whether you are performing an electronic notarization or a traditional notarization, the requirement to keep a journal is mandatory. While the imposition of additional requirements on Notary Publics in New York may seem frustrating, they are truly designed in a way to protect the integrity of the notary service, and it also serves as an important safeguard to protect the individual notary as well from those seeking to commit fraud.
This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.
New Federal Information Reporting Requirements to be Imposed on Privately-Held Companies and Their Owners by Department of the Treasury
Effective January 1, 2024, corporations, limited liability companies and similar entities (which are not publicly-traded companies) must file detailed information concerning the entity and its owners with the U.S. Department of Treasury. Significant penalties will be imposed on entities and owners for noncompliance with this new reporting requirement.
These obligations arise from the National Defense Authorization Act for Fiscal Year 2021, in which Congress enacted the Corporate Transparency Act (“CTA”) as a component of the Anti-Money Laundering Act of 2020. This article provides a summary of the CTA, the reporting requirements it creates and the penalties that could be imposed in the event of noncompliance.
Purpose. The CTA is intended serve a variety of purposes, from improving national security and anti-money laundering standards to gathering information about entities within the United States with “hidden owners” and setting a clear and universal standard for incorporation practices.
Reporting Obligation. The primary mechanism by which the CTA seeks to achieve these purposes is the establishment of a national registry of beneficial owners of certain entities, referred to as “reporting companies”, which will be required to file with the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury, reports identifying the company’s beneficial owners and information about company applicants. The contents of these reports will be discussed in more detail below.
Reporting Companies. The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is created by filing a document with the Secretary of State or similar office in any state, territory, federally recognized Indian Tribe, or under the laws of a foreign country and registered to do business in the United States.
Beneficial Owners. The CTA defines a “beneficial owner” as an individual who, directly or indirectly:
The CTA also excludes certain individuals from the definition of beneficial ownership, including:
Company Applicants. The “company applicant” is either:
Reporting Requirements. In each report to FinCEN, a reporting company is required to provide the following information for each beneficial owner of the entity:
Company applicants will also be required to provide this information, but may provide a business street address rather than a residential address. However, company applicants will only be required to provide this information for entities formed on or after January 1, 2024.
Additionally, certain “company information” is required in the report, including the reporting companies’:
Exceptions. The CTA contains a number of exceptions for entities exempt from reporting, including certain regulated industries which already require similar beneficial ownership information reporting, publicly traded companies, certain investment companies, nonprofits and government entities.
There is also a significant exception that applies to “large operating companies” which meet the following conditions and are therefore exempt from the reporting requirement:
Effective Date. The date that initial reports to FinCEN are due depends on whether the reporting company is an existing entity or a newly formed one. The final rule implementing the CTA will go into effect on January 1, 2024. Reporting companies in existence prior to this date will have one year, until January 1, 2025, to file their initial reports with FinCEN. Reporting companies created on or after January 1, 2024 will have 30 days after receiving notice of their creation or registration to file their initial reports with FinCEN.
Following the filing of a reporting company’s initial report, any changes to the information included in previous filings – except for changes with respect to the company applicant(s) – must be reported within 30 days of such change.
Penalties. Providing false information or failing to report complete information to FinCEN can result in fines of $500 per day up to a maximum civil penalty of $10,000 and imprisonment for up to two years. The CTA does contain a safe harbor from liability for the submission of inaccurate information if the person who submitted the report voluntarily corrects the report within 90 days.
For further information regarding your particular circumstances, or if you need assistance with compliance, reach out to your accountant or contact us at (315) 471-8111.
This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.
Jeff Fetter has been appointed to a Task Force in the support of New York farmers. “The emphasis will be on administrative actions that can be taken by the Governor and state agencies to provide an immediate and timely response to important issues around supporting and expanding food production in New York.”
Read the complete story at: Hochul Supports NY Farmers
We are pleased to welcome Kayla C. Sharshon, Esq.
Kayla is part of the Firm’s Estate Planning and Wealth Preservation Group. Read about Kayla: Kayla’s Biography
The article below was recently published by DFA Financing/Agri-Max Financial Services, LP, in conjunction with the Dairy Farmers of America at: https://dfafinancing.com/dfa-financing-news/blog/july-2022/planning-and-utilization-of-the-advisory-team-in-a
Economic challenges continually face today’s agriculture industry. Farm product prices are not under the farm’s control while operational and input expenses continue to rise year after year. For those who have been working in agriculture for years, the cyclical nature of the difficult times continue to arise every few years. Regardless of when the downturns occur or how long it continues, it is those who are prepared for these times who persevere through and continue to prosper.
