E-Filing: The Faster & Safer Way to GoWhether or not you are a fan of the electronic age, it is clearthat, as a society, we are moving towards a paperlessenvironment. You only need to open your most recent bank orcredit card statement to find an insert or paragraph asking youto “switch to electronic statements” to see the trend taking place.More individuals are using their debit cards for purchases and/ormaking electronic payments via the internet, instead of a check,and consumer online purchases are at an all-time high.

The federal and state taxing authorities are no exception to thewave of becoming paperless. The Internal Revenue Service (IRS)first launched the e-file program for electronic filing ofindividual returns in 1986, with many states following shortlythereafter. In later years, business returns and tax-exemptorganization returns were added to the program. The 2009Worker, Homeowner, and Business Act expands the e-filerequirement to individual and estate and trust income taxreturns. In the initial year, 25,000 returns were electronically filed. The IRS reports that for the 2008 tax season, over90 million individual returns and nearly 2 million business returns were electronically filed. According to IRS

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A Qualified Personal Residence Trust (QPRT) is an estateplanning technique that allows a person to transfer his orher personal residence, including a vacation home, toyounger family members at a significant gift tax savingswhile retaining the right to live in the residence for aspecified period of time. While this technique works bestwhen interest rates are higher, the current depressed valueof the real estate market could more than offset thedisadvantage of lower interest rates.

In a typical transaction, the Grantor transfers his or herpersonal residence or vacation home to an irrevocable

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Is Your Charity in Compliance with UPMIFA? page 6Windes in the Community page 8Cost of Living Adjustments for 2010 page 8

I N S I D E

Y O U R C ATA LY S T F O R S T R AT E G I E S &

Saving Taxes Starts with Your Home

Outlook for 2010: NewRequirements & Options for

Retirement PlansThe year 2009 has been tumultuous for retirement plans.The precipitous fall of most retirement account balancesfrom late last year through the first part of this year hasbeen countered by a dramatic rise in the stock marketthrough the third quarter. Many sponsoring employershave struggled to meet their traditional level of matchingand discretionary contributions in a difficult economy;yet, surveys show that employees have managed tomaintain their level of salary deferrals to their 401(k)accounts. On the other hand, high unemployment ratesand a general lack of available credit have increased the

E-Filing: The Faster & Safer Way to Go

Outlook for 2010: NewRequirements & Options for

Retirement Plans

Saving Taxes Starts with Your Home

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Commissioner Doug Shulman, “Every year, more people realize that electronic filing is the safe, accurate way for taxpayers tocomplete their taxes and get faster refunds.”

As a matter of practice, our firm began e-filing California individual returns in 2003 and business returns for all of ourCalifornia-based clients for the 2008 tax return season, as well as any state or federal mandated returns. (Note: Californiabusiness returns are not currently mandated.) The following are some frequently asked questions regarding e-filing:

Q: Is my personal information safe when e-filing?A: Yes. Both the federal and state governments employ high-level encryption software to ensure that your personalinformation is safe.

Q: Does e-filing my return increase the likelihood for an audit?A: When a return is paper filed, the information is taken from the return and entered by an employee of the taxing authorityand, thus, is open to human error. E-filing eliminates this step and provides for a more accurate return.

Q: By e-filing my return, will I receive my refund sooner?A: Yes. On average, taxpayers who e-file their returns receive their refund 7-10 days earlier than those who paper file. Thosewho choose direct deposit along with e-file receive their refund even sooner.

Q: What happens if a business taxpayer fails to comply with the federal e-file mandate?A: Any return not in compliance with the e-file requirement will be considered to not have been timely filed and wouldrender any elections invalid. The taxpayer also becomes subject to penalties.

ELECTRONIC PAYMENT REQUIREMENTSIn addition to e-file mandates, many states are beginning to adopt electronic payment requirements for payment of taxliabilities over certain thresholds. On September 20, 2008, Governor Schwarzenegger signed Assembly Bill 1389, adding asection to the California Revenue and Taxation Code that affects many taxpayers. This new law requires individuals, inaddition to previously mandated banks and corporations, to remit all future payments electronically once they:

• make an estimated tax or extension payment (by check or electronic method) over $20,000 for a taxable yearbeginning on or after January 1, 2009; or

• file an original return with a tax liability over $80,000 for a taxable year beginning on or after January 1, 2009.

