NEWSLETTER THIS CONTENTISSUE'SCORNERS &ManufacturingHealthcareCryptocurrencyConstructionCannabisDistribution Not-for-Profit Real WealthTrustsEstate&EstatesManagement
Sax Focus • www.saxllp.com Page 2 4Registration8:00a.m.9:30a.m.MILERRun9:40a.m.TrailWalk10:45a.m.Kids’Dashes saturday, october 1, 2022 | garret mountain reservation woodland park, nj For more information: Contact Cheryl Moses at (551) 427-2505 or moses.racedirector@gmail.com. of race proceeds go to St. Joseph’s Children’s Hospital and their Child Life Department to provide quality-of-life programs for their pediatric patients. $25 $22 $30 $5 2022 MEMBERUSATF ONIN-PERSONRACEDAYONLINE BY SEPT. 29 DASHESKIDS’ ENTRY FEES 4 Miler or 1.5 Mile Walk FEATURINGCOURSE Scenic Park Courses | Custom Technical T-Shirt | Refreshments Kids’ Activities | DJ Entertainment | Awards and Random Prizes Beautiful, scenic USATF certified 4 Mile double-loop course Hilly and flat on paved park roads | Mile clocks and water stops 1.5-mile scenic trail walk through Garret Mountain Reservation Sax is thrilled to announce the 11th annual 4 MILER at Garret Mountain Reservation will be held on Saturday, October 1 in Woodland Park, NJ. As always, 100% of dollars raised will go directly to support St. Joseph’s Children’s Hospital in Paterson, NJ. Through the generosity of 4 MILER sponsors, donors, participants and volunteers, the Sax 4 MILER has raised over $680,000 for the Child Life Department which o ers high-impact therapies that help mitigate the negative e ects of treatment and hospitalization for pediatric patients with chronic, life-threatening or terminal illness. PLEASE HELP US TO CONTINUE MAKING AN IMPACT! You can help by participating, donating to the cause or sponsoring the event. Learn all about it here: saxllp.com/Sax4MILER
Sax Focus • www.saxllp.com Page 3 18 SAX FOCUS NEWSLETTER IN THIS ISSUE The information contained within this newsletter is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax or financial advice from a professional. 04 CANNABIS CORNER Taxed to Death: The Background on Cannabis Companies' Tax Challenges Written by: Adam Holzberg, CPA, MBA 06 CONSTRUCTION CORNER Q3 Construction Industry Update: Trends, Opportunities & Challenges Written by: Missy O'Shea, CPA HEALTHCARE CORNER Complying With Value-Based Risk as Healthcare Providers Transition From Fee-For-Service Written by: Debbie Nappi, CPA, MST and Brian S. Kern, Esq. MANUFACTURING & DISTRIBUTION CORNER Top Three Bottlenecks Facing the Supply Chain Written by: Joshua Chananie, CPA 16 NOT-FOR-PROFIT CORNER Conflict of Interest Policy for Non-Profit Organizations Written by: April Kushner, CPA 18 TRUSTS & ESTATES CORNER The Summer Guide to Estate Planning Written by: Joy Matak, JD, LLM 22 CRYPTOCURRENCY CORNER Stablecoin May NOT be So Stable Anymore Written by: Jamie J. Torres and Mayank Shah, CPA 08 GENERAL ACCOUNTING CORNER The New Lease Accounting Standard for Private Companies & Non-Profits: What You Need to Know Written by: Jason Borofsky, CPA, MBA and Adam Holzberg, CPA, MBA 20 100406 WEALTH MANAGEMENT CORNER How Do We Choose the Funds We Use? 13 13
Written by: Adam Holzberg, CPA, MBA Senior aholzberg@saxllp.comManager
Sax Focus • www.saxllp.com Page 4 CANNABIS CORNER Taxed to Death: The Background on Cannabis Companies’ Tax Challenges
Since then, other taxpayers have attempted similar strategies, and the tax court sided with the IRS. While those taxpayers had a similar general framework as CHAMP, they were unable to prove profit motive within the non-cannabis activities and did not have proper record keeping justifying their allocation of expenses. While still a possible tax strategy, there are significant hurdles to overcome to justify splitting the expenses amongst different activities.
Congress enacted 280E in 1982 after a drug trafficker won a tax audit the previous year, allowing him to deduct all his standard “business” deductions. The purpose of this new tax code section was to cripple the profits of those working in the illicit market and prevent them from taking ordinary business deductions. However, this would only be effective if everyone involved in the illicit market was paying their taxes in the first place.
All cannabis companies must understand that 280E can be planned for and minimized, but there is no escaping it. It has survived multiple tax court challenges that attempted to strategize around it and has survived two constitutional challenges. 280E remains a massive financial burden to cannabis companies for the foreseeable future.
Meanwhile, medical marijuana first became legal in California in 1996, and recreational cannabis first became legal in Colorado and Oregon in 2012. Companies in these newly established industries all paid their federal taxes, paying onerous amounts under the tax code. It is not uncommon to see a cannabis operator paying as much in taxes as they made in pre-tax income. 280E was crafted to cripple the illicit market but instead has severely damaged the legitimate market and allowed the illicit market to survive and thrive. Under 280E, companies are unable to take most of their ordinary expenses, such as rent, utilities, payroll, and other costs necessary to run a business. Cannabis companies are limited to only deducting costs that can be included under cost of goods sold. The impact of this ranges widely throughout the supply chain. Cannabis cultivators and manufacturers can allocate a wider range of costs to their cost of goods sold with careful tax planning. In contrast, cannabis retailers are limited more to purchases of products and delivery charges.
Companies have attempted other strategies outside of the CHAMP tax strategy. One such company attempted to have a related management company operate on behalf of the cannabis retailer. By doing so, they believed all the expenses on the management company would be deductible. The tax court ruled in favor of the IRS, and the company was forced to pay taxes on the income received through the retail store and the management fee income received by the management company. Essentially, this tax strategy forced the company to pay taxes twice on the same income without ever deducting any of their standard business costs. In another case, the tax court ruled in favor of the IRS, stating that the taxpayer in question could not deduct their charitable contributions.
While a part of the reason to legalize cannabis amongst the various states was to end the illicit market, 280E has allowed that very same illicit market to remain a strong competitor to the legitimate market. To maximize every justifiable deduction, it is imperative that cannabis companies partner with CPAs who can best walk them through careful tax planning and help them survive the eventual tax audit.
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Over the many years, several tax strategies have been attempted to avoid 280E or significantly reduce its impact. In that same time frame, the IRS has challenged each one of those strategies and has won on every challenge except for one. In 2007, the tax court ruled in favor of the taxpayer, Californians Helping to Alleviate Medical Problems (CHAMP), that they should be able to deduct expenses that could reasonably be separated from the cannabis sale activities. This meant that a company could potentially allocate costs between cannabis sale activities and non-cannabis activities. The costs allocated to the non-cannabis activities would be deductible.
