Private Wealth Developments and Observations

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.

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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.

Retirement Planning Strategies under the Scrutiny of the Federal Fisc

Posted in Retirement Planning, Tax

OLYMPUS DIGITAL CAMERAPresident Obama’s proposed budget for 2016 shows that some retirement planning strategies have drawn the attention of the Federal government and may be subject to future legislative limitations.

The President’s proposed budget suggests that Roth IRA conversions be limited to only pre-tax contributions. This would effectively eliminate the “backdoor” Roth IRA conversions by which taxpayers whose income is too high to contribute pre-tax money into a Roth IRA instead contribute to a traditional IRA with after-tax money and then quickly convert to a Roth IRA.

Additionally, the proposed budget calls for the elimination of “aggressive” strategies for claiming Social Security benefits. The exact strategies at issue are not specified in the proposed budget, so professionals in the industry and those saving for retirement are left to speculate. Speculation has pointed to two particular techniques as those most likely to be addressed. The first, sometimes called the “claim now, claim more later” strategy involves married couples, often dual-earner couples, one spouse of which chooses to accept spousal benefits at full retirement age (age 66), then later switches to receive his or her own benefits when they max out at age 70. A second approach, sometimes called the “file and suspend” strategy, can be used in conjunction with the first. Because one member of a couple typically must file for retirement benefits in order for his or her spouse to claim a spousal benefit, some couples may have one spouse file for benefits at full retirement age, but then immediately suspend their own benefits, allowing the suspended benefits to grow while their spouse still claims a spousal benefit in the interim.

It should be noted that in the current congressional climate, it is unlikely any such proposals would be codified in the near future. It is also unclear how or if any such proposals could be given retroactive effect if they are implemented.

If you have legal questions about your retirement planning strategies, contact the Private Wealth professionals at BakerHostetler.

IRS Plans to Further Restrict Family Business Valuation Discounts

Posted in Estate Tax, Tax

tax iStock_000006743485_LargeIRS regulations anticipated for release as early as this September may further restrict valuation discounts. The exact scope of the regulations is unknown, but the regulations will likely make it more difficult for taxpayers to discount the value of family business interests.

Valuation Discounts Generally

Valuation discounts in family business interests are often utilized in connection with “estate freezes” that deflect future asset growth from the estate of a senior family member to a younger generation member. Families place restrictions—such as restrictions on the owner’s ability to become a full-fledged voting member or partner of the entity—on interests given to junior family members. Splitting interests and dividing control in this way considerably reduces the value of the transferred interests. The most significant valuation discounts arising from such mechanisms are lack of marketability and lack of control discounts. Thus, when appraisals are done for family business interests with such restrictions placed on them, the transferred interests are valued at significant discounts, and the tax on a transfer may be correspondingly reduced. However, the interests still retain economic benefits for the transferees.

Section 2704 Restrictions Background

In 1990, Internal Revenue Code Section 2704 was enacted to curb the use of such techniques that reduce the value of assets in a taxable transfer. Section 2704 ignores certain “applicable restrictions” when valuing interests in family-controlled entities, such as restrictions that effectively limit the ability of the entity to liquidate and that lapse (or that the family has the power to eliminate) after a transfer is made. However, an exception to Section 2704 provides that restrictions imposed by state or federal law continue to be respected, rather than disregarded, for valuation purposes. In response, many states have changed their laws to provide restrictions that might otherwise be ignored for valuation purposes under Section 2704.

New Regulations on the Way

Section 2704(b) gives the Secretary of the Treasury the power to issue new regulations disregarding additional restrictions if the restrictions reduce the value of the transferred interest but not the value of the interest to the transferee. The IRS has interpreted this grant of power broadly and has long maintained its authority to further restrict valuation discounts.

Since 2003, new regulations under Section 2704 have been on the IRS-Treasury Priority Business Plan, and for several years the Administration included a section in its statement of revenue proposals (commonly known as the “Greenbook”) calling for additional legislation to strengthen the Treasury’s authority to disregard restrictions under Section 2704. However, these revenue proposals were noticeably dropped from the Greenbook in 2014, prompting many to conclude that regulations are now imminent. To confirm this, Cathy Hughes, an Estate and Gift Tax Attorney Advisor at the Treasury Department, spoke at a conference in late April this year, and indicated that new regulations may be released in September of this year.

What might the new regulations look like? The 2013 Greenbook, which was the most recent Greenbook to contain the Section 2704 revenue proposals, provides some clues. The 2013 Greenbook proposed several changes, including the following:

  • The addition of “disregarded restrictions” which are “to be specified in regulations” and may extend beyond the scope of the liquidation restrictions currently addressed by Section 2704.
  • The attribution of the voting power of certain minority interests held by charities or non-family members (to be specified in regulations) to the family for purposes of assessing family control.
  • The addition of safe harbors to permit taxpayers to prepare governing documents for a family-controlled entity so as to avoid the application of Section 2704.

Commentators have also considered a variety of other possibilities for the new regulations. For example, some commentators suggest that the new regulations might distinguish between holding and operating companies and apply more restrictive regulations to the former. Still other commentators believe that the regulations may limit the availability of minority and marketability discounts for transfers involving family-controlled entities, notwithstanding legislative history that clearly indicates that Section 2704 was not intended to affect such discounts.

If you are considering a transfer with valuation discounts, now is the time to act. While the effective date of the looming Section 2704 regulations is unknown, regulations are typically effective prospectively. In the normal course, regulations are issued in proposed form, comments are invited for a period of time, and final regulations are issued thereafter. The effective date of the regulations is typically the date of the final regulations; however, in some cases, regulations have been deemed effective as of the date of the proposed regulations. (Notwithstanding the foregoing, even a transaction completed before the release of the Section 2704 regulations is not guaranteed to avoid scrutiny under the regulations because the IRS could attempt to treat the regulations as interpretive of existing law.)

For more information, please contact Chad Makuch (216-861-7535 or cmakuch@bakerlaw.com). Chad is an associate with BakerHostetler’s Private Wealth team and prepared this blog posting with the assistance of Amanda Tate, a 2015 summer associate in BakerHostetler’s Cleveland office.