Over the next 25 years, 45 million households will be receiving an inheritance after the passing of a loved one, according to analytics firm Cerulli Associates. The transfer of assets from baby boomers to millennials and beyond will be in excess of $68 trillion.
According to a poll by the Ohio State University, most Americans will only save about half of their inheritance. That means most Americans will essentially use it for immediate gratification purchases. Firsthand, I’ve seen how some beneficiaries used their inheritance on special breed dogs, new cars, lavish vacations, and other items.
I won’t discount that some of these impulse purchases are due to a form of mourning after the loss of a loved one. However, if we can plan properly for when these inevitable wealth transfers occur, a person’s financial plan can allow the inheritance to flow nicely into it. Here are a few examples of what to do if you know that you’ll be receiving an inheritance either soon or in the future.
Follow the Wishes of the Deceased
If your loved one had wishes on how the money was to be spent or who it was to be spent on, hopefully they had those conversations with the beneficiaries already. If not, well-crafted estate documents should explain their wishes and instructions.
Take It Easy
It’s ok to think of some of this money as a windfall. Weigh the cost of the total inheritance against the price of what you want. Discuss the idea with your trusted financial advisor. Having a second opinion from a great advisor can be helpful, especially if they can calculate how it will affect any future compounding of your own pile.
Assemble the Team
If you don’t already have a trusted fiduciary advisor, now is the time to interview and acquire one. Similarly, find a trusted estate attorney because your finances may get a bit more complicated after you receive the inheritance. Now it’s time for you to make your own instructions for your wishes by drafting estate documents to surpass you. Hire a CPA to weigh in on the potential taxes of your decisions as well. A team approach will pay dividends in planning opportunities down the road.
Review Your Finances
If you don’t already have one, build an emergency fund with your new inheritance. Depending on your financial
situation, having three to six months’ worth of necessary expenses in an easily accessible high yield account will help you sleep at night knowing that you can cover an emergency purchase on a rainy day or help with expenses if you are furloughed or lose your job.
Other Items to Think About
Sometimes, people don’t just inherit cash or securities. Sometimes, they inherit houses, cars, or jewelry. The estate documents of the deceased may explain how to handle these other items. If not, this is another area where that team approach can help you. You may now be in the realm of capital gains tax, and items kept need to be added to your estate documents. Will a second home become a rental property where liability protection may become necessary?
Use your inheritance wisely, and do not try to handle it all on your own. For some, emotions can cloud financial judgement. Trusted professionals are here to guide you through it all, and most of them have extensive experience to provide insight. Remember to seek out true fiduciaries that will steer you in a direction that benefits you and not them. We are here to help!
Derek M Oxford | CFP®, AEP®
On July 4th the President signed into law a bill that extends the PPP loan application deadline to August 8th 2020. If you have an interest in applying for the PPP loan, you still have time to access the remaining funds for the PPP program. We have included a link to the revised PPP application and encourage you to speak with your local lender about access to these funds if you are interested.
Furthermore, on June 5th, 2020, the President signed into law the PPP Flexibility Act that superseded and modified some of the PPP loan provisions included in the CARES Act. We previously published an article summarizing these changes, but also wanted to highlight the two revised loan forgiveness applications: 1) Form 3508 and 2) Form 3508EZ. Both of these forms include the recent changes from the PPP Flex Act, and provide additional clarity to borrowers regarding loan forgiveness.
We have updated our list of frequently asked questions (below) to accommodate the recent changes. Please note, additional guidance is still needed on several issues and the following information is not intended to be relied upon for official guidance. If you have specific questions regarding the PPP loan, or another financial related question, we invite you to contact our team at CPS Investment Advisors at: Info@CPSInvest.com
1) Question: The act allows a business to use 24-weeks instead of 8-weeks as their covered period. Do I need to wait for the 24-weeks to pass before applying for forgiveness?
Answer: No. After you have used the PPP funds, you can apply for forgiveness before the 24-week covered period expires.
Please note: Applying before your covered period expires might negatively impact certain safe-harbors. Please consult with your lender or trusted advisor prior to applying for forgiveness.
2) Question: Is the forgiveness “all or nothing,” or can the loan be partially forgiven?
Answer: The loan can be partially forgiven. For any amount not forgiven, the business will have 5 years to repay the loan.
3) Question: Is the $100,000 annual salary limit a different amount for the 8-week covered period vs the 24-week period?
Answer: Yes, the loan forgiveness application specifies the following:
“For an 8-week Covered Period, that total is $15,385. For a 24-week Covered Period, that total is $46,154.”
4) Question: Can the PPP funds be used to pay bonuses or increase salaries?
