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WealthDirector

Private Wealth Developments and Observations

What do Prince, Michael Jackson, and Whitney Houston Have in Common?

Posted in Estate Tax

Michael Jackson, Prince and Whitney Houston each revolutionized the music industry and impacted popular music for decades. We all appreciate how Michael Jackson moonwalked across the stage, Prince made it (purple) rain and Whitney Houston will always love you. These impactful artists changed, and continue to change, the music landscape. What do Michael Jackson, Whitney Houston and (possibly) Prince have in common? The Internal Revenue Service (“IRS”) is interested in their ability to continue to profit from the music industry through royalties, released music, unreleased music and the use of image. What is the value of the right to use an image, sell music, earn royalties and benefit from intellectual property after death?

Both Whitney Houston’s and Michael Jackson’s estates are engaged in tax litigation with the IRS. The IRS valued Whitney Houston’s assets at around $36 million, whereas the estate valued the assets at $13.9 million. Among other things, the IRS asserts that royalties, publicity rights and intellectual property are worth approximately $22 million more than the estate’s valuation. In Michael Jackson’s case, the numbers are much more substantial, and much farther apart. The IRS valued Michael Jackson’s estate at $1.32 billion, while the estate asserted that the value was only around $7 million. For the posthumous image and likeness, the IRS valued those rights at $434 million, and the estate valued Michael Jackson’s publicity rights at $2,105. The Michael Jackson case is docketed for trial in February 2017. Continue Reading

Governor Kasich Signs House Bill 229 to Create Ohio Family Trust Company Act

Posted in Family Trust Company

Ohio Statehouse originalOn June 14, 2016, Governor Kasich signed House Bill 229 into law. The bill, which was over two years in the making, allows an Ohio family to establish its own trust company to serve as trustee for its family trusts. The legislation, co-authored by Rob Galloway of BakerHostetler’s Private Wealth Team, had been through a series of amendments to earn the acceptance of the Ohio Division of Commerce’s Department of Financial Institutions.

Family trust companies (FTCs) have seen increased use as a wealth succession planning tool in the past several years as more states have enacted FTC legislation. Currently, there are over 15 states with such legislation, the most recent being the state of Florida.

FTCs provide the benefit of a permanent trustee (in the form of a corporation or limited liability company) along with the ability of a family to substantially control its operations. Under current Ohio law, the trustee for a family trust was either (a) one or more individuals or (b) a commercial trustee. This meant that an Ohio family seeking to use an FTC was required to form and operate the FTC in another state. Such out-of-state operations resulted in increased operating costs, extra administrative effort and a loss of revenue from the state of Ohio.

Similar to laws in several other states, Ohio’s legislation allows for two types of FTCs: licensed and unlicensed. A licensed FTC is subject to the following requirements: (1) it must have a minimum capital balance of at least $200,000, and up to $500,000, at the discretion of Ohio’s superintendent of financial institutions; (2) it may provide services to “family members,” certain nonfamily members and certain affiliated entities; (3) it must maintain office space and at least one part-time employee in Ohio; (4) it must hold at least two governing board meetings per year in Ohio; (5) it must perform certain administrative activities in Ohio; and (6) it must maintain a fidelity bond and directors/officers insurance, each in the amount of $1 million. A licensed FTC is also subject to supervision by Ohio’s Department of Financial Institutions and will be audited every 18 months. Continue Reading

The Three Most Important Provisions for S Corporations Under PATH Act

Posted in Tax

Tax Words MedIt has become a tradition that at the end of each year, Congress passes legislation to extend previous legislation. In late 2015, Congress passed Public Law 114-113, which contains the Protecting Americans from Tax Hikes Act (“PATH”). PATH’s benefits to donors and charities were detailed in a previous post, which is available here: Donors and Charities Benefit Under New Tax Legislation. This post focuses on noteworthy extenders for S corporations.

The three most important sections for S corporations (and S corporation shareholders) in PATH include the built-in gains (“BIG”) tax, bonus depreciation, and contributions to charity.

