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Archive for the 'Estate Planning' Category

Single Member LLCs Might Not Offer Asset Protection

Posted by Robert Louis on 20 Jul 2010 | Tagged as: Estate Planning

The Florida Supreme Court has just issued an opinion denying asset protection for single member LLCs. We’ll write more about this later, but it points up the importance of thinking about protecting the wealth you have accumulated.

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Federal Rates Fall Again: Great For Planning

Posted by Robert Louis on 20 Jul 2010 | Tagged as: Estate Planning

The IRS has just announced that the applicable federal rate under Code Section 7520 will fall to 2.6% in August, down from 2.8% in July and 3.2% in June. These very low rates make certain planning and wealth transmission techniques far more effective. For example, the use of grantor retained annuity trusts (GRATs) is far more effective when interest rates are lower. This means that larger amounts can be transferred to succeeding generations= more efficient estate planning.

In addition, low interest rates mean that intra-family loans are more effective. For example, under the August rates, you can lend to a child, for example, for a term of less than three years at annual rate of just .53% per year. The child can then invest the money and keep the difference in rates. This is a way of transferring wealth without using annual gift tax exclusions or lifetime exemptions.

Combined with the continued low values in many assets, these low interest rates make this an ideal time for estate planning.

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Is it possible?

Posted by Robert Louis on 25 Jun 2010 | Tagged as: Estate Planning, Income Tax

Is it possible that Congress will do nothing for the rest of the year to restore the federal estate tax? Given the other items on its agenda, and the fact that this is an election year, it’s very possible. But then what? At the end of the year, the so-called Bush tax cuts expire. That means that the estate tax will return, at its earlier rates and exemption level: a maximum graduated rate up to 55% and an exemption of only $1,000,000 (as compared to the $3,500,000 that was in effect in 2009). Many more people will be subject to federal estate tax, and that will affect the planning they should be doing now.

In addition, the lower income tax rates that were in effect will expire. Capital gains rates will return to their prior, higher levels, and regular income tax rates will also rise. Congress has the ability to extend the lower rates, but it must take some action to do that. And we have seen that on tax issues, it’s difficult to get changes enacted. What if Congress does nothing, or if efforts to extend the lower tax rates fail? Higher taxes. It’s probably a good idea to start planning with respect to income taxes now, in anticipation of eventual higher tax rates: possibly postponing deductions to next year and accelerating income into this year. All of this could change, but it’s probably wiser to assume that nothing will happen.

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Federal interest rates used in valuing transfers fall again

Posted by Robert Louis on 18 Jun 2010 | Tagged as: Estate Planning

The IRS has announced the rates of interest used in valuing gifts and other transfers for the month of July, and they have fallen again. This means that transfers to the next generation can be made at a lower cost in gift tax exemption. But here’s something else affected by these lower rates: intra-family loans. An individual can lend money to a child or grandchild, for example, for a period up to just under three years, and charge interest at the rate of .61%. That means that a loan at that rate will not be considered a gift. How does this work? The person who receives the loan invests the money and earns some rate of return. To the extent that the rate exceeds the required loan rate of .61%, the borrower gets to keep the difference, and that can be substantial if the loan is big enough. The difference is not considered a gift to the borrower, which makes the intra-family loan an effective technique of transferring assets without worrying about the gift limitations in the Internal Revenue Code.

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Congress is about to do something, eventually

Posted by Robert Louis on 18 Jun 2010 | Tagged as: Estate Planning, Family Business

A bill has passed the U.S. House making changes in grantor retained annuity trusts (GRATs). The bill would require that GRATs have a term of at least ten years, and would eliminate the zeroed out GRAT. These changes would make GRAT planning a little less advantageous, although transfers of wealth involving GRATs remain an excellent method of minimizing taxes. They are particularly helpful in transferring closely held business interests. With the right kind of assets, GRATs are a valuable planning technique. The change in the law hasn’t been acted upon yet by the U. S. Senate, and they might delay for some time yet. The changes are to take effect when the bill is signed into law, so there is still time to do some effective planning under the existing rules. And, even if the changes are made, GRATs remain a technique to consider in transferring assets while “holding on to them” for a while.

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

In Lieu of a Tax Refund, a Chevy Nova

by Robert H. Louis

OK, that’s not part of the President’s tax proposals, at least not yet.

The Obama Administration has released some of its tax proposals and, under the rubric of closing “sort of” loopholes, there is a suggestion that grantor retained annuity trusts (GRATs) must have a minimum length of ten years. GRATs of two years’ duration had become popular, as a technique that improves on the benefits of longer term GRATs, and commentators had suggested that even greater benefits could be obtained with very short term GRATs. GRATs are a useful technique for transferring wealth, but some in Washington apparently thought the technique was being pushed beyond its intended level of tax benefit. Similarly, a proposal has been made to limit the kinds of discounts that may be obtained in transfers to family limited partnerships (FLPs). FLPs are also a popular transfer technique, and an important part of the value proposition is the reduction in value that results from restrictive provisions in the partnership agreements. Again, it is apparently someone’s view that discounts based on provisions of the partnership agreements are not always supported by reality.