CANNABIS COMPANIES' TAX CHALLENGES or most businesses, taxes can range from an inconvenient to unpleasant experience. For those in the cannabis industry, taxes can be a life-or-death experience. While nearly all states have either decriminalized or legalized recreational cannabis, cannabis remains illegal at the federal level. Under the Controlled Substances Act, cannabis has been classified as a Schedule I controlled substance, which plays an integral part in its tax status. It is because of this classification that IRC 280E has an impact on the industry. 280E, a one-line sentence in the tax code, says the following: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any State in which such trade or business is conducted.”
Adam Holzberg, CPA, MBA is a Senior Manager at Sax and focuses on increasing the overall operational efficiencies, financial reporting best practices, and internal controls for clients. As a member of the Sax Cannabis Practice, Adam supports companies from seed to sale in a variety of areas including but not limited to innovation and growth strategies, attestation services, tax compliance, and prelicensing consulting. He can be reached at aholzberg@saxllp.com
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The certification requirements for these designations vary from state to state and, in some cases, city to city. In all cases, though, the purpose is to help companies headed by currently underrepresented demographics gain a stronger foothold in the construction industry. This kind of certification can help a business gain greater access to opportunities like being prioritized for strategic partnerships, unique business development and networking opportunities, and access to the SBA’s 8(a) Business Development Program.
More Contractors Transitioning to MBE/WBE
H Written by: Missy O'Shea, CPA moshea@saxllp.comPartner
appy Summer! As the weather heats up and we transition into the second half of the year, we wanted to touch on a few important topics and updates happening in the construction industry.
We’re also seeing a number of contractors transitioning to Minority Business Enterprise (MBE) and Woman Business Enterprise (WBE) status. This can help them potentially secure work and better profit margins on publicly funded contracts.
It’s no secret that the construction industry often lags a few years beyond the overall economy with regards to economic downturns and other challenges. When the pandemic hit, we projected that the backlog of contractors would remain healthy in the 2-3 years following as many were deemed “essential,” and even with delays, the work on hand would need to be completed. As we’re now more than halfway through 2022, the average construction backlog is still healthy through 2023. But moving forward, the construction landscape is still one of competitive bidding, has an uncertainty of future new job opportunities, and a high level of competition with respect to those opportunities – and will prove even more so beyond 2023.
Backlog Beyond 2023
Q3 IndustryConstructionUpdate: Trends, Opportunities & Challenges
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The South is hot, and we don’t just mean temperature-wise. Another construction industry trend we’re seeing is that companies based in New Jersey and New York are heading south to find work. Primarily, they’re heading to Florida, South Carolina, Virginia, and ThisTexas.is happening mainly because of the population shifts happening in these states. During and following the COVID pandemic, Americans are moving away from older cities in colder climates and flocking to more affordable up-and-coming cities throughout the South. An increasing population means an increased demand for not just housing but commercial construction and local infrastructure.
Q3 CONSTRUCTION INDUSTRY UPDATE
A few key obstacles construction companies face include lease standard changes and the new “makeup” of financial statements.
• To get their foot in the door with a new group of clientele –if successful and done well, these mid-size contractors have now secured a new pool of customers moving forward.
Although some industries are feeling somewhat “back to normal” now, others remain cautious about progressing forward with changing landscapes, regulations, and risk factors. Banking is one of these industries. Construction companies are reporting that banks are asking for more detailed financial information and projections than ever before, which can slow down the lending process and ultimately make it more challenging to move forward with new projects.
Missy O’Shea, CPA is a Partner at Sax and a vital member of the firm’s Construction Practice, assisting clients with accounting, auditing, and financial services that are unique to the industry. Her areas of expertise include attest engagements, bonding capacity and bank line consulting, accounting software consulting, cash flow and profitability improvement, tax strategies and planning and additional advisory services. She can be reached at moshea@saxllp.com
While most contractors may have plenty of work on hand, the vast majority find themselves increasingly burdened with the difficulty of retaining employees. Across the industry, employees in roles like estimators, project managers, and financial and accounting roles are demanding higher wages and requesting more flexibility and hybrid work arrangements. Even the level of field laborers is experiencing issues with the more experienced, high-skilled generation opting for early retirement and a significantly reduced population of resources to replace them.
Mid-Size Contractors Playing in the Big Leagues
The construction industry continues to be one with limited work opportunities and increased competition. Another avenue we see mid-size contractors exploring is taking on larger than normal jobs for various reasons:
• Because that’s where the opportunities are – more public projects that would have been bid separately in the past are being bundled into “mega” projects. As with any new venture, mid-size contractors need to be careful of the time, effort, and resources involved in taking on larger contracts.
It’s a challenge with multiple causes. Rising material prices cut into profit margins while inflation drives living expenses up, pushing employees to ask for higher wages. Americans’ relationships with their careers are changing, and in a post-lockdown world where the places and processes used for work have changed, companies need to adapt if they hope to attract and retain skilled employees.
Difficulty Maintaining Employees
If you’ve been in the industry for some time, you know it’s constantly in flux. We’re here to answer your financial questions and advise you on the best way to continue growing your business.
• To maintain the level of employees and “feed the machine,” – one larger job can take the place of many jobs that the contractor historically performed.
• Just because they can – the smaller to mid-size contractors tend to come in at lower prices and margins than the typical larger contractor that would bid the job and therefore have better chances at securing the work.
Banks Cracking Down
NJ/NY-based Companies Head South
A trusted financial advisor can help you understand what a bank is asking for and provide accurate statements to help you secure financing. Cash Flow – Still Key The only thing that has not changed in the construction industry is the focus on cash flow. As you can see from the entries above, many in the construction industry face restrictions and feel forced to find creative solutions to issues like staffing shortages and new financing requirements. Even for companies that currently have work, keeping it both funded and progressing is proving to be a challenge for many. Many report that “anything that comes in the door goes immediately out the door.”
Sax Focus • www.saxllp.com Page 8 CRYPTOCURRENCY CORNER Stablecoin May NOT Be So Stable Anymore
Written by: Mayank Shah, CPA Senior Tax mshah@saxllp.comManager
Written by: Jamie J. Torres Senior jamietorres@saxllp.comAssociate
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There are two ways for a stablecoin to maintain its peg, either with collateral or through an algorithm. A stablecoin can gain trust through collateral, whereby the coin is backed up by some kind of asset which supports the value of the coin. The most common collateral is the U.S. dollar. In general, 1 stablecoin equals $1 U.S. Anotherdollar. way a stablecoin can maintain its peg is through an algorithm. When a stablecoin has an algorithmic peg, its company creates a smart contract containing a set of rules to guide the increase or decrease in the amount of circulating stablecoins depending on the coin’s price. For example, one stablecoin may start with a value equivalent to $1 U.S. dollar but as more crypto owners buy-in, one stablecoin could be worth $1.20 U.S. dollars. In order to retain the coin’s peg, the company will mint (or generate) more coins, and this increase in supply will alleviate the price pressure and maintain the coin's value at $1 U.S. dollar. This scenario will be reversed if crypto investors sell their stablecoins; meaning that if more coins are sold, the algorithm will burn (permanently remove coins) based on the fluctuating demand to keep one stablecoin worth $1 U.S. dollar.