Answer: Perhaps yes, but further guidance is needed.
Covered payroll cost are currently listed as salary, wages, commissions, or tips (Capped at $100,000 on an annualized basis for each employee) Current guidance does not restrict an increase in salaries or bonuses, but keep in mind that each employee is still restricted to the $100,000 annualization cap.
5) Question: When does the covered period start?
Answer: The date the lender makes the first disbursement of the PPP loan to the borrower
The SBA answered this question on Question #20 of the PPP FAQ’s.
IMPORTANT: See question #12 (What is the “Alternative Payroll Covered Period”?) for an election to possibly adjust the start date.
6) Question: Are the expenses used for forgiveness cash or accrual?
Answer: It’s a bit of a hybrid.
The loan forgiveness application specifies the following:
Eligible Payroll Cost: “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.”
Eligible nonpayroll cost: “An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
7) Question: If my rent increase, or if I’m renewing my lease agreement soon, will the new lease payment count toward loan forgiveness?
Answer: Not under current guidance. A leasing agreement must be in force before February 15, 2020.
8) Question: Can I contribute to my profit sharing plan (PSP) with PPP funds?
Answer: Further guidance is needed
Currently, employer contributions to defined-benefit or defined-contribution plans are considered covered payroll cost. However, because PSP contributions are more discretionary, we caution the use of the funds into this type of plan until more guidance is provided.
9) Question: What utilities can I use the PPP funds for?
Answer: Electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. See the CARES ACT SEC. 1106 (5)
10) Question: Will I get a tax deduction for the expenses paid with the PPP loan?
Answer: Not if the amounts used are forgiven.
The IRS provides more guidance in IRS Notice 2020-32 stating, “Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)”
11) Question: I have the PPP loan & EIDL loan. Can I keep and use them both?
Answer: In general yes, but the funds cannot be use for the same purpose.
Each loan has different restrictions regarding the use of the funds. Make sure you are using the funds in accordance with approved qualifying/covered cost.
12) Question: What is the “Alternative Payroll Covered Period”?
Answer: You can elect to start the covered period beginning the first pay period following their PPP Loan disbarment date
The following is from the Loan Forgiveness Application:
“For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period) that begins on the first day of their first pay period following their PPP Loan Disbursement Date.”
13) Question: A safe harbor exists for loans less than 2-million dollars. Am I still subject to review?
Answer: Yes, you are subject to review regarding loan forgiveness.
The $2 million safe harbor regards the “good faith” certification made by a borrower when they initially applied for the PPP loan.
The SBA addressed this on Question #46 of the FAQ’s on the SBA’s website.
14) Bonus Question: How long should I retain my records for loan forgiveness?
Answer: Six years after the loan is forgiven.
The following is from the Loan Forgiveness Application:
“The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.”
If you have any additional questions, please contact our team. Our CPS Team is committed to helping both our clients and community get through these uncertain times. If you, or someone you know, needs assistance, please be sure to reach out. Our advisors are working around the clock to answer all your money questions: Info@CPSInvest.com
Sterling J Searcy Jr | CPA
There is a catch. There is always a catch. Right…?
Well, maybe. Let me explain. The Paycheck Protection Program (PPP) has been a lifeline for many businesses. This program provides potentially forgivable loans to businesses with certain restrictions on the way the funds can be utilized. It has pumped billions of dollars into the U.S. economy, has allowed businesses to retain employees during this pandemic, and has helped suspend the overall shock from COVID-19 nationwide.
Ok, that sounds great! But what’s the catch?
Your 2020 tax bill might be higher than you expect! That’s the catch.
In a recent notice (2020-32) from the IRS, they clarified that, “…no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan…”
Okay. So, what does that mean in plain English?
If you received a PPP loan that is ultimately forgiven, you can’t deduct the expenses (on your tax return) that the PPP loan paid for.
Hmmm that’s Interesting, but I still don’t understand. Please give me an example.
No problem! Assume your business received a PPP loan of $25,000. Your business used the entire $25,000 toward covered expenses, and luckily the entire loan amount was forgiven. Let’s take a look at the following hypothetical 2020 tax scenario to see the impact.
In the above scenario, when the PPP loan was forgiven, the expenses that the PPP loan paid for are no longer considered tax deductible. This resulted in $5,000 of additional tax due. Ultimately, you should receive a net benefit if the PPP Loan is forgiven. Just keep in mind that if your PPP loan is forgiven, your 2020 tax bill might be higher than you otherwise anticipated.
It is also worth noting that a few members of Congress have proposed allowing a tax deduction for forgiven PPP funds. However, until a new law is passed, Notice 2020-32 will continue to provide the guidance on this matter.
