How to Avoid Probate Using Trusts And Other Creative Means

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How to Avoid Probate Using Trusts And Other Creative Means

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

The probate process can take a long time to finalize and can become costly, therefore it is important to know whether a probate is required following the death of an individual. The more complex or contested the estate is the more time it will take to settle and distribute the assets. Furthermore, the proceedings of probate court are publicly recorded so avoiding probate would ensure that all settlements are done privately.

Note though that having a Will does not mean that probate is avoided, it just serves a roadmap for the probate court. There are several options involved with end of life planning to help avoid the probate process.

Bypassing Probate

Use Of Probate Affidavits – If an estate is small enough to bypass the probate process, then the estate’s asset may be claimed using alternative legal actions, such as an affidavit.  State law will determine whether this process is available and if so the limitations and restrictions.

Use Of Beneficiary Designations – Some assets can bypass probate because beneficiaries have been initiated through contractual terms, such as pension plans, life insurance proceeds, 401(k) plans, medical savings accounts, trusts, living trusts, and individual retirement accounts (IRA) that have designated beneficiaries. However, if the beneficiary designation is missing or rules of succession for the asset are not clear, then the asset is transferred according to the Will, or to the deceased’s estate and therefore the asset will need to go through probate.

Joint Tenancy with the Right of Survivorship – Property owned in joint tenancy automatically passes, without probate, to the surviving owner(s) when one owner dies. Joint tenancy often works when couples (married or not) acquire real estate, vehicles, stocks, bank accounts, securities, or other valuable property together.  In Non-Community Property States, married couples (or registered domestic partners or civil union partners) take title not in joint tenancy, but in “tenancy by the entirety”. Both avoid probate. Joint tenancy is easy to create and easy for the survivor to transfer title to himself or herself after one owner dies. When one joint owner dies, the surviving owner(s) automatically get the deceased owner’s share of the joint tenancy property.  The property doesn’t go through probate court—the survivor(s) still need to fill out some paperwork and present it with the death certificate to the keeper of the ownership records to obtain the property into their names.  If you’re a joint tenant, you can’t leave your share to anyone other than the surviving joint tenants. The surviving joint tenant will automatically own the property after your death.  However, there are some drawbacks to joint tenancy such as, the last surviving joint tenant must use another method to avoid probate at death, probate isn’t avoided if both owners die simultaneously, share of each owner must be equal in most states, and if you own property by yourself, adding a joint tenant requires making a gift of a half-interest in the property.

Utilizing Trusts To Avoid Probate

Trusts are created by contracts usually set up with a written contract called a trust agreement. The trust maker (usually called the grantor or settlor) creating the trust will need to name a trustee (or trustees) in charge of the trust and the trust property, and the trust agreement must name a beneficiary or purpose for whom the trust property is held.  A trust can be revocable or irrevocable.

  • Revocable Trusts (sometimes called Living Trusts) – the grantor often names himself or herself as the initial trustee. The trust agreement should provide for successor trustees that can replace the initial trustee once the initial trustee steps down. The initial beneficiary of a revocable trust is usually the grantor, and when the grantor dies, the grantor’s children are usually the successor beneficiaries.  The trust agreement is a legal document, similar to a Will. The trust agreement lays out the terms, rules and provisions of the trust and the assets in it. A trustee who has a fiduciary duty is designated by the grantor as the individual (or entity) who, at a certain point, will control those assets for the benefit of the beneficiaries. The trust agreement allows a trustee to manage the assets in the trust and transfer them to beneficiaries after the grantor’s death. However, unlike a Will a trust takes effect while the grantor is living, and you can have both a trust and a Will. The trust does not have to go through probate for assets to go to beneficiaries when the grantor dies or becomes incapacitated. Assets must be assigned to the trust to be covered by its terms. That means they are re-titled to indicate ownership by the trust. The types of assets that can be assigned to (or fund) a trust include real estate (land, commercial property, homes), financial accounts (life insurance policies, checking accounts, savings accounts, money market accounts, stock and bond certificates, money owed to you, non-qualified annuities), personal property (jewelry, artwork, antiques), and business interests.
  • Irrevocable Trusts – operate in a similar manner as revocable trusts; however, oince executed the terms cannot be changed. They are typically used where the value of the estate is expected to be higher enough that there will be estate taxes or the grantor desires a layer of asset protection.  Special rules apply in order to address these objectives or concerns.  Irrevocable trust agreements should name a trustee other than the grantor, and an irrevocable trust will often name a beneficiary who is not the grantor.