Mayank Shah, CPA is a Senior Tax Manager at Sax and a vital member of the firm’s M&D and Cryptocurrency Practices, assisting clients with accounting, tax, and financial advisory that are unique to these industries. His areas of expertise include tax compliance, tax strategies, tax planning and additional advisory services. He can be reached at mshah@saxllp.com
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All of this to say that it seems taxpayers – and their advisors - might have a long battle to conquer if they want to take the position that their stablecoins are “securities,” eligible for a tax loss which is calculated as if the stablecoins were hypothetically sold at the end of the year when it becomes worthless.
UNSTABLE STABLECOIN
“The near wipeout of TerraUSD and LUNA coins cost many investors millions of dollars. The assets of Binance, the world's largest cryptocurrency exchange by daily trading volumes, in Luna fell to just $2,200 from $1.6 billion." Source: NDTV.com
cryptocurrency is a decentralized virtual currency, also known as a digital asset. Cryptocurrency is secured by cryptography and is designed to exist outside the control of a government or any other central authority. The freedom that cryptocurrencies offer comes with a price: high volatility triggered by sudden changes in supply and demand. As the multicellular organism of cryptocurrencies evolved, in 2014, “stablecoins” were created. A stablecoin is a type of cryptocurrency intended to absorb volatility by pegging each coin to a real-world currency, also known as a “fiat currency.” Unlike original cryptocurrencies (BTC, ETH, etc.), stablecoins are considered more centralized since there is a company behind the scenes maintaining their pegs.
The crypto market is well in a bear season, but faithful investors still believe that the market will bounce back. Peter Smith, CEO of Blockchain.com, says, “More pain is coming, more risk will be exposed, but ultimately, it’s a good thing for the decentralized economy. ‘Creative destruction’ is ultimately helpful in consolidating the crypto economy.”
Like all other investments, cryptocurrencies have been experiencing significant losses due to inflation and economic uncertainty. The most recent hit in the cryptomarket was the crash of algorithmic stablecoin TerraUSD and its sister coin Terra (LUNA). Last May, TerraUSD lost its peg to the U.S. dollar and collapsed almost 100%, causing a devastating loss across the cryptomarket.
Source: CNBC.com
Jamie J. Torres is a Senior Associate at Sax and specializes in cryptocurrency, and high-net-worth clients. As a member of the Sax Cryptocurrency Practice, Jamie works closely with cryptocurrency investors, NFT creators, miners, and other clients in the decentralized community. Her undertaking is to engage in the changing regulatory landscape of virtual assets to help both individuals, and business owners understand how taxable events are triggered by cryptocurrencyrelated transactions. She can be reached at jamietorres@saxllp.com
Recently, Congress introduced a Digital Asset Bill dubbed the “Digital Commodity Exchange Act of 2022,” (the “DCE Bill”) which, importantly, designates digital currencies as “ancillary assets.” It would allow digital currencies to be treated as “commodities” under U.S. law under the oversight of the Commodity Futures Trading Commission (CFTC), unless any such currency behaves more like a security. In other words, the DCE Bill would treat most cryptocurrencies like commodities but those which are issued by a corporation to build capital and provide the investor's privileges like dividends, liquidation rights, financial interest in the issuer, etc. would be treated as securities.
This precipitous fall could mean that taxpayers may need to recognize a complete loss of their entire investment in the stablecoins. That is to say, while stablecoins sold after a crash could result in reportable capital losses, where there is no longer a market for these assets, selling these coins could be difficult or Taxpayersimpossible. finding themselves in this situation may discover that they are restricted by law from deducting losses stemming from worthless stablecoins until they can be sold or disposed of completely. The IRS does only allow loss deductions for securities that become worthless during the year under IRC Sec.165 but only if the security is considered a capital asset in the taxpayer's possession. Under IRC Sec. 165(g)(2), securities are defined as: “a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or a bond, debenture, note or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.”
Since stablecoins do not meet the letter of this statute, it appears that without legislation, or possibly additional clarification from the IRS, taxpayers might be precluded from taking advantage of the deductions under IRC Sec. 165. In other words, if there is no market to sell a stablecoin whose value has plummeted, there may be no mechanism as a matter of current tax law for a taxpayer to deduct the loss.
Types of value-based payment models include:
3. Shared risk – in addition to shared savings, a healthcare entity would also share in the additional cost that exceeds the targeted amount.
4. Global capitation – the entity receives a per-patient monthly payment for the individual’s care.
1. Shared savings – an organization is paid based on the traditional fee-for-service model and then an annual accounting is completed to compare total spending to the agreed upon target. If your organization was below the target, a bonus will be issued.
2. Bundled payments – a payer bundles costs for a procedure or an episode of care. All providers share the bundled payment.
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FromProvidersAsValue-BasedWithRiskHealthcareTransitionFee-For-Service
s we move into the second half of 2022, it is important that we reflect on the progress we have made during the past and adapt to the changes that are needed as we move forward. The same holds true for the future of the healthcare industry as we continue to transition away from fee-for-service models and embrace the value-based payment models that reimburse providers for the clinical management of patients served, rather than the volume of patients that were seen. The transition from fee-for-service to value-based healthcare reimbursement has prompted provider groups to reconsider their positions on the continuum of care with payors. Most physician practices still under the fee-for-service models are branching out and starting to sign up for value-based arrangements. Many have realized that taking on financial risk, although difficult, is the key to future success and have moved into “at-risk” contracts. In doing so, much consideration is needed, as taking on financial risk can expose other areas of liability, which should be factored in during the due diligence process. The fee-for-service model has been a profitable and comfortable one for many healthcare providers, and thus there has been hesitancy to move into a shared risk model. Most such models have been limited to “upside risk” - allowing providers to share in savings when delivering care more efficiently. Now providers are expected to share in down-side risk – requiring that providers refund a payor if the actual cost of care exceeds the agreed upon financial benchmarks for care delivery. Though providers must now share in the down-side risk in these models, the financial rewards for providers who excel in these programs are most advantageous.
Complying
Value-based models are based on patient care management which rewards efficiency, meeting quality metrics, and achieving favorable patient outcomes. Participants must produce positive clinical results while managing the cost associated with patient care. Tools such as advanced analytics and data procurement are available in the form of dashboards and customized reports, which pave the way to predictive analytics to assist in the modeling of the cost of care for physician practices and healthcare systems.
