In last week's Olmstead v. FTC decision, the Florida Supreme Court ruled that single member limited liability companies (LLCs ) do not provide protection from "outside" creditors. This has been a concern of mine since a similar bankruptcy court ruling in Colorado in 2003, and I have advised clients that North Carolina LLCs could face similar attack.
LLCs are great entities for providing asset protection for their owners against "inside" creditors, such as a tenant injured on real property owned by the LLC. Multi-member LLCs also protect a member's interest from outside creditors such as the holders of unrelated judgments. This Facebook post from Florida attorney Ed Arista offers a nice synopsis of LLCs and asset protection.
Friday's Wall Street Journal had an article on the latest estate tax proposal, from independent Senator Bernie Sanders and Democratic Senators Tom Harkin of Iowa, Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio.
The proposal would retroactively reinstate a $3.5 million exemption with a tax rate of 45%. Estates valued between $10 million and $50 million would pay a 50% rate, estates valued above $50 million would pay 55%, and estates in excess of $500 million would be hit with an additional 10% surtax. The proposal includes a 10-year minimum on grantor retained annuity trusts (GRATs), which would greatly reduce the usefulness of these trusts as estate tax reduction strategies.
Don't look for the proposal to become law anytime soon, however. Many estate tax measures have stalled in this Congress and I don't think things will change in the near future.
Most people who execute living wills, health care powers of attorney and other advance directives express their desire to not have their lives prolonged if terminally ill or in a persistent vegetative state.
However, there are some who believe that all or many measures should be taken to prolong their lives. The North Carolina statutory documents are not really designed for this purpose. Thanks to a client, I recently discovered the "Will to Live" Durable Power of Attorney, which is designed for persons who want to be kept alive by artificial nutrition hydration and nutrition, as well as other life-prolonging measures under most circumstances.
This document does meet the NC statutory requirements. Just as with the standard living will, I would encourage those who are interested in using it to discuss it with both their physician and their estate planning attorney.
On June 15, 2010, the House of Representatives passed The Small Business Jobs Tax Relief Act of 2010 (the "Act") which, if passed by the Senate and signed by the President, will significantly limit the utility of Grantor Retained Annuity Trusts (GRATs).
New Limitations
The Act would impose the following new limitations on GRATs:
(1) A required minimum 10-year term;
(2) The annual annuity payment cannot decrease relative to any prior year during the first 10 years of the term; and
(3) The remainder interest must have a value greater than zero determined as of the time of the transfer.
The new legislation would apply to all transfers to GRATs made after the date of the enactment of the Act.
Impact of New Legislation
When creating a GRAT, a short annuity payment period is considered advantageous because the grantor's death during the annuity payment period will cause all of the GRAT property to be included in the grantor's estate for tax purposes. In addition, potential significant appreciation within the shorter term will not be cancelled out by virtue of a longer term normalization or reduction in values. The required minimum 10-year term increases the mortality risk and could make GRATs less desirable for those who anticipate significant short term appreciation. Furthermore, by mandating that the annual annuity payments cannot decrease during the first 10 years of the GRAT term, the Act removes the possibility of front-loading the annual annuity payments as a means of converting a 10-year GRAT into a shorter term GRAT.
By requiring a remainder interest with a value greater than zero, the Act would require that the grantor pay gift tax, or at least use some portion of the grantor's $1,000,000 gift tax exemption, when establishing the GRAT. Since the GRAT may or may not actually realize an investment return sufficiently in excess of the §7520 Rate (i.e., the hurdle rate to beat to actually have an effective transfer of property via the GRAT) so as to pass property to the GRAT remainder beneficiaries, this can result in a waste of the grantor's gift tax exemption or the payment of gift tax without any benefit.
Please click here for a more detailed explanation of how GRATs work.
What action do you need to take?
Although it is impossible to say whether the Act will actually become law, the current confluence of (i) low asset values, (ii) a §7520 Rate near its all time low, and (iii) the real possibility that GRATs might not remain as viable an estate tax planning technique for much longer, suggests that now is the time to establish a GRAT.