Fiduciaries, estates, and trusts are not required to make payments electronically, regardless of the amount owed.

The California Franchise Tax Board (FTB) realized that some taxpayers and practitioners needed additional time to implementpractices and procedures to comply with the requirement. Therefore, during the 2009 calendar year, taxpayers subject to themandate were permitted to remit their payment by check instead of electronically without being assessed an “e-pay penalty”(1% of the amount paid). However, taxpayers subject to the mandate during the 2009 calendar year will be required to maketheir payments electronically beginning with payments made after January 1, 2010 or be subject to the 1% penalty. Once ataxpayer meets the mandatory e-pay threshold, they are required to make all future payments electronically, regardless of theamount, type, or taxable year. For example, a taxpayer becomes subject to the mandate during the 2009 calendar year. Anypayment made after that (i.e. a bill payment from a previous year or their 4th quarter estimated tax payment submitted1/15/2010) must be made electronically. When a taxpayer is required to make electronic payments, but pays by other means,they may be assessed a penalty equal to 1% of the amount paid.

Unlike corporations, there is no registration process for individuals subject to the mandatory e-pay law. The tax payment maybe made using one of the following methods:

• Pay online with Web Pay at www.ftb.ca.gov/online/webpay/index.asp.

• Request an Electronic Funds Withdrawal (EFW) on your e-file return.

• Pay by credit card (additional fees may be charged by your credit card company).

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E-FILING: THE FASTER & SAFER WAY TO GO

trust and reserves the right to live in the residence, rent-free, for a specified term (the longer the term, the smaller the annualtaxable gift). The gift takes place at the time the property is transferred into the trust. The value of the gift is determined bysubtracting the actuarially determined value of the Grantor’s retained interest (the term the Grantor is allowed to live in theresidence rent-free) and any contingent reversion the Grantor holds (i.e., if the Grantor does not survive the term, the residencereverts back to his or her estate) from the value of the entire property. The calculation of the taxable gift is based upon anumber of factors, including the fair market value of the property at the time of transfer, the Grantor’s age, the trust term andthe Applicable Federal Rate (AFR) at the date of the transfer. Generally, no gift tax will be payable, although a portion of theGrantor’s maximum unified (estate and gift tax) credit will be used. Transfers to a QPRT do not qualify for the annualexclusion since the Grantor is the only beneficiary during the trust term.

During the term, the Grantor can be the trustee of the trust and will be treated as the owner of the property for income taxpurposes. The Grantor may continue to take a tax deduction for any property taxes and mortgage interest payments made.The trust can also take advantage of favorable income tax treatment allowed to taxpayers on the sale of personal residences. Forexample, if the QPRT sold the residence to a third party, and the residence is the Grantor’s principal residence, the QPRTshould have the benefit of the Section 121 election to exclude $250,000 of gain or $500,000 for married individuals filingjointly. Any gain exceeding the amount excluded would be taxed directly to the Grantor.

At the end of the term, the Grantor can still live in the house but will have to pay a fair market rate of rent to the trustbeneficiaries, who will then be the owners. The net rental payments can accumulate in the trust and be periodically distributedfree of gift tax to the beneficiaries. Upon the death of the Grantor, trust assets are distributed to, or held in trust for, thebeneficiaries. No further gift occurs when the property is distributed to the beneficiaries, regardless of any increase in the valueof the property at that time. The basis of the residence (generally, acquisition cost) transferred to the beneficiaries at the end ofthe trust term is the Grantor’s carryover basis. If the Grantor dies during the term, the value of the property will be includedin the estate and will get a step-up in basis to fair market value at the Grantor’s death. However, the portion of the Grantor’sunified estate and gift tax credit that was used when the initial transfer was made is fully restored.

BENEFITS OF A QPRT• The QPRT allows the gift to be valued at a substantial discount as determined by using actuarial tables published by

the IRS. The value of the gift is equal to the value of the remainder interest, and the value of the gift is furtherreduced if the Grantor retains a contingent reversionary interest (i.e., the residence reverts to the Grantor’s estate orliving trust if the Grantor does not survive the term).

