Wednesday, August 3, 2016

Window Closing on Discounts for Intra-family Gifts

We've been quiet for a couple of weeks, something we intend to avoid in the future, however today's blog addresses the Proposed Regulations announced yesterday by the Treasury Department and the IRS with respect to the ability to claim a discounted valuation for Intra-family gifts. If you or your clients are considering transferring partial ownership of a family business on to children it may be beneficial to do so sooner, rather than later.

In previous blogs we discussed the strategy of using a Family Limited Partnership or Family L.L.C. to transfer interests in either family owned businesses or other types of assets, such as real estate, to children while allowing parents to retaining control of the entity during their lifetime. A major benefit of such transfers is the ability of the parent to claim a significant discount in the valuation of the transferred assets for the purposes of Gift Tax liability. On Tuesday August 2, 2016, the Treasury Department and the Internal Revenue Service announced Proposed Regulations that address this strategy and, if put into effect as written, will significantly reduce the ability of family business owners to take advantage of this strategy.
Under current regulations, it is possible for a parent to transfer interests in a family business to the other family members while retaining operational control of those businesses. The transferred interest does not contain voting rights and specifically indicates that the family member does not have the right to sell or otherwise alienate the interest. The lack of control over the operation of the business and inability to sell the interest reduces the value of the interest and allows for a discount in the value for purposes of gifting. This discount allows the client to transfer a greater value of assets to their loved ones at a lesser cost for gift tax purposes. When it has challenged transfers of this nature in court, the IRS has consistently argued against the size of the discounts. 
The Proposed Regulations generally provide that if a parent transfers an interest in a corporation that the parent controls to any other member of the family any "applicable restriction" shall be disregarded in valuing the transferred interest. The Internal Revenue Code defines “applicable restriction” as “any restriction that effectively limits the ability of the entity to liquidate, but which, after the transfer, either in whole or in part, will lapse or may be removed by the transferor or any member of the transferor’s family, either alone or collectively.” In plain English, the Proposed Regulation provides that if a parent transfers an interest in a family owned business to their child with the restriction that the child cannot alienate their interest in the business without the parent’s permission, that restriction is ignored for purposes of valuing the transferred interest. The removal of such restrictions from consideration in valuing the interests transferred will have a significant impact on the strategy of transferring interests in family owned businesses.
While the Proposed Regulations will significantly limit the valuation discount available to clients when making transfers of family-owned businesses, it does not entirely eliminate the benefits of such transfers. Until these regulations go into effect and are tested in real-world situations, it is unclear what level of discount the IRS will argue is reasonable with respect to other restrictions placed on interests transferred to children that do not relate to the child's ability to alienate the interest. Additionally the strategy of transferring minority or non-controlling interests in family businesses to children is still very beneficial, especially when those business interests contain assets that are likely to appreciate significantly in coming years. Such transfers are also still relevant in the context of succession planning for family businesses, as an equity interest in the family business is often necessary to ensure that future generations are fully invested in the operation of that business before they are given control of the company.
There is still an opportunity to take advantage of the valuation discount, but the window for doing so may be closing. Before these Proposed Regulations can go into effect they must first go through a 90-day public comment period, after which there may be changes, but even if there are no changes, portions of the regulations will not take effect until 30 days after the government issues a final version of the regulations.
The strategy of using a Family L.L.C. to obtain a discount in the valuation of assets transferred to children is a complex legal strategy that business owners should not attempt without consulting an attorney and accountant who are familiar with the process. Avoiding significant issues with the IRS in implementing this strategy requires sound valuations of the business and working with advisors familiar with the process of justifying such valuations. If you have additional questions, concerns, or interest in discussing whether this strategy may be appropriate for your circumstances, or the circumstances of one of your clients, we encourage you to contact us quickly, as the time available to take advantage of this strategy is very limited.

Alan and Matt

Wednesday, July 13, 2016

Making Decisions about Funeral Arrangements

Well so much for scheduling posts to go up every Tuesday, I guess my technical expertise are not as sharp as I thought.

Estate planning focuses on the legal and financial aspects of the distribution of the person's assets following their death. While our clients appreciate the peace of mind they get from this planning there are other issues related to death and dying which are equally important to consider, many of which are more personal and may have a greater impact on your loved ones. Today's blog addresses one of these very personal matters, issues surrounding making funeral arrangements.

Following the death of a loved one, an issue that often causes the most complications is the funeral arrangements. Many questions surround this matter, including what would the deceased want, who is responsible for paying for services, and who has the authority to make decisions? Each of these areas can be fraught with intra-family stress and strife, but as with many other issues addressed in this blog, planning can limit or eliminate many of those problems.

For many individuals, funeral planning begins long before they have any reason to believe death is imminent. This planning takes multiple forms, from a simple note stating their wishes to a detailed letter of instruction including their desire for burial or cremation, the selection of a church for services and hymns to be played, and even charitable organizations to which contributions can be made to honor the decedent in lieu of sending flowers. It is also becoming more common for individuals who want to preplan their funerals to work with a Funeral Director to plan and completely pay for their services in advance. The benefits of preplanning the funeral, as articulated by our clients, include ensuring that their wishes are honored, avoiding excessive spending on funeral services, and knowing that with the planning completed their family members will have more time to focus on the grieving process. While many benefits to preplanning your funeral exist, not everyone is comfortable doing so. Nonetheless, it is important to know who will be responsible for these decisions when the time comes to make them.

Recently the Michigan Legislature updated the law that governs who has authority to make funeral decisions to allow individuals to name a designated Funeral Representative. This individual, who may be named as part of a Will, Power of Attorney, or a separate writing signed in the presence either two witnesses or a notary, has legal priority to make decisions regarding final arrangements. Prior to this change, and in the absence of a designated Funeral Representative, surviving spouses have priority, followed by children, grandchildren, parents, grandparents, and finally siblings. This extended statutory plan of priority creates many conflicts, as various family members argue about funeral arrangements, each believing they know best for their loved ones. With the change in the law, an individual can appoint the person responsible for making decisions and inform that person of their wishes in advance. Regardless of who makes decisions, a frequent concern regarding funeral arrangements is the cost of those services and the responsibility for paying that cost.

The average cost of a traditional funeral in the United States is between $7,000 and $10,000, which is a substantial expense for anyone to bear unexpectedly. Some individuals choose to limit the effect of this cost on their loved ones through preplanning and prepaying for their funeral as we discussed above, others carry small life insurance policies to cover the expense, but many people do nothing at all. In these circumstances, loved ones must figure out how to pay for these costs in a short time. Under Michigan probate law, the costs of funeral and burial take priority over all other claims, except the costs and expenses of administering a decedent's estate. This means that whoever pays for these expenses is entitled to reimbursement for their costs before almost all other creditors. This priority however does little to clarify who will be responsible for these expenses. One potential solution to this uncertainty is executing a living trust. As we have discussed before, following the death of the trust Grantor, the successor Trustee can immediately take over the administration of the trust and in that capacity make distributions from the trust to pay for funeral expenses. In the absence of this planning however a relative or other individual must incur the substantial costs and await repayment during the probate process.

While problems and choices follow us even in death, it is possible to limit the problems that arise following your death by engaging in planning while you are alive. While this planning may initially be difficult to consider, the benefits to your loved ones in a very difficult time make that difficulty seem minute.

Alan and Matt