AZ CPA March/April 2017
Financial Planning Issue Retirement Risks Financial Exploitation of the Elderly Life Insurance and Creditors
The Arizona Society of Certified Public Accountants y www.ascpa.com
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AZ CPA The Arizona Society of Certified Public Accountants
CPAs Join us for the
ASCPA Annual Meeting May 19
If you like Ted Talks, then you are sure to enjoy what we have in store for you at the Annual Meeting. In addition to honoring Life Members Randy Fletchall and Jim Susa, we will present Ignite CPAs — a fast-paced event where six CPA speakers will present a topic, giving them each five minutes to inspire and entertain you! Join us at the Arizona Biltmore Resort.
Thanks to our Gold Sponsors:
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Greg Nelson Molly Montgomery Mike Allen Jared Van Arsdale Brenda Blunt Michael Chesin Virginia DeSanto Marcus Feder Teresa Finley Julia Miessner Mark Patton Jeffrey Quick Curtiss Smith Nancy Thomas Char Woodall
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Chapter Presidents Southern Chapter Northern Chapter
Cathy Poore Bethany de Alva Southwest Chapter Jennifer Sullivan North-Central Chapter Ellen Carpenter AZ CPA is published by the Arizona Society of Certified Public Accountants (ASCPA) to provide information, news and trends in the profession of accounting. It is distributed 10 times a year as a regular service to members of the Society. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in articles or advertisements within this publication. Opinions expressed by contributors are not necessarily those of the ASCPA.
Go to www.ascpa.com for more information or to register.
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AZ CPA MARCH/APRIL 2017
Arizona Society of CPAs 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034-2021 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 www.ascpa.com
AZ CPA Volume 33 Number 3
March/April 2017
Features 8
Two Life Members to be Honored at Annual Meeting Randy Fletchall and James Susa are featured for their contributions to the profession. by Patty Gannon
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Columns & Departments Chair’s Message by W. Gregory Nelson, CPA
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Member News
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A Dash of SALT by James G. Busby, Jr., CPA
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Board Highlights Quick Quiz
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Classifieds 22
Retirement Risks Under Any Administration Learn about the four common risks the average person faces when approaching retirement today. by Wm. Jason E. Washo, CPA, PFS, CFP
Financial Exploitation and Elder Abuse One in nine seniors are subject to elder abuse. Find out what you can do to help your clients. by Emily Kile
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Life Insurance and Creditors — A Complicated Story
Find out the nuances that need to be taken into account by clients, CPAs and financial planners to receive maximum asset protection for life insurance proceeds. by Philip R. Rupprecht and J. Phillip Glasscock, CPA
Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 225-B Phoenix, Arizona 85034-2021 www.ascpa.com
Special thanks to John Chichester, CPA , for his help in editing the articles in this Financial Planning issue.
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ASCPA Chair’s Message
Hamilton Gave Us More than a Broadway Musical Several months ago, I talked with a good friend of mine about the amazing story of Alexander Hamilton, as described in the hip-hop musical Hamilton. The story of Hamilton is both interesting and fascinating. Much of our modern financial economy is built on the foundation he laid as one of America’s founding fathers and its first treasury secretary.
by W. Gregory Nelson, CPA
Hamilton has a compelling personal story that has drawn thousands to the play, but it is his economic ideas that remain relevant to investors, financial markets and economic policy today.
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Hamilton has a compelling personal story that has drawn thousands to the play, but it is his economic ideas that remain relevant to investors, financial markets and economic policy today. From his birth in 1755 in the Caribbean until his death following a duel with Aaron Burr in 1804, Hamilton set in motion the development of our modern banking system and the mechanism for ensuring the creditworthiness of the United States. All of us have benefited from Hamilton’s work, but today’s financial markets are much more complicated. Financial terms that would have been foreign to Hamilton are commonplace today: 401(k), ESOPs, 529, options, derivatives, hedge funds, mutual funds, ETFs, etc. There is no one better to help clients navigate through these financial products than a CPA. In fact, according to a recent independent survey, three out of four respondents associated CPAs with financial planning. As millions of baby boomers are now heading into retirement, planning services for this group is expected to substantially increase. The same is true for Gen X and millennials because the percentage of employees covered by defined benefit pension plans has dropped to less than 20 percent for those employed in the private sector. Future retirees will be responsible for developing their own savings and investment strategy to fund a comfortable retirement. Accordingly, over the next decade, the Bureau of Labor Statistics expects 32 percent job growth for financial planners, compared to 14 percent for all occupations. The ASCPA has nine different interest sections for membership. One of those sections is the Financial Planning Section, which provides an online community for financial planners for networking and sharing information on topics of mutual interest. In addition, a search of the ASCPA website reveals dozens of relevant courses: ESOPs, insurance planning, tax smart investing and more. This month’s AZ CPA salutes our membership involved in the financial planning with several articles that, whether you are a financial planner or not, I am certain you will find interesting. As my term as chair of our Society ends, I would like to thank my colleagues on the board, especially Cindie Hubiak, and the ASCPA staff, for their work on behalf of all the CPAs in Arizona. During my time as your chair, I have had the opportunity to more fully appreciate the value our ASCPA brings, whether we are in public or private practice. Among the highlights of my year has been the opportunity to meet so many members across our great state. Thank you for your dedication to our profession and your membership in our Society. n
Member News ASCPA Speed Mentoring for Accounting Students Heinfeld, Meech & Co., P.C. promoted the following individuals: Anthony St. George, CPA, to audit manager, Cynthia Rojo to senior associate, and Malia James, CPA, Patrick Copeland, and Cheryl Kuslits to staff associate II. Flowers Rieger & Associates, PLLC hired Alan J. Zachman, CPA, as a senior tax manager. Recent BeachFleischman PC staff promotions: Eric Freeman, CPA, and Mikaela J. Knutson, CPA — manager; Krista L. Conway, CPA — senior manager; Monica A. Vera, CPA, Melissa Sim, CPA, Ryan A. Stephens, CPA, Sarai Portillo, CPA, and Daniel Arneson, CPA — supervisor. John Gyuwon Cho, CPA, and his firm have merged with Seby & Associates, Ltd. on Jan. 1, 2017. Robert J. Schlichting, CPA, joined the firm as a tax manager.
