Dedon on Estate Planning

Say It Ain't So, Congress

2009-12-21T07:24:02-08:00

Incredibly, it now appears Congress will adjourn without passing estate tax legislation, meaning there will be no estate tax imposed on individuals who die in 2010. However, the bad news is that, for 2011 forward, exemption amounts are only $1 million with maximum tax rates of 55 percent.

There was hope when the House passed a Bill extending the current $3.5 million exemption amount ($7 million for married couples who properly plan). However, it is now unlikely the Senate can reach agreement. Several Senators believe the exemption amount should be increased and estate tax rates should be reduced. Many were hopeful that the two sides would compromise – those wanting repeal would allow estate tax in 2010 in exchange for an increased exemption amount in 2011 forward. However, if compromise will happen, it may not happen until 2010.

Assuming Congress does not address estate tax reform until 2010, several issues arise. Presumably, any legislation would be retroactive, thereby inviting litigation from wealthy estates whose decedents passed away between January 1 and new legislation. Congressional leaders are considering issuing a public "letter of intent" that would indicate Congress’ willingness to address the issue next year (for whatever that’s worth). Second, if there is no estate tax, is it more difficult for members facing re-election to vote for a "new" tax? If so, does reaching a rationale solution to the problem become more difficult, meaning there is one year with no tax and subsequent years with only a $1 million exemption.

Finally, one issue not widely discussed if the estate tax is repealed is the elimination of the step-up in basis on inherited assets. In short, a capital gain tax would replace the estate tax on inherited assets. According to the Center for Budget and Policy Priorities, a think tank, these new taxes could affect many families that are now protected under current law. Ironically, those taxpayers hurt most would be the small businesses that need estate tax relief the most.

Federal Estate Tax Changes

2009-12-07T06:37:11-08:00

Finally, some progress in providing certainty to the uncertain estate tax law. On December 3, the House passed a bill to make permanent a $3.5 million exemption amount. Absent new law passed by this Congress, the estate tax will disappear in 2010 only to return with a vengeance in 2011 with a relatively small $1 million exemption amount.

Interestingly, the House Bill was passed despite opposition from both the most conservative and liberal members: conservatives who believe the estate tax should be repealed because a 45% tax rate on estates above $3.5 million ($7 million for a married couple) is confiscatory, and liberals who believe the "rich" should be paying more. Thus, many House Members who do not believe $3.5 is the perfect amount nevertheless saw the Bill as the best compromise to address a looming problem. As Ways and Means Chairman Charles Rangel said, the Bill is the "best possible arrangement so people will know what to expect as it relates to the estate tax."

However, it is still uncertain whether the Bill will become law, with the Senate having a full plate over the next couple of weeks before adjournment. Even assuming the Senate addresses the legislation, it will again be examined by those Senators wanting greater protection from estate tax and those wanting even a lower exemption amount. Notwithstanding, most expect the House Bill to become law. Other possibilities include an exemption amount as high as $5 million, lower tax rates than 45%, and perhaps an exemption amount indexed for inflation.

We should at least know soon.

Asset Protection For Business Owners

2009-12-02T09:40:34-08:00

See the attached article below published on December 2, 2009 in Virginia Business Magazine on asset protection for business owners.

Wednesday, December 2, 2009

Virginia Business

Asset protection for business owners in uncertain times

December 02, 2009 11:30 AM
John Dedon

Many business owners face a number of issues unrelated to revenue and expenses. One pressing concern is the threat to the business from liability claims. If you are selling a product or providing a service, the danger that you may be the target of a products liability or negligence claim is a reality of doing business. The business could be selling automobiles, landscaping, real estate development or property management, customers in a store. It does not matter because the concern is the same: if I am sued am I personally at risk, and is my business at risk?

Checklist of protection steps

Here is a checklist of basic safeguards all business owners should have in mind:

1. Do you have sufficient liability insurance in amount and in scope of coverage?

2. Are you aware of the various statutes of limitations that may protect you from various claims?

3. Do you operate as a corporation or LLC so that you are protected personally? Thus, liability would be limited to the entity, not its shareholders, officers or directors. This assumes you observe the corporate formalities so that a plaintiff could not “pierce the corporate veil.“

4. If the corporate veil was pierced, perhaps the stock is owned in a Trust or separate entity so that you are not personally liable as the shareholder.

5. If you operate as an S corporation or an LLC, do you pay out most or all of the earnings to the owners so that, if liability is limited to the entity, there are not significant assets at risk?

6. If there are various business activities (e.g., real estate holdings, real estate management, and real estate sales) do you maintain LLC’s or Corporation’s for each business to segregate liability?

7. If somehow personal liability attaches to the owners, officers, or directors, have you titled and positioned your personal assets so that the personal assets are protected? These personal steps could include tenants by the entirety, trusts, or entities that receive the protection of charging orders. For more information on these personal steps, see below.