Benefits of Trusts

In both revocable and irrevocable trusts, the trust agreement will name a trustee who has legal control and authority over the trust, and the trust agreement will also name a beneficiary who has equitable rights over the trust property. For either kind of trust, the trust maker must title property into the name of the trust, usually by naming the trust as owner of a financial account, or perhaps by filing a deed with a county recorder, naming the trust as owner of real property. Also, trusts avoid delays, probate costs, publicity from probate and family disputes, may be drafted to protect property from going to a beneficiary who has creditors or to preserve trust property from going to a beneficiary using government benefits, and they may help prevent many costly estate administration mistakes, such as taxes and beneficiary disputes.

What Should You Do?

The probate process could be expensive and complex especially during a time of grief. Consider reaching out to a Trusts and Estates and/or Probate Attorney such as those at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

What You Need To Do When A Decedent Has Outstanding Tax Returns Or Outstanding Tax Liabilities?

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A taxpayer who dies with unfiled income tax returns and/or outstanding tax liabilities to the IRS or any State tax agency complicates the administration of the decedent’s estate or trust.  That is because the estate or trust will now be accountable to creditors, including the IRS and State tax agencies given that the decedent’s rights, liabilities, assets and interests transfer to their estate when they pass away. Because the resolution of these tax issues will require the appointment of a personal representative, it is necessary to first open a probate administration.

What is Probate?

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

Where a personal representative knows that there are outstanding tax liabilities, the personal representative must provide Notice Of Administration to the IRS and applicable State tax agencies which provide instructions for such tax creditor to file a Proof Of a Claim with the probate court.  Where the amounts claimed as outstanding by the tax agencies are incorrect and overstated, the personal representative has the opportunity to dispute such claim which will eventually be heard by the probate court.  Such errors usually occur where the tax agencies did not properly post payments, has yet to process late-filed tax returns or amended tax returns, or the liabilities are based on returns created by the tax agencies and not based on returns filed by the decedent.  It is in the best interest of the personal representative to make sure these tax liabilities are accurate even if it means having the outstanding tax returns prepared or amended income tax returns filed as the failure to cover unpaid taxes from the deceased’s estate is considered to be a breach of fiduciary duty which can impose personal liability on the personal representative.

How Are Outstanding Tax Liabilities Paid?

The collectability of a decedent’s outstanding tax liabilities is typically limited to the value in their estate. Though, there are also situations where a beneficiary may incur tax liabilities for assets he or she receives from the estate such as inheriting real estate owned by the decedent if the personal representative transfers legal title to a beneficiary with unpaid property taxes.

Usually, beneficiaries do not pay income taxes on assets they inherit. There are exceptions regarding retirement accounts, proceeds from life insurance and savings bond interest. Inheritance from an individual retirement account (IRA), 401(k) or 403(b) is taxable if the money was tax deductible at the time the decedent contributed. If there are non-deductible contributions in the account, a portion of the account may be non-taxable. However, a surviving spouse who inherits money from certain retirement accounts of the decedent may roll over the money into their retirement accounts to defer taxes.

Beneficiaries who inherit proceeds from Roth IRAs should not pay taxes on the withdrawals because the contributions made by the decedent were not tax deductible. Furthermore, beneficiaries may not be required to pay taxes on the proceeds that the contributions generate so long as the account is five years old or older.

For life insurance contributions, beneficiaries do not usually pay taxes on the proceeds except on that portion of the proceeds that includes interest. Beneficiaries may also pay taxes if the policy was transferred to them for cash or other valuable consideration. Beneficiaries who inherit savings bonds may pay taxes if the bonds mature and if the beneficiaries redeem the bonds after the original owner deferred the tax. Also, some States have what is called an “inheritance tax” where a beneficiary who inherits from an estate has to pay the State tax on the value that he or she receives. It is the law of the State where the beneficiary resides and not the law where the decedent was domiciled that dictates applicability.