We urge you to speak to your tax advisor regarding your 2020 taxes and how your PPP funds might impact your 2020 tax liability. If you have any additional questions, please contact our team. If you, or someone you know, needs assistance, please be sure to reach out. Our advisors are available to answer all of your money questions: Info@CPSInvest.com
Sterling J Searcy Jr | CPA
In June of 2019 the Securities and Exchange Commission approved several new rules governing how financial firms work with individual investors. The new rules were designed to help consumers understand the nature of the relationship they have with a financial services firm and the people who work for that firm. These rules apply to both brokers, and also fiduciary investment advisors.
What is Form CRS?
The Securities and Exchange Commission created a new form, called the Customer Relationship Summary, also known as “Form CRS”. The regulations require brokers and investment advisors to deliver a copy of Form CRS to their customers. The new form is also required to be posted on the website of the broker or investment advisor. The new form is intended to make it easier for you to decide whether you should hire a particular firm or individual.
The relationship summary is required to be short and written in understandable language. The form should contain an introduction which describes how the firm is regulated – as a broker, or an investment advisor, or both. The relationships and services section of the document describes the services the financial firm may provide. Form CRS also has a summary of the fees, costs, and potential conflicts of interest an advisor may have.
In theory, Form CRS should make it easier for you to understand whether your advisor is a fiduciary, legally obligated to act in your best interest. In practice, the Dual Registration Loophole will continue to cause confusion among consumers.
Watch Out for the Dual Registration Loophole
The Securities and Exchange Commission regulates two types of firms: broker-dealers (also called Brokers) and Registered Investment Advisors. Registered Investment Advisors are fiduciaries. A fiduciary is someone legally obligated to act in your best interest. Brokers are not fiduciaries. Brokers have a much lower standard of conduct when they make recommendations. Brokers are allowed to accept commissions for selling financial products. This often creates a conflict of interest. When a Broker recommends an investment product, you never know if it is the best thing for you, or it simply pays the best commission to the broker.
Some firms are registered as both Brokers and as Registered Investment Advisors. This is the Dual Registration Loophole that allows some advisors to market themselves as fiduciaries while still collecting commissions. In a perfect world, Form CRS would clearly describe when your advisor is acting as a fiduciary, and when they are acting as a broker. Firms taking advantage of this loophole can publish two separate versions of Form CRS. One form will describe the firm’s activities as a fiduciary, and another form will disclose the firm’s activities as a broker. If you choose a firm that uses dual registration, make sure you understand when they are acting as a broker, and when they are acting as a fiduciary investment advisor.
Choosing a financial advisor can be a life-changing decision. Form CRS can give you important information to help you make that decision wisely. Take the time to read a prospective advisor’s Form CRS and understand the services they actually provide, and how they make money. Most importantly, understand whether your advisor is a fiduciary, obligated to work in your best interest, or a broker who is free to put their own interest first.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
In normal years, the due date for filing individual federal income tax returns is April 15th. This year, the IRS moved the deadline to July 15th due to the coronavirus pandemic. Fortunately for taxpayers, this 90-day extension of the deadline will not cause any interest or penalties. This relief also applied automatically to all taxpayers. Unlike a normal extension, no additional forms were required.
Need more time? You can get an extension.
If you can’t file your return by the July 15th deadline, you can still get an automatic extension until October 15th by using IRS Form 4868. This form can also be filed electronically. Filing for an extension until October 15th will not prevent penalties and interest. The IRS encourages to pay in full with the extension request. If that isn’t possible, information on payment options are available on www.IRS.gov.
Always file a return, and pay what you owe.
One of the biggest tax mistakes you can make is to not file a return because you owe money to the IRS. If your return shows you owe tax, always file on time and pay by the due date if possible. If you can’t pay the entire amount, file your return, pay what you can, and make arrangements with the IRS to pay the difference. You may owe interest and penalties on the unpaid tax, but filing your return on time will help you avoid additional penalties. It will also give you the option to work with the IRS to pay the unpaid balance.
Having a few extra months for tax filings was a welcome bit of good news amid the pandemic. That extra time is almost over, and tax day is right around the corner. Be sure to file on time, pay on time, and don’t let taxes derail your financial plan.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
This year has been a rollercoaster ride. The COVID-19 crisis and the ensuing shock to the global financial markets have captured the headlines and changed the way we live. With everything that has occurred, it is not surprising that the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which took effect January 1, 2020, has been nearly forgotten. The SECURE Act was drafted to help Americans save for retirement, and made several positive changes such as raising the age for required minimum distributions (RMD), as well as removing the age limit for making IRA contributions. This provided a great benefit to savers, but the SECURE Act also had some downsides, such as the demise of the “Stretch IRA”.
