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Monthly Archives: May 2014

Why Your Trust Needs Fiduciary Accountings by Rick Bazzani

Posted on May 30, 2014 by Rick Bazzani

The role of the trustee is integral to the successful maintenance and protection of assets held in trust. He or she is responsible for carrying out the fiduciary responsibilities entrusted to them, including making prudent investment decisions and meeting the wishes specified by the grantor to distribute the trust assets as specified in the trust agreement. Equally important is the trustee’s duty to maintain transparency and share with beneficiaries information relating to the administration of the trust, typically in the form of annual fiduciary accountings. When trustees fail to fulfill this obligation, they open the trust to disputes and often-hostile litigation, both of which defeat the original intent of the trust instrument.

Whether trustees simply overlook their requirement to prepare regular accountings of trusts or avoid it due to the laborious efforts required to do so, they risk disputes and related litigation over trust assets, distributions and administration. In addition, they put themselves in danger of legal action for breach of fiduciary responsibilities, for which beneficiaries may seek restitution from them personally.

At that point, the courts can compel trustees to provide the fiduciary accountings for all missing years and recall facts that may have occurred many years ago. This in itself can be a challenging and logistical nightmare, especially for the trustee who also failed to retain accurate records.

Consider a common estate-planning situation in which parents establish a trust to manage assets for their two children upon the parent’s deaths. Knowing that the elder child is more fiscally responsible, the parents draft the trust to provide that their firstborn receives his or her portion of the inheritance outright upon the parent’s passing. For the younger child, the parents place his or her portion of the estate in a trust and appoint the elder child to serve as trustee in an attempt to prevent the younger child from burning through his or her inheritance too quickly. Without the benefit of fiduciary accountings, the younger child may easily assume that he or she is not receiving proper distributions from the trust, to which he or she is entitled. As a result, the younger child may bring legal action against his or her sibling for mismanagement of the trust and demand the termination of all co-trustees as well as the immediate distribution of all assets to him or her – regardless of the parent’s original wishes.

Similar disagreements between heirs may arise when they have conflicting interests, such as when one beneficiary wants to take regular distributions from a trust’s remaining assets while the other prefers to reinvest the assets and grow the trust.

In both of these examples, the preparation and filing of annual fiduciary accountings, either by the trustee or professionals with the experience and skill required to do so, would provide all related parties with material facts concerning the trust’s assets, income and disbursements. As a result, notions of improper trust management can be dispelled and discord between related parties can be tempered, in turn mitigating the risk of future trust litigation.

With correct and up-to-date fiduciary accountings, trustees would also be able to refute claims of fiduciary impropriety by demonstrating they upheld their responsibilities to “administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries” and in accordance with the wishes of the grantors.

When trustees accept the fiduciary responsibilities of administering a trust, they accept the associated risks that come with it. They must gain knowledge of relevant laws and the ability to abide them while navigating carefully through often complex issues and family relationships. As a result, it behooves trustees to embrace annual fiduciary accountings and provide beneficiaries with the opportunity to understand how trustees manage their assets. The transparency that results from these accountings creates understanding and trust between all parties, which can go a long way in preventing unnecessary trust litigation.

Berkowitz Pollack Brant’s tax advisors and accountants work with clients to plan comprehensive estate plans and work with trustees to ensure they meet their fiduciary duties to manage trust assets in accordance with the law.

About the Author: Rick D. Bazzani is a senior manager in the Tax Services practice with Berkowitz Pollack Brant. Additional reporting provided by Carley Astigarraga, a member of the firm’s Business Valuation and Litigation Support practice. For more information, call 954-712-7000 or email

How to Update an Irrevocable Trust by Jeffrey M. Mutnik

Posted on May 27, 2014 by Jeffrey Mutnik

Rarely is estate planning a one-time endeavor. As the world evolves, so too do families and their circumstances. Grandchildren are born, children divorce and remarry, and decisions made yesterday may not be applicable tomorrow or into the future. Additionally, with the passing of time, new laws are enacted that affect the intended tax and legacy benefits of estate planning tools, often making the initial plan outdated, obsolete and counter to a family’s current estate-planning needs. In the case of irrevocable trusts, where grantors sacrifice flexibility for greater asset protection and tax advantages, trustees and beneficiaries essentially live and die by the trust’s original terms. In the past, decisions to modify irrevocable trusts required a lengthy and costly legal process. However, the times they are a-changing.