The IRS and any State tax agency can only enforce its claim for unpaid taxes through the decedent’s estate and if the decedent dies without assets or if there are insufficient funds from the estate, those taxes may go unpaid. The IRS cannot transfer the tax liability to another person, except to a surviving spouse when such spouse filed a joint tax return with the decedent, the decedent owed back taxes on a return involving a property they co-owned with the surviving spouse that they filed as married filed separately, or the couple lives in a community property state.

Spouses who believe the IRS or State tax agency is wrongly holding them responsible for their deceased partner’s taxes can apply for innocent spousal relief from the IRS or State tax agency. Innocent spouse relief can protect spouses from paying additional taxes, interest and penalties if the deceased spouse failed to report their income, misreported their income, claimed tax deductions and credits incorrectly, or omitted items on a tax return. Also, a surviving spouse can file a joint tax return for the last year the deceased was alive. Spouses can file as a qualifying widow or widower for two tax years following their spouse’s death if they have a qualifying dependent, which allows surviving spouses to claim standard deductions as a married couple.

How To Determine The Amount Of Back Taxes A Decedent Owes?

For a beneficiary, executor, or administrator to determine the amount of back taxes a decedent potentially owes one must contact the IRS and inform them that you are authorized to receive the decedent’s tax records. This is done by filing a Form 56, Notice Concerning A Fiduciary Relationship. Additionally, a variety of transcripts can be secured from IRS that provides information about the decedent’s previous tax returns and how much they owe.

What Should You Do?

At the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. When there are outstanding tax liabilities or outstanding tax returns, the expertise of a skilled lawyer at the  Law Offices Of Jeffrey B. Kahn, P.C. is needed to help protect the interests of the parties involved. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

Unless Congress Acts To Legalize Cannabis, Here’s Why You Cannot Count On The Recent Proposed Rule To Reschedule Cannabis To A Class 3 Substance.

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The prime benefits of classifying cannabis as a Class 3 substance is that the Federal government would recognize medical benefits of cannabis, make Section 280E inapplicable to licensed cannabis operators, and open up financial and banking markets.

The Associated Press reported on April 30, 2024 that the Drug Enforcement Administration (“DEA”) will propose a rule to reschedule cannabis to Schedule III under the Controlled Substance Act. The proposed rule has since been reviewed by the Department Of Justice and on May 16, 2024 has been published in the Federal Register. Next the DEA will take public comment on the plan to move marijuana from its current classification as a Schedule I drug, alongside heroin and LSD. It moves cannabis to Schedule III, alongside ketamine and some anabolic steroids, following a recommendation from the federal Health and Human Services Department. After the public comment period and a review by an administrative judge, the agency would eventually publish the final rule in the Federal Register.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 38 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Those 38 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 24 states.

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

The New Rule If Approved Will Put Federal Law More In Line With State Laws.

Currently, under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The New Rule If Approved Will Result In A Tax Regime Similar To What Non-Cannabis Businesses Face.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is currently prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.  Therefore, under current law, the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

The New Rule If Approved DOES NOT Change Reporting Of Cash Payments.

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

So with all these potential benefits, what forces are present to block this proposed rule?