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Private/Commercial Payors
TRANSITION FROM FEE-FOR-SERVICE
A few collaborative payors have built models that include true data and risk-sharing. While the benchmarks and target prices are negotiated, these programs can have considerable risk. The implications of the risk, and whether to transfer it, depend on individual GroupsEmployerscircumstances.thatcontractdirectly with self-insured employers might do so with agreed-upon rates. If so, providers essentially guarantee costs. These models reflect what a true competitive market looks like. Unless special interests derail healthcare transparency, they are also what the future of healthcare delivery will look like. Indeed, healthcare risk would no longer relate to the nuanced and complex rules of the government and commercial payor programs. Rather, the risk would be in failing to deliver care at the cost advertised. Healthcare becomes an open, functioning marketplace.
THE RISK WhetherCollateral dealing with the government, commercial payors, or employers, posting certain forms of collateral may be necessary under value-based models. Collateral may include a letter of credit, an escrow account, or a surety bond. Stop-loss insurance – though not always accepted as collateral – is often used to backstop any risk, limiting overall exposure, stabilizing balance sheets, and placating investors and creditors.
The value-based models are offered by the following: Center for Medicare and Medicaid Services (CMS) CMS has been testing new payment models - with varying levels of risk - for years. Of the models that include downside risk, the government has set up frameworks to ensure groups can absorb losses. Repayment mechanisms include lump sum payments back to CMS and reductions in future remuneration for physician participants. CMS also requires a form of collateral (see below), though the collateral itself rarely covers the risk. CMS has a goal of having 100% of Medicare providers in meaningful downside risk programs by 2025.
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Commercial models tend to be watered down versions of government models. Payors often resist meaningful data – sharing and pressuring participants to purchase stop-loss insurance directly from the payors – limiting significant risk taking.
Risk-Bearing Structure Depending on the structure and sophistication of the participating provider group, it may elect to file to become a risk bearing entity, such as an organized delivery system (ODS). Absent specific regulations, risk-taking entities may maintain their current structures and simply pay losses if/ when they come due. Small companies will generally purchase stop-loss which provides for a reasonable deductible and the liquidity needed upon a loss occurrence.
Brian S. Kern, Esq. is a licensed healthcare attorney and the CEO of Deep Risk Management, LLC – a boutique value-based risk firm. He is a nationally recognized leader in healthcare risk, focusing mainly on professional liability and financial risk - and the intersection of the two. Brian works closely with some of the most reputable and innovative healthcare practices and MSOs in the US, helping them build cuttingedge risk management platforms by leveraging data and predictive analytics. He can be reached at bkern@deepriskmanagement.com
Captives have also come under scrutiny in recent years for not having adequate risk transfer and thus serving merely as tax shelters. Captive managers and other consultants can assist groups comply with myriad regulations associated with captive insurance Riskproducts.taking is propelling many provider groups to the top of the care continuum. Responsible, calculated risk takers will continue to bring them closer to the premium dollar. Those who ignore the compliance side of risk taking do so at their own peril, and the peril of others who are impacted.
When taking on risk with multiple parties, be sure that the same collateral is not utilized more than once. On annual financial statements, liabilities should be properly addressed and classified. They should also be “valued” appropriately to avoid additional risk.
Stop-Loss / Reinsurance Stop-loss insurance is used as a tool to ensure financial stability and meet obligations to creditors and investors. Given the breadth of liability associated with taking on risk, large payors have learned how to leverage stop-loss insurance. Newer entrants into healthcare risk taking often do not have the same tools or access to reinsurance dollars.
Larger entities often create captive insurance plans to handle risk. Captives allow companies to self-insure a certain amount of risk and purchase reinsurance above that amount. Managing a captive requires a serious time and capital commitment along with a myriad of reporting requirements.
CONCLUSION Value-based healthcare will continue to be the future of healthcare. To gain control within the new value-based healthcare delivery system, healthcare organizations need to manage clinical data and the down-side risk inherent in value-based models. Understanding how to use risk transfer mechanisms effectively can not only reduce liability under the value-based models themselves, but liability from countless other areas, and result in greater financial rewards for your healthcare organization. Please consult with your team of professionals to assist you in the process of migrating forward in value-based healthcare.
Accounting / Legal / Financing Contracts should be reviewed to ensure compliance. Review provisions in agreements with lenders, investors, creditors or vendors to determine if any require prior notice before entering into new risk sharing programs.
Debbie Nappi, CPA, MST is a Partner at Sax LLP, and serves as Co-Leader of the firm’s Healthcare Practice. She is an advocate for her clients, and specializes in consulting services, revenue cycle management and physician productivity in the rapidly changing landscape. She serves as interim CFO during M&A transactions, mitigating risk and ensuring a smooth and successful process. She conducts due diligence for private equity, analyzes Healthcare related transactions on the buy and sell side, reviews practice evaluations and manages post-close transactions. She can be reached at dnappi@saxllp.com
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Debbie and Brian have joined forces to bring helpful information to healthcare providers and assist them in navigating the complex and rapidly changing terrain of the healthcare industry.
Management services organizations (MSOs) attract and often have private equity funding, which expects a healthy return on its investment. MSOs should provide full transparency into the terms of the deals being negotiated on behalf of physicians and investors alike. Details of VBC models can be extremely complicated, particularly when it comes to coding and risk adjustment. Everyone with a material financial stake should be apprised of, and comfortable with, the terms of downside risk deals and their maximum potential losses.
ABOUT THE AUTHORS
However, the stop-loss market for downside risk in VBC models has been developing new capabilities to support provider groups. Groups should not go at-risk without conducting due diligence on the cost and availability of risk transfer options.
Balance Sheet Reporting Private equity (PE) infusion is frequently utilized to facilitate acquisitions. When MSOs put PE dollars at risk - without sufficient insurance – it can create balance sheet inequity since the estimated loss, if not secured by insurance, is subject to financial reporting by the healthcare entity and (depending upon the circumstances) must be reflected as a liability or as a footnote to the financial statements to alert the readers of the loss occurrence. The best way to keep capital free is to hedge VBC risk.
COMPLIANCE Guarantors Investors, and any employees used for purposes of collateral, should be considered in the decision to take on risk. If physician employees end up having their payments reduced due to poor performance under a value-based care program, employers will then bear the burden of the associated liability. Employers can also be liable to investors depending upon the relationship.