The same holds true when it comes to facing the need for long term succession planning for a farm or ranch – it is critical to be prepared and to have a plan in place. Unlike many industries where the owners’ goal is to develop and then sell the business for the greatest financial gain possible, the owners of closely held agriculture businesses are generally more focused on ensuring the perpetuation of the farm or ranch for the next generation and beyond. But, without the proper plan in place, that is close to being an impossibility.
What is succession planning? Having a will? A buy sell agreement with your partners? And, what role does the farm advisory team play in ensuring that a proper plan is in place. The key players of the advisory team include the accountant, the attorney, the management consultant, the financial/insurance advisor and, of course, the banker. There may be others involved as well as each adds his or her own individual expertise and experience to the plan. In many cases, the client may have a greater comfort level with one or more of the advisors than others so its important to have “the team” working together for the client. If the client sees that his team is all “on the same page”, the process is much easier for the client to accept.
It’s the advisory team that can facilitate the conversations with the client to make a succession plan a reality – despite the hesitation of the client. When it comes time to acquiring land, purchasing equipment and machinery the consensus among the owners is many times “we need it now, help us get it!” But when it comes time to planning for the future, procrastination many times stands in the way. It may be perceived as time consuming, too expensive or it may be just a reluctance of the senior generation to face the reality of the winding down of their careers. Whatever the reason, the advisory team needs to impress upon the owners and management team – senior and junior – the importance of ensuring that a plan is in place for both expected and unexpected events.
It is critical to have the proper advisory team in place in developing and implementing an effective succession plan. Each advisor plays an important role in the planning. The role of all advisors is to ensure that discussions take place, plans are structured and that they are kept up to date and maintained as the tax laws, the operations and/or the family involvement change over the years.
Back to the primary question – what is agriculture succession planning? It is not simply a will that leaves assets to family members and it is not simply a buy sell agreement that provides that if Dad dies, Uncle Bob buys him out and vice versa. Succession planning involves many components of a well coordinated plan that is based on the particular circumstances that exist within the farm or ranch and most importantly it must be in writing and kept up to date. These components include:
Estate Planning – farm based wills and trusts that do not simply divide assets among heirs. What entities are involved and who is to own and manage them, etc?
Asset Protection Planning – utilization of limited liability entities and trusts to protect assets for not only the current generation but future generations.
Management and Knowledge Transfer – establish a plan today that allows the junior generation to benefit from the years of experience of the senior generation and the many relationships that have been established by the senior generation over the years. The time for son and daughter to meet the banker for the first time should not be at Dad’s funeral.
Succession Planning Agreements – planning for expected and unexpected events that will arise in the future such as death, disability, divorce, departure etc. with proper agreements such as buy sell agreements among the owners of the operation and employment and long term incentive arrangements with key employees who may not be owners, but are critical to the continued success of the farming operations.
Lifetime Planning – implementing the appropriate lifetime strategies to protect assets from plaintiffs in lawsuits, minimize or eliminate estate taxes including spouses in matrimonial matters and possibly to protect assets from being improperly managed by owners who should no longer be in controlling positions.
Opportunities for succession planning today are greater than ever. Federal estate and gift exemptions are nine times what they were twenty years ago. In 2022, there is a federal estate and gift exemption of $12,060,000.00 for each individual. With a properly structured plan a married couple can benefit from a joint $24,000,000.00 exemption. This affords opportunities not only for transfers at death, but utilizing long standing and accepted planning strategies to remove significant assets from a taxable estate during life – and this can be done in a manner that benefits both the senior and junior generations. State laws must be taken into consideration as well as to potential estate taxes, but many states have followed the federal lead in lessening the impact of estate taxes on closely held business owners.
Under current law, the federal exemption is to be reduced to about one half of that amount in 2026. Therefore, planning should begin as soon as possible if it is advisable to utilize lifetime gifting opportunities. Almost it may sound logical that if a farm owner utilizes only a portion of their exemption before 2026, they will still have the remaining exemptions, but that may not be the case – logic does not always play a role in tax law.