  1. Chevron Doctrine repealed by U.S. Supreme Court. The regulatory state has been in full force since, ironically, 1984, with the institution of the Chevron Doctrine. The Chevron Doctrine has required courts to defer to the expertise of administrative agencies when the legislative intent of an underlying law is ambiguous, which made it a cornerstone of how regulators and businesses interact. But on June 28, 2024, the Supreme Court’s Republican-appointed majority demolished the doctrine in its rulings in the Relentless v. Department of Commerce and Loper Bright Enterprises v. Raimondo appeals, overturning the broad authority of the administrative state and raising fresh questions about how cannabis will be regulated moving forward. Keep in mind that rescheduling has been moving forward as a regulatory, rather than a legislative, change, and now, regulations do not hold the same force of law as they did since 1984. But even if the Chevron Doctrine was not repealed, the normal rule making process still faces certain congressional and judicial challenges explained further below.
  2. Congressional Challenges. Under the Small Business Regulatory Enforcement Fairness Act (also known as the Congressional Review Act), new final rules must be sent to Congress and the Government Accountability Office for review before they can take effect. “Major rules” (ones that are economically significant and require OIRA review) must be made effective at least 60 days after the date of publication in the Federal Register, allowing time for Congressional review. In emergency situations, a major rule can be made effective before 60 days. If the House and Senate pass a resolution of disapproval and the President signs it (or if both houses override a presidential veto), the rule becomes void and cannot be republished by an agency in the same form without Congressional approval. Since 1996, when this process started, Congress has disapproved only one rule. Congress may also exercise its oversight in other ways, by holding hearings and posing questions to agency heads, by enacting new legislation, or by imposing funding restrictions.
  3. Judicial Challenges. Individuals and corporate entities may go into the courts to make a claim that they have been, or will be, damaged or adversely affected in some manner by a regulation. The reviewing court can consider whether a rule: is unconstitutional; goes beyond the agency’s legal authority; was made without following the notice-and-comment process required by the Administrative Procedure Act or other law; or was arbitrary, capricious, or an abuse of discretion. An agency head can also be sued for failing to act in a timely manner in certain cases. If a court sets aside (vacates) all or part of a rule, it usually sends the rule back to the agency to correct the deficiencies. The agency may have to reopen the comment period, publish a new statement of basis and purpose in the Federal Register to explain and justify its decisions, or re­start the rulemaking process from the beginning by issuing a new proposed rule.

It should be clear that the most certain way that cannabis can be legalized and thus be treated like any other lawful business is by Congress enacting legislation. 

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government so it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

How Can A Creditor Collect From A Decedent’s Estate?

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A person who dies owing monies to his or her creditors complicates the administration of the decedent’s estate or trust.  That is because the estate or trust will now be accountable to creditors given that the decedent’s rights, liabilities, assets and interests transfer to their estate when they pass away. Because the resolution of these creditor issues will require the appointment of a personal representative, it is necessary to first open a probate administration.

What is Probate?

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

Where a personal representative knows that there are outstanding liabilities, the personal representative must provide Notice Of Administration to the creditors which provide instructions for such creditor to file a Proof Of a Claim with the probate court.  Where the amounts claimed as outstanding by the creditors are incorrect and overstated, the personal representative has the opportunity to dispute such claim which will eventually be heard by the probate court.

During the probate process, a creditor’s claim is filed in the probate court for the unpaid debts and liabilities of a decedent. The probate court will hear these claims and decide whether or not these claims should be paid, and how much. Both individuals and entities have the legal right to file claims against an individual even after they have passed away. A creditor may have a claim against a deceased person through an attempt to collect on debts for which the decedent incurred while they were alive, and for which they were legally liable. A creditor may also have a claim from a payment or distribution amount of the decedent’s estate that is promised, but the distribution or payment does not take place.

If an estate does not go through probate, creditors may still be entitled to make claims against inherited property. Inheritors are liable for estate debts up to the value of what they inherited but not all assets that do not pass through probate are available to creditors. For example, life insurance proceeds and retirement accounts are generally not subject to creditor claims.

Ways that a dispute with a creditor can arise during administration of an estate

Types of situations arising from a creditor dispute that involve probate litigation include:

  • A creditor disputing whole or partial disallowance of a claim
  • A creditor disputing the priority of payment
  • A creditor whose claim is disallowed contesting allowance of other creditors’ claims
  • A creditor petitioning the court to allow a claim after expiration of the time limits
  • A petition by a personal representative asking the court to disallow or allow a claim
  • An action seeking to hold a personal representative liable for improperly handling a claim

However, a common and complex dispute that arises in claims brought by creditors has to do with estates becoming insolvent before all of a decedent’s debts have been paid. Creditors can pursue certain non-probated assets (e.g., bank accounts, trust funds) when this occurs. Tracking down non-probated assets can be very complicated, costly, and take a long time. Creditors will have to track down the deceased debtor’s non-probated assets, and, if the beneficiaries don’t agree to voluntarily part with those assets, the creditor may need litigate to compel the repayment of the debt.