Thank you to our members who served as mentors to accounting students at the ASCPA’s first speed mentoring event. Stella Shanovich, Audit Office Managing Partner, BDO USA, LLP also spoke to the group about the value of mentoring throughout their careers. Accounting students learned more about the CPA profession and enjoyed networking with our members. “There are so many more career paths within accounting than I realized. It was interesting to talk to people that work or have worked in many different environments and paths.” Christine Sanchez, Grand Canyon University “All of the mentors were very open and honest in answering questions and provided lots of valuable advice on career opportunities.” Jenni Taylor, University of Phoenix
Nordstrom & Associates PC promoted Rebecca Cordasco, Tim Anderson, and Jennifer Nordstrom to shareholder effective January 1, 2017.
In Memoriam Harry T. Magill, CPA — ASCPA Life Member and long-time professor at Arizona State University.
Bylaw Changes Thanks to all members who voted on the proposed changes to the ASCPA Bylaws. The amendment has passed and the changes will be implemented as of May, 2017.
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Two Life Members to be Honored at Annual Meeting James M. Susa, CPA, and Randy Glenn Fletchall, CPA, will be recognized by the Arizona Society of CPAs with Life Membership at the Annual Meeting and Awards Luncheon on May 19, 2017, for their many contributions to the Society and the CPA profession. James M. Susa, CPA Lawyer and CPA, James Susa, has been a member of the ASCPA for 17 years. During that time, he has served on the Tax and Legislation Committees and the Board of Directors. He is a past chair of the Arizona State Board of Accountancy Law Review Committee, the State Bar of Arizona Tax Section and the Arizona State Board of Tax Appeals. Susa is a shareholder in the law firm DeConcini McDonald Yetwin & Lacy, P.C. and has served as Assistant Attorney General representing the Arizona Department of Revenue and an administrator at the Department. He is recognized as a certified tax specialist. Receiving his CPA certificate in 1997, Susa has been supportive of the ASCPA and the CPA profession for almost 20 years. “Jim supported Arizona CPAs when he let me know about a practice of law issue being addressed by the Arizona Supreme Court. With his guidance and the assistance of others, we obtained an exemption for CPAs in areas that allow them to do their jobs. Another state didn’t have a ‘Jim,’ and their CPAs faced restrictions until changes could be made,” said Cindie Hubiak, ASCPA President & CEO. “Jim has brought several of these types of issues to our attention. We appreciate his initiative.” “I was certainly surprised when Cindie called me to tell me about this honor,” says Susa, who also recently was the recipient of the Boy Scout’s Silver Beaver Award. Susa is Treasurer for the Boy Scouts in Southern Arizona. “I’ve always been active in Scouting,” says Susa, who was probably one of the youngest boys to become an Eagle Scout. “I will always remember when
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Senator Barry Goldwater came to Sedona to present me with the Eagle Scout award I had earned at age 13,” he said. Susa’s sons also participated in a Boy Scout first when all three received their Eagle Scout award on the same day (at ages 15, 17 and 18). Susa says he is particularly proud of
being a CPA and says that being a CPA is very helpful in his day-to-day work as a tax attorney. “When people ask me what I do for a living, I often tell them I’m a CPA” says Susa. “CPAs have a revered role in safe guarding the financial markets. That is something to be proud of, and I am proud to be a CPA.”