If a gift is made of $4,000,000 today and the federal exemption is reduced to $6,000,000 in 2026, the person’s remaining gift exemption is not $6,000,000 – its $2,000,000. The law provides that if a portion of the present exemption is used, that’s charged against the remaining exemption. However, if a person gifts $12,000,000 today and the exemption is reduced to $6,000,000, there is no “clawback” – that is, the person does not get charged back for going over the exemption. Therefore, the most beneficial use of the lifetime exemption is when it is completely used. But, that may not be practical for many farm owners. This is another example of where the advisory team plays an important role – determining the best action to take based on knowledge of the facts and circumstances surrounding the farm assets and operations, who the present and future players are, etc.
A properly structured succession plan provides opportunities not only for continued business with the current generation of owners and managers, but for establishing working relationships with the next generation. For the farm, this is also important because if there is an unforeseen death, disability or other tragic event, there is inevitably a need to reorganize and address the ongoing operational needs of the farm during an extremely difficult time. To ensure the continued support of the bankers and avoid an overall re-evaluation of the farm or ranch and its ability to get through this time of crisis, it is critically important that the bankers have a comfort level with those in the management team that everything will continue on as planned. The time devoted to creating and maintaining a properly structured plan is worth as much or if not more than that new piece of machinery or tract of land.
The Succession Plan Audit
Questions to Ask
This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken. For additional legal assistance contact Jeffrey Fetter at [email protected].
When customers use a credit card to purchase goods or services, there is a processing fee that businesses must pay in order to receive payment. The fee can be anywhere from 1%-5% depending on the credit card company, so in order to help bear the cost, many businesses wish to impose an additional charge on their customers who choose to pay with credit or debit cards. This additional charge can be referred to as a “surcharge” or “convenience fee.” However, the practice of “surcharging” is prohibited by New York State under section 518 of the New York General Business Law, unless a business utilizes its exceptions. A business is legally allowed to “surcharge” their customers who use a credit or debit card while still complying with New York State law, as long as certain conditions are met.
The exception to section 518 allows businesses to charge a higher price when:
Simply stated, section 518 regulates the way in which businesses may communicate their prices, rather than completely prohibiting them from adding an extra cost for the use of credit or debit cards.
For example, a merchant who wants to add a 3% surcharge fee to customers who pay with a credit card is permitted to do so, but only under certain conditions. Taken from the Supreme Court’s decision in Expressions Hair Design v. Schneiderman (2017), “A merchant who wants to charge $10 for cash and $10.30 for credit may not convey that price any way he pleases. He is not free to say “$10, with a 3% credit card surcharge” or “$10, plus $0.30 for credit” because both of those displays identify a single sticker price – $10 – that is less than the amount with which the credit card users will be charged. Instead, if the merchant wishes to post a single sticker price, he must display $10.30 as his sticker price.”
The regular cost of a good or service must be displayed as the price that a credit card user would pay at the register. Customers who pay in cash, by check, or by means other than a credit or debit card will be given a “discount” at the payment counter. So, in order to comply New York State law, businesses are required to post the higher credit card price labelled as the “regular price,” but may offer a discount to those who pay in cash. Businesses may post both prices, but must advertise the prices as (1) the “regular price” (the sum of the price of the product/service and the credit card fee) and (2) the “discounted price for cash payment.”
The second condition is the requirement that these prices must be posted in a prominent place within the business where it is easily viewable to customers prior to payment. The basis for these regulations are to avoid blindsiding the customer at the payment counter with an unexpected higher price tag and to ensure that customers are fully informed before making their decision to purchase.
A few examples of lawful ways to advertise prices, taken from the New York Division of Consumer Protection website, are listed below:
Unlawful ways to advertise prices, also taken from the New York Division of Consumer Protection website are:
The bottom line is this:
For assistance with compliance, or to discuss other laws and regulations that may impact your business, reach out to your usual firm contact, or contact the firm at (315) 471-8111.
Participant-directed retirement plans (usually, 401(k) plans for private employers and 403(b) plans for public employees) have proliferated for over 40 years, driven in part by employers’ desire to shed their fiduciary responsibility for investing the plan’s assets. The financial industry has encouraged this shift by offering hundreds of investment options, including brokerage accounts for individual stock and bond holdings, mutual funds and ETFs, and annuity contracts. Often, the plan sponsor pays no or little attention to those options once the plan is first set up, and as shown in a recent United States Supreme Court ruling, that inattention can prove hugely expensive to the fiduciaries in charge of arranging the investment options.
