WASHINGTON — Beginning June 15, taxpayers requesting letter rulings, closing agreements and certain other rulings from the Internal Revenue Service will need to make user fee payments electronically using the federal government’s Pay.gov system.
The IRS recently highlighted a reminder that a tax credit is available for those who hire long term unemployed workers. There are 10 categories of qualified hires, including if the employee has been unemployed for 27 weeks and has taken unemployment for a portion of that time. Businesses should remember to take advantage of the credit when looking to hire qualified workers. For more information regarding this or any other business or tax related issue, please contact us at 404-255-7400 or firstname.lastname@example.org.
A new option for small companies (less than $5 million in receipts) exists to apply up to $250k of research credit against payroll tax liabilities rather than income tax liability. For start ups the new option offers an opportunity to take credits that would otherwise be deferred if the company did not have taxable income to offset the credits.
For more information regarding this or any other small business legal concern please contact us at 404-255-7400 or email@example.com.
With the election of Donald Trump as President, many income, estate, and gift tax issues are in a state of uncertainty. President-Elect Trump has mentioned eliminating the Estate Tax, but it’s unclear if he will make that a priority, or if Congress is interested in such a change.
In June, we warned business clients that new regulations governing overtime laws would take effect on December 1, 2016. However, a number of states sued the Department of Labor and on November 23, the United States District Court for the Eastern District of Texas issued an injunction blocking the implementation from taking effect.
Small business owners may be in for a shock later this year when new Department of Labor Regulations governing overtime go into effect. On December 1, 2016, a Final Rule by the Wage and Hour Division will go into effect, causing approximately 4.2 million currently exempt workers to have a right to time and a half pay from their employers.
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.
Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) have long been used for a variety of purposes, including centralized asset management, creditor protection, efficient legacy planning, and implementing legitimate discounting and freezing techniques for estate planning purposes. Our estate and gift tax system relies on accurately determining the fair market value of the property being transferred. Fair market value is to be determined objectively considering hypothetical buyers and sellers. Appraisers must take into account valuation discounts for lack of control and lack of marketability. When property is transferred to descendants or trusts, the value of the particular property being transferred is what is reported for gift tax purposes, and then the property with all future appreciation is excluded from the grantor’s estate.
The IRS began a campaign of attacking FLPs back in 1997. Court decisions have generally rebuffed various tactics and positions taken by the IRS in the family limited partnership area.
The IRS publishes its priority guidance plan each year to emphasize areas of the tax law that the IRS may issue additional regulations. Additional regulations affecting valuations in an intra-family transfer context has been on the IRS’ priority guidance plan for the last 11 years. Now, it has been elevated to a proposal set forth in President Obama’s Administration’s 2013 Green Book. The IRS recently announced that it could issue proposed regulations as early as September, which would severely restrict valuation discounts for interests in FLPs and other family entities.
Articles are now appearing which are encouraging estate planners and clients to get ahead of these likely new rules. It is likely that the IRS position will be that any new rules will be effective upon the publication of the proposed regulations, even though they will not become “final” regulations until a much later date.
Earlier this summer, we sent messages to clients who are in the midst of their estate planning that they may want to expedite the process, before the IRS can issue proposed regulations which greatly curtail the legitimate discounting and freezing techniques that we’ve implemented with countless clients. One would think that only Congress can change the law with respect to re-defining the value of property for gift and estate tax purposes, but the Obama Administration has an historical edict of affecting change by more government regulation. The IRS, no doubt, is feeling very confident in their power to limit valuation discounts by way of their regulatory authority.
If you have put off further estate planning, time may be of the essence. If your planning should include the many benefits of FLPs and FLLCs, or if you have an FLP or FLLC and gifting may be appropriate, you may want to get with your advisor sooner, rather than later. If we can help, give us a call.
Many of our clients wrestle with the decision to purchase term insurance or permanent insurance. The premiums for term insurance are cheap, particularly when you’re young, while permanent insurance generally provides a level premium with more certainty that a death benefit will be paid.
Term insurance seldom pays a death benefit. The reasons for this are simple. Most people live to, or close to their life expectancy. By the time they have reached their life expectancy, the premiums on term insurance have increased to the point where the insurance is dropped, or the individual has reached an age or health condition that is deemed uninsurable by the insurance company.