Photo by: Chris Mooney
Randy Glenn Fletchall, CPA Randy Fletchall retired to Arizona in 2012, after spending his career as an EY partner. Prior to transferring to the EY national office in 1996, he spent his first 20 years at the firm serving commercial banking and other financial services clients and in key leadership positions in the firm’s financial services industry practice. At EY, Fletchall was the Americas vice chair – Quality and Risk Management and before that Americas vice chair – Professional Practice with responsibility for national office accounting, auditing, SEC reporting, quality control and risk management functions. He was a member of the Americas Executive Board from 2003 - 2012. One of Fletchall’s greatest contributions to the profession was serving as chair of the American Institute of Certified Public Accountants (AICPA) from 2007 – 2008 and serving as a member of the AICPA’s Board of Directors for six years. Prior to his service on the board, he served as an at-large AICPA Council member and served as vice chair of the AICPA’s SEC Practice Section Executive Committee. “Serving as chair of the AICPA was really quite eye-opening,” says Fletchall. “Previously, I had spent much of my time working with my colleagues at the Big Four firms. Pretty soon you start thinking that is the only view there is of the profession. One of the best parts of the position was visiting all the state societies throughout the country. I met CPAs of all stripes –in public and private practice, government and academics. I learned how much we all had in common and just how much I had been viewing the entire profession through my firm and colleagues.” Fletchall continues to serve as the president of the AICPA Foundation Board of Trustees. He is also a member of the AICPA National Commission on Diversity and Inclusion. In addition, Fletchall remains active with the AICPA as a lifetime member of the council and participation in projects, such as the now-completed implementation activities of the Pathway Commission.
Photo by: Patty Gannon Fletchall served on the Professional Practice Executive Committee and Research Advisory Board of the Center for Audit Quality and on the XBRL U.S. Board of Directors. In addition, he was an organizer of the international Forum of Firms and initial member of the Transnational Auditors Committee of the International Federation of Accountants. He served as a member of the Public Company Accounting Oversight Board’s Standing Advisory Group from its inception through 2009. Fletchall served on the ASCPA Board of Directors and its Executive Committee and on the ASCPA Foundation Board and chaired its Scholarship Selection Committee.
He holds a BS in Finance and has an MBA from Kansas State University. He is a member of Kansas State’s Accounting Advisory Council and was its 2007 Accountancy Hall of Fame inductee. Fletchall was drawn to an accounting career because he felt the market for jobs was best. “Accounting is the language of business. I got an MBA with an emphasis in accounting. I decided to work at EY for one year to get my experience and then I thought I would leave the profession and do something else. Instead, I ended up in the auditing practice of EY for 36 years!” Currently, Fletchall is enjoying working on his golf game and spends his time in Idaho during the summer. n
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A Dash of SALT
Arizona Finally Implements Sales Tax Simplification In this month’s state and local tax (SALT) column, Busby highlights key Arizona sales tax reforms that are now in effect, noting that although most reforms were intended to simplify sales tax reporting for taxpayers, penalties apply to taxpayers who are required to use the Arizona Department of Revenue’s (Department’s) online reporting and payment system but fail to do so. In 2013, the Arizona Legislature passed a transaction privilege (sales) tax reform bill. Arizona is one of just four states that allows municipalities to administer their own sales taxes, and one of lawmakers’ primary objectives was to simplify the state’s sales tax system by requiring the Department to issue all municipal sales tax licenses, to process all municipal sales and use tax returns, and to receive all municipal sales and use tax payments.
Simplification Was Delayed by Two Years Arizona’s sales tax reforms were to take effect on January 1, 2015, and some changes were effective on that date, such as the cumbersome new rules governing the taxation of construction contractors and the rule that prevents municipalities from initiating a new sales or use tax audit on a company unless the company is engaged in business in only one municipality or the municipality or the Department authorizes the municipality to conduct the audit. The primary simplifications, however, did not go into effect on that date. Rather, late in 2014, the Department announced that those key reforms were being delayed until January 1, 2016, because of the “complexity and scale of programming” required. Then about a year later, the Department updated its website to indicate that the key reforms would not go into effect beginning January 1, 2016, because its computer system still was not ready.
Key Reforms are Now in Effect Beginning with January 2017 sales tax returns that are due in February of 2017, the Department will process all municipal sales and use tax returns and receive all municipal sales and use tax payments on combined returns that allow taxpayers to report all Arizona state, county and municipal sales and use tax liability on the same return. In addition, the Department now issues sales tax licenses for the state and all municipalities that impose sales taxes. Last year, it initiated the sales tax license renewal process for all municipalities. Arizona state and local sales tax licenses now must be renewed by January 1 each year.
by James G. Busby, Jr., CPA
James G. Busby, Jr., CPA, is a state and local tax attorney at The Cavanagh Law Firm. Busby previously worked in the SALT departments at Arthur Andersen and Deloitte & Touche. Before entering private practice, Busby was in charge of all transaction privilege (sales) tax audits at the Arizona Department of Revenue. If you have any questions, please contact the author. He can be reached at (602) 322-4146 or JBusby@CavanaghLaw.com.
The Department is Pushing Taxpayers Toward Online Transactions The Department encourages all businesses to renew their sales tax licenses, file and pay their sales and use taxes online using the online system. Businesses that have more than one location are now required to renew their licenses and file their sales and use tax returns online. Similarly, the Department expects businesses that
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reported $1 million or more in sales taxes in the previous year to pay their sales and use taxes via electronic funds transfer (EFT). Penalties apply to taxpayers that are required to pay their taxes via EFT but fail to do so. During the current legislative session, the Department is pushing for legislation that eventually will require virtually all taxpayers to file and pay their sales and use taxes online.