Currently, more than 20 U.S. states, including Florida and New York, allow trustees to alter irrevocable trusts through the practice of “decanting.” Much like decanting a bottle of wine, decanting a trust allows trustees to pour, or distribute, the assets of one irrevocable trust (the distributing trust) into a new one (the receiving trust). This essentially results in rewriting and often improving the irrevocable trust’s initial terms to address changed circumstances. It is not intended to change the original objectives of the grantor who established the trust, nor may it be used to meet the frivolous wants and desires of beneficiaries.

Why Consider Decanting a Trust?

It is not uncommon to find that when grantors established their irrevocable trusts, perhaps several years or decades ago, they failed to anticipate the full range of potential scenarios and issues that could occur in the future.

For example, as tax laws change, which they do frequently, the state where the grantor originally established the trust may no longer provide the same levels of asset protection and tax advantages as it had previously. As a result, trustees may be able to decant the trust and move it to a jurisdiction that offers greater tax benefits, such as a state that does not have income taxes. However, in these situations, trustees must be careful of long-arm statutes, in which some states will continue to tax the trust even after a change in jurisdiction, or residency rules that govern taxes based on the grantor’s state of residence.

Additionally, if a beneficiary is embroiled in a contentious divorce proceeding or has problems with substance abuse, gambling or other issues that can compromise his or her use of the trust assets, the trustee may decide it is in the best interest of the trust and the beneficiaries to modify when or if the troubled beneficiary will receive distributions. Similarly, the trustee may determine that a planned payout to a child under a certain age is too much of a windfall for the beneficiary at that particular snapshot in time. By decanting the original trust, the grantor may include more flexible language in the receiving trust and make it easier to accommodate beneficiaries’ changed circumstances without negating the grantor’s original intentions.

Other reasons for decanting an irrevocable trust can include extending the trust’s termination date, creating a dynasty trust for future generations, terminating trustees, reducing administrative costs or dividing trust property to create separate trusts.

While the reasons for decanting are numerous, there are situations when doing so is not easy, permissible nor beneficial. For example, some trusts include specific language that prevents the decanting of assets or precludes the trustee from having the power to distribute principal from the trust. Additionally, trustees and beneficiaries must assess the legal, tax and reporting consequences of decantment, including whether or not it results in a taxable gain and whether tax attributes (such as net operating loss carryovers) transfer with trust assets.

No one can predict how an irrevocable trust will impact its beneficiaries in the future. Grantors can only assess the situation based on the circumstances and laws applicable at the time of settlement and create entities that they hope will benefit their beneficiaries in the manner they desire. The rising popularity of decanting indicates that is interest in finding potential solutions to difficult situations and attempt to keep trust provisions up-to-date with changing times. However, with the current lack of IRS guidance on the topic, grantors, trustees and beneficiaries should tread carefully, relying on experienced financial and legal advisement, before making any final decisions.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director in Berkowitz Pollack Brant’s Taxation and Financial Services practice. For more information, call (954) 712-7000 or email

IRS Releases 2015 Annual Contribution and Deduction Limits for Health Savings Accounts by Nancy M. Valdes

Posted on May 23, 2014 by

On April 23, 2014, the Internal Revenue Service released the 2015 annual contribution and inflation-adjusted deduction limits for health savings accounts (HSAs).

To be eligible to contribute to an HSA, individuals must participate in high-deductible health plans. For 2015, the deductible for these plans may be no less than $1,300 for self-only coverage and $2,600 for family coverage. The limit on annual out-of-pocket expenses, which include deductibles, co-payments and other amounts, but exclude premiums, may not exceed $6,450 for self-only coverage and $12,900 for family coverage.

The IRS allows individuals who participate in high-deductible health plans to deduct contributions to HSAs. For calendar year 2015, the annual limitation on deductions for individuals with self-only coverage plans will be $3,350, up from $3,300 in 2014. For individuals with family coverage plans, the limitations on deductions will be $6,650 in 2015, up from $6,550 in 2014.

The tax professionals with Berkowitz Pollack Brant have experience helping businesses and their employees structure and leverage the benefits of a variety of tax-advantages benefits plans.

About the Author: Nancy M. Valdes, CPA, is a senior tax manager in Berkowitz Pollack Brant’s Tax Services practice. For more information, call (305) 379-7000 or email

Protect Yourself from the Top Tax Scams of 2014 by Joseph L. Saka

Posted on May 21, 2014 by Joseph Saka

While the 2013 tax filing deadline has passed, the Internal Revenue Service warns taxpayers to remain vigilant against the proliferation of illegal schemes that continue to put them at risk of fraud and identity theft. Following are the top-seven tax scams, according to the IRS.

