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GONNELLA & MAJORS, PC
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Planning Tips In Uncertain Times The economy is a mess, home prices are reeling, and stocks have plunged. But for those likely to become ensnarled in the estate tax, there’s a silver lining: These troubled times offer some of the best opportunities in years to transfer wealth to younger generations, without triggering much or any inheritance tax along the way. This is a great time to get your estate in order. We are seeing our clients transfer assets to their heirs that they believe are temporarily depressed – from real estate, to shares of stocks, to interests in family owned businesses. These transfers reduce the size of their own estates and give their heirs the chance to “cash in” on the rebound. We can also take advantage of the lower interest rates to generate a transfer of assets to heirs without incurring any gift tax. These are ideas to consider: 1. You can make a gift to anyone (or to as many people as you desire) for up to $12,000 before the end of 2008. If instead of cash, you make that gift of beaten down stocks or mutual fund shares, you are using depressed values and any upswing in the value will in essence be a “tax free” gift. In 2009, that gift amount increases to $13,000. 2. Pay your children’s and grandchildren’s tuition and medical bills directly to the educational or medical institution. These payments made directly to a qualified educational organization or medical care provider do not count as taxable gifts. 3. Over your lifetime, you can give away an additional $1,000,000 gift tax free. While that $1,000,000 will reduce – dollar for dollar – the amount you are able to shield from estate taxes when you die, giving it while your assets are depressed makes a lot of sense. All the appreciation and gains will accrue to your heir’s balance sheets and be outside of your estate. We have other, more complex planning strategies, that you can employ that will give you an even “bigger bang for your buck.” Those strategies include the following: 1. Making loans to family members with these historically low interest rates makes a lot of sense. Rates for the month of November range from 1.63% (short term loans), to 2.97% (mid term loans) to 4.24% (long term loans). If your child, as the borrower, invests your loan proceeds wisely, everything over the interest rate amount is owned by the child gift tax free. 2. The sale of an asset which has the potential to appreciate significantly to a Grantor Trust is a sophisticated and popular planning strategy. This strategy provides a tax-advantaged way to pass assets to children and grandchildren, while keeping the value of the property in the trust outside of their estates. 3. A Grantor Retained Annuity Trust is another popular technique, and one that is blessed by the Internal Revenue Code. It is similar to the loan technique, described above, and if all goes well, with the asset growth, it can get a big chunk of money to children free of both gift and estate taxes. If you would like to learn more about these strategies and other estate planning techniques, please contact our office at 307-733- 5890 to schedule an appointment. ________________________________________________________________________________________________________ Wyoming Close Limited Liability Company (Wyoming Close LLC) And Why It Provides Great Planning Opportunities The State of Wyoming is one of, if not the most attractive states, in the country because of its taxes. In its June 2004 issue, Bloomberg Wealth Manager magazine declared Wyoming to be the number one friendliest state for wealthy people. For example, Wyoming has:
No inheritance tax No gift tax No franchise tax No excise tax No business and occupation tax Low property taxes Wyoming is also attractive as the state to choose for the formation of business entities. Choices of business entity have evolved. Historically, corporations were the business entity of choice. However, limited partnerships and limited liability companies have become more popular as they provide greater tax reduction, greater asset protection and are more flexible. In July of 2002, Wyoming’s legislature enhanced their Close Liability Company legislation. These statutes are unparalleled when determining a jurisdiction for a business entity for your clients. These are the reasons why... 1. CREDITOR PROTECTION Creditor protection is one of the main reasons clients put their businesses into a statutory entity. However, many state statutes only give nominal creditor protection for their business entities. The Wyoming Close LLC gives maximum protection as it mandates by statute that a creditor of a member of an LLC only has the rights of a transferee and that the charging order is the exclusive remedy by which a judgment creditor may satisfy a judgment. (W.S. 17-15-122). This statute enhances creditor