  1. BIG recognition period set at five years permanently, IRC §1374: This provision is beneficial because it permanently reduces the amount of time that an S corporation’s assets are subject to the BIG tax (and its taint). The BIG tax imposes a corporate-level tax on the inherent gain in an S corporation’s assets for a prescribed time. The BIG tax taints the S corporation’s assets, and applies if the S corporation converted from a C corporation or received assets from a C corporation. If the S corporation sells or otherwise disposes of those assets during the recognition period, the BIG tax applies. The recognition period was 10 years, but has fluctuated between five years (tax years 2012-2014) and seven years (tax years 2009-2011). This provision makes the recognition period for the BIG tax permanent at five years, and is effective for tax years beginning after December 2014.
  2. Bonus depreciation continues through 2019, IRC §168(k): This provision is beneficial because it extends bonus depreciation, which allows an additional first-year depreciation deduction. In general, this provision extends the additional first-year depreciation deduction through 2019, effective for property acquired and placed in service after December 31, 2014. The bonus depreciation percentage is now 50 percent, applicable to property placed in service after December 31, 2014, and is reduced by 10 percent per calendar year beginning in 2018. This provision also extends the election to increase the alternative minimum tax credit limitation in lieu of bonus depreciation for five years.
  3. Charitable contribution reduces shareholder’s stock basis by pro rata share of contributed property’s basis permanently, §1367: This provision is beneficial because it limits the stock basis reduction. If an S corporation contributes money or property to a charitable organization, the charitable contribution flows through the S corporation to the S corporation shareholders. The S corporation shareholder must adjust his, her, or its stock basis accordingly. This provision makes permanent that the amount of a stock basis reduction arising from a charitable contribution is equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. The provision applies to charitable contributions made in taxable years beginning after December 31, 2014.

New Basis Reporting Requirements (and Penalties) for Decedents’ Estates

Posted in Estate Planning, Estate Tax

Wealth Preservation & Estate Planning statement on old paper

FEBRUARY 2, 2016 UPDATE: The final version of Form 8971 and the Instructions have been posted by the IRS.

On July 31, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (the “Act”) to reauthorize the Highway Trust Fund’s spending authority for another three months. To offset the legislation’s costs, the Act makes a number of changes to the tax code, including provisions with respect to the income tax basis of property acquired from a decedent.

The Act amends the Internal Revenue Code by (i) amending Section 1014 to add a new subsection, 1014(f), and (ii) adding Section 6035. With respect to “any interest in property included in the decedent’s gross estate for Federal estate tax purposes” that is reported on a federal estate tax return, new Sections 1014(f) and 6035 operate together to require executors and/or beneficiaries of decedents’ estates to file “statements” with the Internal Revenue Service (and furnish copies to each affected beneficiary) that identify “the value of each interest in such property as reported on such return and such other information with respect to such interest as the Secretary may prescribe.” For convenience, the required new statements are referred to (solely for purposes of this blog) as “Basis Statements,” since such Basis Statements would declare the value of property acquired from a decedent that the filing party believes to be the correct value to be used as the income tax cost basis of the property in the hands of the beneficiary who received the property by reason of a decedent’s death. Continue Reading

Donors and Charities Benefit Under New Tax Legislation

Posted in Tax

Tax Words MedWhile most provisions of the Internal Revenue Code (“Code”) do not automatically expire, there are dozens that do. Included among the expiring provisions have been several intended to enhance charitable giving. Each has been hostage to the late-year legislative ritual of frequent short-term extensions, which has created significant uncertainty for donors, charities, and their advisors. Fortunately, in the latest round of tax legislation, known as the Protecting Americans from Tax Hikes Act (“PATH Act”), many of these favorable provisions have been extended permanently and, in some cases, expanded. Continue Reading

Use of a Limited Liability Company for Charitable Purposes

Posted in News

Lightbulb and dollars

On December 1, Mark Zuckerberg wrote a letter to his newborn daughter, Max, and shared it with the world (on Facebook, of course). The letter announced the commitment of Zuckerberg and his wife, Priscilla Chan, to improve the world in which their daughter will grow up, which included the creation of the Chan Zuckerberg Initiative, a limited liability company whose mission is to “advance human potential and promote equality in areas such as health, education, scientific research, and energy.” Mr. Zuckerberg further stated in the letter his intent to give away for such purposes during his lifetime 99 percent of his shares in Facebook, currently valued at $45 billion. Continue Reading

Family Trust Company Legislation Passes Ohio House

Posted in Family Trust Company

Ohio Statehouse originalOn December 9, 2015, House Bill 229 was passed by the Ohio House of Representatives by a vote of 84-8. The bill, which was almost two years in the making, allows an Ohio family to establish its own trust company to serve as trustee for its family trusts. A companion bill is being considered by a committee of the Ohio Senate, with several hearings already having taken place. The legislation, co-authored by Rob Galloway of BakerHostetler’s Cleveland Private Wealth Team, has been through a series of amendments to earn the acceptance by the Ohio Division of Commerce’s Department of Financial Institutions.