Identity Theft

Identity theft occurs when thieves gain access and use an individual’s personal information, such as his or her name or Social Security number, to commit a crime, such as filing fraudulent tax returns and claiming refunds.

Taxpayers who believe they may be a victim of identity theft due to lost or stolen personal information should contact the IRS’s Identity Protection Specialized Unit at (800) 908-4490.

Telephone Scams

Thieves, claiming to be IRS officials, telephone victims and trick them into divulging personal information and making immediate tax payments via wire transfer or pre-loaded debit cards. These convincing criminals, who threaten victims with arrests, suspensions of business and drivers’ licenses, and deportation, often have knowledge of the victim’s personally identifying information.

Taxpayers should never share sensitive information over the telephone. Rather, they should ask the caller for a call back number and an employee badge number, hang up the phone, and call the IRS at 1-800-829-1040 to determine if they, in fact, have any issues with the agency.


Phishing occurs through unsolicited emails or fake websites that pose as legitimate sites to lure potential victims into divulging personal and financial information.

To protect themselves from these scams, taxpayers must remember that the IRS will never initiate contact with them to demand payment or request financial information by telephone, email or text. Taxpayers who receive unsolicited emails or any other electronic communications containing website links or attachments from the IRS or any organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), should remember the following:

• Do not reply to these messages;

• Do not open attachments or click on links, both of which may contain malicious code or viruses that can infect computers;

• Do not provide personal or financial information; and

• Report the suspicious email to the IRS by forwarding it to

False Promises of “Free Money”

Thieves, posing as qualified tax preparers, promise victims large and inflated tax refunds in exchange for costly fees or through the filing of fraudulent tax returns that include false claims of improper credits, deductions or exemptions.

The IRS reminds taxpayers that they are legally responsible for the information contained in their tax returns, even if someone else prepared them. Filing inaccurate, false or inflated returns, regardless of whether the taxpayer is a willing accomplice or innocent victim of these schemes, comes with severe penalties. As a result, taxpayers should take extra precautions to ensure their returns do not make claims to which they are not entitled.

Misuses of Trusts

In these schemes, thieves attempt to coerce taxpayers into transferring assets into trusts in exchange for inflated deductions and tax refunds.

Hiding Income Offshore

Income held in offshore banks, brokerage accounts or nominee entities must comply with the U.S. tax system and meet reporting requirements or risk significant penalties and fines, including criminal prosecution.

The IRS’s Offshore Voluntary Disclosure program allows taxpayers to come forward, disclose unreported offshore income and catch up on their filing requirements.

Impersonation of Charitable Organizations

Following natural disasters, criminals often impersonate charities and contact taxpayers by telephone and email in an attempt to steal money and private information from the taxpayers.

To avoid falling victim to these schemes, the IRS advises taxpayers to focus their donations on established, easily recognized and legitimate charities and avoid giving out personal information, such as Social Security numbers and credit card details, to anyone who solicits for donations.

The advisors and accountants with Berkowitz Pollack Brant have the credentials and experience to help domestic and foreign individuals manage complex tax and estate planning issues and guide them through processes to protect themselves against tax schemes.

About the author: Joseph L. Saka, CPA/PFS, is director in charge of the Tax Services practice at Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail

Florida Bar Now Requires Firms to Have Written Trust Account Plans by Richard Pollack

Posted on May 13, 2014 by Richard Pollack

Effective June 1, 2014, all Florida law firms employing more than one lawyer must have in place written plans for each of the trust accounts they manage. The Florida Supreme Court adopted this amendment to Florida Bar Rule 5 – 1.2 (c) in late March of this year, leaving law firms with little time to assess their current plans and implement changes to meet the updated requirements.


By employing written trust account plans and disseminating them to all firm members, law firms are adding another layer of checks and balances to their fiduciary responsibilities to maintain, protect and report on trust accounts under their management. They aim to ensure that the firm’s lawyers are held accountable for their individual compliance with trust accounting procedures and to avoid misappropriation of trust funds. Failure to comply with the amendment by June 1 may result in severe sanctions.


The advisors and accountants with Berkowitz Pollack Brant Forensics practice are skilled at working with law firms to evaluate existing trust account plans, to identify deficiencies in how lawyers follow these plans, and to provide consultation on the development of appropriate programs that avoid future Bar scrutiny and resulting penalties.


Please contact one of our forensics professionals for assistance and more information about how your law firm can meet its expanded trust account fiduciary responsibilities.