protection over most other states for both LLCs and FLPs. 2. VALUATION ADJUSTMENTS & COMPRESSION of VALUE LLCs (and FLPs) are often used to adjust or compress the valuation of assets in the entity. These discounts are available because of the restrictions placed in the operating agreements on the members of the LLC. These discounts are helpful both for gift and estate tax reduction. However, the Internal Revenue Code does not allow restrictions on withdrawal or dissolution rights that are more rigid than that of the default law of the state where the LLC (or FLP) is created. Thus, even if an operating agreement places severe restrictions on these rights, when determining the reduction in value, only the default under state law may be considered. Thus, discounts may not be as favorable in many other jurisdictions. Under the Wyoming Close LLC statutes the default restrictions are very strict. The default restrictions are as follows:
not have a return of his or her capital unless all members consent, and irrespective of his or her capital contribution, only has the right to demand and receive cash in return for his or her contribution to capital. (See W.S. 17-25-107). B. The Wyoming Close LLC may be dissolved only by unanimous written agreement of all the members. (See W.S. 17-25- 108). These onerous default restrictions allow greater discounting or compression of value of the assets within the LLC, thus generating greater tax savings. 3. SIMPLE to CREATE and EASY to ADMINISTER FLPs are commonly used as the business entity of choice for discounting of value and creditor protection. The main problem with an FLP is that there must be a general partner who is the manager and a limited partner who is not a manager. The limited partner has statutory creditor protection but the general partner has no creditor protection and may be held personally liable. Thus all the assets owned by the general partner are subject to attachment by creditors. To avoid this potentially disastrous result, practitioners create the FLP entity and then create another entity to hold the general partnership interest. Only with the creation of this other entity can the general partner have protection from creditors. This second entity often is a corporation or an LLC. Each entity requires a separate checking account, a separate tax identification number and a separate annual tax return. If a client does not want the administrative burden of two entities, the only option is for the managing general partner to be an individual without creditor protection. The Wyoming Close LLC grants to all members, whether they are managing members or non-managing members, protection from creditors. To obtain creditor protection for all members of a Wyoming Close LLC:
B. Only one checking account needs be maintained. C. Only one tax identification number needs to be requested. D. Only one annual tax return needs to be filed. We have found that our clients truly appreciate simplifying their lives to the greatest extent possible and still provide them with the planning tools they want for their business and estate planning. The Wyoming Close LLC provides this simplicity. In addition, the bookkeeping is not as complex, and thus the possibility of error is substantially reduced. 4. COST EFFECTIVE TO SETUP AND ADMINISTER The filing fees and the annual fees to be paid to the Wyoming Secretary of State are very competitive with the fees of other states. The initial filing fee is $100. Thereafter the annual fee is only $50 provided the LLC does not have assets actually located and employed in the State of Wyoming. (W.S. 17-15-132 and 17-16-1630). Many of the LLCs filed in Wyoming have their assets outside of the state, and thus the $50 fee applies. ________________________________________________________________________________________________________ Taking Advantage of Lower Interest Rates Through a Grantor Retained Annuity Trust If you are concerned about having a taxable estate, you may want to consider taking advantage of the currently low interest rates to transfer money to your descendants through the use of a Grantor Retained Annuity Trust (GRAT). A GRAT is an estate planning technique that enables taxpayers to "leverage" gifts made to family members. A GRAT involves a gift of property to a trust in which the creator (Grantor) of the trust retains the right to receive an annuity from the trust for a term of years, while the remainder interest in the trust passes to the Grantor’s beneficiaries. Because the Grantor retains an annuity interest, the value of the gift to the beneficiaries is generally reduced so that there is little or no gift tax consequence. When the Grantor's retained term interest ends, the GRAT terminates and all assets are distributed either outright to, or to a different trust for the benefit of, the remainder beneficiaries. Generally, if the property transferred to a GRAT has an overall annual investment