In Hughes et al. v. Northwestern University et al, decided on January 22, 2022, the Administrative Committee for two Northwestern University retirement plans allowed participants to choose from among 400 mutual funds and annuity contracts (under a recent study, the average number of investment options was only 17). The options included both retail mutual funds and funds which, although exactly the same as their retail fund counterpart, could only be offered by the fund sponsor to institutional investors.
Their only difference was in the amount of fees charged to the funds internally for investment management services, marketing expenses, brokerage fees and transfer fees. The sum of these fees, as a percentage of the value of the fund itself, comprises an “expense ratio” that is identified in each fund’s prospectus. In the Hughes case (and generally), the difference in the expense ratios between the retail funds and their institutional counterpart often exceeded one-half percent (50 basis points) each year. Any participant who chose to invest in a retail fund, when the institutional fund was also available, suffered a much lower rate of return over time. The plaintiff in Hughes complained that the retail funds should not even have been offered, and the Committee was liable for the losses the participants incurred by not investing in the institutional funds.
Plan trustees and administrators have often justified retail funds by employing expense sharing arrangements between the mutual funds/brokerage service company and the third party recordkeeper for the plan. Under these arrangements, the mutual funds will cause a portion of the revenue they collect to be transferred to the recordkeeper to apply against (if not fully pay) the recordkeeper’s charges for its services. In theory, that frees the Plan from having to pay for those services out of the general pool of plan assets, resulting in a net rate of return that is comparable compared to the returns using institutional funds. It also shifts more of the burden for administrative costs to those participants with higher account balances under the theory that they are benefitting more from the plan than the other participants.
The plaintiff in Hughes argued that even though the plaintiff was given the choice between retail and institutional funds, the Committee breached its duty by offering retail funds knowing that the institutional versions would provide a higher rate of return, and that the recordkeeper’s fees (although paid in part under the expense sharing arrangement) were unreasonably high, therefore the retail funds were imprudent options. The Committee argued that because it offered the choice between the two versions, it was the plaintiff’s responsibility to choose the better one for herself, and the Committee had exercised sufficient prudence. Further, it argued that the sheer array of mutual fund options was enough to counter any argument that the Committee did not act prudently.
The Supreme Court held that the Committee could not rely on the vast number of investment choices as a complete defense to its actions, nor could the Committee defend merely on the basis that both the retail and institutional versions of the same fund were offered. Rather, the Committee must at least take the following steps to demonstrate its prudence in creating and maintaining the menu of options available:
But it also requires the Committee to determine whether the expenses being charged the plan by outside third parties are reasonable. Factoring in the participants’ account balances as a source of payment for those expenses would most likely be considered inappropriate.
There is one more point to mention. The Court’s final words should give some comfort to plan fiduciaries when it noted that “difficult tradeoffs” may confront fiduciaries in making these decisions, even cautioning courts to consider the “range of reasonable judgments” a fiduciary may make considering the fiduciary’s “experience and expertise”. At first blush, a fiduciary may take from this that the less experienced or knowledgeable one is, the prudence standard as applied to the fiduciary is not as high as for more knowledgeable fiduciaries. A better reading is that fiduciary must understand his or her own weaknesses and retain qualified consultants to the extent necessary to satisfy the fiduciary’s duty to monitor plan investment options and the plan’s expenses.
Purpose. Earlier this year, legislation was passed and signed into law in New York to provide many NY taxpayers with a strategy to “work around” the provision under the federal tax law that limits individual taxpayers to a $10,000 deduction for state and local income and real estate taxes paid (the “SALT” limitation).
Example. Here’s an example showing how much additional federal taxes New Yorkers pay by application of the SALT limitation:
Assume Charlie is a partner in a NY partnership and that his share of the partnership’s 2021 net income is $400,000, which is also his adjusted gross income on his federal tax return (the amount appearing at the bottom of page 1 of the Form 1040).
New York’s average tax rate on taxable income of $400,000 is about 6.4%. Therefore, Charlie’s New York income tax liability would be about $25,600. If we assume his real estate taxes exceed $10,000, then none of his NY income taxes can be deducted on his federal return. Had they been deductible, Charlie would have saved between $8,200 and $9,000 in taxes (depending on whether he filed as an individual or jointly with his spouse).
