Is Crowdfunding Taxed?

An elderly man beaten with a brick on July 4th in Los Angeles is in critical condition. A German Shepherd is beaten and shot while protecting his young owner during a burglary. Then, there is the little girl born prematurely who needs tests, treatments, doctors and surgeries to survive. In each of these situations, the individuals received financial assistance by using the donation-based crowdfunding platform GoFundMe.


Crowdfunding isn't a new concept

In their paper, a Brief History of Crowdfunding, David M. Freedman and Matthew R. Nutting define crowdfunding as “a method of collecting many small contributions, by means of an online platform, to finance or capitalize a popular enterprise.” The internet has allowed crowdfunding to reach an unlimited number of potential donations, but crowdfunding is not new. One famous example of pre-internet crowdfunding was the fundraising campaign for the Statue of Liberty’s pedestal.

When the Statute of Liberty sailed from France in 1885, there was no pedestal for her. She remained in crates on Bedloe’s Island for over a year until Joseph Pulitzer, owner of “The World” opened up his newspaper’s editorial pages to support the effort. Similar to a GoFundMe page, Pulitzer proposed to print the name of every individual who donated to the construction of the pedestal on the front page of The World, no matter how small the amount. His idea worked. By the fall of 1885 over 120,000 people had donated over $100,000, enough funds to complete the project.


Income Tax Implications

It’s unlikely that an individual who sets up a crowdfunding page considers the income tax implications of their fundraising efforts. In fact, Section 61 of the IRS Code states that "gross income means all income from whatever source derived," unless a specific statutory exception exists. So, based on Section 61, the general rule is revenue raised from crowdfunding is includible in income unless specifically excluded elsewhere. However, a statutory exception does exist that may exclude crowdfunding revenue from an individual’s gross income. That exception arises under IRC 102(a), which is commonly known as the gift and bequest exclusion.

If a GoFundMe page is established correctly, the amounts raised may qualify for the gift and bequest exclusion under IRC 102(a). But when does a donation qualify as a gift rather than income under IRS Code Section & Regulations? The U.S. Supreme Court has defined a gift as given from " 'detached and disinterested generosity,' … 'out of affection, respect, admiration, charity, or like impulses,' " and not from " 'any moral or legal duty,' or from 'the incentive of anticipated benefit,'" or "in return for services rendered" (Duberstein, 363 U.S. 278, 285 (1960)). So, generous donors who make payments to GoFundMe pages should be giving based on a “detached and disinterested generosity” and should not receive any services or goods or “quid pro quo” for their donation.


Keep a paper trail

Remember the burden is upon the GoFundMe campaigner to prove the funds received qualify for the gift and bequest exclusion under IRC 102(a). Therefore, it is important to keep a paper trail and document everything in case the IRS comes knocking upon your door.

Essential steps in the paper trail include the following:

  1. Keep a list of the donors to the GoFundMe campaign; include their name, date of donation, and amount donated, and any contact information provided by GoFundMe.
  2. Clearly identify the recipient of the funds on the GoFundMe page.
  3. If the campaign is set up by someone other than the beneficiary, be sure to clearly indicate on the GOFUNDME page that the creator is acting on behalf of the beneficiary.
  4. Be sure the campaign website clearly states that donations or gifts are solicited. If possible and appropriate, the website should also state that donors will receive nothing in return for their donations.
  5. Print and keep a copy of the campaign website to show to the IRS. By the time the IRS issues a notice of deficiency, the campaign website may no longer be available and the taxpayer (whether an agent or a beneficiary) has no way of showing the IRS the information used to solicit donations.
  6. Keep documentation of all monetary transfers of the funds to the beneficiary or spent on behalf of the beneficiary. A clear paper trail or accounting should exist showing that the funds were spent as indicated on the website. Receipts, invoices and copies of checks should be maintained as well.

In the examples used above (the premature birth, the elderly man, and the German Shepherd), the funds raised are for necessities (i.e., medical treatment and care), and the donors did not receive any services or goods in return. Once donation based crowdfunding moves to patronage-oriented endeavors such as creative or artistic endeavors, where a backer receives something in exchange for their payment, or equity-based crowdfunding, where backers received equity for their payment, the funds donated no longer qualify for the IRC 102(a) gift and bequest exclusion. Instead, the crowdfunding campaign has clearly moved into the realm of generating revenue that is reportable income to the IRS.