Personal liability protection

If you are a professional you may be subject to personal liability for negligence claims regardless of the entity you create. Alternatively, any business owner who fails to take the necessary steps to ensure the corporation or LLC entity is respected can be liable if the plaintiff or creditor “pierces the corporate veil.” In either of these events, you may be personally liable. In the case of personal liability, what steps can you take to protect yourself short of a bankruptcy filing?

Here are some fundamental planning considerations:

1) Assuming you are married, are your assets titled “tenants by the entirety” with your spouse? Many states, such as Virginia, protect assets from claims against only one spouse if the assets are jointly titled with the spouse. One negative of titling assets “tenants by the entirety” is that it may not be desirable for estate planning purposes.

2) Have you irrevocably transferred assets to trusts with an independent trustee for beneficiaries, such as your children? In this event, if a claim later arose after the transfer the assets in trust would be protected. Some states, such as Delaware, offer additional asset protection if a Delaware irrevocable trust is created and managed by a Delaware Trustee.

3) Are you using LLCs or family limited partnerships with several members or partners so that, if you are sued, the remedy is a “charging order. “ A charging order precludes the creditor from attaching the assets or your ownership interest.

Of course, if you transfer assets after a claim or judgment arises, none of these transfers would be protected if the plaintiff can prove a “fraudulent conveyance.” A fraudulent conveyance refers to a transfer that renders you insolvent or that is done with the intent to delay, defraud or hinder creditors. Therefore, the protective planning described above is best accomplished and mostly likely to succeed if done before any known or potential claims exist. If the planning is part of a comprehensive estate plan it further enhances the likelihood of success.

John P. Dedon is a principal in the firm with the Trust, Estate & Tax Planning practice group of Odin, Feldman & Pittleman. Dedon blogs about estate planning issues for Virginians and U.S. citizens at dedonestateplanning.typepad.com

Protecting Business Owners From Creditors

2009-11-23T13:15:10-08:00

Many business owners face a number of issues unrelated to revenue and expenses. One pressing concern for many business owners is the threat to the business from liability claims. If you are selling a product or providing a service, the danger that you may be the target of a products liability or negligence claim is a reality of doing business. The business could be selling automobiles, landscaping, real estate development or property management, customers in a store - it does not matter because the concern is the same: if I am sued am I personally at risk, and is my business at risk?

Here is a checklist of basic safeguards all business owners should have in mind:

Do you have sufficient liability insurance in amount and in scope of coverage?

Are you aware of the various statute of limitations that may protect you from various claims?

Do you operate as a corporation or LLC so that you are protected personally? Thus, liability would be limited to the entity, not its shareholders, officers or directors. This assumes you observe the corporate formalities so that a plaintiff could not "pierce the corporate veil."

If the corporate veil was pierced, perhaps the stock is owned in a Trust or separate entity so that you are not personally liable as the shareholder.

If you operate as an S corporation or an LLC, do you pay out most or all of the earnings to the owners so that, if liability is limited to the entity, there are not significant assets at risk?

If there are various business activities (e.g., real estate holdings, real estate management, real estate sales) do you maintain LLC's or Corporation's for each business to segregate liability?

If somehow personal liability attaches to the owners, officers or directors, have you titled and positioned your personal assets so that the personal assets are protected? These personal steps could include tenants by the entirety, trusts, or entities that receive the protection of charging orders.

Each topic in this list could lead to a discussion in and of itself, but this is a good starting point.

Life Insurance

2009-11-09T15:27:08-08:00

Many clients rely on life insurance as part of their estate plan. Indeed, for clients with taxable estates, it is difficult to plan without using life insurance to pay estate taxes. Life insurance is particularly important if the assets are illiquid, such as real estate or a closely held business, and the estate tax needs to be paid within nine months of death.

Life insurance can be purchased so that the entire amount of the death benefit is received by the beneficiaries estate tax free. For example, under current law, if a husband and wife have assets worth $7 million exclusive of life insurance, and they have a $3 million life insurance policy in an irrevocable trust, the children receive $10 million estate tax free. This assumes the assets are positioned properly to take advantage of each spouse's $3.5 million exemption and the irrevocable trust is the original owner of the policy.

When creating an irrevocable trust, several complicated issues arise that are the Trustee's responsibility. If the Trustee is a family member unfamiliar with the legalities of irrevocable trusts, professional guidance is necessary. Issues relevant to the Trustee include (1) is a Trust account opened by the Trustee to receive premium payments; (2) assuming the grantor pays the premium, is the payment protected by the annual exclusion; (3) the answer to (2) above often depends on whether "Crummey letters" have been prepared, qualifying the premium payment for the annual exclusion.

The Trustee also is responsible for making sure the policy is performing properly, e.g., are the policy assumptions pertaining to interest and mortality rates appropriate? Also, the Trustee must determine if the insurance carrier is still a strong company.

Using an Irrevocable Trust to own life insurance provides significant advantages. However, the advantages come with some complication; namely, choosing the right Trustee. If the Trustee is not an institution or professional, the Trustee must know where to turn for help in dealing with a myriad of issues.