Source: Moses & Singer, LLP June 2010 Client Alert
When it comes to inheriting an IRA, spouses have more flexibility than other heirs. Here are the basic rules:
The surviving spouse may treat the inherited IRA as his or her own, roll it over into an existing IRA, or remain the beneficiary on the account.
As a surviving spouse, you may only treat the IRA as your own if you are the sole beneficiary. If there are multiple beneficiaries, the account can be separated so the spouse's share is in its own account.
If you elect to treat the IRA as your own, the IRA is simply retitled as the spouse's IRA. As an alternative, you can roll the balance over to your own IRA. Since the account is then considered the yours, you can then name your own beneficiaries. Withdrawals are subject to a 10 percent federal income tax penalty if you have not reached age 59 1/2 and you must start taking required minimum distributions (RMDs) at age 70 1/2. RMDs are calculated using the uniform IRS table, which assumes a joint life expectancy with the beneficiary considered 10 years younger.
If the surviving spouse remains the beneficiary of the IRA and is the sole beneficiary, distributions are required by the later of the year the original IRA owner would have reached age 70 1/2 or by December 31 of the year following the IRA owner's death. If the spouse is not the sole beneficiary, then distributions must begin by December 31 of the year following the IRA owner's death.
Required distributions are calculated based on the single life expectancy table for beneficiaries. However, spouses recalculate their life expectancies every year by looking up the factor on the IRS table. Non-spouse beneficiaries get the life expectancy figure from the table in the first year, but in each subsequent year, they reduce the factor by one year. Since the table assumes a single life expectancy, distributions would be higher than if the spouse treated the IRA as his or her own.
Although lower RMDs are required when a spouse rolls over or treats the IRA as his or her own, there are circumstances when the spouse might want to remain the beneficiary:
A spouse under the age of 59 1/2 can make withdrawals from the beneficiary account using the life expectancy table, without paying the 10 percent federal income tax penalty. Once the account is rolled over, withdrawals before the age of 59 1/2 would result in a 10 percent federal income tax penalty.
A spouse who is significantly older than the deceased IRA owner can delay RMDs by remaining the beneficiary. He or she would not have to take RMDs until the deceased spouse would have reached age 70 1/2, even if the surviving spouse is already past age 70 1/2.
When a Roth IRA is involved, the surviving spouse would normally want to roll the Roth IRA over or treat it as his or her own. Then, no distributions would be required during his or her lifetime. If the surviving spouse remains the beneficiary, then distributions would be required as described above for traditional IRAs.
Finally, depending on the provisions in your spouse's will or trust, and the total value of all of your assets, it may make sense to disclaim the IRA to save estate taxes at your death. With a properly worded will or trust, you can still use the IRA during your life time. Consult with your estate planning attorney for more information.
According to a recent article on WSJ.com, the additional 3.8% tax that starts in 2013 will also apply to undistributed income in estates and trusts, starting at about the $12,000 mark (making the top rate 44.4%). This will make planning for distributions to beneficiaries that much more important, as most beneficiaries will be in lower tax brackets.
Here's an article about Houston's Dan Duncan's death this year and his $9 billion estate, which will completely escape estate taxes (although his heirs may be liable for capital gains taxes upon the sale of some of his assets). Had an estate tax been in place this year, the IRS would have received about $4 billion from Duncan's estate. Not much in terms of the federal budget, but think how far that amount would go in cleaning up the gulf oil mess.
On June 2, 2010, Senator Charles Grassley (R-IA) offered reporters his view on the uncertain future of the estate tax. Grassley is the ranking Republican on the Senate Finance Committee.
From today's GiftLaw eNewsletter: In December of 2009, the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009. This makes permanent the 2009 estate exemption of $3.5 million and top estate tax rate of 45%. If the House and Senate are not able to take action on estate taxes by the end of 2010 then on January 1, 2011 the estate tax returns with a 55% top rate and an exemption of $1 million (plus indexed increases). If this were to happen, Sen. Grassley stated that there will be a "tremendous upheaval at the grassroots of America."