If you have any questions about the legalities of crowdfunding, please contact us at main@highswartz.com or call (215) 345-8888. Or contact any of our estate attorneys in Bucks or Montgomery Counties. Our Wills, Trusts & Estates attorneys provide comprehensive legal services to assist in all of these matters.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation. 

High Swartz named among 2019 ‘Best Law Firms’ by U.S. News – Best Lawyers

Full-service law firm in Bucks and Montgomery counties recognized for prowess in Family Law, Municipal Law, Real Estate Law and Litigation - Real Estate, Land Use and Zoning

High Swartz LLP, a full-service law firm with offices in Norristown and Doylestown, Pennsylvania, is pleased to announce that it has been named a “Best Law Firm” for 2019 by U.S. News – Best Lawyers®, achieving a Tier 1 ranking in the Philadelphia Metropolitan area in the practice areas of Family Law, Municipal Law, Real Estate Law and Litigation - Real Estate, Land Use and Zoning and National Tier 2 ranking for Land Use and Zoning Law.

To be eligible for a Best Law Firm ranking, a firm must have at least one lawyer included in The Best Lawyers in America©. Attorneys are neither required nor allowed to pay a fee to be listed. For 2019, 9 High Swartz attorneys were named among Best Lawyers:

Best Law Firm rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field and review of additional information provided by law firms as part of the formal submission process.

The highest honor, a Tier 1 ranking, is based on a firm's overall evaluation, which is derived from a combination of its clients' impressive feedback, the regard that lawyers in other firms in the same practice areas have for the firm, and information that the firm provided to Best Lawyers via a survey.

How to Plan a Funeral

People love to make plans-the perfect wedding, that dream vacation, a comfortable retirement, the kitchen remodel.  Making plans is one of the great joys of life- except for when it comes to making plans for the end of it.

Understandably, we don’t like to think about—much less make specific plans for—our own deaths or the death of a loved one. When we do, we’re often prompted by necessity—an illness, concern for the well-being of dependent children, or an insistent estate attorney or financial planner.

But, even then, most of our planning involves tax consequences and the disposition of assets.  Those are certainly the most important parts of estate planning, but they’re not the only part.

Too often, we fail to plan for the events that almost always follow our own deaths. And, if the purpose of estate planning is to lessen the burden on those who are left behind and to ensure that the wishes of the deceased are followed, funeral planning should be an essential part of any estate plan.

When my own mother passed away last Spring, it was an event that put me on the other side of a terrible process.  And even as an experienced estate attorney, I was dismayed by the amount of decisions (small and large) I had to make on behalf of my mother; and I had to make those choices at a time when grief left me barely capable of deciding on what to wear each day.

A lot of those decisions involved issues that, as an attorney, I had previously considered to be outside the “estate planning” process. I asked my clients if they had any burial wishes (i.e. cremation or burial), but that was the extent of it. The rest were details that I assumed were planned and decided within families. Unfortunately, as I learned the hard way, those details weren’t planned or even discussed within my own family, and now I assume this is the same for my clients and their families.

Many of the decisions are small and simple, and easily made while making the sometimes more complicated decisions regarding assets. They may seem fairly trivial compared to what is to be done with the family home or heirlooms, or how investment accounts are to be divided, and therefore, they are easily overlooked. But, to your loved ones, who care more about you than your possessions, your guidance in these matters will be every bit as important.

Based upon my own experience with my Mother’s funeral, here are some examples of things to consider:

  1. Funeral Home - The funeral home is important not only for the aesthetics of, or facilities for, any viewing or reception, but for the funeral director, who can be an invaluable source of advice and practical knowledge.
  2. Internment - Would you prefer to be buried or cremated? If buried, do you have a burial plot or a cemetery of choice? If you have a burial plot, do you have copies of the plot contract(s) to ensure there is in fact room for you to be buried? What kind of coffin would you prefer? Wood, metal, color, ornate or simple? Does your cemetery require a vault as well, and if so, what is your preference? Do you have a choice of clothing, a certain suit or dress, or something of sentimental value you want to be buried with? If cremated, would you like your ashes preserved in an urn or spread in some location? What kind of urn would you prefer?
  3. Service - Would you like a viewing, mass or a reception? A solemn and quiet occasion of remembrance, or a festive celebration of life with food and wine, and music? A small intimate gathering, or an open invitation to all those who knew and cared for you?Is there a church, synagogue, mosque or other place of worship that you would prefer to have your service? If so, is there a particular priest or cleric you would want to perform that service? A poem, a prayer, a passage from a book that you would like read? A favorite reading or gospel read? What music would you like played and do you have a preference who sings or plays at your funeral? Do you have a preference on pallbearers?
  1. Flowers – Do you have favorite flowers or colors that you want incorporated in the funeral sprays at the service and cemetery?
  2. Photos – Do you have a favorite photograph of yourself, that embodies who you were or how you lived your life, that you want people to remember you by?
  3. Memorial - Would you like a simple tombstone, or something more elaborate? What material or design?  Is there a particular inscription you want? Are there other family members buried there that need to be included on the tombstone and if so, does your Executor have those details?
  4. Miscellaneous – Do you have any unusual wishes that your family and/or Executor needs to know about? For example, moving a buried relative to the family plot or language you want incorporated in your obituary or eulogy.
  5. Death Certificates- Your family should order extra Death Certificates from the funeral home, as they are readily available and less expensive than ordering them from Vital Statistics (which can take over six weeks). I suggest one Death Certificate for every account number (even if there are multiple accounts in one financial institution) and other assets (i.e. home, car), and about ten extra.

It’s not necessary that all or any of this be incorporated into your Will.  In fact, it is better that the last plans of your life are kept somewhere easily found and separate from your testamentary documents. Wills may not be read until after the funeral is over.

Please understand that none of this planning will lessen your tax burden, or ensure the orderly administration of your estate. These considerations may have no economic value to you or anyone else.  But perhaps to your grieving loved ones, they may be the most important plans you leave.

The High Swartz estate attorneys in Bucks County and Montgomery County support your decision to be proactive in protecting your family’s future. Our estate planning attorneys help you protect, preserve and manage your estate so you can reach your goals of safeguarding assets, planning for orderly business succession, minimizing inheritance taxes and making sure the benefits of your hard work go to your family.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Revocable Living Trust: Not the Magic Bullet

So what is a revocable living trust?  A trust is a legal written agreement between various individuals:  The individuals involved include the trustmaker, who is the person that creates the trust agreement (also commonly referred to as the grantor, trustor or settlor); the trustee, who is the person that manages the trust assets; and the beneficiary(ies), who are the individuals or entities that receive the benefits or assets held by the trust.

In a revocable living trust, the trustmaker serves as the initial sole trustee and is the sole beneficiary of the trust during his or her lifetime.  The trust is considered revocable because it may be amended or revoked by the trustmaker until death.  At death, the trust becomes irrevocable and the successor trustee then manages and disposes of the trust assets according to the provisions of the trust agreement.

For some reason, revocable living trusts have become extremely popular in recent years.  Often, they are marketed as a way to avoid probate and shorten the administration process.  Perhaps in New York, California or Florida they may be a good idea, but in Pennsylvania the situation is different.  Often the associated costs and the process in preparing a revocable living trust may not justify its creation.  So, before you insist on including a revocable living trust as part of your estate plan, it’s important to understand what a revocable living trust can and cannot do.

Do not fear Probate.  In Pennsylvania, probate is not the costly, time consuming nightmare that everyone fears.  Probate is the process by which a Will is proven to be a valid.  The process begins when the person appointed as Executor in a Will appears before the Clerk of the Register of Wills and files the original Will, the death certificate, and a Petition for Grant of Letters Testamentary.  The clerk will examine the documents, confirm the person’s identity and request the soon to be Executor to take an oath of office.  If the paperwork is in order, the process is smooth and can take less than 15 minutes.

Cost of Probate.  Pennsylvania probate fees are based on the size of the probate estate.  The probate estate includes those assets that pass pursuant to the terms of a Will.  Probate assets do not include assets with beneficiary designations such as life insurance policies, 401(k) funds, and IRAs, assets titled jointly, or assets with payable on death or transfer on death designations.  The assets that do pass pursuant to a Will and, therefore, are subject to probate include household personal property, vehicles, non-joint bank accounts, and property titled solely in the name of the decedent.   Once non-probate assets are removed from the calculation, the cost of probate is actually not that expensive.  So, for example, a probate estate ranging in value between $300,001 to $400,000 results in a probate fee of $375.00 as of 2015, which is significantly lower than the cost of preparing a revocable living trust.