• The amount of the taxable gift is computed based on the equity in the residence at thetime of the transfer. If the Grantor survives the term, all subsequent appreciation isremoved from the Grantor’s estate, thus reducing the estate tax.

• Once the specified term is over, the rental payments paid by the Grantor result in cashtransfers made to family members, which are not applied against the Grantor’s gift taxannual exclusion or maximum unified credit.

• A QPRT may also provide substantial creditor protection for trust assets, provided theGrantor is willing to allow someone else to be the trustee.

If you have questions regarding a QPRT, or would like more information, please contact AmyVaughn at 562-435-1191 or avaughn@windes.com.

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SAVING TAXES STARTS WITH YOUR HOMECONTINUED FROM PAGE 1

Facts: Result:

Age of Grantor 55 Transfer Date 10/2009Value of residence $ 700,000 AFR Rate 3.2%Term 15 years

Taxable Gift $ 357,868**Value of residenceat end of term $1,260,660* Potential estate

tax savings $ 451,396*** assuming 4% growth per year

** determined based on IRS actuarial tables

EXAMPLE

Amy A. Vaughn, JD, CPASenior Manager

Tax & Accounting Services

SAVING TAXES STARTS WITH YOUR HOMECONTINUED FROM PAGE 1

OUTLOOK FOR 2010CONTINUED FROM PAGE 1

number of plan participants willing to tap their retirement savings through taxabledistributions and plan loans. It is time for a look at new concepts and procedurescoming in 2010.

ELECTRONIC FILINGBeginning with the 2009 plan year filings, the Department of Labor (DOL) willrequire all retirement and welfare benefit plans (other than one-participant plans)to file their annual Form 5500 electronically using the EFAST2 system. Theswitch from paper filing to electronic filing will result in significant changes in thefiling procedures for both plan sponsors and third-party administrators (TPAs).

Plan sponsors will have three options for electronic filing of data on the Form5500 and all the required supporting schedules: 1) A private web-based system(e.g., a commercial software forms package), 2) A third-party software application,transmitted to the DOL via internet, or 3) The DOL’s web-based system knownas IFILE. Most employers will use the first system, with the 5500 prepared by theTPA. Large employers who prepare their own Forms 5500 are the most likely toutilize the third-party software. Meanwhile, the IFILE system will have limiteduse by small practitioners who file only a few reports.

Regardless of which system is used, each plan sponsor must obtain an electronic signature to file their report with the DOL.The plan sponsor will need to designate an individual to contact the DOL website and enter certain personal information.The individual will then receive an email with a link to a website to receive the credentials (signer ID and PIN code). Thecredentials are personal to the individual obtaining the credentials. If a plan sponsor has different company officers signing the5500, each officer will be required to obtain his or her own credentials.

It is important to note that neither TPAs nor financial institutions will be allowed to obtain signer credentials on behalf oftheir clients. Furthermore, the government limits one set of credentials per email address. When an individual obtains signercredentials, the individual must certify to the government that the credentials will not be shared with anyone, including a TPAor financial institution. Obviously, these restrictions will require coordination between the plan sponsor and the TPA assistingin the preparation of the Form 5500 package for filing.

403(b) REPORTINGBeginning in 2009, exempt organizations who sponsor 403(b) arrangements will be subject to expanded reporting and auditrequirements. This increased compliance is part of the 2007 regulations and will complicate the administration for manysponsors who previously enjoyed broad exemptions under the existing rules.

403(b) plans that satisfy certain requirements will continue to be exempt from reporting under the new regulations. Generally,this limited exemption applies to arrangements that accept only employee salary deferrals, and where the employer takes a“hands-off ” approach with respect to plan operation or interaction with the annuity providers. While the exemption is still inplace, the new rules that apply to the operation of the plans may make it more difficult to maintain the plans while continuingthe hands-off approach. The DOL has published a bulletin on how employers can comply with the new rules and still meetthe safe harbor exemption to avoid the Form 5500 requirement.