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Retirement Risks Under Any Administration By Wm. Jason E. Washo, CPA, PFS, CFP The fears many consumers raise in our offices typically are not the ones we know to be bigger obstacles to their retirement success. The fear of losing principal, worrying about what the market will do next, and fretting over the administration in the White House are all common concerns we hear daily. As professional planners, we need to know how to reassure our clients and address the items that truly have the ability to make, or break, a great retirement. While you can debate what the top risks truly are, here are four common risks the average person approaching retirement today will face: • Outliving one’s assets • The effects of inflation • The uncertainty surrounding social security • Rising eldercare costs First – there is the very frightening risk of outliving ones assets. Life expectancies have been on the rise for the past several decades. Charts from the Center for Disease Control show that a man born today would reach an average age of 76.4 and a woman would reach age 81.2. Furthermore, if we look at the average couple, there is a 48 percent chance one of the two will reach age 90. Bottom line: Consumers often do not realize how long they may be living in retirement. How can you best prepare clients who may be living longer? Save more and/ or spend less—likely a bit of both. Making good use of IRAs and other qualified plans may provide significant benefits when attempting to accumulate retirement assets. Also, having a realistic budget that won’t break the bank always helps, too. There is a lot of information out there about covering withdrawal rates and their impact on portfolios. Safe withdrawal rates can vary widely, based on market performance and portfolio construction. Many clients make two mistakes by underestimating longevity and overestimating a reasonable withdrawal rate. They assume much shorter life expectancies than the statistics tell us, then they
compound this mistake by withdrawing a higher percentage of their retirement portfolios than they should. If we plan for the client to live longer, the safest approach for withdrawal rates is to keep them as low as possible. Second – another risk is the slow, yet meticulous, effects of inflation and the erosion of purchasing power. Many people approaching retirement believe they need to focus primarily on protecting their principal.The longer people live, the more the effects of inflation will be apparent to them. At just three percent inflation, $100,000 would decrease in value to $73,742 in 10 years, $54,379 in 20 and $40,101 in 30. Recent history shows inflation has been low compared to historical trends, closer to two percent, but it is too soon to accept this lower inflation rate as a new planning paradigm. Deep down inside, clients know inflation exists, they protest when they encounter rising prices for goods and services they purchase. Somehow they don’t relate this problem to their own cash and investments. Some retirees initially believe they should place all their assets in fixed income instruments such as Bonds and CDs. This move likely would result in a very slow, yet real, erosion of their purchasing power. Stocks can help work towards a goal of making their money last over the long run. When it comes to investing, risk is always involved. But when you look at history, and assess the risk over longer periods of time, patient investors typically come out ahead. Dividends from stocks may also provide a rising income over the long term. A balanced approach should still be sought, using a carefully selected mix of stocks, bonds and cash would be prudent for most people. It is important to take into account any fixed income sources a client has when formulating the mix. Attention to items such as Social Security and private pensions may be worth considering when formulating retirement portfolios. Third – Social Security has demographics working against it. It would be dangerous for younger generations to dismiss these trends. For those currently receiving or soon to be receiving
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benefits, little is expected to change. The clearest picture we can paint for clients is to explain how many payers there are for each beneficiary. As far back as 1940, there were 159 payers to every beneficiary, a statistic that facilitated Franklin D. Roosevelt’s signing of the Social Security Act in 1935. Today, there are three payers to every beneficiary and this ratio is expected to drop. And again, don’t forget people are living longer. The fact is there are less people paying in for people who are living much longer lives. Our clients don’t need to be actuaries to see there are negative tides working against this social welfare benefit. Being aware of this risk is about all anyone can do to minimize any repercussions. It would not be unreasonable for future generations to expect less government support as people experience increasing elder care costs. Fourth – long-term care and elder care costs continue to rise. More people are entering retirement with greater familiarity of the financial impacts from longterm care expenses. Many have helped
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care for an aging parent or have seen the financial stress an in-law encounters as costs from prolonged stays in care centers add up. Fortunately, this is one area where qualified long-term care insurance premium deduction limits did increase. The average cost of nursing homes and assisted living communities still shock many clients. In Arizona, the average annual cost of a private room in a nursing home was $93,075 for 2016. Clients can consider asset-based long-term care policies and traditional long-term care insurance to address this risk. Most stays in extended care facilities or long-term care provided at home do not qualify for Medicare. Seeking Medicaid assistance has been increasingly difficult as the needs are growing and the resources dwindle. Paying out of pocket or relying on private insurance is a prudent planning assumption for most clients. These four risks are not new. They have no greater or lesser impact under the past, the new or the future administrations of the White House. It