Family trust companies (“FTCs”) have seen increased use as a wealth succession planning tool in the past several years as more states have enacted FTC legislation. Currently, there are over 15 states with such legislation, the most recent being the state of Florida.

FTCs provide the benefit of a permanent trustee (in the form of a corporation or limited liability company) along with the ability of a family to substantially control its operations. Under current Ohio law, the choice of trustee for a family trust is either (a) one or more individuals or (b) a commercial trustee. This means that an Ohio family seeking to use an FTC is now required to form and operate the FTC in another state. Such out-of-state operations result in increased operating costs, extra administrative effort, and a loss of revenue to the state of Ohio.

Continue Reading

Estate Planning Considerations for Millennials

Posted in Estate Planning

I am a millennial. I grew up in the age of the Internet, computers, and text messaging. I had my first cell phone in late elementary school, where I mastered the game of Snake on a one-inch square screen. My generation then progressed past dial-up Internet, Game Boy, and CD players to smartphones, apps, and Beats headphones. Millennials are unique and have very distinctive estate planning needs.

Millennials present an estate planning challenge because we often must consider both sides of the fence: inheritance and our own planning. More wealth will be transferred in our parents’ generation than in any other (approximately $30 trillion in the next 30 years). This wealth shift makes discussions between millennials and our parents about estate plans and family business transitioning relevant and timely.

For planning, the millennial’s first step should be a private one: think. Take a moment, and truly contemplate, “What happens if…” Ask honest questions and listen openly for answers. “Who should receive my assets? Spouse? Siblings? Friend? Charity?” “Who should be the personal representative (sometimes called an executor) of my estate?” This reflective step does not have to be formal or the answers well developed. Professional advisors can help you in answering these questions. There are no right or wrong answers; they are personal and specific to the millennial.

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New IRS Procedure for Issuance of Federal Estate Tax Closing Letters

Posted in Estate Planning, Estate Tax

tax iStock_000006743485_LargeEffective for all federal estate tax returns filed on or after June 1, 2015, federal estate tax closing letters will be issued only upon request.

The process for making a request:

  • Timing – no earlier than four months after the date of filing of the return.
  • Contact – telephone the IRS @ (866) 699-4083 (estate and gift tax department).
  • Provide: Name of the decedent, social security number and date of death.

If a federal estate tax closing letter is available to be issued, it will be sent to both the Executor/Personal Representative and attorney of record (who signed the federal estate tax return) within 7-10 business days. No further information will be provided unless either the Executor/Personal Representative or the attorney who signed the return makes the telephone request. Information as to whether or not the closing letter is available or other status information will not be provided to anyone else. As a practical matter, a first call to the IRS to request the closing letter could be made by anyone, and a follow-up call could be made by the attorney of record after the 10 day period has passed (if necessary).

Experience to date indicates that federal estate tax closing letters will be made available promptly upon appropriate request (if available).

For more information on this or any estate tax issue, contact any member of BakerHostetler’s Private Wealth team.

Co-authored by: Diana J. Adams

BakerHostetler Recognized as “Law Firm of the Year” in Trusts & Estates Law by U.S. News – Best Lawyers® 2016 “Best Law Firms”

Posted in News

BakerHostetler was named “Law Firm of the Year” in Trusts & Estates Law in U.S. News – Best Lawyers® 2016 “Best Law Firms” list. In addition, 16 of the firm’s practice areas received national Tier 1 rankings, earning 36 national rankings (Tiers 1 through 3) and 81 Tier 1 regional rankings.

Law Firm of the Year recognitions are based on a firm’s overall performance in a particular practice area and represent a significant showing in the 2016 U.S. News – Best Lawyers® Best Law Firms research.

Tier rankings are based on an evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys, and review of additional information provided by law firms as part of the formal submission process. Clients were asked to provide feedback on the firm practice groups’ expertise, responsiveness, understanding of a business and its needs, cost-effectiveness, civility, and whether they would refer another client to the firm.

Overall, 176 BakerHostetler attorneys were selected for inclusion in The Best Lawyers in America© 2016.