Generally, there is no priority among claims within the same class of creditors, except for claims relating to medical and hospital expenses. If a decedent’s debts are greater than the assets of the estate, creditors must be treated equally within each class in the order of priority. When estate assets are insufficient to pay all the debts, some claimants may receive all or partial payment, and some claimants may receive nothing from the estate.

What Should You Do?

Whether you are a creditor looking to enforce payment from an estate or you are the administrator of an estate that is insolvent, consider contacting a skilled lawyer at the  Law Offices Of Jeffrey B. Kahn, P.C. to help protect the interests of the parties involved. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

Did A California Decedent Fail To Title An Asset Into A Trust And You Are Looking To Avoid Probate? Consider utilizing a Heggstad Petition.

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Did A California Decedent Fail To Title An Asset Into A Trust And You Are Looking To Avoid Probate? Consider utilizing a Heggstad Petition.

In the realm of estate management and planning, a Heggstad petition plays a crucial role when a California decedent has neglected to formally transfer their property into their trust prior to passing. This mechanism is particularly significant as it provides a streamlined process to transfer the decedent’s property into the trust without the oftentimes lengthy and cumbersome probate process.

What Is Probate?

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

The probate process can take a long time to finalize and can become costly, therefore it is important to know whether a probate is required following the death of an individual. The more complex or contested the estate is the more time it will take to settle and distribute the assets. Furthermore, the proceedings of probate court are publicly recorded so avoiding probate would ensure that all settlements are done privately.

Utilizing A Heggstad Petition.

After a decedent dies and it is determined that there is an asset or group of assets that were intended to be placed in a trust while the decedent was alive but in fact such assets were never titled in the trust, utilizing a Heggstad Petition may be the way to go to avoid a full-blown probate administration.

Originating from the California court case, Estate of Heggstad, this legal petition offers a testament to the intention of the deceased, allowing a trust to serve its intended purpose — minimizing estate taxes, avoiding probate, and ensuring a smooth transition of assets to the beneficiaries.

California Probate Code 850 is where the ruling of the case of the Estate of Heggstad is codified.  It allows the option of skipping the expensive and long task of probate by using a Heggstad petition in California. If a Heggstad petition is successful and the probate court agrees there is sufficient evidence that the asset or property was to be part of the trust, then the petitioner (usually a trustee successor of the trust) will receive a court order verifying that the property or asset is indeed a part of the decedent’s trust. A piece of property may be excluded from a trust for several reasons such as, extenuating circumstances that prevented the decedent from transferring the property, decedent passed away before transfer or property was completed, property was taken out of the trust for a limited time and never put back in the decedent’s trust, a decedent thought the property was transferred but there was a mistake or oversight in the documentation,  the decedent forgot to transfer the property, or the decedent did not know how to properly transfer to the decedent’s trust.

Usually, the process of securing an Order from the probate court after filing of a Heggstad petition takes between 2 and 4 months, which is a much shorter timeline than the probate court’s timeline of 18 to 24 months on average. In order for a Heggstad petition to be approved certain documents and evidence should be gathered to be submitted. Documents needed include a copy of the living trust, schedule of assets for the living trust, property deed(s), information about the decedent, heirs, and beneficiaries. Furthermore, evidence proving that the decedent’s original intent was to include the asset or property in the trust is necessary to having a Heggstad petition approved and successful in court. A Heggstad petition is a great alternative to going through a full-blown probate to deal with a situation where assets or property were not included in a decedent’s trust.

What Should You Do?

Legal professionals frequently advise the thorough completion of trust funding to obviate the need for a Heggstad petition; however, it remains an invaluable tool for trustees and beneficiaries alike when facing the challenges posed by incomplete estate plans. It underscores the critical importance of meticulous estate planning and the invaluable safeguard a well-drafted Heggstad petition can serve as against the unpredictability of probate proceedings, thus ensuring that the decedent’s wishes are honored and the beneficiaries are protected.