The “Work-Around”. The new legislation enables the individual owners of “pass-through entities” – partnerships, LLCs and S corporations – to effectively regain the tax benefit by having the pass-through entity (which is not subject to the SALT limitation) opt into a new “pass-through entity tax” or PTET. This approach shifts the New York income tax liability to the pass-through entity, which pays the PTET (the tax brackets for this tax are similar to individual tax brackets). The law then grants a tax credit to each partner, member or shareholder (to be applied on his or her individual tax return) for his or her share of the taxes paid by the entity so that there is no “double tax” to both the entity and the individual owner.
The entity will deduct on its federal return the amount of NY taxes it paid, thereby reducing the amount of each individual owner’s share of the entity’s taxable income and in effect regaining for them the lost deduction under the SALT limitation.
In order to prevent the individual from in effect gaining a deduction on his or her NY return for New York taxes paid by the entity, the individual will have to add back into taxable income his or her share of the PTET paid by the entity.
Note the following:
We trust this will help you and your accountants in addressing the SALT limitation that has affected so many New Yorkers. After you have had a chance to review this, please do not hesitate to contact us.
On May 7, 2021, Governor Andrew Cuomo signed the “New York HERO Act” (the “Act”) into law. Under the Act, the state aims to prevent occupational exposure to airborne infectious disease, including COVID-19. The Act requires employers to develop workplace health safety plans in order to prevent the spread of airborne communicable illnesses, and to allow employees to establish and administer a joint labor-management workplace safety committee.
In a memorandum attached to the signed bill, Governor Cuomo requested “technical changes” that will likely delay the implementation of the law. Specifically, Governor Cuomo has requested that the legislature provide employers with an opportunity to cure any failure to comply with the law, provide more detailed instruction on the development and implementation of workplace standards, and limit litigation to circumstances where employers are acting in bad faith and refuse to cure deficiencies. As written, the Act requires employers to have a health and safety plan in place thirty (30) days following the effective date of the law, and to allow employees to establish a joint labor-management workplace safety committee within six (6) months. However, it is likely that the dates will be delayed following the legislative edits. Below is a summary of what we know so far about the obligations the new law will place on employers.
The New York State Department of Labor (“DOL”), in consultation with the New York State Department of Health (“DOH”), has been tasked to prepare a model airborne infectious disease plan (“Employer Safety Plan”), and establish minimum requirements for preventing exposure to airborne infectious diseases. Under the law, the DOL must establish minimum safety requirements for worksites, differentiated by industry. Once the DOL has established a model Employer Safety Plan, employers will have the choice to adopt the model or to create an Employer Safety Plan on their own with the same minimum standards express by the DOL in the model.
The Act provides some requirements that must be included in the model, but leaves it to the DOL to include any other matters the DOL Commissioner finds relevant. Similar to the protocols issued by other governmental agencies in the last year – the DOL is required to include procedures and methods for the following:
Importantly, where an employer opts to create their own Employer Safety Plan, the Act requires “meaningful participation of employees” (or of the appropriate collective bargaining representative, if applicable). Further, all employees must be provided with a copy of the Employer Safety Plan on the effective date of the act, or upon hiring, whichever is later. The Employer Safety Plan must also be included in employee documents, and posted “in a visible prominent location” in the worksite. Unlike the emergency, temporary, COVID-19 regulations passed through various gubernatorial orders in the spring and fall of 2020, or the recommendations and best practices that continue to be released by federal employment and protective agencies, the Act is now a part of New York law.
Finally, under the Act employers are prohibited from retaliating against employees for exercising their rights, reporting violations, or refusing to work after a violation of the Employer Safety Plan. The DOL is given the authority to issue fines to employers for violating the Act. As discussed above, Governor Cuomo signed the Act after the legislature agreed to revisions including allowing a cure period before an employer may be subject to litigation. It is unclear if the same protections will be built in for civil penalties.
The Act also requires employers to “permit employees to establish and administer a joint labor-management workplace safety committee.” The legislative intent appears to have been to target larger corporations. Nonetheless, employers of any size are obligated to meet this requirement. It is unclear if the legislative modifications will include clarification on the process required for employees to request the formation of such committee. If such committee is formed, however, it is authorized to:
Further, employers are required to allow employees to attend: 1) training on the function of worker safety committees, 2) an introduction to occupational safety and health, and 3) committee meetings on a quarterly basis. Employees are entitled to their usual compensation for the aforementioned activities. Employers may not retaliate against employees for participating in establishing a workplace safety committee.
