Newsletter: May/June 2012
June 14, 2012
Large Gift Planning With Increased Tax Exemption; Asset Protection Opportunities Under Ohio's New LLC Laws; Estate & Tax Planning For Same Sex Couples
LARGE GIFT PLANNING WITH INCREASED TAX EXEMPTION
Act now! The time to utilize the current $5.12M lifetime gift tax exemption is winding down.
If you have any clients who have been considering making a large gift to their children or grandchildren, now is the time to remind them that time is running out. For the remainder of 2012, the lifetime gift tax exemption is $5,120,000 per individual, which means that someone can gift up to $5,120,000 to their children and/or grandchildren and not incur any gift taxes as a result of those transfers.
Under current law, this amount will be reduced to $1,000,000 on January 1, 2013; however, the general feeling among estate planning professionals is that a change will be made to the law for 2013 and that the estate and gift tax exemption amounts will end up around $3,500,000. With this being an election year, enacting change will be difficult and may not get done before the end of the year. In any event, it appears that this opportunity to make a tax-free transfer of up to $5,120,000 per person (or up to $10,240,000 per couple) will only be available through the end of the year.
Why would your clients want to consider transferring such a large amount to children or grandchildren? Such a transfer would be made in hopes of reducing or eliminating federal estate taxes that may be due upon death. Transferring $5,120,000 today will reduce the value of your client's estate by $5,120,000 plus all of the growth earned on that amount from the time the transfer is made until your client's death (presuming that your client lives for at least 3 years after the transfer).
If the size of your client's estate is such that your client can make a large transfer and still have plenty left over to maintain his or her lifestyle, this can result in huge estate tax savings. For example, if your client gifts $5,120,000 now and lives for 10 more years, the amount gifted could easily double in that time, which would mean that the value of your client's taxable estate would be reduced by approximately $10,000,000. Such a reduction could result in a federal estate tax savings of over $4,000,000.
Of course, such a large gift would have to be made under carefully controlled circumstances. The gifts should be made to an irrevocable trust that we call a Family Gift Trust so that you and your client can still maintain some control over the gifted assets and how they are invested and spent. This type of trust also provides asset protection planning for the children and grandchildren who are the recipients of the gift. Your input would be needed on which assets to gift as any assets gifted during life retain the original cost basis and do not receive a step up in cost basis as do assets received due to a death. This type of gifting requires lots of careful planning and does not happen overnight, so now is the time to get working.
Here is a real life example involving one of our client's who made a large gift of units in a limited liability company (LLC) to her 3 children. The LLC holds assets with a fair market value of about $6,755,000. This client had used some of her available lifetime gifting exemption amount previously, so she gifted LLC units with a fair market value of $4,125,000 equally to her 3 children. The units were gifted into separate Family Gift Trusts for each child and their families. With the gift, our client has reduced her taxable estate by $4,125,000 plus all of the growth on the assets. The gift was made toward the end of last year, and the assets have gone up in value since then.
By doing the gift through the LLC, a valuation discount has been applied as well, thereby reducing the taxable value of the gift to $3,030,000, which is a reduction of $1,095,000. This means that our client only used $3,030,000 of her available exemption when she made this large gift.
In this particular case, our client reduced her taxable estate by over $4,125,000 as the value of the assets has increased since the gift was made, and she only used $3,030,000 of her exemption to do it. This is a great outcome for her! The amount that can be transferred to children and grandchildren free of estate and gift tax will be significantly reduced from the $5,000,000 that is currently allowed in 2013, so this is the time for your clients to consider whether making a large transfer makes sense for them.
Please contact Jennifer B. Cusimano at Smith and Condeni LLP for more information regarding any of the matters discussed in this article.
ASSET PROTECTION OPPORTUNITIES UNDER OHIO'S NEW LLC LAWS
Possibilities abound in one of the country's (finally!) most favorable jurisdictions.