Plan sponsors who fund any level of employer contribution do not meet the exemption. Any such plan sponsor must file acomplete Form 5500 to provide expanded information more like the requirements applicable to 401(k) plans. Up until 2008,all 403(b) plans, regardless of the number of plan participants, were exempt from the general requirement to attach anindependent CPA audit of the plan and trust to their Annual Report. While small plans will continue to enjoy a waiver of theaudit requirement, beginning in 2009, all plans with more than 100 participants will be required to provide the audit as partof their report.

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the filing procedures for

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administrators (TPAs).”

OUTLOOK FOR 2010CONTINUED FROM PAGE 1

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DEFINED BENEFIT/401(k) COMBINATION PLANSBeginning in 2010, employers will be able to adopt a single plan to provide both Defined Benefit (DB) and 401(k) benefits toemployees. Currently, employers wishing to provide such benefits must adopt separate plan documents, perform dualadministration and file two Form 5500 reports. This combined plan was thought to be a great vehicle to provide streamlinedbenefits at a discounted administrative cost. After reviewing the particulars of the regulations governing these new plans,however, their practical use may be limited.

The new DB/401(k) plan will be available to small employers, defined as those having at least two, but no more than 500employees. The plan must have a single trust holding all plan assets, but must distinguish the assets belonging to each portionof the plan. The defined benefit plan can be based on either a traditional or cash balance plan formula. The 401(k) portion ofthe plan must have an automatic contribution provision (employees must defer a minimum 4% of pay) and a required matchequal to 50% of the 401(k) contributions, up to 4% of pay. Profit sharing contributions may also be made but must beprovided on a uniform basis to all participants.

While these plans may work for certain situations, they also have practical limitations that may continue to favor a two-planarrangement. There is currently no plan document available for these combined plans, which will force adopting employers tocreate a “linking agreement” between two plan documents. In addition, it is not clear that these plans can use the same non-discrimination testing methods available to separate plans. This testing issue could greatly hinder their effectiveness in reducingemployer costs, especially for employees closer to retirement. Finally, the requirement for an automatic contributionarrangement subjects the employer to increased notification and contribution requirements that may not be necessary and notrequired in a separate plan arrangement.

ROTH CONVERSIONSRoth IRA accounts were first created by the Taxpayer Relief Act of 1997. These accounts allow eligible individuals to contributeafter-tax dollars to an IRA, rather than the before tax dollars used to fund a traditional IRA. The account will grow tax free,and, assuming the account is not cashed in before five years, the account proceeds, including the growth, will never be taxed.The availability of these accounts has been restricted to taxpayers below certain income levels. The income limitation fortaxpayers in 2008 was $100,000.

Beginning in 2010, the income restrictions have been eliminated, which will allow all taxpayers to not only contribute to Rothplans, but also to convert all or part of an existing traditional IRA to a Roth IRA account. A conversion will result in taxationof the traditional IRA account; however, the taxpayer has the option of either paying all the tax in 2010 or spreading the taximpact over the 2011 and 2012 tax years. Once converted, the traditional IRA will be subject to all of the regulations applicableto Roth IRA accounts, and will never be taxed again.

These accounts may provide some unique income tax and estate planning opportunities for wealthier individuals who havesubstantial IRA accounts and who can absorb the taxable income resulting from the conversion. Roth accounts are not subjectto minimum distribution requirements, so the account capital can be preserved after the attainment of age 70-½. Since Rothaccounts are never taxed, they have advantages in estate planning and generation-skipping strategies.

CONCLUSIONThe year 2010 should be busy for retirement plans. Besides the items mentioned above, all definedcontribution plans are in the process of being amended and restated for the Economic Growth andTax Relief Reconciliation Act of 2001 (EGTRRA), and 403(b) plan sponsors are required to adopt aplan document for the first time. This is an ideal time to re-visit your plan design in light of thesemany changes.

If you have questions regarding your retirement, or would like more information, please contactRichard Green at 562-435-1191 or rgreen@windes.com. Richard L. Green, CPC, APA

PartnerEmployee Benefit Services

IS YOUR CHARITY IN COMPLIANCE WITH UPMIFA?