Although the Act is awaiting revision, and guidance will certainly be forthcoming from the DOL regarding employer obligations, it is never too early to begin assessing corporate compliance. For those New York businesses that established return to work plans in the spring and summer of 2020, the Employer Safety Plan may very well be a revised version of similar plans already in place. However, for entities and organizations that are not used to employee involvement at the level that will be required by the employee safety committee (if formed), the Act may require some adjusting in the coming months. Regular examination of corporate compliance with local, state, and federal laws and regulations should be a part of your corporate planning. For assistance with compliance, or to discuss other laws and regulations that may impact your business, reach out to your usual firm contact, or contact Melissa Green ([email protected]).
In terms of dollar value, individual retirement accounts (IRAs) constitute one of the greatest and most pervasive wealth accumulation vehicles in the country, holding trillions of dollars for millions of Americans. No wonder. They enjoy tax-deferred build-up during one’s working years and continued freedom from income taxes even in retirement. They are easily passed on to surviving spouses and family members without entanglement in the owner’s estate. The required minimum distribution (RMD) rules have allowed accounts to grow over decades for the benefit of surviving spouses and second and third generations. Finally, state laws have protected these accounts from creditors of the owners, spouses and beneficiaries both inside and outside of bankruptcy.
Naming a spouse and/or children or grandchildren as a beneficiary oftentimes resulted in complete payout of the account not occurring for 40 years of more. The compounding effect within a tax-deferred account has resulted in enormous accumulations over that time. Add to that the creditor protection afforded by state law, and you have in an IRA a super-loaded trust account that is controlled not by a trustee but by the named beneficiary, a perfect scenario for many families.
However, two recent changes have greatly reduced the IRA’s value as an asset protection and wealth-developing device.
First, Congressional legislation in late 2019 put an end to the multiple-decade IRA payout strategy for second and third generations. While RMDs to the IRA owner and spouse are still based on their life expectancies, once the account becomes payable to a non-spouse beneficiary (with limited exceptions), the account must be fully paid out by the 10th year thereafter. No distributions need to be made before the 10-year period expires, but by the end of that year, full distribution must be made.
Second, a 2019 federal district court ruling from the Northern District of New York (Todd v. Endurance American Insurance Company, 596 B.R. 79) has thrown a curve at traditional IRA planning. In that ruling, the court held that New York’s creditor protection statute for retirement accounts such as IRAs (NY CPLR §5205(c)(2)) does not exempt an IRA from the claims of creditors in a bankruptcy estate of a non-spouse beneficiary who inherited the IRA, nor is the IRA excluded from the bankruptcy estate. The Court listed various characteristics of an inherited IRA (including that the funds can be drawn without penalty at any time, and that no additional funds can be added to the account by the beneficiary) which caused it to view an inherited IRA not as a retirement account for the beneficiary, but merely an inherited asset that, like most other inherited assets, should be available to the beneficiary’s creditors.
So, for New York residents, in the course of just one year, two of the major advantages of an IRA (long-term wealth accumulation and permanent creditor protection) have been greatly diluted.
Nevertheless, careful planning may restore those benefits to a very large degree. For example, instead of naming children and grandchildren as outright beneficiaries, an IRA owner can achieve much of the desired wealth generation by naming a charitable remainder trust (CRT) as the IRA beneficiary. The estate tax charitable deduction that one receives from the funding of a CRT is secondary, if not merely an afterthought. Rather, by naming a CRT as beneficiary, the children and grandchildren can receive an income interest that can stretch for decades.
Moreover, naming a CRT (indeed, any irrevocable trust that contains valid spendthrift provisions) as beneficiary returns the IRA’s creditor protection that was taken away under the Todd case.
The lesson here is to review your IRA beneficiary designations with your advisors and make appropriate changes if the recent changes in the law, as discussed above, now interfere with your objectives.
We’d be happy to review with you your objectives in your estate plan, including the important considerations that IRAs deserve.
Since 1979, the Syracuse-based law firm of SCOLARO FETTER GRIZANTI & McGOUGH, P.C. has provided sophisticated tax, business, litigation, employee benefits, estate and trust planning and administration services to its individual, business, entrepreneurial and professional clients throughout New York, Pennsylvania, Florida and other states in which its attorneys are admitted to practice.