Your client has worked hard, building a successful business and likely accumulating significant assets in his or her company, be it an Ohio corporation or a Limited Liability Company. Asset protection was likely a particularly relevant factor in your client's choice of entity at the time of its formation. Clients relied on the certainty of the limited liability laws to protect their business interests from the claims of their personal creditors. Due to a 2010 Florida Supreme Court case, Ohio's LLC law was suddenly considered suspect in that creditor remedies were viewed as uncertain as and much broader than business owners expected when entering into such arrangements. These negative implications for our clients were due to the similarities between the Florida and Ohio LLC statutes concerning the exclusivity of creditor remedies.
In February of this year, Governor Kasich signed legislation, effective May 4, 2012, which substantially upgraded Ohio's corporate laws, including those involving LLC creditor remedies. This radical improvement was a direct result of and response to the Florida case law. As a result, Ohio is now to be considered among the elite asset protection jurisdictions in the country along with Delaware, Texas, and South Dakota.
The planning opportunities for your clients are numerous. First, clients can obtain greater asset protection by converting their existing corporations into LLC's, whether the corporation is an Ohio or an out-of-state corporation. Generally, shares of stock are attachable by an owner's creditors while LLC membership interests are not. Converting is a “tax neutral” event for the client and the resulting LLC is treated as a mere continuation of the prior entity. For a one-time expense of conversion, with no tax complications, clients can obtain the asset protection they have long sought.
In addition, single member LLC's are treated the same as multi-member LLC's under the new law which thus strengthens the position of those single member entities and places them on equal footing with their multi-member counterparts. Single member entities have often been considered especially vulnerable to attack by the owner's creditors. This uniformity of treatment regardless the number of members makes creation of parent/subsidiary LLC arrangements an attractive alternative to the long popular parent-sub corporate structures.
Also, judgment creditors are now automatically bound by the terms of the LLC Operating Agreement which provides numerous opportunities for members to create appropriate deterrents to undesirable creditor behavior. Initial drafting or later amendment or restatement of an Operating Agreement can provide for monetary fines or fee shifting provisions so that interference or meddling by a creditor punishes those unacceptable actions. Such provisions can help ensure that creditors remain where business owners want them – on the outside looking in.
Finally, Ohio is now safe for those LLC's that were formed in another LLC-favorable jurisdiction but who do business in Ohio. There should be no lingering concerns that Ohio courts might improperly apply Ohio's formerly unfavorable rules. Since Ohio's laws now are in harmony with those other favorable laws, whichever law a court applies will benefit Ohio's LLC business owners.
Ohio has leapt out of the dark ages and into the present with this legislation and the Buckeye State is finally an attractive LLC jurisdiction. Every client must meet with his or her trusted advisors to explore the options and to create a specialized plan that will address his or her personal goals for this critical business planning.
Please contact Robin Rose Stiller at Smith and Condeni LLP for more information regarding any of the matters discussed in this article.
ESTATE & TAX PLANNING FOR SAME SEX COUPLES
Disparate treatment of same sex couples presents numerous estate and tax planning challenges.
Proper estate and tax planning can be an overwhelming and complicated task that often requires the advice of several professionals, such as lawyers, accountants, insurance advisors, and financial advisors. For one segment of the population, same-sex couples, however, the task is further complicated by the disparate treatment among the states of same-sex couples and the federal government's non-recognition of same-sex marriages.
In some states, same-sex couples can legally marry, while in others those relationships may be legally recognized, not as marriages, but rather as civil unions or domestic partnerships. People in a same-sex civil union or same-sex domestic partnership who live in a state that does not permit same-sex marriages are usually given most of the same rights and privileges as other married people living in the same state, with the obvious exception that they cannot legally marry their partner in that state. Other states do not legally recognize a same-sex marriage, civil union, or domestic partnership at all.
The differing treatment of same-sex couples in the various states means that even the most routine act of taking a family vacation can give rise to some critical legal issues that can and certainly should be addressed in a carefully prepared estate plan. Estate and tax planning may very well be more complicated for same-sex couples than it is for their opposite-sex counterparts, but it is nevertheless critical for them to work with their professional advisors to implement an estate and tax plan that addresses the complex and unique issues that they may face. In such cases, even a few hours of planning may help to prevent a lifetime of problems.
Please contact John R. Tullio at Smith and Condeni LLP for more information regarding any of the matters discussed in this article.