401(k) Plans Can Land Employers in Court by Sean Deviney

Posted on May 05, 2014 by Richard Berkowitz, JD, CPA

Since 2010, the U.S. Department of Labor has issued a litany of regulatory updates designed to improve transparency and fiduciary responsibilities relating to the management of 401(k) plans. As a result, employers who sponsor these defined-contribution plans face more challenging compliance requirements as well as increased scrutiny of their financial stewardship over employee’s investments. In fact, over the past four years, a growing number of employers have landed in front of the U.S. judicial system and spent millions of dollars defending themselves against claims of fiduciary mismanagement.

Employer-sponsored 401(k) plans represent the largest retirement savings vehicle in the United States. According to the U.S. Department of Labor, the number of 401(k) plans grew to about 513,000 in 2011 from 17,000 in 1984, while active participants increased to 61 million from 7.5 million. As more and more Americans rely on 401(k) plans to fund their retirement, plan sponsors meet increasingly stringent fiduciary responsibilities to safeguard employees’ interest and comply with plan design, management, monitoring and fee-disclosure requirements.

Fee Disclosures

The Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for how employers administer, manage and monitor plans in the best interests of plan participants and beneficiaries. Among these requirements are employers’ duties to assess the reasonableness of administrative costs and other fees charged by covered service providers (CSPs), such as record keepers, investment managers and advisors, and other financial consultants who receive compensation to manage the benefits plans. Over time, these fees can take a significant bite out of employees’ savings, especially when plan administrators charge them to employees against investment returns.

To help 401(k) participants understand how much of their account balance is being used to cover plan fees and expenses, the Department of Labor now requires plan sponsors to disclose all of fees assessed to plan participants. The determination of whether or not these administrative fees are reasonable falls to the employer, who must constantly monitor fees and ensure they align with comparable charges by similar plans. Even when an employer retains the services of a CSP, the responsibility for ensuring plan compliance with fiduciary and reporting regulations falls to the employer, rather than the CSP.

Should an employer believe it is paying too much for plan administration, it has a responsibility to act in the best interest of its employees and take appropriate steps to attempt to reduce the fees or risk litigation for breach of fiduciary duties. For example, employees of power and technology company ABB Inc. charged that the company failed to monitor the internal controls of its defined contributions plan and subsequently paid excessive fees for investments offered by the plan. In response, the Eighth Circuit Court of Appeals in St. Louis recently affirmed a lower-court ruling that awarded $13.4 million to the company’s 401(k) plan participants. Similarly, the Supreme Court recently expressed interest in a California case, Tibble v Edison International, in which participants in the California utility company’s 401(k) charged that company placed them into high-cost retail mutual funds when less expensive options were available.

Employer Reporting Requirements

Managing fee disclosures is just one of several fiduciary responsibilities 401(k) sponsors must uphold. To demonstrate sound financial judgment, employers should carefully develop an Investment Policy Statement (IPS) that details steps they will take to monitor the suitability of investment options made available to participants and achieve desired plan objectives. This document should contain guidance on fund selection, measurement and de-selection processes; recommendations for addressing underperforming funds; and the responsibilities of the investment committee to carry out the plan with the highest levels of efficiency. Continuous monitoring of the IPS and reporting on plan performance are required to ensure plan sponsors can make timely changes, as needed, to protect participants’ financial interests and maintain plan effectiveness.

Employee Education

Businesses that sponsor 401(k) plans have a responsibility to educate employees about their plans’ offerings and the rights and responsibilities afforded to those who choose to participate. This may include details on how one becomes eligible to participate in a plan, vesting schedules, asset allocations and how one files claims for benefits. These simple explanations enhance participants’ understanding of how the plans work and enable them to make better, more informed financial decisions.

While many employers consider 401(k) plans a competitive advantage to help them attract and retain quality employees, businesses must understand and follow through on the myriad of fiduciary responsibilities they hold to satisfy the needs of plan participants and comply with regulatory requirements.

The professionals with Provenance Wealth Advisors have extensive experience helping businesses of all sizes design, assess performance, improve employee participation and institute best practices in managing employer-sponsored benefits plans.

