Update On The IRS Regulations Project

michael w. hoffmanLast July, I wrote in my column that the IRS made it known that it would issue proposed regulations as early as September (2015) which would severely restrict valuation discounts for transfers among related entities (such as transfers of limited partnership or LLC interests to other family members or trusts).  Not surprisingly, here we are in the spring of 2016 and there are no regulations.

Early this month, an IRS representative spoke at the ABA Tax Section meeting and spoke about upcoming IRS guidance.  She predicted that in the next couple of months the IRS would issue 5 or 6 new regulations, the first of these being the proposed regulations under Section 2704, which would place further restrictions on valuation discounts.  While we don’t know what the scope of these new restrictions will be, we are certain that they will have a significant impact on valuing property transferred between related family entities.  As I expressed last year, our concern is exacerbated by the fact that the IRS will likely make these rules effective retroactively to the date of the proposed regulations.

The judicious use of valuation discounts has long been a responsible tenant in estate planning.  Whether it’s getting the “biggest bang for the buck” out of annual gift tax exclusions, use of your one-time lifetime applicable exclusion amount (currently $5,450,000 in 2016), or reducing actual estate or gift taxes, applying appropriate discounts has always been pertinent to accurately determine the fair market value of the property being transferred.

For instance, if Father owned a piece of property worth $100 and gifted 50% of that property to Daughter, the valuation of the undivided one-half interest might only be $40, as opposed to the mathematical value of $50.  In a similar vein, if gifts of limited partnership interest or non-voting LLC membership interests in family enterprises are gifted, appropriate valuation discounts for things like lack of control and lack of marketability are applicable.

If the new regulations change the rules and re-define how property is valued for gift and estate tax purposes, the impact will be huge.

As one of my colleagues recently wrote, “The first (regulation project issued this spring) will be new proposed regulations under Section 2704, with time estimates of ‘very, very shortly’ and ‘this spring, before summer’.”  If you have put off any estate planning concerning freezing or gifting, time is of the essence.  If you are planning to include the many benefits of family limited partnerships and family limited liability companies, or merely gifts of fractional interests, as illustrated in the example above, you may want to get with your advisor immediately.

For further information regarding this or any other estate planning concern, please visit Hoffman & Associates at www.hoffmanestatelaw.com, call us at 404-255-7400, or send us an email.

Single Member LLCs for Asset Protection

IAN M. FISHERAt 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.

For more information regarding this or any other business law concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.