is the steps people take to manage risks in their own administration of retirement that will determine their likelihood of success. n Wm. Jason E. Washo, CPA, PFS, CFP® is the owner of Washo Financial in Scottsdale. This article is not intended to provide individual tax or legal advice. Securities and Financial Planning offered through LPL Financial. A Registered Investment Adviser. Member FINRA/SIPC. Washo Financial is not an affiliate company of LPL Financial.Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and the federally registered CFP in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. CDs are FDIC Insured and offer a fixed rate of return if held to maturity. Stock investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Financial Exploitation and Abuse of the Elderly By Emily Kile Financial exploitation is a serious problem facing our nation. According to the National Adult Protective Services Association (APSA), one in nine seniors reported being abused, neglected or exploited in the last 12 months. APSA also reports that 90 percent of exploiters are family members or someone who is trusted. This reality creates a significant dilemma for professional advisors. Lawyers, CPAs, financial advisors and others may find out about financial exploitation from different sources. For example, a CPA might be reviewing information for tax returns and wonder if the large transactions out of an account are tax deductible. Perhaps your client has large medical bills or is paying other deductible expenses for a family member. As a financial advisor, you may observe that the client is making more requests for cash to be deposited to a checking account or asking to cash out of insurance, annuities or other investments that were purchased for a long-term hold. While the distributions might be innocent or done with complete mental clarity by your client, those same decisions might be symptoms of a bigger problem. Transactions that are inconsistent with the person’s long-standing practices and behavior could be indicative of cognitive decline in the client or of financial exploitation. Arizona has laws to protect vulnerable adults. The statutes make clear that a person in a position of “trust and confidence” to a vulnerable adult shall use the vulnerable adult’s assets solely for the benefit of that adult and not for the benefit of the person who is in the position of trust and confidence, or to the person’s relatives unless one of four exceptions applies. The exceptions are generally: 1) the court approves of the transaction; 2) the transaction is specifically authorized under a valid durable power of attorney; 3) the transaction is required
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to obtain or maintain ALTCS benefits; or 4) the person in a position of trust and confidence is the spouse of the vulnerable adult and the transaction furthers the interests of the marital community, including applying for public benefits. A “vulnerable adult” is someone who is unable to protect him or herself from abuse, neglect or exploitation by others because of a physical or mental impairment. We often hear about the vulnerable person who played the “foreign lottery.” Perhaps the individual continues to send $5,000 and $10,000 overseas just waiting for the big payoff after the “administrative fees” are paid. Clearly, this is abuse and exploitation. For the individual “playing the lottery” it is not nearly so obvious. My clients have told me about how nice the person on the phone was to them, that the caller was the only person who called all week, and how the person seemed genuinely concerned about
their welfare. Sometimes they tell me that they understand they will never collect on the money spent, but it was just nice to have a friendly voice at the other end of the phone. Perhaps more commonly, however, we have clients who are being taken advantage of or even exploited by those closer to them. Imagine your 75-year-old client. Her husband has recently died after 50 years of marriage. Your client “Wilma” is very lonely. Her husband “Fred” did all of the financial tasks. He paid the bills and he was your main point of contact. After Fred died, Wilma had a neighbor move into her home and act as her companion and caregiver. The neighbor “Betty” is very helpful to Wilma. She cooks and cleans and provides company to Wilma. As Wilma’s health declines, her children start to investigate her financial situation to come up with a budget to pay for care. They think about selling the house to use the proceeds to pay the assisted living community or obtaining
a reverse mortgage to obtain more professional help. As they investigate, they learn that Wilma quit-claimed the property to Betty, when Betty lost her own home in a foreclosure shortly after moving in with Wilma. Wilma remembers signing documents, but she thought she signed documents so Betty could live with her and not pay rent. Is this exploitation? Perhaps you have a client who is aging and has one child who seems unable to become independent. The child, “Pebbles,” lives with Wilma. Pebbles does not have a job and takes Wilma to the grocery store, helps her at home, brings her to all appointments and is nominated on all documents as the Agent and Trustee. What happens if Pebbles starts to pay her own bills with Wilma’s money, or Wilma gifts Pebbles money? Does it matter in your assessment if Wilma has become completely reliant on Pebbles or if Pebbles is now asking for the money? Or, maybe Pebbles told Wilma that if
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she stopped paying/gifting money to Pebbles, Pebbles was going to move out and leave Wilma all alone in a house she cannot manage and with no way to get around since she no longer has a car? As the facts become more “extreme,” it might be easier to believe that it is exploitation or that your client is vulnerable. However, as stated above, if the Durable Power of Attorney does not authorize gifting by the Agent to the Agent, it could be exploitation regardless of the other facts. Unfortunately, there are no easy answers, and we all know that the real life facts are always much more convoluted than any scenarios I can write about in this article. It is important for you to make sure you have good documentation about the decisions made and the advice provided, particularly when the requests are out of the normal course of your relationship with that client. Don’t be afraid to raise concerns with your client about transactions that are
suspicious or are very different than the client’s prior behavior. Encourage your client to seek medical advice or to engage with supportive services if you suspect cognitive decline. It feels awkward to address these issues with a client. However, estate planning attorneys do and are able to craft the conversation so it is still dignified and respectful. Ignoring the signs of exploitation places your client at risk for depression, feelings of shame or fear, and the loss of assets, which may not be recovered. It may also put you at risk for liability. Ensure that you have an engagement agreement or other documentation that provides direction on who you can talk to, in addition to the client. Discuss with the client when you can talk to their Agents, successor Trustees, professionals assisting the client, or other important people in the client’s life. Create internal policies with trigger points when you require a physician report to confirm whether the client
has the capacity to direct decisions for which you were retained. If you cannot resolve the concerns by addressing the issues with the client and working with the client’s representative, you may need to make a report to Adult Protective Services. All reports can be provided anonymously. You can make a report at: https://des.az.gov/services/ aging-and-adult/adult-protective-services/ file-aps-report-online. n Emily Kile is a managing attorney at Kile & Kupiszewski Law Firm, LLC. Emily’s practice focuses on estate planning, special needs planning, guardianship/ conservatorship matters, probate, trust administration, ALTCS planning and elder law. Contact her at (480) 348-1590; info@ kilekuplaw.com; www.kilekuplaw.com
Emily Kile will be a speaker at the ASCPA Financial Planning Conference on June 7. Find out more at www.ascpa.com.
