Thursday, August 22, 2019

Everything You Need to Know About the DOL Fiduciary Rule

By Mitchell Grant 

The Department of Labor (DOL) fiduciary rule, was originally scheduled to be phased in from April 10, 2017, to January 1, 2018. As of June 21, 2018, The U.S. Fifth Circuit Court of Appeals officially vacated the rule, effectively killing it.

Breaking Down the Fiduciary Rule

The DOL’s definition of fiduciary demands that retirement advisors act in the best interests of their clients and put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest and states that all fees and commissions for retirement plans and retirement planning advice must be clearly disclosed in dollar form to clients.

Key Takeaways

  • The Fiduciary Ruling was one of the most hotly debated topics in finance, with many brokers and investment firms doing all they could to halt it being enacted.
  • The Fiduciary Ruling was brought into effect to protect the interests of clients versus the financial interests of their brokers and advisors. This led to lower commissions for brokers, less income from "churning" portfolios, and increased compliance costs.
  • The DOL Fiduciary Rulings were vacated in 2018, but statements made by the DOL Secretary in May of 2019 stated the DOl was working with the SEC to reenact the controversial ruling.
  • The individual investors most affected were those with fully managed IRAs and 401(k) accounts. These investors would have benefited the most from the Fiduciary Ruling.

History of the Fiduciary Rule

The financial industry was put on notice in 2015 that the landscape was going to change. A major overhaul was proposed by President Obama on February 23, 2015: "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."
The DOL proposed its new regulations on April 14, 2016. This time around, the Office of Management and Budget (OMB) approved the rule in record time, while President Obama endorsed and fast-tracked its implementation; the final rulings were issued on April 6, 2016.
Before finalizing the ruling, the DOL held four days of public hearings. While the final version was being hammered out, the legislation was known as the fiduciary standard. In January 2017 during the first session of Congress of the year, a bill was introduced by Rep. Joe Wilson (R, S.C.) to delay the actual start of the fiduciary rule for two years.
 
While the new rules were likely to have had at least some impact on all financial advisors, it was expected that those who work on commission, such as brokers and insurance agents, would be impacted the most.
In late March 2017, the world's two largest asset managers, Vanguard and BlackRock, called for a more significant delay considering the confusion these repeated moves to delay the rule had caused. After a 15-day public comment period, the DOL sent its rule regarding the delay to the Office of Management and Budget for review. 

178,000: The number of letters the DOL received that opposed a delay to enact the new Fiduciary rulings.

After the review by the OMB, the DOL publicly released an official 60-day delay to the fiduciary rule's applicability date. The 63-page announcement noted that "...it would be inappropriate to broadly delay the application of the fiduciary definition and Impartial Conduct Standards for an extended period in disregard of its previous findings of ongoing injury to retirement investors." Responses to the delay ranged from supportive to accusatory, with some groups calling the delay "politically motivated."
In late May 2017, then-newly appointed DOL Secretary Alexander Acosta, writing in an opinion piece for the Wall Street Journal, confirmed that the fiduciary rule would not be delayed beyond June 9 as the DOL sought "additional public input." The DOL officially reopened the public comment period for the rule for another 30 days on June 30, 2017.
 
However, in early August 2017, the DOL filed a court document as part of a lawsuit in the U.S. District Court for the District of Minnesota, proposing an 18-month delay to the rule's compliance deadline. This would have changed the final deadline for compliance from Jan. 1, 2018, to July 1, 2019. The same document suggested the delay might include changes to the types of transactions that are not allowed under the fiduciary rule. The proposed delay was approved by the Office of Management and Budget in August 2017.
 
Originally, the DOL regulated the quality of financial advice surrounding retirement under ERISA. Enacted in 1974, ERISA had never been revised to reflect changes in retirement savings trends, particularly the shift from defined benefit plans to defined contribution plans, and the huge growth in IRAs.

