Legal Matters in Starting Your Business

Mike_Hoffman_17Join Mike Hoffman in this 74 minute audio as he hosts the 11th session of the 24 hour MBA in discussing how to get your business off the ground.  There are many different legal options in starting a business, and in this audio session, you will understand the best way to start your business and keep it successful for future generations.  24hrmba-11.mp3

 

Opportunities to Take Advantage of Before Its Too Late

Tax laws are changing at the end of this year.  Take advantage of these opportunities before it’s too late.

Estate Tax Savings’ Techniques:

Gifting:  Use your $5,120,000 gift tax exemption.  Next year, the exemption is scheduled to be reduced to $1,000,000.  If you don’t use the exemption, you could lose it, and there is little downside as long as you don’t need the assets for future sustenance.

Spousal Access Trusts: Create spousal access trusts to use all or a portion of your gift tax exemption.  Your gift tax exemption can be used in a way that still allows you to provide for your spouse.

Valuation Discounts: Utilize valuation discounts for lack of marketability and lack of control. Gift hard to value or fractional interests in property.  By doing so, you can leverage your $5.12 million dollar exemption to remove even more property from your estate.  These valuation discounts for family owned assets and businesses are under scrutiny by the IRS and Congress.  If you wait too long, the law might change and you may lose the opportunity to leave more to your children and grandchildren.

Intra-Family Loans: Make intra-family loans. Interest rates are at all time lows.  By loaning money to trusts for the benefit of your children and grandchildren, you can remove virtually all of the appreciation on the loaned funds from your taxable estate, while knowing the principal is still there and can be paid back should you end up needing it.

Income Tax Savings’ Strategies:

Make Distributions: Make dividend payments from C corporations to take advantage of the current 15% tax rate. Next year, the rate is scheduled to go back up to ordinary income tax rates, and the new Healthcare Surtax could apply in certain circumstances making the highest effective tax rate on dividends 43.4%. That is almost a 200% increase in the tax rate on dividends.

Harvest Capital Gains: Sell appreciated assets now rather than next year.  The current capital gains rate of 15% is scheduled to rise to 20% next year and with the Healthcare Surtax, the highest effective tax rate on capital gains will be 23.8% in 2013.  That’s almost a 60% increase in the tax rate.

Charitable Deductions: Contribute to charities now, when the benefit is 35 cents on the dollar. Proposed legislation will reduce the deduction to 28 cents on the dollar next year.  Consider donor advised funds and private foundations that will allow you to have some control after the gift is made.

Fund 529 Plans: 529 plans are a great way to save for college.  Growth is tax free, and distributions are tax free if used to pay for qualified tuition and living expenses.  You can use up to 5 years worth of annual exclusion gifts in one year – that’s $65,000 per child in one year ($130,000 from a married couple), without using any of your lifetime gift exemption.  Act now because Congress may act to curb, reduce, or make the requirements more restrictive.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Asset Protection: You Get What You Pay For

As estate planning, tax and business lawyers, we are always concerned with asset protection.  Whether we are talking in the context of trusts for surviving spouses or descendants, or protecting personal assets from business hiccups, asset protection is at the front of our minds when advising clients.

Asset protection comes in all shapes and sizes, from the simple to the ultra complex. Rules can vary significantly from state to state. Generally speaking, if you want to protect an asset, don’t own it!  Strategies can range from the simple professional who puts his or her home in their spouse’s name.  In debtor oriented states like Florida, it could mean owning that residence jointly as tenancy by the entirety, which protects the property from creditors of each spouse.  Titling property correctly is simple and inexpensive.  Of course, once you have transferred that property to your spouse, it may be difficult to get it back!

Traditionally, businesses have conducted themselves as corporations or similar entities, one reason being to isolate the business activity from other assets owned by the business owner.  For instance, if a corporation were to get a judgment against it, the creditor’s only recourse would be against the assets of the corporation.  The creditor would not be able to reach through the entity and get at the other assets of the owner.  This is one of the reasons that our clients traditionally do business as corporations, LLCs or limited partnerships.  All of these entities have the characteristic of limited liability.

However, if it is the owner who is the subject of a judgment creditor, he can lose his stock in his closely held business.  So, consider placing assets in a limited liability company.  Some jurisdictions (not Georgia) provide that a creditor’s sole remedy, with respect to the LLC ownership by a debtor, is to obtain a charging order.  This remedy permits the creditor to stand in line to receive any distributions from the LLC that would otherwise go to the LLC’s owner (the debtor);  but the creditor cannot take the owner’s membership units or foreclose on ownership interest.  This, of course, is not a popular remedy for creditors.  Creditors would prefer to control the ownership interest in the business, allowing them to sell assets or otherwise liquidate the business in order to satisfy the debt.  Charging orders as a sole remedy are a statutory rule in a number of jurisdictions including Florida (for multiple member LLCs) and Nevada (a jurisdiction we find ourselves using more and more for the clients whose primary motivation is asset protection).

Creating a corporation is more expensive than merely titling assets in the name of your spouse.  Forming an LLC is significantly more expensive than forming a corporation.  Forming an LLC in another state is somewhat more expensive on the front end and annually than forming a Georgia entity.  You get what you pay for.

The next level of asset protection brings us to the area of trusts.  Of course, you can form an irrevocable trust for the benefit of another, and if properly drafted, that trust can own property which is protected from the grantor’s creditors.  However, Georgia does not recognize what are referred to as “self-settled” trusts;  one cannot create a trust for his or her own benefit in Georgia and many other jurisdictions.  There are approximately a dozen states that do recognize some sort of self-settled asset protection trusts that can accommodate the grantor as a possible beneficiary of the trusts.  Again, of the dozen or so states that allow what are referred to as “domestic asset protection trusts”, Nevada would have to be at the top of the list.  Domestic asset protection trusts require an independent trustee, meaning that the grantor cannot be in total control of the trust assets, although total control would not have to be given to the third party. Significant management control could be retained by the grantor if the trust agreement is carefully drafted.  These arrangements are significantly more expensive than forming an LLC for asset protection purposes.  Generally speaking, the more protection one seeks, the more expensive it is to set up the structure and maintain it.

Other trusts provide asset protection characteristics.  For instance, it is possible to create a trust for the benefit of one’s spouse, and the assets in the trust would be protected from not only the grantor’s creditors, but also the spouse’s creditors.  The grantor is entitled, in essence, to control the disposition of the trust upon the demise of the spouse.  Again, this arrangement must be carefully drafted, particularly if husband and wife are creating trusts for each other.  Again, the grantor should not retain total control of the trust’s property, so a third party trustee is highly recommended.  These types of arrangements tend to be more expensive than the domestic asset protection trust.   There are numerous other trust arrangements that offer asset protection; the appropriate choice depends on the actual circumstances and objectives.

Trusts can also be established in foreign jurisdictions where the local laws with respect to taxes, statute of limitations and contracts are very favorable as deterrents to creditors.  Again, offshore trusts have been around for hundreds of years.  Popular jurisdictions include the Cook Islands, Nevis, Bahamas, Cayman Islands and a number of other Caribbean island countries.  These trusts have been romanticized for many years. They are most popular with liquid investment assets. These arrangements tend to be the most expensive types of asset protection devices, so they also tend to be rare.

Finally, no one arrangement is absolutely perfect.  Ownership transfers should occur prior to the time a liability or potential judgment appears.  Creditors’ lawyers can always argue that assets were transferred in an attempt to defraud particular creditors, therefore seeking court intervention or set-aside.  However, prudent and timely planning should always be better than no planning, even if the result is that creditors are more receptive to sitting down to negotiate more favorable terms with our clients.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.