Speculative, or active investors try to predict what’s going to happen next in markets or to individual securities, and place clever trades ahead of the curve. Be they individual traders or well-heeled analysts, the competition is so fierce and price-setting is so instantaneous, their efforts aren’t expected to add persistent value, especially after costs. They may work hard to decipher financial conditions and economic indicators. They may even be correct. But that “curve” they’re trying to trade ahead of is always blind to the next price-altering news. Over the long run, this makes it nearly impossible to consistently surpass the prices and longterm expected returns already available in highly efficient markets.
oes it seem like there’s been an extra level of uncertainty lately, threatening your investment plans? Of course, there are always big events going on; that’s the world for you. But today’s brew of geopolitical threats, inflation trends, rising interest rates, recessionary fears, and lingering COVID concerns may feel especially daunting. The market’s volatile reactions to it all may have left you wondering whether, this time, seemingly heightened risks call for a higher-alert approach to your investment selections.
If you’re seeking clarity, the daily spew of financial commentary won’t help. To cut past the clutter, let’s revisit our investment selection process. Reviewing the steps involved speaks to the importance of looking past today’s unsettling news in pursuit of your greater goals.
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Step One: Eliminate the Ineligible Chocolate or vanilla? Back in the 1970s, when Vanguard’s John “Jack” Bogle introduced the first retail index fund, there were similarly limited choices available to satisfy an investor’s tastes. For better and worse, the volume and variety of investment flavors has certainly changed over the years, with a glut of product providers adding to an ever-growing menu of selections. Fortunately, out of the universe of investment products, we can promptly eliminate most of them. No, it’s not about how they’ve been performing lately. Instead, we weed out the speculative, or traditional active product providers who are playing an entirely different game from the one we have in mind.
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Step Three: Inspect the Product Packaging
Step Two: Identify the Best of the Best
We Use? W eal th A d vi so rs
To build toward desirable investment outcomes, we favor fund managers who are:
• Collaborative: They specialize in providing sensible, low-cost building blocks for creating and managing solid investment portfolios to facilitate investors’ greater financial goals.
• Visionary: They’ve been around for a while, with a strong track record for capturing known and newly identified dimensions of expected returns.
• Evidence-based: They harness the same, growing body of evidence we use to create a more reliable investment experience across the market’s “random walk.”
Beyond the investments themselves, there are the “containers” in which investment opportunities are delivered. These days, there’s nearly no end to the shiny packaging in which product providers can wrap their offerings. There are traditional mutual funds and ETFs. There are hedge funds, target-date funds, annuities, separately managed and/or direct indexing accounts, private Do We Choose the Funds
After we eliminate the speculative product providers, we’re left with a much smaller, but still sizeable pool of credible selections. This is a nice “problem” to have. But it means we must narrow the field further by identifying the best of the best. We also must periodically revisit our selections, as new or existing providers offer potential enhancements over time. As your advisor, we believe we add considerable value through out upfront and ongoing due diligence. We aim for providers who offer a prudent balance between incorporating important innovations, without creating chaos. This involves identifying the most robust factors, or expected sources of return, and understanding how they interact with one another across various market conditions.
• Persistent: They are deliberate, patient, and thrifty, with an eye toward offering more than just a menu of popular products and short-term “pops.”
How
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• Taxable Tradeoffs for Existing Wealth: Most investors arrive with existing investments—good, bad, and ugly. In pursuit of perfection, we must carefully account for the costs of transitioning toward a more cohesive portfolio. This includes accounting for the “space” in your existing, taxsheltered accounts, as well as the tax ramifications of selling less desirable taxable positions. Upfront and ongoing, we perform cost/benefit analyses to identify when our preferred investment selections should be in your best interest, and when tradeoffs may have to do.
• Ideal Application for Your Income Streams: Different selections also may make more or less sense for assets you’re adding to your investment portfolio. For example, even if your company retirement plan doesn’t offer ideal selections, it may still be among your best, most tax-wise investment vehicles— especially if your employer is matching your contributions. After all, free money is hard to beat. For the income you’re directing to your retirement plan, we’ll make appropriate recommendations based on what’s available in the plan.
Sax Focus • www.saxllp.com Page 15 partnerships, robo-advisors, and more. Do-it-yourself investors can also go directly to cryptocurrency exchanges and trading platforms like Robinhood to manage their own money.
Step Four: Incorporate Your “You” Into Your Investments
• Sustainable Investing: Do you want to incorporate an “ESG” (Environmental, Social, Governance) or similar values-based element in your investing? The right solutions for you depend on where your priorities fall.
For example, Harry Markowitz and William Sharpe introduced Modern Portfolio Theory in the 1950s, and Capital Asset Pricing Model in the 1970s, respectively. Their insights set the stage for moving from individual stock speculation to diversified portfolio construction. In the 1990s, the Fama/French three-factor pricing model helped us understand the importance of capturing global returns from multiple sources. Since then, we’ve explored ways to incorporate other, potentially persistent factors—such as profitability, investment, and momentum. Most recently, we’ve also started applying factor investing in additional markets, such as alternative lending and reinsurance, which may offer discrete sources of expected returns. In short, new studies can change or add to our existing assumptions, with portfolio construction models evolving accordingly.
Fund Selection Built to Last So, how do we choose the funds we use? The answer depends on how to best extract the most dependable returns out of highly efficient markets. It depends on heeding practical improvements as they arise. It depends on determining how these forces are expected to impact you, and your one and only investment experience.
• Personal Circumstances: There are any number of details that might influence the specific selections we’d recommend for your evidence-based portfolio. How long do you have to invest toward your various goals? What are your cash flow wants and needs? Are you a business owner? What are your legacy plans? These and other fundamentals can influence not only how we structure your investment accounts, but which specific holdings to tilt toward or away from.
Even if a new and improved fund hits the market, what are the tax ramifications of your investing in it? Even if it is a solid solution, does it fit into your greater financial goals? How can investment management (such as adding new assets or rebalancing your portfolio back to plan) help us incorporate the latest, greatest opportunities, without incurring excessive costs? These are a few of the many questions that factor into your optimal investment selections.
How else can we help you invest toward the personal financial goals that will add the most meaning to your life? Let us know! Sax Wealth Advisors is an independent registered investment advisor, and a wholly owned subsidiary of Sax LLP. The firm provides customized investment and financial solutions for individual wealth management, in addition to employer retirement plans. For more information, visit www.saxwa.com
Who are you, and what is your money about? As our next step, we need to get to know you very well, so we can identify where you are planning to go. Even world-class investments won’t do, if they don’t align with your personal tastes and unique financial circumstances. For example:
Reputable product providers heed such updates—or sometimes develop them themselves—and build them into new or existing solutions. We, in turn, must weigh the advantages and disadvantages of incorporating them into your portfolio.
Regardless of the wrapper, the initial hurdle remains unchanged: Is the product provider managing your money in an appropriate, evidence-based manner, as described above? After ruling out any speculative action, we also want to review each product’s prospectus or similarly detailed disclosures to avoid packaging that is overly complicated, suspiciously opaque, and/or needlessly expensive. (If there are no details to inspect, that’s a big, red flag in itself.)