These views, of course, were not formulated since January 20, 2009. They have been percolating in Washington for years, and represent the tension between those who want to push the envelope of tax planning techniques and those who view most tax planning as somehow unfair or undemocratic. When these proposals are taken up in earnest later in the year, there might be additional restrictions placed on planning techniques. In fact, that’s just about certain to happen. For now, the proposals being made are stated to become effective on enactment. It is possible for changes to be made retroactive to the beginning of the legislative session but, for now, that’s not the stated intent. For that reason, there is now a flurry of planning taking place.

One item that Congress still hasn’t taken care of is the federal estate tax or, as PR hacks like to call it, the death tax. Under the current law, the exemption from tax is $3,500,000 and the tax rate is 45%. In 2010, the tax disappears, but for one year only, then comes back in 2011 with a graduated rate up to 55% and an exemption reduced to $1,000,000. The Administration has proposed continuing the 45% rate and the $3,500,000 exemption indefinitely, but attention seems about to turn to the health care reform bill, with the hope that a bill will be passed by October 1. Will this effort, on top of the variety of other issues now before Congress, including one or two wars, a Supreme Court nomination and the financial crisis, give adequate time to amend the estate tax law by the end of the year? As noted above, Congress could make the change next year and have it retroactive to January 1, 2010, but that would only add more uncertainty to what is becoming an uncertain federal tax system.

The next six months are likely to see significant changes in how we and our clients are taxed, as well as how we receive and pay for health care. It’s not too early to think about a moon roof with that tax refund.

(from the Legal Intelligencer)

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

LET’S TAKE GRAMPA ON A ROLLER COASTER

By Robert H. Louis

Some fun, eh, Grampa? Grampa?…

We are now within a few months of the effective date of perhaps the craziest tax scheme ever passed by Congress (although there are many competitors for that title). Beginning January 1, 2010, there will be no federal estate tax due with respect to decedents dying on or after that date, until the end of the year. Then, when 2011 arrives, the tax is reinstated, but the exemption falls back to $1,000,000 and the maximum rate rises to 55%. So, under the current tax scheme, people who die next year will, in some sense, be performing a selfless financial act for their families. Or, as suggested by the title, they might be encouraged.

It sounds funny, but that’s the method of taxation passed by the Congress and signed by the President in 2001. Everyone assumed that the law would be changed long before 2010, but that date is fast approaching. All that needs to happen for this bizarre tax situation to come into effect is that the Congress does nothing. And, as we have seen, that’s one of their specialties.

Numerous proposals have been made to remedy this situation. Those proposals include: reducing the exemption to $2,000,000 for an indefinite period; increasing the exemption to $5,000,000; allowing a surviving spouse to use any portion of the exemption not used at the first death; and re-unifying the estate and gift taxes, so that people could give away the full amount of the estate tax exemption during life, rather than being limited to $1,000,000. The President has recommended making the $3,500,000 exemption and 45% rate apply for 2010 and future years.

It’s still very likely that the law will be changed by December 31. In the meantime, the only sensible planning assumption can be that the tax will remain in effect, and probably with the exemption and rate now in effect. But, while we’re waiting to see what happens, this is an ideal time to do lifetime planning. Interest rates used by the IRS in valuing various kinds of transfers remain low, and asset values have also remained at low levels. For those interested in transferring homes or businesses, this is the time to act.

(from the Legal Intelligencer)

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

It’s A Holiday Miracle

By Robert H. Louis

Congress has fallen below even the lowest expectations of tax practitioners. It’s like a (bad) dream come true.

For the past eight years, I’ve been describing our estate tax system to clients: we’ll have gradually lowering rates, and the exemption will eventually rise to $3,500,000. Then, if you can believe it, there will be one year, 2010, when the tax will disappear. The next year, the tax will reappear, at the higher rates and lower exemption that existed before the law was changed. Then, I would explain that Congress would of course have to fix the law because that made no sense. We would laugh and I would send them a bill.

But time passed and the law wasn’t fixed. Congress flirted with repeal of the estate tax, but never reached that point. It was assumed that they would do something to avoid this strange sequence of tax law changes, which originated in artificial budget constraints. There was some continued grumbling about repeal, mostly from people trying to get the attention of wealthy donors. Earlier in this month, it appeared that there would be a one year extension of the current law ($3,500,000 exemption, 45% tax rate), then maybe an extension of a few months. Now, the effort to extend the law has been abandoned for the year, and the estate tax is scheduled to be reduced to zero in 2010.

Leaders in Congress promise that the law will be changed early in the year. But that means that the law would have to be amended retroactively to the first of the year. Otherwise, the lucky people who die in the first week (or actually their families) would have a windfall for no particular reason. Congress has the power to pass tax laws on a retroactive basis, at least back to the beginning of the year, but every time this happens, there are lawsuits, and we can expect those again (“Grampa died with a smile, knowing we wouldn’t owe any estate tax”), but it’s likely that a retroactive change would be upheld.

