Auctions have long been lucrative fundraising events for not-for-profits. But these events come with some tax compliance responsibilities.

Acknowledging item donations

If you auction off merchandise or services donated to your charity, you should provide written acknowledgments to the donors of the auctioned items valued at $250 or more. You won’t incur a penalty for failing to acknowledge the donation, but the donor can’t claim a deduction without substantiation, which could hurt your ability to obtain donations in the future.

Written statements should include your organization’s name and a description — but not the value — of the donated item. (It’s the donor’s responsibility to substantiate the donated auction item’s value.) Also indicate the value of any goods or services provided to the donor in return.

Other rules

Donors of services or the use of property may be surprised to learn that their donations aren’t tax-deductible. Alert these donors before they make their pledges. Also inform donors of property such as artwork that tax law generally limits their deduction to their tax basis in the property (typically what they paid for it).

If you receive an auction item valued at greater than $500 — and within three years sell the property — you must file Form 8282, “Donee Information Return,” and provide a copy to the original donor. Form 8282 must be filed within 125 days of the sale.

Substantiation for winning bidders

A contribution made by a donor who also receives substantial goods and services in exchange — such as the item won in the auction — is known as a quid pro quo contribution. To take a charitable deduction, winning bidders at a charitable auction must be able to show that they knew the value of the item was less than the amount paid. So provide bidders with a good faith estimate of the fair market value of each available item before the auction and state that only the amount paid in excess is deductible as a charitable donation.

In addition, your nonprofit is required to provide a written disclosure statement to any donor who makes a payment of more than $75 that’s partly a contribution and partly for goods and services received. The failure to provide the disclosures can result in penalties of $10 per contribution, not to exceed $5,000 per auction.

Plan ahead

If you plan to hold a fundraising auction, don’t wait until the last minute to think about tax compliance. Contact us: We can help.

© 2018

The most effective estate planning strategies often involve the use of irrevocable trusts. But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth?

If your marriage is strong, a spousal lifetime access trust (SLAT) can be a viable strategy to obtain the benefits of an irrevocable trust while creating a financial backup plan.

Indirect access

A SLAT is an irrevocable trust that authorizes the trustee to make distributions to your spouse if a need arises. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $11.18 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ creditors, including any former spouses.

The key benefit of a SLAT is that, by naming your spouse as a lifetime beneficiary, you retain indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse.

To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations.

Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.

Risks

There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. But there may be ways to mitigate this risk.

If you’re considering using a SLAT, contact us to learn more about the benefits and risks of this type of trust.

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Funny thing about customers: They can keep you in business, but can also put you out of it. The latter circumstance may occur if you overrely on a few customers that abuse their credit. To prevent this, keep your credit application form comprehensive and updated. When working with private companies, request financial statements and look at metrics such as profit margin (net income divided by net sales). From the balance sheet, calculate current ratio (current assets divided by current liabilities). For more help assessing customers’ creditworthiness, contact us.

Of course, you expect the declarations in your will to be carried out, as required by law. Usually, that’s exactly what happens with wills. However, it’s possible your will could be contested and your true intentions defeated if someone is found to have exerted “undue influence” over your decisions.

Undue influence defined

Undue influence is an act of persuasion that overcomes the free will and judgment of another person. It may include exhortations, insinuations, flattery, trickery and deception.

Frequently, undue influence happens when an elderly individual, who may or may not have all of his or her bearings, is convinced to change provisions in a will or otherwise suddenly rewards another person, such as a caregiver.

Conversely, not all influence is “undue.” For instance, it’s perfectly reasonable for a child or close friend to advise an elderly person. It’s usually up to a court to decide if the “suggestion” constitutes undue influence.

Elements of undue influence

Generally, an interested party lodges a claim for undue influence when a deceased person’s will is being probated. To be successful, he or she typically must prove the following elements:

• The will distributes assets in a way that wouldn’t be reasonably anticipated,
• The deceased relied on the person who allegedly exerted undue influence,
• The deceased’s physical or mental condition made him or her susceptible to undue influence, and
• The accused person benefits from changes in the will or some other suspicious transaction.

Protect against claims

If your will distributes assets in a way your family might not expect, it’s possible that an undue influence claim could be successful — even if your will reflects your true intentions. Circumstances could still give the appearance of undue influence.

There are, however, steps you can take while you’re of sound mind and body to protect your estate against undue influence claims:

Establish competency. The best way to do this is to draft your will while you’re still in reasonably good health. Arrange for a physical examination around the time your will is executed. This is equivalent to a physician “signing off” that you’re competent.

Communicate clearly with family. Claims of undue influence may arise when relatives are blindsided after you’re gone. Let them know your intentions as soon as possible and explain your reasoning.

Taking these two steps may help avoid confrontations and place interested parties on notice that you’ve addressed the situation. The mere fact that you’ve taken action will be recognized in your favor. Contact us if you’re concerned that your will may someday come under an undue influence claim.

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Every year is a journey for a business. You begin with a set of objectives for the months ahead, probably encounter a few bumps along the way and, hopefully, reach your destination with some success and a few lessons learned.

The middle of the year is the perfect time to stop for a breather. A midyear review can help you and your management team determine which objectives are still “meetable” and which one’s may need tweaking or perhaps even elimination.

Naturally, this will involve looking at your financials. There are various metrics that can tell you whether your cash flow is strong and debt load manageable, and if your profitability goals are within reach. But don’t stop there.

3 key areas

Here are three other key areas of your business to review at midyear:

1. HR. Your people are your most valuable asset. So, how is your employee turnover rate trending compared with last year or previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.

2. Sales and marketing. Are you meeting your monthly goals for new sales, in terms of both sales volume and number of new customers? Are you generating an adequate return on investment (ROI) for your marketing dollars? If you can’t answer this last question, enhance your tracking of existing marketing efforts so you can gauge marketing ROI going forward.

3. Production. If you manufacture products, what’s your unit reject rate so far this year? Or if yours is a service business, how satisfied are your customers with the level of service being provided? Again, you may need to tighten up your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals.

Necessary adjustments

Don’t wait to the end of the year to assess the progress of your 2018 strategic plan. Conduct a midyear review and get the information you need to make any adjustments necessary to help ensure success. Let us know how we can help.

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