• Risk Tolerances: Are you comfortable taking big risks in pursuit of greater rewards? Maybe you even thrive on the bleeding edge of the latest investment innovations—such as potential new investment factors, alternative markets beyond stocks and bonds, cryptocurrency, and other blockchainrelated investment vehicles. Conversely, you may prefer only the most tried-and-true solutions, with decades of dependable performance data on record. Your portfolio can be tailored in either direction, while maintaining an evidencebased approach either way.
Step Five: Manage the Modifications You may have noticed, the world never stops spinning. The same can be said for evidence-based investing. Even an evidence-based portfolio is expected to evolve over time.
Benchmarks and indexes improve over time as well, sharpening our ability to track and compare relative performance. Enhanced technologies can eliminate inefficiencies, making it possible to pursue expected sources of return that simply weren’t accessible to us in the past.
One thing fund selection should not depend on is reacting to the daily news. The world’s financial, economic, and geopolitical events do influence your returns. But just as the weather is one thing and climate is another, our focus remains on harvesting seasons of bounties, while standing firm against the inclement days that come and go. We favor investment product providers who do the same, and build their evidence-based solutions accordingly.
Potential Financial Constraints
Shortage of Warehouse Space
You now have all of this extra inventory, but where do you put it? Are you going to outsource the storage or take this expense on internally? If you are going to store the excess stock in existing warehouses, some costs may include additional racks or equipment to retrieve this inventory later on. Relating to our previous section, if you were to purchase this extra equipment, you would need skilled laborers actually to use the equipment and move inventory when needed.
s we slowly return to normalcy (if such a thing even exists anymore), it is important to identify where your supply chain may be lacking and where potential opportunities may exist. It comes as no surprise that aspects of the supply chain have been drastically affected by the pandemic. We hope that supply chain issues aren’t impacting your business as hard as some others, but if they are – we might have ways to ease some of the pain on the financial side. Contact us at www.saxllp.com to learn more.
A Written by: Joshua Chananie, CPA jchananie@saxllp.comPartner
Sax Focus • www.saxllp.com Page 16 M&D CORNER
Top SupplyFacingBottlenecksThreetheChain
Below we will identify three bottlenecks that are sources of constraints for your business's supply chain.
Shortage of Skilled Labor
This may be one of the most widely discussed topics in the past two years across numerous industries, but it is still one of the most significant areas that need attention. The aging population of the skilled workforce has led to a mass exit, but there are not enough skilled workers that are able to replace them. The cost of labor is going up drastically, yet the skill level and experience do not always equate. Therefore, more time is needed for training and taking time away from the actual work. Two of the most in-demand roles are skilled workers working on the manufacturing floor and truck drivers delivering freight. Lead times continue to remain an issue, and if the labor shortage continues, there may be no end in sight within the near future.
With lead times that were once six months now taking up to eighteen months, manufacturers are overbuying to compensate for the increased wait time. Manufacturers are purchasing increased inventory quantities, yet there is no designated place to store them. Now, many have to invest in space to store additional inventory, whether it means adding other facilities to the warehouse or outsourcing storage space.
The pandemic has had a tremendous impact on the factory's ability to staff and produce the goods needed for ongoing production. With the recent spike, factories were experiencing shutdowns, enhancing the issue when we thought we were reaching the end.
Joshua Chananie, CPA is a Partner with Sax and Leader of the firm’s Manufacturing and Distribution Practice, concentrating on advising clients on the key areas critical to their success.With more than 15 years of experience, Josh specializes in distribution and inventory management, shareholders agreements, profitability, succession planning, financial strategy, operational efficiencies, risk management, and tax challenges. He can be reached at jchananie@saxllp.com
With the cost of freight increasing by nearly three to four times, it is harder for manufacturers and distributors to receive raw materials and finished goods from their suppliers. And once you find the parts or raw materials, it comes with a price as the current demand far exceeds the supply. Since this issue occurs throughout multiple industries, the prices of goods have increased across nearly all. That home renovation you're looking to do? Better estimate about two to three months lead time and place your order now for your new patio furniture and appliances.
Delay of Raw Materials and Finished Goods Freight ships line up the California coast to deliver freight, yet the backup of vessels affects lead times even more. Once these ships can actually enter the desired port, there is nowhere to put the inventory carried. Not only is there nowhere to put the stock, but there are also not enough skilled longshoremen to assist in removing the freight from the ship. Does anyone want to pick up a new skill?
If you are financing these expenditures, you will also need to factor in the interest and debt related to the purchase. The question then becomes, are customers still going to remain in business to purchase this additional inventory, or will the demand decrease and this inventory collects dust?
Sax Focus • www.saxllp.com Page 17 BOTTLENECKS FACING SUPPLY CHAINS
Sax Focus • www.saxllp.com Page 18 NOT-FOR-PROFIT CORNER Written by: April Kushner, CPA akushner@saxllp.comPartner Conflict of Interest Policy for OrganizationsNon-Profit
The organization and the board should consider how they would manage a potential conflict so when a real conflict arises the board will be ready to handle it with more ease. Minutes of the meeting should reflect the discussions had by the board and management. Either the policy or a questionnaire could be used each year and given to board members to reiterate what a conflict of interest is, examples of a conflict, and ask the individual to disclose any existing or potential conflicts. Minutes of the meeting should reflect the discussion and review of the policy. Minutes should also reflect when a board member does disclose a conflict and how the conflict is or will be managed.
• A manager hires their nephew in a supervisory role even though the person does not have sufficient experience and qualifications
What Should be Included in a Conflict of Interest Policy? A COI policy should be in writing and reviewed annually. Required elements would include purpose of the policy, definitions, procedures, and violations. The policy should specify that directors, officers, and key employees must act in the best interests of the organization. Anyone who has a conflict, or thinks they have a conflict, is required to disclose it and a board member who has a conflict should abstain from voting on the matter. The policy should then be signed and dated by the individual.
ost individuals who work for a non-profit organization or serve on the board of directors/trustees may not know what a conflict of interest means. People are often unaware that their activities or personal interests could conflict with the best interests of the organization and don’t have enough examples of what a conflict of interest truly is. A conflict of interest can be defined as a situation in which a person is in the position to derive personal benefit from actions or decisions made in their official capacity. Sometimes the conflict can be financial, but most often the conflict is two competing interests. This duality of interest would prevent a board member from being impartial and loyal to the organization. Since conflicts can arise from personal, professional, or volunteer positions, an organization should seek to raise awareness among employees and board members, encourage disclosure and discussion regarding anything that may be a conflict, and encourage a culture of transparency and openness.
