While you are gathering your tax information to prepare this year’s tax forms, let me share the top five problems that stick out like a sore thumb to anyone who looks at your return.
1. Holding title to your assets in a form that may invite death taxes and the administrative burden of taking an estate through probate.
You get a 1099 for any financial accounts that you own. This may come from a bank, investment company or custodian of your investments. Assets held in joint name with rights of survivorship automatically become owned by your joint owner in the event of your passing. This may in fact be your desired outcome.
But after your passing, these assets are now in the sole name of your survivor. This will mean that these assets will need to pass through probate in order to get to whomever you’ve appointed in your will. You can avoid this by making a transfer on death election at the account level with your custodian or using a trust to hold the title.
2. Holding too many accounts.
If you get a stack of 1099’s, ask why. You may have had a good reason to set things up this way, but is that purpose still valid or just causing a recordkeeping problem? Is there a way to consolidate these accounts to reduce your paperwork and make it easier to oversee and monitor your accounts?
3. Capital loss carryforwards.
As investors, we can only use capital losses to offset other gains or then use only $3,000 against all other income. If you’ve got losses in excess of that, they are carried forward to future tax years. If you’ve been carrying around losses for years, it tells us that the coordination between your investments and your tax plan is lacking. If you have carried forward losses, consider creating gains to utilize these losses.
4. Your Schedule E.
If you are the beneficiary of any trusts, you will receive a K-1 form to report your share of income and losses.
As the beneficiary of a trust, you may or may not have control over the underlying assets. Find out who controls these assets and what rights or powers you have to make any changes. This may sound pushy, but many times in years past we’ve seen clueless beneficiaries of trusts that simply didn’t know that they could ask questions or learn more about what is in store for them.
5. A very significant issue, is there any business that provides pass through income?
The possible problems can come from the lack of a succession plan, a poor or outdated buy-sell agreement with partners, and not having the proper funding in place to survive the death or disability of an owner. Every year we meet an unsuspecting spouse who is disappointed at the unwinding of their share of a business after passing. Don’t let that happen to your family.