There are traditionally three phases of estate planning. I refer to these phases as Core, Legacy and Stewardship.
The foundation of most Georgia estate plans is a Will. Your Will is the legal document that dictates how your probate assets are distributed upon your death. But what are your probate assets? The easiest way to answer this question is to first define non-probate assets.
Non-probate assets are assets that pass outside of the probate estate to a named beneficiary (or beneficiaries) and independently of your Will. These are assets that pass by operation of law or under the terms of a contract.
Not only has the IRS threatened to change the rules of valuing gifts, which will have a significant impact on many estate planning techniques used over the last several decades, the presidential elections will have a huge impact over whether the estate and gift tax law survives, or becomes extremely more expensive and complicated.
After an agonizing wait, the IRS issued Proposed Regulations on August 4th that will eliminate many of the valuation discounts applicable for family-owned businesses and wealth in general. These new rules will become effective thirty days after publication of final regulations, which are expected in the next 12 months.
That means gifts prior to the effective date of the regulations may continue taking into account all applicable valuation discounts and used over the last several decades, and those family business owners who postpone these estate planning techniques of transferring wealth to trusts for future generations will be hurt economically under the new rules. While we do not know for sure what the final regulations will say, the question is obvious, is any further postponement worth the risk?
Additionally, there is a substantial difference between the two presidential candidates’ tax policy proposals, particularly relating to the estate and gift tax. Donald Trump proposes to eliminate the estate and gift tax. Mrs. Clinton, however, proposes to reduce the estate tax exemption (which will be $5,490,000 in 2017) to $3,500,000 (per person) with no adjustment for inflation. She proposes to reduce the lifetime gift tax exemption from $5,490,000 (2017) to $1,000,000, with no adjustment for inflation.
This situation is reminiscent of the concern in 2012 when we feared the exemptions may go from $3,500,000 to $1,000,000. Many clients scurried to take advantage of estate and gift tax advantages before year-end. Those clients, by the way, are generally laughing all the way to the bank as not only have they moved significant wealth out of the gift tax system, but the statute of limitations on the IRS’ ability to review the substance of those transactions has just about expired.
Mrs. Clinton is not done there! She proposes to raise the current estate tax rate from a flat 40% to 45% on estates under $10,000,000, 50% for estates from $10,000,000 to $50,000,000, 55% for estates from $50,000,000 to $500,000,000, and 65% for estates for over $500,000,000. While this seems shocking, the maximum estate tax margin rates when I began practicing in 1976 was technically 77%!
Obviously, the double attack from the IRS and the potential Clinton Administration will raise havoc in the estate planning circles. Be ready to react relatively quickly as these proposals threaten to become reality.
For more information regarding this or any other estate planning concern, please contact us at 404-255-7400 or email us at firstname.lastname@example.org.
If the IRS has its way, one of our prime estate planning techniques will soon be obsolete.
Earlier this month, the Treasury Department released proposed regulations under Section 2704 of the Internal Revenue Code that will severely undermine valuation discounts, which are commonly used by us and other estate planners to reduce the value of assets that are gifted or sold pursuant to a client’s estate planning.
We have all seen the headlines about Bobbi Kristina Brown, the daughter of the illustrious Whitney Houston, and her tragic death. After being found unconscious in the bathtub of her Roswell, Georgia townhome, she was admitted to the hospital and placed in a medically induced coma for months before being transferred to hospice and subsequently passing away. Her death is tragic for many reasons: her young age, the eerie similarities between her death and her mother’s, the allegations of domestic abuse, and the immediate fight among family members to gain control over her care and her assets. With proper estate planning, at least the last tragedy would have been avoided.
At Hoffman & Associates, we advise many of our clients to form limited liability companies, known as LLCs, to hold and protect their assets. In general, an owner of an LLC interest, or a “member” of the LLC, will not be responsible for any debts of the LLC, which is a win-win situation for the client. Further, if the member gets sued for something related to the LLC, such as the actions of an employee of the LLC or product liability from a product produced by the LLC, the member’s personal property will be shielded from the person suing the LLC.
Additionally, if a member is sued for something unrelated to the LLC, the member’s LLC interest will be somewhat shielded from that judgment creditor. Often the remedy for a judgment creditor against a member of an LLC is what is known as a “charging order,” which means they cannot take ownership of the LLC, but will be entitled to any LLC distributions to that Member.
However, in a few limited instances, a court will look through the LLC to get to a Member’s assets, known as “piercing the veil” of the LLC. Generally, this is done in the case of an LLC with only one member, which is the situation numerous clients find themselves in – they do not have a partner to add or do not want to add a partner to their business. Even with this risk, many clients will want to own the whole LLC themselves, which is a very simple structure, since all of the LLC’s taxes would pass through to that single member.
Often, states are more likely to pierce the veil or not limit the remedy to a charging order in the case of single-member LLCs, or SMLLCs. In fact, only a handful of states limit action against a member of a SMLLC to a charging order. Delaware, Nevada and Wyoming are the popular states that offer this statutory protection. If a client is focused on asset protection and does not want an additional LLC member, forming the LLC in one of these three states is the best course of action.
Even in a state that limits a remedy to a charging order, a court can still pierce the veil of a SMLLC if the LLC member does not respect the structure of the LLC. In a recent Wyoming case, Greenhunter Energy, Inc. v. Western, 2014 WY 144, (WY S.C., Nov. 7, 2014), the Wyoming Supreme Court completely disregarded a SMLLC because the Member did not treat the LLC like a separate operating entity. There were numerous problems in this case, but they are easily avoidable with a proper Operating Agreement and by respecting the LLC as a separate entity.
Some clients desire more anonymity. Delaware, Nevada, and Wyoming all require a manager’s name to be filed with the state, which becomes an easily accessible public record. If a client also desires anonymity, one option would be to form an LLC in a state that does not require a manager’s name to be listed (such as Georgia) and have that LLC serve as the manager of the SMLLC.
Although the SMLLC can be ineffective if not formed and used properly, as shown in the Greenhunter Energy case, it can be a great tool for those clients who have asset protection goals, even if they do not want to bring a partner into their business. If this is you or someone you know, please contact Hoffman & Associates to discuss a single-member LLC to protect your assets.