performance that exceeds the Internal Revenue Code “Section 7520 Rate” in effect at the time of the creation of the GRAT (3.4% in April of 2008), the return on the investment in excess of the 7520 Rate will be passed on to the remainder beneficiaries free of gift tax. If the annual investment performance of the GRAT assets does not exceed the Section 7520 Rate, all of the GRAT assets will be returned to the Grantor in satisfaction (or partial satisfaction) of the retained annuity interest, and the Grantor will be in the same position economically and tax-wise as if the GRAT had never been established. ________________________________________________________________________________________________________ Five Tiers of Asset Protection If you are concerned about claims by potential creditors or frivolous lawsuits, it is important to keep in mind the five tiers of Asset Protection. These include:
How Should I Title Property Owned Jointly with Others? Like most married couples, you may own your home, bank accounts, and investment accounts or other property jointly with your spouse. When holding title to property with your spouse, or others, there are some important factors to keep in mind. There are several ways to jointly own property, each with its own legal characteristics: Tenancy In Common: Tenancy in Common (or Tenants in Common / TIC) is a form of joint ownership in which each co-owner is regarded as owning a fractional interest, or a separate and distinct share, in the same property. The co-owners may own the property in equal shares (50/50), or in unequal shares (60/40). This form of ownership is common between business partners or co- owners who are not married. There is no right of survivorship between the co-owners, meaning that when one co-owner passes away, that owner’s interest in the property will be part of the owner’s estate and will pass to the beneficiaries named in the owner’s Will or to the owner’s heirs. Joint Tenancy: Joint Tenancy (or Joint Tenancy with Right of Survivorship / JTWROS), is a type of joint ownership in which the co- owners have an equal share and interest in the property, and the co-owners have a right of survivorship. As a result, when one co- owner passes away, the owner’s interest in the property is automatically transferred to the other co-owners of the property. This is typically a good result, as the owner’s interest in the property does not have to go through the probate process. This form of ownership is common between husband and wife, parent and child, or siblings, where the co-owners want ownership to pass immediately and automatically to the surviving co-owners. Tenancy by the Entirety: Tenancy by the Entirety (or Tenancy by the Entireties) is a type of joint ownership only available to married couples. Like Joint Tenancy, Tenancy by the Entirety provides a right of survivorship, so if one spouse dies, the entire interest in the property automatically passes to the surviving spouse, without going through probate. To create a Tenancy by the Entirety, the property must be conveyed to the married couple “as John and Jane Smith, as Tenants by the Entirety” or “as John and Jane Smith, as Husband and Wife.” When dealing with property held as Tenants by the Entirety, the consent of both the husband and wife is required. Unlike Wyoming, there are many states that no longer recognize Tenancy by the Entirety. Where it is recognized, a significant additional benefit of Tenancy by the Entirety is the ability to shield or protect the property from the creditors of one spouse. Holding title to property as Tenancy by the Entirety is an easy way to provide additional asset protection for your property. It may be a good idea to look at your investment accounts, bank accounts, and other property owned jointly with your spouse and determine how they are titled. If not held as “Tenancy by the Entirety,” or as “Husband and Wife,” please contact our office to discuss whether it would be beneficial to retitle the assets in such a manner. There are also others ways to hold title to jointly owned property, which include Revocable Living Trusts and Limited Liability Companies (LLC’s), that may provide additional benefits to the owners, but are not discussed in this Article. If you have a Living Trust or an LLC that is intended to hold certain property, it is important to make sure that the asset is appropriately titled in the name of the Trust or LLC. If you have questions regarding how your property is titled, please contact our office. |
| Gonnella & Majors, PC ▪ 575 South Willow Street ▪ P.O. Box 1226 ▪ Jackson, WY ▪ 83001 Phone (307) 733-5890 ▪ Facsimile (307) 734-0544 ▪ www.wyomingestatelaw.com Disclaimer: Wyoming Rule of Professional Conduct 7.3(b), requires a notification that this is an advertisement. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisement or self– proclaimed expertise. |
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