The absence of an estate tax in 2010 has another consequence. Under the current law, when someone dies, his or her assets are stepped up in basis to their date of death value, which is a valuable tax benefit. Without an estate tax, assets won’t be stepped up. Instead, those who inherit will carry over the basis the decedent had, which will add to the complexity of the tax law administration and increase tax liabilities on the heirs, in many cases more than the estate tax would have done. When carryover basis was added to the law in the 70s, it was so complicated that it had to be repealed. Let’s hope that a new year will bring a resolution of this problem.

(from the Legal Intelligencer)

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

Congress Finally Abandons Common Sense

by Robert H. Louis

Perhaps the only surprise is that someone thought they had common sense.

In the week since the dawning of the (temporarily) estate tax free world, it has now been suggested that Congress will not try to reenact the federal estate tax retroactive to the beginning of the year. There was considerable uncertainty expressed as to whether Congress could do such a thing. If they did so, there would surely be litigation challenging such action, and that would have resulted in delay in settling estates. The effect of leaving the estate tax in abeyance for a period of time, which might continue for the entire year, is that anyone dying during the period would have no estate tax assessed on his or her estate. Of course, very few people have enough assets to be subject to the estate tax, under the $3,500,000 exemption in effect in 2009. But the news for families of those who die during the lacuna period is not all good, because of the carryover basis problem.

If the assets of a decedent are not subject to estate tax, then the basis of those assets is not automatically stepped up to date of death value. There’s an exception to this rule, as there is to everything in the Internal Revenue Code. A certain amount of assets may be stepped, more if they pass to a surviving spouse. But this requires additional work to determine which assets should be chosen for stepup. And for those assets not stepped up, it will be necessary to keep records of the basis of the asset when it was owned by the decedent. That could be difficult for assets acquired by the decedent many years earlier. And it has the tax effect of subjecting those assets to capital gains tax upon sale that would have been avoided if all assets had been stepped up to date of death value.

But there’s another wrinkle. Many wills that were written based on the existence of the federal estate tax might not work as intended if there is no such tax in effect. For example, many wills have been written in this way: give my surviving spouse the smallest amount necessary to reduce the estate tax as low as possible, and the balance to a trust for my family. When the tax was in effect, that meant that the exemption amount would go into the trust, and the balance would pass to the spouse, outright or in another trust. But now, the amount that must pass to the trust to minimize estate taxes is zero, so nothing would be allocated to the spouse. The spouse might benefit from the remaining trust, but only if the will is written so that the spouse might benefit from that trust, and not all wills are so written, particularly those where there is a second marriage. So this change in the will might result in estate plans not working as intended, possibly leading to surviving spouse electing to take a statutory share in lieu of the will provisions. And lawyers may be called to account if they haven’t advised clients of the effect of the change in the law, and the possibility of amending wills to correct the problem. Our firm has been contacted by our insurance carrier to advise us of our responsibilities toward clients as a result of the lapse in the tax. So the failure to extend the tax has possible effects beyond the simple freedom from estate tax for those who die before the tax is reimposed.

(from the Legal Intelligencer)

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Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

Another Possible Solution To Estate Tax Problem

By Robert H. Louis

Very recent discussions in Washington have resulted in a proposal that resolves the estate tax issue and avoids litigation on constitutionality.

Congress is expected to reenact the estate tax at some point, although the exact date is unclear. Some commentators have suggested that no action may be taken in all of 2010, which would result, under the law enacted in 2001, in a return to a graduated tax system with rates up to 55% and a $1,000,000 exemption.

But here is a proposal that is being discussed by some Democrats in DC: the estate tax would be reenacted through 2011 with a 45% rate and a $3,500,000 exemption. But for those who died between January 1, 2010 and the date the new law is passed, there would be a choice: you could be taxed under the reenacted law (45%, $3,500,000) or you could pay no estate tax and have carryover basis for the assets owned by the decedent; that is, there would be no stepup in basis at death. Thus, for those decedents, there could be a determination of which taxation method produces less tax and less complexity.

That idea seems to avoid the possibility of litigation challenging the retroactive enactment of the estate tax. If the tax is simply reenacted in a few weeks, retroactive to January 1, there is sure to be litigation challenging its constitutionality, and the outcome is not clear. Further, such litigation could drag on for years, resulting in uncertainty as to how estates are to be administered for a long period of time. The option technique permits decedents’ representatives to choose how to be taxed, so they would have nothing to complain about.

(from the Legal Intelligencer)

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Archive for the 'Estate Planning' Category

Single Member LLCs Might Not Offer Asset Protection

Federal Rates Fall Again: Great For Planning

Is it possible?

Federal interest rates used in valuing transfers fall again

Congress is about to do something, eventually

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