Sen. Grassley noted that Sen. Jon Kyle (R-AZ) and Sen. Blanche Lincoln (D-AR) have proposed that the Senate Finance Committee pass an estate tax bill with a $5 million per person exemption and a 35% top estate tax rate. However, Grassley expressed the opinion that "the Finance Committee would like to take up consideration of legislation, but we aren't assured by the majority leader that the bill passed out of committee will be taken up on the floor."
Under the Senate rules, even if the Finance Committee were to pass the Kyle-Lincoln estate tax compromise, Majority Leader Harry Reid (D-NV) is not obligated to schedule a floor vote and could simply stall the legislation. In my view, Grassley's statement about the upheaval is ludicrous. The folks who constitute America's "grassroots" are not millionaires. Even with a $1 million exemption, proper planing can reduce or eliminate estate taxes for those with far more than $1,000,000. Stop whining and start focusing on something that will really help our country. That's my 2 cents on this Saturday afternoon.
From IR-2010-071: The IRS offices listed below will be open June 5 from 9 a.m. to 2 p.m. IRS staff will be available on site or by telephone to help taxpayers work through their problems –– especially recently received tax notices –– and walk out with solutions.
“We’ve helped thousands of taxpayers resolve their problems the same day at these open houses,” IRS Commissioner Doug Shulman said. “If you have a question regarding a notice, a problem with your taxes or difficulty resolving a tough tax issue, we encourage you to come in and work with us.”
IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues. At a previous IRS open house on May 15, close to 7,000 taxpayers sought and received assistance. About 97 percent of the taxpayers who came in for help had their issues resolved the same day.
At the June 5 open house, someone who has received a notice seeking additional information can speak with an IRS employee to get a clear explanation of what is necessary to satisfy the request. A taxpayer who cannot pay a tax balance due can discuss with an IRS professional whether an installment agreement is appropriate and, if so, fill out the paperwork then and there. Assistance with offers-in-compromise — an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed — will also be available. Likewise, a taxpayer struggling to complete a certain IRS form or schedule can work directly with IRS staff to get the job done.
North Carolina Offices Open:
Charlotte: Five Resource Square, Suite 1-300
10715 David Taylor Drive
Charlotte, NC 28262
Greensboro: 320 Federal Place
Greensboro, NC 27401
While I think it's great that the IRS is having these open houses to try to help taxpayers, keep in mind that the IRS's primary goal is to collect every tax dollar it can. The IRS is not your friend. If you owe more than $10,000, you are probably best served by hiring a tax attorney, CPA or enrolled agent to assist you.
With the federal estate tax returning next year at a rate of 55%, with only a $1 million exemption, planning to reduce estate tax should be on the forefront of the minds of those fortunate enough to have assets in excess of that amount.
One technique that was shared with me recently by Chad Virgil, CFP, works as follows (example scenario):
75 year old man in standard health
$500,000 IRA
Taxable estate
The IRA is converted into a $500,000 single-life qualified annuity, which generates $48,145 annually for life, with no residual estate tax value.
After income taxation at the highest rates (35% federal, 7.75% NC), the net income per year is $27,563.
An irrevocable life insurance trust (ILIT) is formed, and purchases a $500,000 single person guaranteed universal life policy - premium is $24,058 per year. This amount would be covered by the gift tax annual exclusion of $13,000 for just two beneficiaries of the ILIT (e.g two children). The ILIT means that the $500,000 will be received estate tax-free by the children.
$3,505 of net income is left over each year - enough for a nice trip to the Caribbean!
Note: the numbers used in this illustration are from March, 2010, with a MetLife annuity and Hartford life insurance policy.
are multiple beneficiaries, the account can be separated so the spouse's share is in its own account. 
