Category Archives: Estate Tax

Is New York “Offshore?”

Posted on by under Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Financial Powers of Attorney, Generation Skipping Tax, Illiquid Assets, Income Tax, Kansas, LLCs, Missouri, Small Business, Trusts, Wills

The NY Times has this fascinating article about the recent corporate tax controversy of large global companies parking money in international holding companies that have domestic bank accounts or investments. But poof (now you see it; now you don’t) – by tax accounting magic, the money’s held internationally. America has the highest corporate tax rate in the developed world –  35%. Some other countries, like Ireland, have much lower tax rates, so having the money held by an Irish subsidiary in a New York bank account yields a substantially lower (say 13%) tax rate.

While offshore bank accounts (for individuals or corporations) are often discussed in political terms, they’re a bipartisan issue. While companies some might view as conservative do it (like oil and gas companies), so do seemingly more moderate or even liberal giants like Microsoft, Google, and Apple. (A few months back, Apple passed ExxonMobil as the biggest company by market cap – all those iPhones, iPads, and iPods everybody loves fueled its rise to the coolest big business on the planet.) And wealthy folks of all political stripes like Mitt Romney, Al Gore, Terry McAuliffe, and Penny Pritzer have offshore accounts or investments. Why? Lower tax bills. Whether you think offshore holdings are great or terrible, the math tells the story.

The unfortunate moral of the story is the obscene complexity of America’s tax law – call it the lawyers’ and accountants’ full employment act. Most Americans, whether conservative or liberal, favor a less complex IRS Code. Meanwhile, if my law firm, Johnson Law KC LLC, can help you or your family with your personal estate planning or small business needs, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com) for a free consultation.

(c) 2013, Stephen M. Johnson, Esq.

Talking to Family about Inheritances

Posted on by under Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Financial Powers of Attorney, Gift Tax, Illiquid Assets, IRA, Kansas, Living Wills, Medical Powers of Attorney, Missouri, Probate, Small Business, Trusts, Wills

CNBC has this article about a recent US Trust study about when parents should talk to their children (and grandchildren) about inheritances. As the article points out, many children of wealthy families realize they’re wealthy based on the lifestyle they enjoy. But there’s a big difference between knowing “My family’s wealthy and takes exotic vacations” and knowing “Mom & Dad have XYZ income each year, a house held in ABC trust, a controlling interest in Family Co LLC, a vacation home also held in trust, and a net worth of $_______.” When to tell family members specifics is an important question to consider in careful consultation with your family’s accountant, attorney, and other professional advisors. As the article suggests, maturity levels, financial acumen, and other factors come into play. But as the article rightly concludes, “even if parents don’t give their kids “the number” for their wealth, they should at least give them the skills and the values to manage it well.”

Beyond the tax and legal details of structuring entities that attorneys and other wealth advisors do, imparting skills and values to manage a legacy is vital. Without the skills and values, a child or grandchild may not know how a family member became wealthy, why a family member managed their lifestyle as they did, or what legacy the wealth should have. I encourage clients to be open and honest with their families when the time comes to discuss inheritance and legacy. But don’t just give your family the numbers, give them the context and share your values and passion and legacy with them.

If my law firm, Johnson Law KC LLC, can help you or your family with estate planning or asset protection needs, or give you ideas for spurring these important conversations with your family, please call (913-707-9220) or email me (steve@johnsonlawkc.com) for  a convenient free consultation.

(c) 2013, Stephen M. Johnson, Esq.

IRS Audits

Posted on by under Estate Planning, Estate Tax, Family Business, Financial Powers of Attorney, Gift Tax, Income Tax, Kansas, Missouri, Small Business, Trusts, Wills

News is coming out that the IRS may have been improperly scrutinizing political ideas of some nonprofits applying for tax exempt status for a couple of years, especially in the run up to the 2012 presidential election. If the IRS was denying nonprofit applications based on political ideas (e.g. favoring conservatives or favoring liberals), we can all agree that would be inappropriate and likely illegal, because nonprofits are about serving the common good, not political gains (or losses). While we watch the investigation unfold and the political theater and finger pointing in Washington D.C., another group of people, affluent taxpayers, are seeing a rise in audits.

As this CNBC article explains, more audits of wealthy taxpayers isn’t necessarily bad and may actually be a positive check or balance in the tax system. There are 2 reasons why the IRS might audit wealthy taxpayers more than middle class folks: (1) wealthy taxpayers often have very complex tax returns (individual, investments, corporate, trusts) to file each April 15 because of the diversified nature of their holdings and income and (2) the IRS is more likely to pursue an audit that will yield a better result (e.g. they’re more likely to pursue a few million in disputed income from a hedge fund billionaire than a few bucks in tips the local Starbucks barista forgot to report). Both of these reasons are perfectly legal and appropriate.

Audits are a pain in the neck and take lots of time for families and business owners, but they’re nothing to fear. Follow good accounting practices, keep track of receipts, track income and expenses, and keep old copies of tax returns you’ve filed. The IRS isn’t out to get any of us, they’re just double checking that we did the math right. If my law firm, Johnson Law KC LLC, can help your family or small business with an audit, give me a call (913-707-9220) or send me an email (steve@johnsonlawkc.com). We’re here to serve you and help you be ready for life’s surprises.