Administration Process.  Whether a decedent’s assets pass pursuant to the terms of a Will or a revocable living trust, the administration process takes time and costs money.  The personal representative (trustee or executor) will need to consider the liquidity of the estate, management of the assets, and tax consequences from the sale and distribution of the assets.  As part of an estate administration, whether a revocable living trust or a Will is involved, the representative will likely need to consider:

  • Payment funeral and burial costs
  • Selling or leasing real or personal property
  • Payment for the preparation for the sale of real party, such as cleaning or painting
  • Filing estate and inheritance tax returns
  • Paying creditors
  • Keeping detailed and accurate records
  • Providing notice to the beneficiaries

All these tasks take time.  The administration process cannot be shortened or avoided just by creating a revocable living trust.

Estate, Inheritance and Income Taxes.  A person does not avoid the payment of federal estate taxes, Pennsylvania inheritance taxes, income taxes or any other taxes simply by creating a revocable living trust.  The trustee of the Trust is still responsible for filing the estate and inheritance tax returns and payment of the death taxes associated with those returns.  Planning techniques designed to minimize those taxes are available regardless of whether a revocable living trust or Will is used.

No Asset Protection.  A revocable living trust does not provide protection against creditors or shelter assets from legal claims such as bankruptcy or divorce.  As long as the trustmaker maintains control over the trust property, the law still considers the trustmaker the owner of the trust property.  Examples of control include the ability to amend or terminate the trust at any time.  Control also includes the ability to put property in the trust, take it out, sell it, or give it away at any time with no restrictions.  Since the trustmaker is still considered the legal owner of the trust property, a court can force the termination of the trust and distribution of the trust assets to creditors.

A Living Trust cannot hold all Assets.  A living trust cannot hold all asset types.  For example, accounts such as 401(k)s, IRAs or Roth IRA’s cannot be transferred into a living trust.  These assets can only be owned by an individual, not a business, trust or other entity.  Nor can a revocable living trust own life insurance (the settlor will be deemed the owner at death).  Instead, retirement accounts and life insurance proceeds should be allowed to pass pursuant to their beneficiary designations.  At death, perhaps, the proceeds of these assets can be transferred into a trust, if proper planning techniques are used, but these same techniques are available under a properly drafted Will.

Last Will & Testament.  Even if you have a revocable living trust, a Last Will and Testament is still needed to ensure that all assets are distributed pursuant to the provisions of a living trust.  Unlike a Will, the ownership of assets of a trust are determined by title.  For example, a bank account owned by a trust would be titled under the trust’s name.  An often-overlooked step is assigning tangible personal property (i.e., jewelry, paintings, household furnishings) to a trust.  Since this type of property does not have a written title associated with it, title cannot be transferred to a trust; rather, the property must be assigned.  Another overlooked step is making sure all assets are transferred to the Revocable Living Trust.  If an asset is missed and there is no Will, then Pennsylvania intestate laws are triggered, and that asset will pass pursuant to those laws.

When is a Revocable Living Trust a Good Idea?  A revocable living trust may be a good idea in certain situations.  The first situation arises where an individual owns real estate in another state.  By holding the real estate under a revocable living trust, ancillary probate may be avoided.  But other ramifications should be considered before a transfer is made.  Does the real estate contain a mortgage with a “due on sale” clause?  If so, the transfer of the real estate to a revocable living trust may accelerate the mortgage.  The Garn-St. Germain Act, a federal law, prohibits mortgage acceleration in several situations, including the transfer of residential property containing less than five dwelling units into a revocable living trust.  In addition, keep in mind that once the real estate is transferred into the trust, lenders may not provide new financing while the real estate is held by the trust.  Instead, a person may need to jump through several hurdles to secure new financing, including the transfer of the property out of trust to secure the financing and then the transfer back into the trust once financing is secured.

The second situation arises when a person already has a properly funded revocable living trust.  Usually these individuals are moving from states that have time consuming and expensive probate, such as Florida, California or New York to Pennsylvania.  At that point, it would likely be costlier to unwind the trust rather than amend it.

If you have any questions about living trusts, please contact Mary R. LaSota at (215) 345-8888 or mlasota@highswartz.com. Or contact any of our estate attorneys in Bucks or Montgomery Counties. Our Wills, Trusts & Estates attorneys provide comprehensive legal services to assist in all of these matters.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

The Survivor Takes All… NOT ALWAYS

September 27, 2017

by Mary R. LaSota

Married without a Will in Pennsylvania?  Do you think your surviving spouse will inherit everything?  Think Again.  For those assets that are not disposed of by Will, or by a beneficiary designation (i.e., 401(k), insurance proceeds, IRA) or by survivorship rights (i.e., tenancy by the entirety, joint tenancy with right of survivorship), Pennsylvania’s intestate law determines the person who will receives those assets.