Consider reaching out to a Trusts and Estates and/or Probate Attorney such as those at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

What is Probate?

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What is Probate?

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

The probate process can take a long time to finalize and can become costly, therefore it is important to know whether a probate is required following the death of an individual. The more complex or contested the estate is the more time it will take to settle and distribute the assets. Furthermore, the proceedings of probate court are publicly recorded so avoiding probate would ensure that all settlements are done privately.

Bypassing Probate

If an estate is small enough to bypass the probate process, then the estate’s asset may be claimed using alternative legal actions, such as an affidavit. Also, some assets can bypass probate because beneficiaries have been initiated through contractual terms, such as pension plans, life insurance proceeds, 401 k plans, medical savings accounts, trusts, living trusts, and individual retirement accounts (IRA) that have designated beneficiaries. Furthermore, probate court can be bypassed if assets are jointly owned with a right of survivorship and also if a deceased person’s debts exceed their assets.

What Should You Do?

The probate process could be expensive and complex especially during a time of grief. Consider reaching out to a Trusts and Estates and/or Probate Attorney such as those at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

IRS Says To Cannabis Businesses – Not So Fast! Cannabis remains a Schedule I controlled substance; Internal Revenue Code Section 280E still applies

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The Associated Press reported on April 30, 2024 that the Drug Enforcement Administration (“DEA”) will propose a rule to reschedule cannabis to Schedule III under the Controlled Substance Act. The proposed rule has since been reviewed by the Department Of Justice and on May 16, 2024 has been published in the Federal Register. Next the DEA will take public comment on the plan to move cannabis from its current classification as a Schedule I drug, alongside heroin and LSD. It moves pot to Schedule III, alongside ketamine and some anabolic steroids, following a recommendation from the federal Health and Human Services Department. After the public comment period and a review by an administrative judge, the agency would eventually publish the final rule in the Federal Register.

The IRS announced on June 28, 2024 that until a final federal rule is published, cannabis remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code.  The law with respect to the schedule or classification of cannabis has not changed; therefore, taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment.

Although the law has not changed, the IRS says that some taxpayers are filing amended returns. The IRS also says that while the grounds for filing such claims vary, these claims are not valid. The IRS says it will be taking steps to address these claims.

Internal Revenue Code Section 280E

Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.

This applies to businesses that sell cannabis, even if they operate in states that have legalized the sale of cannabis. Section 280E does not, however, prohibit a participant in the cannabis industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical cannabis is legal in 38 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Those 38 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational cannabis is legal in 24 states.

Twenty-three states and Washington DC, have legalized cannabis for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational cannabis is legal in 6 tribal nations.

Six Tribal nations have legalized cannabis for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

The New Rule If Approved Will Result In A Tax Regime Similar To What Non-Cannabis Businesses Face.

Currently, under Federal law (Controlled Substances Act 21 U.S.C. 801) cannabis is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is currently prohibited by Federal law. Cannabis, including medical cannabis, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.  Therefore, under current law, the Internal Revenue Code which treats businesses in the cannabis industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

The New Rule If Approved DOES NOT Change Reporting Of Cash Payments.

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Cannabis-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the cannabis industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

While the Federal government is still considering whether to reschedule cannabis, it is premature to file any amended income tax returns before the rule to reschedule has been finalized.  Given that cannabis is still illegal under existing Federal law you need to protect yourself and your cannabis business from all challenges created by the U.S. government.  Additionally, assuming that this new rule is approved – ONLY LICENSED cannabis operators can benefit. So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

How An Heir Or Beneficiary Can Contest A Will In Probate Court

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How An Heir Or Beneficiary Can Contest A Will In Probate Court

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

The probate process can take a long time to finalize and can become costly, therefore it is important to know whether a probate is required following the death of an individual. The more complex or contested the estate is the more time it will take to settle and distribute the assets. Furthermore, the proceedings of probate court are publicly recorded so avoiding probate would ensure that all settlements are done privately.

When Can An Heir Or Beneficiary Contest the Will?