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The Uniform Prudent Management of Institutional Funds Act (UPMIFA) becameeffective in California on January 1, 2009. UPMIFA is designed to impact charities bystrengthening the rules governing management and investment decision-making bycharities and provides more guidance for those who manage and invest the funds;providing guidance for setting endowment spending policies to assist organizations inprotecting the purchasing power of endowment funds; and updating provisionsgoverning the release and modification of restrictions on endowment funds to permitmore efficient management of these funds. In this initial year of adoption, charitableorganizations should review their current policies and practices to ensure that they arein compliance with UPMIFA.

PRUDENT INVESTINGUPMIFA replaces an act that had existed for nearly 40 years. As a result, it is likelythat most organizations with endowments will have outdated investment policies.Boards, and, in particular, finance and investment committees, should review theirinvestment policies and may need to seek legal or investment counsel to ensurecompliance with UPMIFA.

In making decisions on the investment of assets, UPMIFA directs charitable organizations to take the following seven factorsinto account:

1. General economic conditions.

2. Possible effects of inflation.

3. Potential tax consequences of particular investments.

4. The role of each investment in the context of the entire portfolio.

5. Total realized and projected current return and capital appreciation.

6. Availability of other resources of the charity to meet projected budgetary requirements.

7. The charity’s projected need for distributions from investment assets to meet current and projected operationalrequirements.

These considerations should be addressed in investment policies. Many charitable organization boards choose to engage aninvestment advisor to assist them in meeting their fiduciary responsibilities. Investment management may be delegated. Guidanceprovided by UPMIFA suggests boards ensure that they meet regularly with their advisors to review performance against UPMIFAstandards and investment policies established by the organization in order to provide effective board oversight.

ENDOWMENT SPENDINGEndowment spending policies should also be reviewed by organizations to ensure that they are compliant with UPMIFA. Inthe absence of specific spending instructions established by the donor in their gift instrument, UPMIFA provides guidancefor prudent endowment spending. California’s enacted version of UPMIFA creates a spending limitation by indicating thatspending in excess of 7% of the fair market value of an endowment fund (averaged over the last three years) is consideredpresumptively imprudent. However, this is not a safe harbor provision. Organizations should review their spending policiesto ensure that earnings from an endowment fund are appropriately allocated between current spending and reinvestment withthe goal of maintaining or enhancing the endowment fund’s purchasing power. Guidance provided by UPMIFA indicatesthat charities should consider, if relevant, the following factors when determining amounts to appropriate for expenditure:

• The duration and preservation of the endowment fund.

• The purposes of the institution and the endowment fund.

• General economic conditions. CONTINUED �

IS YOUR CHARITY IN COMPLIANCE WITH UPMIFA?

• The possible effect of inflation or deflation.

• The expected total return from income and the appreciation of investments.

• Other resources of the institution.

• The investment policy of the institution.

RELEASE AND MODIFICATIONMany charitable organizations are faced with the challenge of effectively managing endowment funds that have beendesignated for purposes that may no longer be applicable. For endowment funds that have been held more than 20 years andthat are under $100,000, California’s version of UPMIFA allows charities to modify or release restrictions on the fund withnotice to the Attorney General’s office.

IMPACT ON ACCOUNTING AND FINANCIAL REPORTINGRecent accounting guidance issued by the Financial Accounting Standards Board in the wake ofUPMIFA has changed the way organizations must account for their endowments. Additionally,required footnote disclosures in financial statements have been significantly expanded tocommunicate information regarding an organization’s investment policies, spending policies, andother qualitative aspects in regard to endowment funds. As such, charitable organizations willwant to ensure their policies and procedures are reviewed by their boards, or investment andaudit committees, as applicable, for compliance with UPMIFA prior to preparing their financialstatements for 2009.

For additional information on the provisions of UPMIFA and its effect on accounting incharitable organizations, please contact Lance Adams at (562) 435-1191 orladams@windes.com.