For many married individuals, this may not be an issue because all of your assets are either titled jointly as tenancy by the entirety or joint tenancy with right of survivorship or your spouse is the primary beneficiary of your retirement benefits.  Good for you, you may not have an issue.  But, what if you are the sole owner of real estate? Or what if you own a business?  Or what if you forgot to update your beneficiary designations?  Or what if you are the sole owner of bank accounts or brokerage accounts?  Ooops… without a Will your spouse may not inherit those assets.

Many states, including Pennsylvania, have laws called “intestate laws” that determine who receives your assets and the amount that those people receive.  So for example, if you are married, your surviving spouse does not receive all of your assets.  Instead, the intestate amount may be divided between your spouse and your children or your spouse and your surviving parents.  It all depends on who is living at the time of your death and their relationship to you.

Let’s take a look at the diagram below:

Take a look at the first branch of the chart, the entire intestate estate.   If there are no surviving parents of the deceased spouse and there are no surviving descendants, then the surviving spouse will inherit the entire intestate estate.  A descendant is a person that is direct line to an ancestor, think children, grandchildren, great grandchildren and on forever.

Now let’s look at the middle branch, $30,000 + 1/2 of the intestate estate.   If there are descendants that belong to both the deceased spouse and the surviving spouse, then those descendants are entitled to 1/2 of the remaining intestate estate.  The surviving spouse will receive the first $30,000 of the intestate estate and 1/2 of the balance.  If there are no descendants, but there are surviving parents of the deceased spouse, then the surviving parents will receive 1/2 of the remaining intestate estate.

In the last branch, 1/2 of the intestate estate, if there are descendants and those descendants are only directly in line to the deceased spouse and not directly in line to the surviving spouse, then the surviving spouse will only receive 1/2 of the intestate estate.  The remaining intestate estate will go to those descendants of the deceased spouse.

As you can see the surviving spouse does not always take all.  This is why it is vitally important to have a plan in place that includes a Last Will & Testament.

If you have any questions about wills, please contact Mary R. LaSota, at 215-345-8888 or via email at mlasota@highswartz.com.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Pitfalls of Joint Bank Accounts

March 29, 2017

When you find yourself faced with the task of helping an aging parent with their banking and bill paying, making his or her bank account a joint account may seem like the easy answer.  However, there are several pitfalls that you should be aware of before you or your parent takes this step.   To avoid possible unintended consequences from creating multigenerational joint bank accounts, the interests of the aging parent and the entire family might be better served by arranging for the aging parent to grant you a Power of Attorney to assist with financial matters.

Ownership

Once you place the bank account in joint names, in the eyes of the law, both parties now have full access to the funds in that account.  It does not matter who put the funds into the account, or that the account may have been solely in the name of one of the account owners previously, both joint account holders now have a right to 100% of the account.  A bank would be powerless to stop either of the joint owners from withdrawing all of the funds in the account.

Creditors

If one of the joint owners has creditors, it would place any assets in the joint account at risk of the collection efforts of the creditor.  This could mean that a parent who places an account in joint names with an adult child could face a situation where that child’s creditors are able to take the funds from that account.  This could happen even if the intention of both was to always treat those funds as the parent’s.

Medicaid

Placing an account in joint names can be considered an improper transfer of assets for Medicaid qualification purposes.  In the event one of the joint owners needs to apply for Medicaid, a transfer of a bank account in to joint names could make them ineligible for Medicaid for a period of time.

Estate Planning

Placing an account in joint names could unintentionally disinherit other beneficiaries.  If a parent places their account in joint names with one child, it will change the distribution of the proceeds of that account when that parent passes away.  That account is no longer governed by the parent’s Will.  If the account contains a large portion of the parent’s estate, this could substantially or completely disinherit other children.  This would result in an unintended disproportionate distribution of their estate.

There is a better way

In order to avoid these problems with joint accounts, you and your loved ones should consider creating a Power of Attorney.  By naming an agent under a Power of Attorney, a parent can give an adult child the ability to assist with banking and finances without changing the ownership of their accounts.

You can contact one of our Estate Planning attorneys, to assist you or your loved ones with establishing a Power of Attorney. If you have any questions, please contact us at 215-345-8888 or via email at main@highswartz.com.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.