Your Corporate Clients May Qualify for a 100% Arizona Income Tax Credit! C & S corps and insurance companies that pay a premium tax can help improve educational outcomes for k-12 students by redirecting their AZ income tax liability to Brophy Community Foundation. • Tuition aid based solely on verified financial need • Average family income = $35,279 • BCF assists students attending 35 schools statewide • Low operating costs - average 5%
To start the process, contact Dawn Kennedy before July 1st at dkennedy@brophyprep.org or 602-264-5291 x6521 MARCH/APRIL 2017 AZ CPA
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Life Insurance and Creditors A COMPLICATED STORY by Philip R. Rupprecht and J. Phillip Glasscock, CPA Life insurance can have wonderful benefits, including asset protection, if properly structured. This article discusses some of the nuances that need to be taken into account by clients, CPAs and financial planners to receive maximum asset protection for life insurance proceeds. “Oh, by the way, we’re buying some life insurance. Who should we name as the beneficiary?” Sounds simple, doesn’t it? Obviously, the beneficiary should be the surviving spouse or, in some cases, the children. If creditor claims are, or could be, an issue, the simple answer might be the wrong answer.1 There are many good reasons to own life insurance. As anybody who has wandered into the life insurance market recently can tell you, life insurance, particularly cash value life insurance, is an extremely complicated product. The beneficiary designation, while initially obvious, is complicated if current or future creditor claims are considered. Clients buy life insurance for a variety of reasons — income replacement, tax efficiency, transfer tax mitigation and others. Since at least 2005, buyers have been told that some portion of the cash value and death benefit are exempt from creditor claims. The creditor exemption question turns, in part, on the beneficiary designation, thus complicating the choice. If the purchaser has, or could have, creditor issues in their future, then designating a beneficiary without considering the effect of later creditor claims could lead to the loss of the insurance proceeds to creditors. For example, Bill and Mary own a small struggling business. They’ve guaranteed the company’s multi-year lease and substantial bank debt. At age 45, Mary dies.She is the owner of a policy, purchased in 2000, with a $1 million death benefit policy and a $250,000 cash value. Bill is the sole beneficiary. Before Mary’s passing the
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cash value was exempt from the claims of the couple’s creditors.2 If the business failed, Bill and Mary could borrow taxfree against the cash value3 and can pay their bills without creditor interference. This $250,000 asset could be critical to the couple’s financial security. If Mary dies while Bill is the sole beneficiary, her passing could be doubly catastrophic. Presumably, Mary is insured because she plays a significant role in the company’s business and its prospects will be materially harmed by her passing. In addition, her passing could have the unintended and unexpected consequence of converting an exempt asset free from creditor claims into a non-exempt asset subject to creditor claims. It is clear law in Arizona that if Mary bought the policy on her life for Bill’s benefit, Bill receives the death benefit free and clear of any of the claims of Mary’s creditors. 4 Unresolved, however, is whether the proceeds of Mary’s policy are exempt in Bill’s hands. Bill has substantial leasehold and guarantee liability. A creditor could argue that although Bill receives the death benefit free and clear of Mary’s creditors, he does not receive the policy proceeds free from the claims of his creditors — even though they share largely the same creditors. Arizona case law has yet to squarely address this issue. Unless the proceeds are exempt in Bill’s hands, they would be subject to garnishment by Bill’s creditors converting that $250,000 exempt asset into a $1 million non-exempt asset. Even if Mary and Bill are not financially struggling today, they face everyday risks (auto accidents, slip and falls, etc.). While elderly clients are less susceptible to certain types of risks, they are in a higher risk category with respect to others. No one is immune from catastrophic risk. Even if Bill and Mary do not see themselves as high risk, they ought to consider beneficiary designation alternatives that preserve creditor protection. Preserving a $1 million exemption for Bill’s life expectancy of 40 years (or more) could have considerable