For this reason, term life insurance is best for temporary needs such as support for a surviving family (particularly when you are young), funding a buy/sell arrangement for a closely held business, providing cash (key man insurance) for transition of business, and for the repayment of debts.
I often tell clients to load up on term insurance when they are young, partly because it’s so cheap, and partly because their financial “security” needs are so great when their families are young. Of course, the premiums for term insurance are lower because it seldom pays a death benefit. The only usual financial “winners” for term insurance are the insurance agent and the insurance company.
As we get older, financial obligations (except retirement) tend to decrease. Many of us begin to look at permanent insurance as a permanent feature or category of assets that we are accumulating during our lifetime. Most of us want to have a certain portion of our insurance that is ongoing. The insurance can provide liquidity to our heirs, cash to pay estate taxes, a fund to provide for the maintenance of a second home, or a mechanism to equalize the estate where certain hard assets (such as farm, business or vacation home) is necessarily directed to one particular heir, while the other child receives cash.
Permanent insurance generally falls into three categories: whole life, universal life (including universal blends and indexed products) and variable life. Whole life is the most expensive, while universal life is generally the most inexpensive permanent insurance policy. Variable life has more stock market investment features inside an insurance policy wrapper.
Universal life is popular among our clients as it provides guaranteed lifetime coverage at the lowest level of permanent insurance premiums, and generally level premiums can be pre-paid or lowered by lump-sum or higher premiums in early years. Generally, with universal life policies, guaranteed cash accumulation for retirement income or other purposes is not a significant objective. The goal is to lock in a death benefit while keeping premiums as low as possible.
By far, our estate planning clients buy mostly universal life products. While there are many varieties, studies show that the internal rate of return on universal life products is generally positive, where as the internal rate return on any term policy, if clients live to or close to their life expectancy, is significantly negative. In other words, with term insurance, we have thrown our money away unless we die prematurely.
Most term insurance lapses before death. This is fine if the reason for the insurance no longer exists. However, many policy owners want to extend the coverage of their insurance while their health is still good, because they know that the risk of their health changing increases with age and health changes can happen suddenly.
Be aware that term policies can carry a conversion right. This is important, even though it might marginally increase the premium cost, because a client might otherwise become higher risk or uninsurable prior to the expiration of the term policy and be unable to get other insurance.
Generally, our clients are rarely content to allow their insurance policies to lapse when they reach the end of the coverage period. The older we get, the more we see the value of “investing” in insurance as one of our many buckets of asset categories that we are accumulating and tending to during life.
As a business owner, does anything sound better than having your business protected from creditors and having it grow completely outside of your estate while still having full control over it? The Beneficiary Defective Inheritor’s Trust (the “BDIT”) technique allows all of that. Essentially, a trust beneficiary, the business owner, YOU, can grow your business in a trust established for you by someone else.
The biggest advantage of this strategy is that the BDIT will be for the benefit of the business owner and will be completely discretionary, so there will be no problem getting money out of the company if needed. Some other benefits of this trust are that the beneficiary/business owner has significant control over the trust property and it is a grantor trust with respect to the beneficiary, so that will further remove assets from the beneficiary’s estate while the assets grow tax free. One other advantage is that a BDIT is more flexible than a defective grantor trust as far as changing beneficiaries of the trust, so it might be a good option if a parent is not sure if their child can handle a business or a similar situation.
The mechanics of the BDIT are as follows:
- A Parent (or other third party, hereinafter the “Parent”) forms the trust (in a favorable jurisdiction for asset protection) for the benefit of the business owner;
- The Parent contributes $5,000 cash to the trust and allocates $5,000 of GST exemption to it;
- The Parent grants the beneficiary a Crummey power of withdrawal over the $5,000 for 30 days and it lapses;
- The Parent retains no powers that could trigger the grantor trust rules for the Parent;
- The Parent grants full discretion over distributions of income and principal to a third-party trustee;
- The child is granted the power to remove and replace the independent trustee with another independent trustee;
- The Parent grants a broad special power of appointment to the child, exercisable during life or at death;
- The beneficiary will be the Investment Trustee and control all managerial decisions; and
- A formula clause will be used to shift any unintended gifted assets to a non-GST tax exempt BDIT.
However, because the BDIT is a very complex strategy, it must be documented, implemented, and administered very carefully. If all the proper procedures are followed, this transaction is legitimate despite the IRS not liking it. Anyone with a growing business should look into a BDIT