The Fiduciary Rule Under President Trump
The regulation was initially created under the Obama administration, but in February 2017, President Trump issued a memorandum that attempted to delay the rule's implementation by 180 days. This action included instructions for the DOL to carry out an “economic and legal analysis” of the rule's potential impact.
Then, on March 10, 2017, the DOL issued its own memorandum, Field Assistance Bulletin No. 2017-01, clarifying the possible implementation of a 60-day delay to the fiduciary rule. Full implementation of all elements of the rule had been pushed back to July 1, 2019.
 
Before that could happen—on March 15, 2018—The Fifth Circuit Court of Appeals, based in New Orleans, vacated the fiduciary rule in a 2-to-1 decision, saying it constituted "unreasonableness," and that the DOL's implementation of the rule constitutes "an arbitrary and capricious exercise of administrative power." The case had been brought by the U.S. Chamber of Commerce, the Financial Services Institute, and other parties. Its next stop could be the Supreme Court.
 
On June 21, 2018, The Fifth Circuit Court of Appeals confirmed its decision to vacate the ruling.

Fiduciary vs. Suitability

Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners, and insurance agents, who work with retirement plans and accounts. "Suitability" means that as long as an investment recommendation meets a client's defined need and objective, it is deemed appropriate.
Under a fiduciary standard, financial professionals are legally obligated to put their client’s best interests first, rather than simply finding “suitable” investments. The new rule would have therefore eliminated many commission structures that govern the industry.
 
Advisors who wished to continue working on the commission would have needed to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as the advisor receiving a higher commission or special bonus for selling a certain product). This was to guarantee that the advisor was working unconditionally in the best interest of the client. All compensation that was paid to the fiduciary was required to be clearly spelled out as well. 

Covered Retirement Plans Included:

What Wasn't Covered

  • If a customer calls a financial advisor and requests a specific product or investment, that does not constitute financial advice.
  • When financial advisors provide education to clients, such as general investment advice based on a person's age or income, it does not constitute financial advice.
  • Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings.

Reaction to the Fiduciary Rule

There’s little doubt that the 40-year-old ERISA rules were overdue for a change, and many industry groups had already jumped onboard with the new plan, including the CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA).
Supporters applauded the new rule, saying it should increase and streamline transparency for investors, make conversations easier for advisors entertaining changes and, most of all, prevent abuses on the part of financial advisors, such as excessive commissions and investment churning for reasons of compensation. A 2015 report by the White House Council of Economic Advisers found that biased advice drained $17 billion a year from retirement accounts.
However, the regulation met with staunch opposition from other professionals, including brokers and planners. The stricter fiduciary standards could have cost the financial services industry an estimated $2.4 billion per year by eliminating conflicts of interest like front-end load commissions and mutual fund 12b-1 fees paid to wealth management and advisory firms.

The June 2016 Chamber of Commerce Lawsuit

Three lawsuits have been filed against the rule. The one that has drawn the most attention was filed in June 2016 by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Roundtable in the U.S. District Court for the Northern District of Texas.
The basis of the suit is that the Obama administration did not have the authorization to take the action it did in endorsing and fast-tracking the legislation. Some lawmakers also believe the DOL itself was reaching beyond its jurisdiction by targeting IRAs. Precedent dictates Congress alone has approval power regarding a consumer’s right to sue. This is the suit that resulted in the March 15, 2018, ruling against the fiduciary rule discussed above.
After the DOL officially announced the 60-day delay to the rule's applicability, a "Retirement Ripoff Counter" was unveiled by Sen. Elizabeth Warren and AFL-CIO President Richard Trumka. Partnering with Americans for Financial Reform and the Consumer Federation of America, this counter attempts to highlight the "...cost to Americans of saving for retirement without the fiduciary rule, starting from Feb. 03, 2017." The press release from Americans for Financial Reform states, "Every day that conflicted advice continues costs them [Americans] $46 million a day, $1.9 million per hour, and $532 a second."

Who Did the Fiduciary Rule Affect?