value. All other things being equal, Bill’s is financially more secure if the $1 million left by Mary is locked in a creditor protected structure because, quite simply, he cannot know what life might bring. Bill and Mary have several options. First, the simplest and clearest option is an Irrevocable Life Insurance Trust (ILIT). Bill and Mary can either purchase replacement insurance or transfer their policy to an ILIT depending on their concern for transfer tax exposure. The transfer tax considerations are simpler if Bill and Mary never own the policy. The cash value of an ILIT owned policy is not exposed to claims of Bill and Mary’s creditors because Bill and Mary do not own the policy and, hopefully, the settlor is not a beneficiary. The death benefit is not exposed to the claims of either of their creditors because the death benefit is payable to the ILIT trustee. The one risk of a conventional ILIT (i.e. in which only the children are beneficiaries) is that Bill and Mary are making a gift and therefore subject to fraudulent transfer considerations subject to, at least, a four-year look back.5 Bill and Mary may not want an ILIT for a variety of reasons. ILITs can be costly to settle, the death benefit may be relatively small, and they generally require a third-party trustee. Bill and Mary may be unwilling or unable to send the Crummey notices. They may want unimpeded access to the cash value for the survivor. There is another option for couples of even modest means and at lower death benefit thresholds. Bill and Mary can, and probably should, name their revocable living trust as the beneficiary. If they do, however, they need to pay careful attention to their treatment of those proceeds under the terms of the trust agreement. First, if an insurance policy is exempt when payable to an individual beneficiary, then the policy (or cash value) is also exempt if it is paid to a trust for the benefit of that individual.6 So, at first pass, it is important that Bill and Mary’s revocable living trust clearly makes
the members of the protected class (spouse, children, other dependents) the ultimate beneficiaries of the life insurance proceeds. Second, Bill and Mary should pay attention to how their trust is drafted, particularly with respect to community property issues, closing off any back doors to the benefit they seek to protect. In general, a carefully drafted, revocable trust can protect policy proceeds for the benefit of the surviving spouse’s life. The surviving spouse, or the children, can enjoy the proceeds free and clear from not only the creditors of the decedent, but also their own creditors. Therefore, if either the cash value of the death benefit is a material part of a client’s financial security, then the client is well advised to pay close attention to the beneficiary designation and consider the alternatives. Simple may not be best; simple could be a disaster. A properly drafted revocable trust should almost always be considered. n
Endnotes 1. This brief article analyzes the options for personally owned life insurance. Corporate (or company) owned life insurance has a distinct set of issues and is not addressed here. 2. A.R.S. §§ 33-1126(A)(6) & 201131(D). Of course, premiums cannot be paid in fraud of creditors. 3. This assumes the policy is not a modified endowment contract. 26 U.S.C. § 7702A. 4. A.R.S. § 20-1131 5. A.R.S. § 44-1009 6. A.R.S. §14-10504(D)(2) Phillip Rupprecht i s a n a s s e t protection attorney at and the managing shareholder of Aiken Schenk Hawkins & Ricciardi P.C. in Phoenix. He can be reached at (602) 248-8203. J. Phillip Glasscock, CPA, is an ASCPA member and a business attorney at Smith Paknejad PLC. He can be reached at (602) 888-9900.
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Highlights of the January Board of Directors Meeting Among other actions at its January 25, 2017 meeting, the ASCPA Board of Directors reviewed the following:
Consent Agenda The consent agenda, which included the board minutes, financial statements and Foundation budget, was approved.
2017-2018 Measurements Approval The board approved the 2017-2018 annual measurements as presented.
Nominating Committee Report
activities, shared how favorably the Society is viewed by legislators and talked with the board about the current legislative session.
State Bar of Arizona Dialogue John Phelps, CEO/Executive Director, provided an update on the State Bar of Arizona activities.
Strategic Plan Update Cindie provided an update on the progress to achieve the Society’s strategic measurements. She also updated the board on the status of the bylaws vote and upcoming activities such as the speed mentoring event.
Molly Montgomery, chair of the nominating committee, shared the names of the board members taking office on May 1, 2017.
A Day in the Life
Office Move/Lease Update
Other Business
Cindie Hubiak and Adela Jiménez provided an update on the status of the Society’s office move, scheduled for the second quarter of this year to a new space in the same building.
Legislative/Advocacy Dialogue Ryan and Kevin DeMenna thanked the board for their support of PAC
Ginny DeSanto and Mark Patton shared the challenges and joys they experience in their life and job.
No other business was conducted. If you have questions or would like additional information, please contact Cindie Hubiak at (602) 324-2888; AZ toll free at (888) 237-0700, Ext. 203; or chubiak@ascpa.com.
Requesting Congressional Delegation Connections As we begin to work with the 115th Congress and anticipate the potential for tax reform, Dodd-Frank changes and more, it’s important to identify members who have connections with our Congressional delegation and would be willing to contact them on behalf of the Society. Please let us know if you have a relationship with these elected leaders: •
Representatives: Andy Biggs, Trent Franks, Ruben Gallego, Paul Gosar, Raul Grijalva, Martha McSally, Tom O’Halleran, David Schweikert, Kyrsten Sinema
•
Senators: Jeff Flake, John McCain
The Society educates Congress members and their staff about matters relevant to our profession. Your engagement with them makes a difference! Contact: smckitrick@ascpa.com.