Once a Will is filed with the probate court, an heir of the filed Will or an heir listed in another version of a Will executed by the testator has the ability to file a dispute or as we call “contested”. They may do so if they believe the filed Will is not truthfully representative of the decedent’s wishes.

There are several instances where a filed Will can be contested, including:

  • Undue Influence: When a testator was incapacitated, elderly, or otherwise vulnerable, a beneficiary may have grounds to contest a Will. A Will may be contested if the beneficiary suspects the testator was taken advantage of while drafting the Will.
  • Mental Capacity: If a beneficiary believes the testator was not of sound mind due to illness, substance abuse, or a mental health disorder, they can contest a Will. Proof that the testator had the capacity to create a legally binding document must be provided for the Will to stand.
  • Provision Violation: In California, a Will must be signed by the testator in front of two witnesses who also sign the document. Neither witness is allowed to be named as a beneficiary in the Will. If any of these conditions are violated, the validity of a Will can be called into question.
  • Multiple Versions of a Will: There are cases when a testator has drafted more than one Will to update their estate plan. Most often, the probate court considers the new document as the legal document, and the old document is deemed invalid.
  • Non-compliance with legal formalities: In California a Will must be in writing, signed by the testator, and signed by two witnesses. Failure to meet all of these requirements can lead to legal issues during the probate process.
  • Beneficiaries who may be missing or uncooperative: California has specific notice procedures that must be followed for beneficiaries who are missing or are uncooperative in the probate process.

Depending on what has taken place already with the probate court will dictate how much time an heir or beneficiary has to contest a Will.  If this is something you are considering, you should reach out to counsel as soon as possible to make sure you do not miss any deadline to file a Will contest.

What Should You Do?

Consider reaching out to a Trusts and Estates and/or Probate Attorney such as those at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

Mississippi taxpayers impacted by April 2024 severe storms, straight-line winds, tornadoes, and flooding qualify for tax relief

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Mississippi taxpayers impacted by April 2024 severe storms, straight-line winds, tornadoes, and flooding qualify for tax relief

On June 27, 2024 the Internal Revenue Service (IRS) announced tax relief for individuals and businesses affected by severe storms, straight-line winds, tornadoes and flooding that began on April 8, 2024 in Mississippi. These taxpayers now have until November 1, 2024, to file various federal individual and business tax returns and make tax payments.

The November 1, 2024, deadline will now apply to:

  • Individual income tax returns and payments normally due on April 15, 2024.
  • 2023 contributions to IRAs and health savings accounts for eligible taxpayers.
  • Quarterly estimated income tax payments normally due on April 15, 2024, June 17, 2024 and September 16, 2024.
  • Quarterly payroll and excise tax returns normally due on April 30, 2024, July 31, 2024 and October 31, 2024.
  • Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2024.
  • Calendar-year tax-exempt organization returns normally due on May 15, 2024.

In addition, penalties for failing to make payroll and excise tax deposits due on or after April 8, 2024, and before April 23, 2024, will be abated as long as the deposits are made by April 23, 2024.

Other Areas Having Extended Deadlines:

The IRS announced on May 16, 2024 that individuals and businesses affected by tornadoes that began on March 14, 2024 in Ohio now have until September 3, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on May 31, 2024 that individuals and businesses affected by severe storms and flooding that began on September 11, 2023 in Massachusetts now have until July 31, 2024, to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For Mississippi – Currently, relief is available to affected taxpayers who live or have a business in Hancock, Hinds, Humphreys, Madison, Neshoba and Scott counties.

For Massachusetts – Currently, relief is available to affected taxpayers who live or have a business in Bristol and Worcester counties.

For Ohio – Currently, relief is available to affected taxpayers who live or have a business in Auglaize, Crawford, Darke, Delaware, Hancock, Licking, Logan, Mercer, Miami, Richland and Union counties.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the current year (2023).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “4777-DR” for Ohio or “4780-DR” for Massachusetts or “4790-DR” for Mississippi.

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

Facing An Appearance In U.S. Tax Court For Your Trial? Here Are Some Tips To Consider.

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Facing An Appearance In U.S. Tax Court For Your Trial? Here Are Some Tips To Consider.