About the Author: Sean Deviney, CFP, CRPS, is a financial advisor and Chartered Retirement Plan Specialist with Provenance Wealth Advisors, an investment advisory firm affiliated with Berkowitz Pollack Brant Advisors and Accountants. For more information, call (954) 712-7000 or email

Any opinions are those of Sean Deviney and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Choosing the Right Valuation Method Can Minimize Future Conflicts Related to Buy-Sell Agreements by Richard Pollack

Posted on May 01, 2014 by Richard Pollack

A transfer of business ownership typically follows a triggering event, such as the death, disability, termination or retirement of a shareholder. In each of these circumstances, disputes can arise from the conflicting goals of all involved parties. Resolving these tensions at the time of transfer can prove costly and time consuming and may even result in irreparable damage or dissolution of the business entity. The best defense against these likely events is a strong offense in the form of a well-thought-out buy-sell agreement that anticipates potential issues and provides a predictable and sound guideline for the smooth transition of ownership and preservation of business interests.

Methods for Determining Business Value

One key benefit of a buy-sell agreement is its ability to define and clearly establish the value of a business at the onset, so that transactions under the agreement can occur in an orderly and reasonable manner in the future. There are a number of ways to value a business interest. For example, a fixed-price agreement allows owners to settle on a future sales price at the time they sign the agreement. With a formula agreement, the owners agree to calculate the business’s value using a pre-determined formula, typically applied to an income statement metric. Neither of these methods requires a formal appraisal of a business, nor do they address potential changes in a business’s value that may occur in the future. Consequently, inequalities may exist between the established value of the business when the partners executed the agreement and its value at the time of ownership transfer. The resulting transfer may not reflect the business’s realistic and reasonable value and could be open to interpretation by all parties.

Conversely, employing a valuation-process agreement relies on the expertise of a qualified business appraiser who establishes a business’s initial baseline price at the time business partners engage in an agreement and builds in periodic valuations into the future. This method helps to set realistic expectations at the start of buy-sell agreement negotiations, instills confidence in the appraisal process and provides parties with reassurance that an agreement signed yesterday will not be outdated tomorrow or five years from now.

Maximizing the Benefits of Valuation-Process Agreements

Valuation-process agreements acknowledge that businesses change and evolve due to a variety of foreseeable and unforeseeable circumstances. By detailing the methods and times that periodic valuations will occur in the future, valuation-process agreements keep up with changes in business, industry and general economic conditions that could affect the company’s sales price over time and into the future.

To maximize the use of these agreements, interested parties, including legal and financial counsel, should understand the defining elements that should be present in a well-drafted valuation-process agreement.

Standard of Value

The “value” of a business is an ambiguous term to which different individuals may apply different meanings. Therefore, the buy-sell agreement should clearly define the standard of value on which the valuation is based. This may include the “fair value” as defined by state law for shareholder disputes or by the Financial Accounting Standards Board (FASB) for asset impairment measures or the more common “fair market value”, which applies to federal estate and gift tax valuations.

Level of Value

The level of value reflects the ownership interest in a business, whether it be controlling or non-controlling, and the marketability of each. For example, parties to a buy-sell agreement may assume they will receive the pro rata value of the business as a whole. This may not always be the case, especially when considering that controlling interests are traditionally more marketable, or easier to convert to cash and more predictable in realizing estimated proceeds, than a non-controlling interest. When a lack of marketability is present, the business interest may be transferred at a discount. Typically, the less control an interest has over the management of the business, the larger the discount will be (i.e. a discount for lack of control may be applicable as well as a discount for lack of marketability).

Effective “As Of” Date

Well-written buy-sell agreements specify the dates on which the valuation(s) should be determined in the future as well as the timeframes and dates of the financial statements the appraiser will use in his or her assessment of the business’s value.

Funding Mechanisms

The way in which one party intends to purchase a business from another party is a special consideration that buy-sell agreements should address. For example, life insurance proceeds paid upon death of a shareholder may be used to fund the purchase. The buy-sell agreement should specify whether such proceeds are to be considered a corporate asset and therefore included in the value of the business. Alternatively, the business may specify that it has sufficient corporate assets to fund a required redemption. No matter the funding mechanism selected, parties should ensure that details of such arrangements be spelled out within the buy-sell agreement and reviewed annually.

Appraiser Qualifications and Standards

The parties involved in a buy-sell agreement have the ability to specify, in writing, their agreement upon a named appraiser or firm responsible for valuing a business interest. They may also detail the business valuations standards the appraiser should follow, for example the American Institute of Certified Public Accountants (AICPA).

Transfers of business ownership can be complicated. However, a comprehensive buy-sell agreement that properly defines how assets are valued and addresses the details of buy-out terms under various scenarios, enables business owners to minimize potential conflicts that may result from future events.

About the Author, Richard A. Pollack, CPA/ABV/CFF/PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is Director-in-Charge of the Forensic and Business Valuation Services with Berkowitz Pollack Brant.

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