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AZ CPA Quick Quiz
7. According to the National Adult Protective Services Association, one in nine seniors reported being abused in the last 12 months: m True m False
You’ve Read It, Now Get Credit Take this quiz online or submit this hard copy on AZ CPA content. Receive a score of 70% or more and earn one hour of CPE credit in specialized knowledge. It’s that easy! Fees Members: $25 Nonmembers: $40 Online Access Login to www.ascpa.com and go to CPE/OnDemand CPE Quick Quiz to access links to all active quizzes. Purchase quiz and the quiz link and password will be emailed to you. Your results will be sent immediately after completing, and certificates are emailed within two business days. Hard Copy Please select one answer for each question. Fill out registration/payment information below and mail or fax to the Society office. Quiz results and certificates will be emailed to the address provided on the registration form. *This quiz will be available until April, 2018. Please note that users have three attempts to pass the quiz with at least a 70% score.
March/April 2017 Issue of AZ CPA* 1. In the Chair’s message, Alexander Hamilton is credited with: m Founding the stock market m Developing our modern banking system m Inventing electricity 2. The two Life Members to be honored at this year’s Annual Meeting are: m Cindie Hubiak & Alexander Hamilton m Greg Nelson & Jim Susa m Jim Susa & Randy Fletchall 3. Arizona state and local sales tax licenses now must be renewed each year by : m January 1 m December 22 m April 15 4. The Dept. of Revenue expects businesses that reported $1 million or more in sales taxes to pay their sales and use taxes : m In advance m Via electronic funds transfer m In person 5. In Arizona, the average annual cost of a private room in a nursing home
for 2016 was: m $93,075 m $65,600 m $38,000 6. Which one of these is not a common risk the average person approaching retirement today faces: m Fraudulent behavior m Outliving one’s assets m Rising elder care costs
8. If an insurance purchaser could have creditor issues in their future, then designating a beneficiary without considering the effect of later creditor claims could: m Be a criminal offense m Secure the insurance benefit m Lead to the loss of the insurance proceeds to creditors 9. If an insurance policy is exempt when payable to an individual beneficiary, then the policy is also exempt if it is paid to a trust for the benefit of that individual: m True m False 10. Which of these is an exception to Arizona’s statute regarding financial transactions between a person in a position of “trust and confidence” to a vulnerable adult? The person: m Needs to obtain benefits for their own use m Is the spouse and the transaction furthers the interests of the marital community m Is specifically authorized by the immediate family to make the transaction
Quick Quiz Registration Name: ____________________________________________________ Email:_____________________________________________________ Telephone: _________________________________________________
Payment
m Member: $25 m Nonmember $40 Checks: Please make payable to: The Arizona Society of CPAs Credit Card:
m Visa
m MasterCard
m American Express
Credit Card #: _______________________________________________ Expiration Date: _____________________________________________ Name on Card. _____________________________________________ Mail to: ASCPA, 4801 E. Washington St. Suite 225-B, Phoenix, AZ 85034-2021; fax to (602) 324-6043; scan and send to ASCPACPE@ascpa.com.
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Classifieds Business Opportunities/ Practices for Sale
Financial Planning Conference June 7 Black Canyon Conference Center Economic Update TBD, Goldman-Sachs
Financial Exploitation: It’s Not Yours Until I’m Dead and Maybe Not Even Then Emily Kile, Kile & Kupiszewski LLC
The Often Overlooked Variable of Time and How it Affects Estate Planning from the Financial, Family and Small Business Perspectives J. Phillip Glasscock, Smith Paknejad
Social Security Planning Ryan Bertrand, Transamerica
Healthcare Update John Coyle, The Segal Group Cyber Frauds and Cyber Security for Financial Planners Robert Minniti, Minniti CPA, LLC
What’s Happening in Taxes in 2017 Ed Zollars, Thomas, Zollars & Lynch, Ltd.
Register and learn more at www.ascpa.com/conferences
TUCSON CPA TAX PRACTICE seeks succession plan with new partner — A two partner firm of over $1 million seeks a tax partner or manager to buy out partners over time. Beneficial if interested person has an existing practice to merge in. Over 30 years, the practice is highly profitable with a strong concentration in business and individual tax preparation and consulting. Firm would also consider merger with equal or larger firm. Firm has a 90-day lease cancellation notice. Please contact CPAfirm3@gmail.com.
Employment TAX ACCOUNTANT — As a growing Scottsdale firm, we are looking for a tax accountant with 3-5 years experience preparing individual & business tax returns. Additional experience with monthly accounting and compilations a plus. Send resumes to: rlocke@f-cpc.com. Seeking Full or Part Time Consulting or Employment/ Have MS in Taxation — I am seeking a full-time, part-time or per diem position for tax season and hopefully sometime during the year. I have 25+ years of experience, have used many different tax and bookkeeping programs during this time. I am a very quick learner and can easily learn new software. I have extensive experience preparing all types of tax returns, including S Corporations, C Corps, Partnerships, LLCs and individuals. I am hoping to get a position that will allow me to help your firm with its business needs and am a very motivated, self-starter. Please contact: lynnlord65@ gmail.com.
For information about classified ads, visit www.ascpa.com and go to Advance Your Career.
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Arizona Society of CPAs 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034-2021
PRSRT STD U.S. Postage PAID Phoenix, Arizona Permit No. 952 ADDRESS SERVICE REQUESTED
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