The SECURE Act and Inherited IRAs
For over 30 years, the “Stretch IRA” has been the cornerstone of estate planning as it relates to passing on wealth held in retirement plans. By handing down your retirement plan or IRA to a “designated beneficiary”, the required minimum distributions could be “stretched out” over the beneficiary’s life expectancy, providing a tax efficient means of passing on wealth. The SECURE Act changed all that by requiring most IRA beneficiaries to distribute the account completely within ten years beginning the year following the account owner’s death. There are exceptions for five special types of beneficiaries, now referred to as “eligible designated beneficiaries”, which includes the surviving spouse of the account owner, the minor child of the account owner, a disabled beneficiary, a chronically ill beneficiary, and a beneficiary less than 10 years younger than the account owner. These eligible designated beneficiaries can for the most part follow the old rules. Also, the changes primarily only apply to retirement accounts inherited beginning in 2020.
Those who have retirement plan beneficiaries that do not meet the definition of “eligible designated beneficiaries” should review their estate plan in light of these changes to determine if the current rules will require changes to their plan.
Other Estate Planning Implications
Trusts have long been used by estate planning attorneys as a valuable tool to distribute retirement accounts to beneficiaries while retaining some control over the distributions after the account owner’s death. As long as the trust was structured as a “see through” trust, meaning that there was a clearly identifiable person listed as beneficiary, then the retirement plan could be passed on to the trust and the required minimum distributions were based on the trust beneficiary’s life expectancy. But, the new rules create a problem – many trusts drafted prior to the SECURE Act no longer qualify for this special treatment, and the consequences can be significant. Instead of allowing the trust beneficiary to take distributions over their life expectancy, many of these trusts will now be forced to distribute the entire IRA account balance to the beneficiary within ten years following the account owner’s death. Some trusts, written as “conduit trusts”, will now prevent distributions until year ten, at which time the entire account balance must be distributed, resulting in a hefty tax bill.
Trusts are complex documents, and there are many different types which are each affected differently by the SECURE Act. If you have a retirement account or IRA with a trust listed as beneficiary, you should meet with your estate planning attorney and trusted financial advisor to determine how you are affected.
Rick Bernard | MBA
It is with great excitement we announce that Nolen B. Bailey | CFP®, CRPS®, ARPC, has been named a Partner at CPS Investment Advisors in downtown Lakeland. He joins Peter Golotko, James Luffman, and Michael Riskin as an owner in the investment firm.
“It is my honor and privilege to work with Nolen Bailey and I am excited to bring him in as an owner. Nolen has proven himself in the industry. He is a leader and a great businessman. I am confident the future of CPS is brighter with Nolen on board.” – Peter Golotko | CPA/PFS, MBA, President of CPS Investment Advisors.
“We are beyond excited to have Nolen as a new owner/partner of CPS Investment Advisors. Nolen has worked extensively to build our 401(k)/retirement plan business making it the fastest growing part of our business.” – James Luffman | CPA/PFS.
“We are incredibly blessed to have Nolen join the ownership group at CPS. Since day one, Nolen has exemplified the work ethic, integrity, and commitment to our clients that has been the strength of CPS for over 45 years. The addition of Nolen will help solidify our growth and stability at CPS.” – Michael A Riskin | CPA/PFS, CFP®, MST.
Nolen has been with CPS Investment Advisors since 2011, and he continuously strives to provide the absolute best service and financial expertise for the firm’s clients. As a Partner, a CERTIFIED FINANCIAL PLANNER™ and the Director of the firm’s Retirement Plan Services division, Nolen has a genuine passion for helping people reach their specific financial goals. He understands that everyone’s financial picture is unique, so he has always taken a collaborative, down-to-earth approach with clients, to make sure that they are comfortable with the path ahead, and confident that they are staying on track.
Nolen also holds the Chartered Retirement Plans Specialist (CRPS®) designation through the College for Financial Planning, as well as the Accredited Retirement Plan Consultant (ARPC) designation through the Society of Professional Asset Managers and Record Keepers (SPARK).
He is a graduate of both Leadership Lakeland Class XXX and Leadership Polk Class X, and was awarded Future Mayor of Lakeland by EMERGE Lakeland in 2014.
He serves on several local boards and executive committees, as he and his wife, Ashley, are proud and passionate supporters of many local non-profits and organizations.
ABOUT CPS INVESTMENT ADVISORS
CPS Investment Advisors is a fee-only, independent financial advisory firm headquartered in Lakeland, Florida, celebrating 45 years helping clients achieve their version of financial independence. As fiduciaries, we are legally and ethically obligated to act in your best interest… never our own.