The new DOL rules were expected to increase compliance costs, especially in the broker-dealer world. Fee-only advisors and Registered Investment Advisors(RIA) were expected to see increases in their compliance costs as well.
The fiduciary rule would have been tough on smaller, independent broker-dealers and RIA firms. They might not have had the financial resources to invest in the technology and the compliance expertise to meet all of the requirements. Thus, it's possible that some of these smaller firms would have had to disband or be acquired. And not just small firms: The brokerage operations of MetLife Inc. and American International Group were sold off in anticipation of these rules and the related costs.
 
Advisors and registered reps who dabble in terms of advising 401(k) plans might have been forced out of that business by their broker-dealers due to the new compliance aspects.
 
A similar issue occurred in the U.K. after the country passed similar rules in 2011. Since then, the number of financial advisors has dropped by about 22.5%. Ameriprise CEO James Cracchiolo said, “The regulatory environment will likely lead to consolidation within the industry, which we already see. Independent advisers or independent broker-dealers may lack the resources or the scale to navigate the changes required, and seek a strong partner.”
 
Annuity vendors also would have had to disclose their commissions to clients, which could have significantly reduced sales of these products in many cases. These vehicles have been the source of major controversy among industry experts and regulators for decades, as they usually pay very high commissions to the agents selling them and come with an array of charges and fees that can significantly reduce the returns that clients earn.
 
Reprinted from Investopedia
 
If you have any questions about the Fiduciary Rule or would like to speak with one of our estate planning attorneys, please contact Morris Law Group today. 

Tuesday, July 23, 2019

Notarization Steps Into the 21st Century in Florida

In early June 2019, Florida Gov. Ron DeSantis signed into law HB 409, the Electronic Legal Document bill (also known as the e-will bill). With this new law, the use of video technology and remote notarization for the online execution of wills, powers of attorney and other legal documents is now approved. Under the provisions of this law, an electronic will is validly executed if it is in compliance with the provisions applicable to written wills.
In a nutshell, the e-will law allows notaries to affix their seals and signatures to legal documents that are not signed in their physical presence if they witness the signature via live, two-way video links.
According to the law, “A notary public may not notarize a signature on a document if the person whose signature is being notarized does not appear before the notary public either by means of physical presence or by means of audio-video communication technology as authorized under part II of this chapter is not in the presence of the notary public at the time the signature is notarized.” Witnesses needed for wills and other documents also can appear remotely as long as they can answer certain questions probed by the notary pertaining to the document holder’s identity.
Supporters of the law, including the Elder Law Section of the Florida Bar, say it will increase access to legal services, such as wills or estate plans, for all Floridians. The new law allows the signing of documents to be conducted entirely electronically in accordance with the strict notary standards that remain in existence.
Critics of the law contend that it puts certain older Floridians at risk by making it too easy for adult children to sell an incapacitated parent’s home without permission or for others to take advantage of elders in nursing homes or long-term care facilities. The law addresses these concerns by excluding those seniors and others who are considered to be “vulnerable adults” from electronic notarization.
A previous attempt by congressional democrats to add an amendment that would have removed wills and powers of attorney from the e-will bill failed. However, the law’s sponsors agreed to prohibit the use of video technology to execute super powers of attorney, preventing the amending of wills, trusts, estates and other documents electronically, at the request of the Real Property, Probate and Trust Law Section of the Florida Bar.
This e-will bill is not without controversy. In fact, two years ago, Gov. Rick Scott vetoed the similar Electronic Wills Act, saying it failed to strike the proper balance between convenience and safety. At the time, Gov. Scott claimed the bill didn’t “adequately ensure authentication of the identity of parties to the transaction.”
The latest version of the law contains several safeguards, such as requiring notaries to question witnesses directly and to demand standard forms of identification that can be confirmed through various online platforms.
Contact us if you have questions about the new e-will law. To update your will or estate plan, request a consultation today with Morris Law Group’s experienced attorneys.

SECURE Act Would Affect Retirement Planning

By: Joe D. Lieberman, J.D., LL.M., Law Clerk, Morris Law Group - June 27, 2019



On May 23, 2019, the U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). H.R. 1994.The SECURE Act would make significant changes to the U.S. retirement system. The SECURE Act passed with nearly unanimous support across party lines, in a vote of 417-3. The legislation now goes to the U.S. Senate for consideration in
that chamber.

