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More than 90 University of Nevada accounting students recently participated in a Volunteer Income Tax Assistance program, preparing tax returns to receive credit in their Federal Tax Accounting class at UNR.

Last year, UNR accounting students helped prepare 700 tax returns and are expecting at least that many this year.

“We have some taxpayers who come in with three, four or five years of unfiled tax returns,” Richard Mason, associate UNR business professor, told local KTVN-TV. “Especially during the economic downturn, we have a number of people who were foreclosed on, who short-sold houses.”

Mason also said he estimated the IRS-sponsored program saves the community upwards of $100,000 to $150,000 in professional fees.

More than 90 University of Nevada accounting students recently participated in a Volunteer Income Tax Assistance program, preparing tax returns to receive credit in their Federal Tax Accounting class at UNR.

With today’s relatively generous $5.34 million federal estate tax exemption, you may think estate planning is only a concern for the rich. Wrong!

Regardless of your income or net worth, there’s one estate planning move you should probably make right now: Check the beneficiary designations for your life insurance policies, bank accounts, brokerage firm accounts, retirement accounts, and other assets. If you’ve not yet turned in the proper forms to designate beneficiaries, do it now. If your forms are out of date, update them.

The consequences of failing to take these simple steps can be serious. If you don’t believe it, consider the following trifecta of real-life horror stories.

Horror Story Number 1

In Herring v. Campbell, the Fifth Circuit Court of Appeals ruled that a decedent’s beloved stepsons weren’t considered his “children” under his pension plan’s terms.

John Wayne Hunter had retired from Marathon Oil Company, where he was a participant in the company’s pension plan. He had designated his wife as the primary beneficiary but failed to designate any secondary (contingent) beneficiary. After his wife died, he failed to designate a new primary beneficiary.

Under the plan’s terms, when a participant died without designating a valid beneficiary, the deceased participant’s benefits were distributed in the following order of priority:

Surviving spouse;
Surviving children;
Surviving parents;
Surviving brothers and sisters (siblings), and
Participant’s estate.
After Hunter died in 2005, the plan administrator considered — and rejected — the possibility that Hunter’s two stepsons might qualify as “children” who would therefore be entitled to all of Hunter’s benefits. Instead, the plan administrator distributed the benefits, which totaled more than $300,000, to Hunter’s six siblings.

The stepsons sued, claiming they should have inherited the benefits. Hunter’s estate had been left to them, and his will referred to them as his “beloved sons.” The stepsons claimed they were in fact Hunter’s children, because he had “equitably adopted” them by his actions.

The district court concluded that Hunter intended to leave his benefits to the stepsons and that the plan administrator had abused her discretion by failing to consider the stepsons’ equitable adoption claim.

On appeal, the Fifth Circuit found no error in the administrator’s interpretation that the term “children” for purposes of the plan meant biological or legally adopted children as opposed to unadopted stepchildren. The Fifth Circuit found that nothing required the plan administrator to incorporate the theory of equitable adoption into the plan’s definition of “children.” Therefore, the district court decision was reversed, and all of Hunter’s pension benefits went to his six siblings, rather than his stepsons.

Horror Story Number 2

In Egelhoff v. Egelhoff, the U.S. Supreme Court awarded all of a decedent’s pension benefits and his company-provided life insurance proceeds to his ex-wife. Even though the decedent had intended to give these assets to his children from an earlier marriage, he had forgotten to change beneficiary designations after the divorce, so his ex-wife remained the named beneficiary. Two months after the divorce, he was killed in a car crash.

The Supreme Court ruled that the beneficiary designations trumped state law that would have automatically disinherited the former spouse. So the ex got the money, and the kids got the bill for an expensive and unsuccessful legal fight.

Horror Story Number 3

Kennedy Estate v. Plan Administrator for the DuPont Saving and Investment Plan is another Supreme Court decision that favors a former spouse. Here, a decedent’s ex-wife had specifically waived any interest in his retirement and investment plan under the divorce agreement. Believing the divorce agreement was the last word on the subject, the ex-husband failed to submit the form required to officially change the plan beneficiary from his ex-wife to his daughter. He died seven years after the divorce. The company’s plan document stipulated that beneficiaries could be changed only by submitting the form.

The Court ruled that the grossly out-of-date beneficiary designation trumped the divorce agreement. So the ex-wife collected $400,000 from her ex-husband’s company savings and investment plan — and the daughter got nothing.

Revisit Beneficiaries as Life Events Unfold

Beloved stepchildren and divorces are not the only scenarios where failing to turn in or update beneficiary designation forms can cause big problems for someone’s intended heirs. You face the same issue if you have a falling out with a child or sibling. Or you might want to leave more of your life insurance benefits to an adult child who just had quadruplets and a bit less to your childless heirs.

Warning: Don’t depend on your will or living trust document to override outdated beneficiary designations. As a general rule, whoever is named on the most recent beneficiary form will get the money automatically if you die, regardless of what your will or living trust papers might say.

Special Advice If You’re Married

If you’re married and have set up accounts naming you and your spouse as joint owners with right of survivorship, the surviving spouse will automatically take over sole ownership when the first spouse dies. If that’s what you intend, great. But you may want to name some secondary beneficiaries to cover the possibility that your spouse dies before you do.

Note that in the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), assets accumulated during your marriage are generally considered to be owned 50/50. If you live in one of these states, you usually need your spouse’s consent to change beneficiaries.

Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchant-ability, and fitness for a particular purpose.

Dealing with clients who don’t report all their income

When times get tight, people moonlight. When people moonlight, they often get paid in cash. When people get paid in cash, they don’t always tell their tax preparer right away – if at all.

“Usually I find out about it by accident,” said Susan Floyd , an Enrolled Agent with Paducah, Ky.-based Egner’s Tax Service. “Even though I ask every year if they have any other income, they usually say no. Once I was talking about my roof and one client said, ‘Oh, I do roofs as a supplemental income.’ He had done that for years without ever turning it in to me. I prepared his return correctly and advised him that he should amend his past returns to reflect the income and expenses. After paying me for the return, taking it with him and not returning the signature forms, I assume he took the return somewhere else.”

Sherry Whah of Sherry Whah EA & Associates in Anchorage, Alaska, works with many small-business clients, from handymen, snow plowers and lawn maintenance workers to craft sellers and others. “Clearly this is income to supplement the household income. The folks who do outside sales for cosmetics, household items and investment sales always believe they have [personal] deductions that they want to take as business deductions. They generally always have losses and are convinced they can take a very aggressive stance. Other clients talk about cash-under-the-table income and how if it is somehow below $600 per customer they don’t have to report it or they are simply hiding cash. Others are so disorganized and don’t pay attention to the business they don’t claim all their income. Intentionally? Maybe.”

Whah uses a publication and brochure to help clients understand taxable income and business deductions – and as a last resort will do what often happens to a bad client. “If the clients insist on taking deductions or not reporting the income,” she said, “I end the engagement and return their documents.