• An employee has a second job working for another company that is a direct competitor
OF INTEREST
Conflicts that are not managed properly can result in significant penalties called “intermediate sanctions” that are assessed against the person who benefits as well as against the organization. Nonprofit organizations are held to a high standard of accountability and governance, so it is best to be proactive. Common practice is to make the policy an annual topic of discussion, instead of waiting for a situation to arise, to ensure that the organization is in compliance with the policy requirements, federal and state regulations, and avoid any negative repercussions that could happen.
Form 990 that is filed with the IRS asks a series of questions in Part VI, Section B regarding policies in place at a non-profit organization and one of the questions is whether there is a written COI policy in place. The tax form also asks whether officers, directors, or trustees, and key employees were required to disclose annually any interests that could give rise to conflicts. Most organizations already have a policy in place, but if you don’t, where should you start? If you do have a policy, how do you ensure that it is understood by employees and board members, and how is your organization monitoring the policy to ensure it is complied with?
CONFLICT
• An HR director does not investigate a claim against an employee because they are a personal friend of theirs
April Kushner, CPA is a Partner at Sax and Co-Leader of the firm’s Notfor-Profit Practice. She has extensive experience auditing and reviewing various types of not-for-profits and her expertise includes federal and state grant compliance and Uniform Guidance requirements. She frequently advises not-for-profit board members and executives on a variety of accounting topics, including recommendations for improving their organizations’ internal controls and reporting. She can be reached at akushner@saxllp.com M
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Examples you may want to consider include:
Monitoring the Policy Management and the board should discuss how they are going to monitor the policy and how often. Many organizations make it a regular process, at least once a year, to add to their board meeting agenda a discussion regarding conflicts of interest. The discussion would include examples of situations that could result in a conflict of interest and educating board members.
How Important Is it? It may not be the most glamorous or exciting topic on your board meeting agenda, but a conflict of interest (COI) policy is very important for a not-for-profit organization and helps to fulfill the fiduciary responsibilities of the board. For many organizations, especially those who receive federal funding, grant agencies and Uniform Guidance require procurement policies to have written standards of conduct covering conflicts of interest and governing the actions of its employees engaged in the selection, award, and administration of contracts to vendors. The policy should discuss employees as well as any organizational conflicts of interest with related parties or other organizations. The Center for Medicare and Medicaid Services also has guidelines for conflicts of interest to protect consumers and to ensure they receive the best care. New York State law requires not-for-profit boards to adopt a process so that board members can annually disclose potential conflicts of interest.
• Investing money with an investment company in which a member of the board is also an employee at the investment company
What
The Difference Between the Old and the New Under the old standard, companies had two different types of leases: operating and capital. A company would record the operating lease expenses equally over the life of the lease and there would be no liability or asset recorded on the balance sheet. If a company determined a lease met the characteristics of a capital lease, an asset and liability would be recorded on the balance sheet, and the company would expense the resulting interest expense and depreciation. Readers of the financial statements would be able to easily tell what the remaining liability was of the capital lease on the balance sheet; however, the same reader would have to dig through the footnotes to understand the remaining amounts owed on the operating lease. While capital leases will have a similar treatment under the new standard, FASB modified the potential criteria to remove hard lines and leave some flexibility for companies. This will also be done under a new name as FASB decided to rename capital leases to finance leases. Additionally, FASB, in a move to create greater transparency, has made significant changes to the treatment of operating leases.
Sax Focus • www.saxllp.com Page 20 GENERAL ACCOUNTING CORNER
hree years after public companies implemented the new leasing standard, private companies and not-for-profit organizations will now have their turn. Despite the initial delays caused by implementation concerns and pandemic related issues, the Financial Accounting Standards Board (FASB) voted in late 2021 to move forward with the new standard. Effective for fiscal year ends beginning after December 15, 2021, all companies will now be required to report a right-of-use asset and a corresponding lease liability onto their balance sheet. There will be no impact to a company’s income statement due to the adoption of the new standard.
Written by: Jason Borofsky, CPA, MBA jborofsky@saxllp.comPartner
Written by: Adam Holzberg, CPA, MBA Senior aholzberg@saxllp.comManager
The New Lease Accounting Standard for Private Companies & Non-Profits: You Need to Know Now T
Lessor Accounting Changes
STANDARD
Exemptions If a company enters into a lease that is under 12 months, under an accounting policy election, these leases can be excluded from being placed onto the balance sheet. Additionally, companies can create capitalization policies for leases where if a leased asset is below the threshold set by the company, then that lease can also be excluded from balance sheet recognition. This could be useful for low dollar leases, such as copiers. Related Party Leases
Adam Holzberg, CPA, MBA is a Senior Manager at Sax and specializes in audits, accounting, and advisory services for closely held companies and not-for-profit organizations. He focuses on increasing the overall operational efficiencies, financial reporting best practices, and internal controls for clients. He can be reached at aholzberg@saxllp.com
Jason Borofsky, CPA, MBA is a Partner at Sax and primarily focuses on the Real Estate industry, providing industry-specific accounting, auditing, tax and consulting services to property owners, developers, and investors. He can be reached at jborofsky@saxllp.com
Implementation in a Nutshell Adopting ASC 842 can impact important financial decisions for your organization. What we have learned about the adoption of the new lease standard from public companies is that it is much more difficult to implement than what was expected. As the effective date is quickly approaching for private entities and non-profits, it is important to begin reviewing lease documents and planning the implementation of the new standard as early as possible. The more lease transactions a company has, the longer the transition could take. A thought-out assessment and planning process is vital to the success of the transition.
At Sax, we advise clients to establish the right team with the knowledge to evaluate the impact of implementation on the organization, assess the nuances of entity’s leases, identify lease population, and effectively put the transition into place. Feel free to reference our recent webinar presentation on this topic or reach out to a Sax advisor to assist your company in all areas of adopting the new lease standard.
Additionally, companies will need to choose a discount rate to reflect the lease liability made up of the present value of all the lease payments. The standard requires that companies use the rate implicit in the lease. However, unless explicitly stated in the lease, this would be difficult for any company to determine. As an alternative, the standard allows companies to use their incremental borrowing rate (“IBR”). The IBR is the rate of interest that would have to be paid to borrow on a collateralized basis over a similar term to the lease payments. In other words, companies would have to base the IBR on what interest rate they would receive from a bank for financing the purchase of the asset they plan to lease over the same timeframe. Once again, the standard provides a difficult solution in determining the discount rate. Luckily, private companies and not-for-profit organizations were given a third option. This third option, an accounting policy election, would allow companies to use the risk-free rate. If a company was looking into a 10-year lease for office space, instead of trying to determine their IBR, the company could simply use the 10-year treasury rate. The downside of using this option is that with a lower rate from the risk-free rate, the resulting liability would be much greater on the balance sheet. This would result in an even larger impact to financial ratios and potential debt covenants. Companies would also record a corresponding right-of-use asset which is made up of the lease liability adjusted for any initial direct costs, lease incentives, and prepaid rent. ASC 842 has a very narrowed definition for initial direct costs which now only refers to costs that were incurred directly related to the lease being obtained.