The SECURE Act would make a number of changes to employer-sponsored retirement plans and individual retirement accounts (IRAs), including, among others:

  • Raising the minimum age for required minimum distributions from retirement savings plans from 70½ to 72;
  • Increasing the cap on the default contribution rate for employers with automatic enrollment plans from 10 percent to 15 percent after the first year of an employee’s enrollment;
  • Eliminating a requirement for employers to share a common industry in order to form a multiple employer plan (MEP);
  • Eliminating a provision in current law disqualifying MEPs in which one employer fails to meet requirements;
  • Providing for the distribution of assets from terminated 403(b) plans;
  • Allowing part-time workers to become eligible for enrollment in 401(k) plans following one year of service with at least 1,000 hours worked or at least 3 years of service with at least 500 hours;
  • Allowing participants to withdraw up to $5,000 without penalty from any employer-sponsored plan or IRA, and exempting repayment of the withdrawn funds from taxation;
  • Providing pension funding relief to qualified family-owned, independent newspapers;
  • Allowing home health care workers with tax-exempt "difficulty of care" compensation to contribute to employer-sponsored plans or IRAs; and
  • Requiring designated beneficiaries of IRAs to withdraw all plan assets within 10 years of the death of the account holder (within five years for nondesignated beneficiaries).
  • For purposes of this article, only modifications of required distribution rules for designated beneficiaries under Title IV-Revenue Provisions, Section 401, of the SECURE Act, will be addressed.

The SECURE Act would significantly modify the required distribution rules for designated beneficiaries. In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest, nonspouse designated beneficiaries of IRAs would be required to withdraw all plan assets within 10 years of the death of the account holder (within five years for nondesignated beneficiaries). This limitation does not apply to: (i) the surviving spouse of the employee; (ii) a child of the employee who has not reached majority (a child will cease to be an eligible designated beneficiary as of the date the child reaches majority and any remainder of the portion of the individual’s interest shall be distributed within 10 years after such date); (iii) disabled (within the meaning of section 72(m)(7)); (iv) a chronically ill individual (within the meaning of section 7702B(c)(2)); or (v) an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee.

The determination of whether a designated beneficiary is an eligible designated beneficiary will be made as of the date of death of the employee. If an eligible designated beneficiary dies before the portion of the employee’s interest is entirely distributed, the remainder of such portion will be distributed within 10 years after the death of such eligible designated beneficiary.

In general, except as provided below, the above amendments apply to distributions with respect to employees who die after Dec. 31, 2019. In the case of a governmental plan, the above amendments apply to employees who die after Dec. 31, 2021.

The above amendments will not apply to a qualified annuity, which is a binding annuity contract in effect on the date of enactment of the SECURE Act and at all times thereafter.

This rule would essentially eliminate stretch IRAs for certain nonspouse beneficiaries whereby, under prior rules, nonspouse beneficiaries were permitted to grow their inherited IRAs tax deferred for an extended period after the death of the employee. A significant consequence of this new rule would require income tax to be immediately paid by a nonspouse beneficiary upon the 10th withdrawal year.

If you have a retirement account and would like to discuss it with us, or, if you believe that your beneficiaries may be subject to income tax upon your death and are interested in learning more about retirement planning, please do not hesitate to contact the Morris Law Group to discuss how our attorneys may be helpful to achieve such estate planning goals.

** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.

Tuesday, May 14, 2019

Domestic Asset Protection Trusts


            Asset protection during a grantor’s lifetime is often accomplished through complex entity structures (multi-member LLC’s or LLLPs) or through irrevocable trusts. However, clients are often apprehensive to transfer too much wealth to an irrevocable trust since they lose all benefit to the transferred assets, and the transfer will most likely require a gift tax return and result in a reduction the grantor’s estate tax exemption amount.  
However, there is a type of irrevocable trust that 1) protects the assets during the lifetime of the grantor; 2) provides for the efficient transfer of wealth; and 3) permits the grantor to be an active beneficiary. This specific estate planning technique is through the use of a Domestic Asset Protection Trust (DAPT).
A DAPT is an irrevocable trust established under the laws of one of the limited number of jurisdictions that permit a grantor of a trust to be a discretionary beneficiary and still protect the trust assets from the grantor’s creditors. We generally recommend the formation of a DAPT pursuant to Nevada law since it offers enhanced privacy and it is the only state that does not have any special classes of creditors that can pierce through a DAPT.
            Domestic Asset Protection Trusts offer many of the same benefits that offshore trusts provide but without subjecting the assets to the risks associated with offshore trusts.  According to the Steve Leimburg’s Asset Protection Planning Newsletter “after 22 years, there still hasn’t been even one non-bankruptcy, non-fraudulent transfer case where a creditor got a judgement or settlement, and then successfully accessed assets owned by a DAPT.”  Interested in learning more about DAPT’s? Contact the experienced attorneys of Morris Law Group.

Tuesday, April 30, 2019

Prize Winnings


Similar to lottery winnings, winning a prize subjects the recipient to income tax.  Section 74 of the tax code states that prizes and awards are included in gross income unless these items qualify as excluded as noted in this section or are considered scholarships and fellowship grants under Section 117.  Gregory R. Hampton, who recently won 100 years of season tickets for his beloved New York Giants as part of the NFL’s Tickets for 100 years contest, is therefore responsible for the taxes on his winnings.  Luckily for Mr. Hampton, the NFL announced that they will be paying the estimated taxes on the winnings.

Upon winning any sort of gambling, raffle, lottery or other similar prize, one must report the full amount of the winnings for the year on their form 1040.  One may itemize deductions on Form 1040 to take advantage of any gambling losses but may not net their winnings and losses.  Interested in learning more? Contact the experienced attorneys of Morris Law Group. 

Tuesday, April 16, 2019

Inherited IRA's



In Private Letter Ruling 201909003, the Internal Revenue Service ruled that an IRA payable to an estate could be transferred to an inherited IRA for the benefit of the estate’s beneficiaries.  In the IRS ruling, the decedent received RMD’s from the IRA during the year of  their death and named  the estate as the sole beneficiary.  In the decedent’s will, the decedent named their entire estate to certain beneficiaries.
            The division of the IRA (of the decedent) into inherited IRA’s for the beneficiaries was not considered a taxable event.  Per the ruling, the beneficiaries can take RMD’s for each of the inherited IRA’s for the remaining years of the life expectancy of the decedent and each beneficiary is then responsible for any tax liability related to the RMD’s from their inherited IRA’s.
 Please note that this ruling applied to the facts of a certain case that was submitted and could have been avoided with proper planning on the front end.  Interested in learning more? Contact the experienced attorneys of Morris Law Group. 

Monday, April 1, 2019

Annual Report Reminder


Annual Report Reminder

Every business entity organized in Florida must file an annual report with the Florida Department of State by May 1st each year. This filing is mandatory for all business entities that wish to maintain an active status, even if no changes were made to the entity. The purpose of the annual report is to update and/or confirm the records of Florida’s Division of Corporations. Additionally, the responsibility to file falls solely upon the entity’s representative since Florida’s Division of Corporations is not required to send a reminder regarding the deadline. 

If you are a member of Morris Law Group’s Generational Planning Solutions (“GPS”) program then please disregard this notice as the filing of the annual report has already been addressed. If you are not a member of our GPS program and would like to find out more information, please contact our office today! http://www.law-morris.com/gps

The annual report can only be filed through Sunbiz, Florida’s Department of State, Division of Corporations (Sunbiz.Org). The option to file the annual report is prominently listed on the website’s homepage. In order to file the report, all you need is the Document ID Number (which can be found on Sunbiz), a valid email address and payment of the fee.

The fees for the annual report vary based on entity classification, and are as follows for 2019:
        For a Profit Corporation: $150.00
    For a Non-Profit Corporation: $61.25
    For an LLC: $138.75
    For an LP or LLLP: $500.00      

Florida’s Division of Corporations will impose a penalty of $400 for an annual report that is filed after the May 1st deadline; however, the penalty does not apply to non-profit corporations. Furthermore, this $400 late fee cannot be waived or abated.

