Wednesday, January 4, 2017

New Year - Resolve to Review your Estate Planning

Today we reprise a New Year's blog from 2015 because we feel that it is important that planners and clients add a commitment to review and update their estate planning to their list of New Year's resolutions.
The importance of this resolution really struck home with me when I reviewed my own estate planning on New Year's Day and realized there were changes I wanted to make even though the most recent revision had occurred less than two years ago.
Our message from that 2015 blog continues to be relevant:
"While we all have full lives that often get in the way of planning, the beginning of a new year is a great time for our clients, friends, and me, to make a resolution to review or consider estate planning.   It is particularly important to: 
1.    Review estate planning documents especially if they have not been updated in the last two or three years. If you have no documents, it is time to consider getting them. Pay special attention should be paid to:
a.    Guardians named to care for minors in the event both parents pass away. If you have previously named guardians, are these still the people you trust?
b.    Distribution provisions for children and grandchildren --when should they receive money and how much?
c.    People named to act as trustees and personal representatives after your death to protect your children and other loved ones. Are those people you named to administer your trust and estate still the ones you want to accept that responsibility?
d.    People named to make legal and medical decisions under your Durable Power Of Attorney and Patient Advocate Designation, in the event you become incapacitated. If you have previously named people, are they still able, and willing, to make these decisions on your behalf?
2.    Review how you titled your assets to confirm you can avoid the high cost, time delays and public exposure of probate under Michigan law at your death.
3.    Inventory your assets, so that a complete list is available for your administrators in the event of a sudden death.
4.    Consider making a list of personal property designations, so that items you value can go to the desired beneficiaries.
5.    Consider making a list of important people and contact information, such as your attorney, accountant, financial planner, or investment advisor, to save your family time and aggravation.
6.    If you have any particular desires, write a letter indicating your personal burial preferences, so your loved ones will know how to handle arrangements at your death.
7.    Consider starting Section 529 education accounts for your children or grandchildren so the funds can grow tax-deferred, and be distributed tax-free, to the extent they are used for higher education.
8.    For those of you with unmarried children over the age of 18, encourage them to execute their own patient advocate designations and durable powers of attorney so that if something were to happen to them, decisions can be made without involving the probate court.
Like all of our other resolutions, these may be hard to keep but, if completed, can provide us peace of mind that if the unexpected occurs, our loved ones will be prepared to deal with whatever comes their way."

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