The U.S. Tax Court allows individual taxpayers to represent themselves without an attorney.  But don’t think that because you did not hire an experienced tax trial attorney that the Tax Court judge will give you much leeway.  Although you have the facts down cold and may have met with an auditor, the auditor’s manager, the appeals officer, and the IRS trial lawyer, the actual trial of your case in U.S. Tax Court is a whole new ball game. Keep in mind that the judge knows very little about your case and will have no patience nor is the judge able to educate you on how to present your case.

Actions that must happen in the weeks leading up to trial

The U.S. Tax Court will issue a Standing Pretrial Order in a regular case or a Standing Pretrial Order For Small Tax Cases. Read this order or notice from the Tax Court carefully and keep a copy. The Standing Pretrial Order or Notice has very specific instructions about getting ready for trial. One of the provisions of the Standing Pretrial Order (sent to petitioners in regular cases) is that you must file a pretrial memorandum. The Standing Pretrial Notice (sent to petitioners in S cases) states that you should submit a pretrial memorandum. The Tax Court encourages all parties to submit a pretrial memorandum. You should look at the Standing Pretrial Order or Notice and the form attached, which shows what a pretrial memorandum looks like. The pretrial memorandum can be very helpful in organizing and preparing your case. The pretrial memorandum may also help the judge to understand your position. Send your pretrial memorandum to the Tax Court, and send a copy to the IRS attorney. The Standing Pretrial Notice also tells you what you need to do to settle your case and how to stipulate facts if you do not settle.

During this period of time you should provide to the IRS copies of documents that you intend to use at trial, agree in writing to facts and documents that are not in dispute and consider whether you need any witnesses to support your case.

Things to expect during the trial

Before you come to Tax Court for the trial you will want to –

  • Think about what facts you want to tell the judge.
  • Organize any documents you have to support your case. If the IRS will not agree (stipulate) to your documents, bring three copies of each document to court.
  • Organize your facts and arguments so you can present your case clearly.

Come to court early so you will be ready when your case is called at the calendar call which starts at 10:00 a.m. You may receive a notice from the Tax Court recommending that you arrive at the Court by 9:00 a.m. to have the opportunity to meet with clinical and calendar call attorneys.

Actions that must happen after trial

After the trial is concluded, the judge usually will direct the parties to file briefs with the Court under the format of seriatim briefs (one after another) or simultaneous briefs.

If seriatim (non-simultaneous) briefs are ordered, you as the petitioner must file your “Opening Brief” first which is due 75 days after the trial has concluded.  The IRS thereafter responds to your Opening Brief with an “Answering Brief” which must it must file 45 days thereafter. You can then respond to the Answering Brief with a “Reply Brief.”

If simultaneous briefs are ordered, the you and the IRS will have a deadline set by the judge to submit each of your Opening Briefs and then each side will have the opportunity to file their Answering Brief by the deadline set by the judge.

These briefs are extremely important in assisting the judge to resolve your tax case and after the briefing process is complete, the ball is now with the Court to decide your case. The failure to file a brief in following specific Tax Court Rules can result in the dismissal of all issues on which you have the burden of proof (which unless the IRS is alleging fraud, will be all issues).

Are you facing an imminent trial in U.S. Tax Court?

While there is no rule forcing the IRS counsel to settle cases and the burden of proof is always on the taxpayer (unless the IRS alleges fraud), there may still be an opportunity to settle the case, limit the disputed issues or get a continuance that an experienced tax trial attorney can get for you.  But if this is something you are looking to do, you need to act quickly as the Tax Court values its trial time as a precious commodity and the last thing you want to do is to disrupt a judge’s schedule and tie up court resources.

What Should You Do?

Succeeding in a Tax Court case is all about organization and early preparation. Even if you believe that you are prepared to litigate your case before the Tax Court, litigating a tax controversy before the Tax Court is no simple task. You are facing an IRS trial attorney that does this every day before a judge who will provide you no leeway in adhering to court procedure just because you are not an experienced tax attorney.  Consider contacting an experienced tax attorney who can argue the application of your facts and circumstances and seek the best possible resolution for your trial.  The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.