The failure to file an annual report by the third Friday of September will result in the administrative dissolution or revocation of the business entity. Such administratively dissolved or revoked entities must then apply for restatement and pay additional fees in order to regain active status in Florida. Therefore, if you are an individual who has formed, or maintains a business entity in Florida, it is crucial that you file the annual report in order to avoid the disruption of business.

Friday, March 29, 2019

Charitable Deductions



With April 15th fast approaching, now is a time to review your charitable gifting for 2018. 
           
           One main tax benefit of charitable gifting is that a qualified donation entitles the donor to a charitable  deduction . Please be aware that there are certain limits on taking charitable contribution deductions.  One can also make a qualified donation of a non cash item as long as the fair market value of the item can be substantiated.  If a donor makes a qualified charitable donation from their IRA, they can also take advantage of that income not being counted as taxable income (with certain restrictions).  There are many tools that donors can utilize to fund their charitable endeavors such as donor-advised funds, private foundations and charitable remainder trusts and these are to be considered when reviewing their charitable goals.  Interested in learning more? Contact the experiences attorneys of Morris Law Group for an immediate consultation.   

Tuesday, March 19, 2019

GIFT TAX RETURN REMINDER

The purpose of this post is to advise you that you may be required to file a Federal gift tax return (IRS Form 709). If you made a gift during 2018, the below summary may be critical to your tax planning.  

The due date for a 2018 gift tax return is April 15, 2019, the same due date as your 2018 individual income tax return. This date can be extended by extending the time to file your individual income tax return using Form 4868 or Form 2350. This due date can also be extended by filing a Form 8892 to request an automatic 6-month extension if you do not request an extension for your individual income tax return. However, neither of these methods will extend the time to pay gift or GST taxes due.

Outright Gifts of Cash or Property
All gifts of cash or property (in excess of $15,000) to an individual other than a spouse requires a gift tax return. As a result of the gift, your lifetime estate and gift tax exemption will be reduced by the value of the gift that exceeds the $15,000. However, no gift tax will be due with the return unless you have fully used your lifetime estate and gift tax exemption.  

Gifts of Cash or Property in Trust
When you gift cash or property to a trust, including a life insurance policy or premium payments to be made on a life insurance policy, you are making a gift to the trusts beneficiaries. If the gift to the trust beneficiaries does not exceed $15,000 per beneficiary, and Crummey notices are properly used, a gift tax return may not be required unless the trust is structured as a generation-skipping transfer (GST) tax trust. If a gift is made to a GST trust, it may be advisable to allocate the donors GST exemption to the trust. While this allocation is automatic, it is advisable to either opt out of the automatic allocation rules for record keeping purposes, or, file a return showing the allocation of the GST Exemption. If a gift to a trust exceeds $15,000 per beneficiary, a gift tax return is required to be filed.

Most CPA’s are willing and able to prepare gift tax returns. However, many prefer not to due to the complex rules that apply to the allocation of GST exemption and other special disclosures. Due to such complexities, we prefer to review all gift tax returns prepared by our client’s accountants to ensure they align with your estate planning goals.



Tuesday, March 12, 2019

MLB and State Income Tax


During the off-season, two MLB superstars signed massive contracts with the San Diego Padres and Philadelphia Phillies which could change the landscape of the league.  The location of these contracts could also dramatically change the amount they have to pay in state income tax.  Bryce Harper signed a 13-year $330 million-dollar contract with the Phillies where the Pennsylvania state income tax is a flat 3.07 percent.  Manny Machado signed a 10-year $300 million-dollar contract with the San Diego Padres that will have him paying 13.3% state income tax on his game salary when playing at home.  State income tax rates vary from state to state.  Good news for anyone looking to join the Miami Marlins is that Florida is one of the handful of states with no state income tax. 
                Find yourself in a state where you are paying heavy state income tax? Interested in taking advantage of some cost savings?  Contact the experienced attorneys of Morris Law Group for an immediate consultation.