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Under the new standard, companies will now have to include operating leases onto their balance sheets. To be put onto the balance sheet, companies will have to take a deep dive into their leases to ensure they are properly recorded. Many leases come with options to renew and while a tenant does not have to decide at the time of signing the initial lease if they will be exercising these options, for purposes of ASC 842, companies will have to make that assessment. If a company deems there is a likelihood of exercising an option or multiple options to renew the lease, then the company needs to factor in those options when determining the lease term.
The new lease standard does not have a major change for lessors’ accounting. The most significant impact is on sale and leaseback transactions. Previously, accounting for these transactions were only applicable to lessees. Under the new standard, lessors will have to ensure the transaction meets the guidance under the new revenue recognition standard.
The other issue with related party leases is that there is not always a lease document between the two related parties. As unwritten terms can still create enforceable rights, facts and circumstances should not simply be ignored if it is not in writing. However, there would likely be greater difficulty in determining what those rights truly are. In some situations, it may be necessary to bring in legal counsel to assist in this determination.
As some companies own the real estate in a separate company and pay rent to that company, a question that has come up is “Can I just change my lease to month-to-month to avoid the new lease standard?” Unfortunately, the answer to this question is more complicated than a yes or a no. In ASC 842, FASB addressed related party leases by stating that related party leases “should be classified in accordance with the lease classification criteria applicable to all other leases on the basis of the legally enforceable terms and conditions of the lease.” To put more simply, FASB will treat related party leases no different than unrelated leases. However, an assessment needs to be made on related-party leases if the actual term of the lease is greater than the legally enforceable terms. This would typically be done based on the economics of the arrangement. If the company has spent a considerable amount of money on improvements for their leased space but is in a month-tomonth lease, the company then has an economic incentive to stay for the duration of the benefits of those improvements.
NEW LEASE ACCOUNTING
Sax Focus • www.saxllp.com Page 22 TRUSTS & ESTATES CORNER Written by: Joy Matak, JD, LLM jmatak@saxllp.comPartner The Summer Guide to Estate Planning
We recognize that it may be easy to put off estate planning with summer barbecues, beach outings, and baseball season in full swing, so we’ve put together a quick list of items to consider:
1. Review and update your current estate plan
3. Consider including asset protection as part of your plan
8. Life insurance review
The federal estate tax exemption as of January 1, 2022, is $12.06 million (or $24.12 million per married couple). The current lifetime exemptions will continue to increase with cost-of-living adjustments until 2026, when they will be halved by operation of law on January 1, 2026, unless some new legislation makes the exemptions permanent. The prospect of a divided government for the indefinite future makes it quite unlikely that the federal government will have the political will to make the current lifetime exemptions permanent. If the law does not change, the exemptions in 2026 will be about $6 million per taxpayer or $12 million per married couple.
Prior to undertaking any substantial gifting plan, we should confirm your sources of income and ensure that planning does not disrupt your current lifestyle or future comfort. This is perhaps more important than determining the structures that will protect your wealth for future generations of your family. Strategic planning can be done to facilitate a steady stream of income to enhance retirement benefits.
he summer of 2022 may be the best time to get your estate and financial plan into shape!
If you have any life insurance policies insuring your own life, it’s important to review your policies regularly to confirm that the cost of the policy is appropriate. Additionally, you should evaluate whether you still need the policy you have and whether it will provide sufficient liquidity and resources to meet your family's needs. Several insurance companies have recently created combined life and long-term care policies which can cover the costs associated with a disability.
6. Strategic charitable giving
You should likely consider incorporating provisions in your planning documents that would protect the assets from future creditors and predators of your heirs. This may be done whether or not you embark on a significant gifting plan by using testamentary trusts that are funded on death. A trust should be structured with maximum flexibility so that the trustee could hold back distributions in order to prevent seizure by creditors or treatment as a marital asset in a divorce proceeding.
Joy Matak, JD, LLM is a Partner at Sax and Leader of the firm’s Trusts and Estates Practice. She has more than 20 years of diversified experience as a wealth transfer strategist with an extensive background in recommending and implementing advantageous tax strategies for multi-generational wealth families, owners of closely-held businesses, and high-net-worth individuals including complex trust and estate planning. She can be reached at jmatak@saxllp.com T
7. Check designated beneficiary clauses on retirement accounts
4. Confirm cash flow and liquidity requirements
Qualified retirement accounts are subject to special withdrawal requirements under the SECURE Act. You should confirm that your designated beneficiary clauses on your retirement accounts are up to date and address your planning objectives. For most of those inheriting an IRA or qualified retirement plan after 2019, the SECURE Act will require all IRA or plan assets to be distributed by the end of the tenth calendar year following the IRA plan participant. This requirement is intended to enhance tax revenues to the tax authorities as contrasted with the long stretch periods that had previously been available. In general, if you had originally planned for the retirement accounts to be left to your beneficiaries through a trust, you may wish to revisit this planning to determine whether you need to create specialized trusts that will still achieve your goals.
You may be able to achieve an estate tax benefit and possibly income tax reductions through charitable trusts. Tax reform improved these opportunities by allowing more of your charitable dollars to be deductible in the year of giving.
2. Consider making gifts to take advantage of the high federal estate tax exemption Estate planning generally involves making gifts of assets in order to reduce the size of your taxable estate and remove assets that are likely to appreciate from your taxable estate so that, as a matter of current law, the appreciation can be transferred to your heirs without a transfer tax. The current economic downturn means that asset values may be artificially depressed. As a result, you may be able to make gifts of assets that will appreciate more rapidly when the market bounces back using fewer of your precious gift tax dollars.
5. State income tax issues
Now that federal tax reform has reduced state and local tax deductions, it may be time to consider moving that trust from a high-tax jurisdiction to a state which has reduced or eliminated state income taxes for trusts. Several states like Nevada, South Dakota and Alaska have enhanced the benefits by moving to their states by increasing asset protection.
Sax Focus • www.saxllp.com Page 23 ESTATE PLANNING SUMMER GUIDE
If you have a trust that's even five years old, you may need a more modern trust which can be drafted to be more powerful, robust, tailored, and flexible. Flexibility is key! The world keeps changing, and you should be sure that the plan that you have currently in place still meets your objectives and achieves the goals you have for your family. Trusts that were set up more than a few years ago may not provide the robust terms that modern trusts provide, such as a modification provision, having trust protectors who can monitor trustees and make mid-course changes, and more.
Parsippany, www.saxllp.com212.268-9888New609.737-6600Pennington,973.472-6250NJNJYork,NY CONTACT