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Lance G. Adams, CPAPartner

Audit & Assurance Services

E-FILING: THE FASTER & SAFER WAY TO GOCONTINUED FROM PAGE 2

A pay-by-phone option is now available. Be aware that making a payment using your bank’s online bill payment system is notconsidered an electronic payment. In this case, your bank mails a paper check to the FTB, which does not meet therequirement to pay electronically.

ADVANTAGES OF ELECTRONIC PAYMENTEven if you are not required to make electronic payments, you can still take advantage of payingyour personal income taxes online. Some of the advantages are:

• Pre-schedule your tax payment for April 15.

• Ensure that the Franchise Tax Board receives your payment on time and receiveconfirmation.

• Schedule your estimated tax payments for the entire year at one time.

If you have questions regarding e-file or e-pay, or would like more information, please contactDani Blair at 562-435-1191 or dblair@windes.com.

Dani BlairManager

Tax & Accounting Services

E-FILING: THE FASTER & SAFER WAY TO GOCONTINUED FROM PAGE 2

P A G E 8

Member of:American Institute of Certified PublicAccountants (AICPA)

California Society of Certified PublicAccountants (CalCPA)

Center for Public Company Audit Firmsof the AICPA

Public Company Accounting OversightBoard (PCAOB) Registered

SOLUTIONSEditorRonald C. Kulek, CPA

©2009 Windes & McClaughry.All rights reserved.

Editorial BoardCarolyn K. De BacaDolores M. HernandezKeith K. Higgins Craig M. ImaSuzy B. MeyerBella P. Wang, CPA

SOLUTIONS is publishedquarterly for the clients,business associates, andfriends of Windes &McClaughry AccountancyCorporation. The infor-mation presented in thisnewsletter is intended asgeneral information andmay not apply in every case.Please contact Windes &McClaughry for specificadvice about your particularsituation.

LONG BEACH OFFICE

Landmark Square • 111 West Ocean Boulevard Twenty-Second Floor • Long Beach, CA 90802Post Office Box 87 • Long Beach, CA 90801-0087Telephone: (562) 435-1191 • FAX: (562) 495-1665

IRVINE OFFICE

Von Karman Towers • 18201 Von Karman AvenueSuite 1060 • Irvine, CA 92612Telephone: (949) 271-2600 • FAX: (949) 660-5681

Comments Email: solutions@windes.com

Windes Supports theLong Beach Marathon

WINDES IN THE COMMUNITY

Maximum Compensation $ 245,000Maximum Contribution Limit $ 49,000401(k) Annual Limit $ 16,500SIMPLE Retirement Accounts $ 11,500457/403(b) Plans $ 16,500

Defined Benefit Annual Limit $ 195,000Covered Compensation Limits-Social Security $ 106,800Catch-up Contributions $ 5,500Catch-up Contributions to Simple 401(k) $ 2,500Highly Compensated Employee $ 110,000

The Internal Revenue Service announced the cost-of-living adjustments applicable to dollar limitations for pension plans anddefined contribution plans for the tax year 2010. All limits are unchanged from 2009.

COST OF LIVING ADJUSTMENTS FOR 2010

WINDES IN THE COMMUNITY

Windes Supports theLong Beach Marathon

At the heart of Windes & McClaughry’s (W&M)mission and vision lie our core V.A.L.U.E.S.The “V” stands for, “value people first,” and the“S” represents serving our communities. Top tobottom, we firmly believe in and live thesevalues. Pictured here is a team of our peopleputting these values into action. Led by JimCordova (partner and tax department chair),who is a member of the New Hope GriefSupport Community’s Long Beach Marathoncommittee, our team of W&M volunteers has donated their time, energy, and smiles to this worthy charitable cause during one ofthe largest annual community events in the city - The Long Beach City Marathon. The event was originally formed to allownonprofit organizations a platform to fundraise and bring awareness to their respective charitable causes. Our volunteers haveteamed up with New Hope Grief Support Community (a nonprofit organization) for the fourth consecutive year to support theircause. Their charge for the day was to arrive well before dawn on race day, set up water stations for the race, and keep the raceparticipants safe, hydrated, motivated, and appreciated. After a long, but fulfilling day of helping to raise this charity over $15,000to continue their charitable cause, it is safe for this group to say, “mission accomplished.”