(c) 2013, Stephen M. Johnson, Esq.

Tax Like its 1972?

Posted on by under Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Financial Powers of Attorney, Gift Tax, Gifts to Minors, Illiquid Assets, Kansas, Living Wills, LLCs, Missouri, Probate, Small Business, Trusts, Wills

Bloomberg provides this interesting article on Summer Redstone’s appeal of the IRS arguing his 1972 transaction was a gift. Some might think that 41 years is a bit late (!) to be challenging a transaction (or collecting tax on it), and many of the lawyers quoted were surprised by the IRS’ claims. It will be fascinating to watch how this case plays out. If the IRS’ argument turns out to be merited (albeit 41 years late), this has ripple potential in the estate planning and tax communities, as attorneys, accountants, and advisors grapple with how to insulate clients (and themselves) from liability decades after the fact.

Stay tuned for updates from the recent 2013 KC Estate Planning Symposium, which I attended last week (25-26 April 2013). This year’s program featured a host of top speakers on topics ranging from grantor trust tax, FLP and other case law updates to special needs trusts, IRAs, asset protection, and Social Security planning.

If my office, Johnson Law KC LLC, can help you or your family with gift tax or other estate planning issues, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient free consultation.

(c) 2013, Stephen M. Johnson, Esq.

Intent, Trusts, and No Contest Clauses

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Gift Tax, Gifts to Minors, Kansas, LLCs, Missouri, Probate, Small Business, Trusts, Wills

The Kansas Supreme Court recently issued an interesting decision in Hamel v. Hamel, arising from Rooks County, Kansas (north central Kansas). Hamel teaches us 3 lessons: as you contemplate estate planning, business succession, and your wealth management goals, be sure (1) your estate planning documents clearly communicate your intent , (2) others (family members and professional advisors) understand your intent, and (3) your estate planning documents provide broad discretion and the necessary powers to handle various transactions. Intent matters and clearly communicating your intent makes all the difference.

Hamel involved Lawrence Hamel, a trust beneficiary and child of the decedent, Arthur Hamel, challenging his father’s trust, specifically whether the trustee had authority to sell farmland owned by the trust. Arthur’s trust said another son (who was a trustee of the trust), Dennis,  had priority (or first refusal rights) to buy the land owned by the trust, and that Dennis had 3 years to buy the land from the trust. Dennis signed an installment sale contract to buy the land over 6 years, paying 5% interest (no interest during the 6th year), funding the purchase with money from the trust with a mere $10,000 down payment, and for Dennis to get all the income and profit the land generated during the 6 years. So Dennis wanted to self deal with the trust on very favorable terms (he was a trustee in his fiduciary capacity and the buyer in his individual capacity, a conflict of interest which the trust waived), have a year of payments interest fee, minimal down payment, and get the land’s revenue before he owned the land. Not surprisingly, Dennis’ brother Lawrence objected. Lawrence pointed out that while their father had wanted Dennis to have the land and permitted favorable inter-family sale terms, the deal had to be done within 3 years, not 6. Enter the trust’s no contest clause, which said if you object to the sale or other trust administration aspects, you lose your inheritance.

This family’s trust dispute wound up at the Kansas Supreme Court. The Justices, in an 8-1 opinion, agreed with Lawrence that the 6 year installment sale to Dennis was too long, since the trust only allowed for 3 years. Instead of enforcing the no contest clause (and disinherit Lawrence for his objections to the farm sale), the Court found that Lawrence had probable cause to challenge the sale of the farm from the trust to his brother. The Court found probable cause in the 3 year sale provision: “while the Trustees [Dennis and a sister] possessed broad authority to sell the Trust real estate, they were not authorized to enter into a contract for the sale of the farmland that extended beyond the 3-year period specifically provided by the Trust.” (Hamel, pg. 24) The installment sale could go far, but not that far. As the Court saw it, Lawrence was just looking out for the Trust’s best interests (the Trustee’s job and fiduciary duty), when the Trustees were cutting corners, so of course he could object and make the Trustees follow the Trust’s rules. The Court didn’t address it, but there may also have been tax traps lurking beneath the surface of this installment sale. The IRS looks closely at inter-family sale and transactions and asks: (1) was the farm properly valued (or did the family take too many discounts)? (2) is the buyer paying the seller a fair market rate of interest for the entire installment sale period? (interest free loans are gifts) (3) is the buyer a bona fide purchaser, or is the “sale” really just a gift wrapped in different paper?

Installment sales are an important technique for asset protection, estate planning, and business succession planning. But they have to be carefully structured and done right, or the result is a long, expensive, contentious, public mess. Installment sales are frequently used by serial entrepreneurs trying to transition a business; farmers, ranchers and landowners trying to pass the family farm on to the next generation, or business owners who are ready to retire from the day-to-day grind. When coupled with a Missouri inheritor’s trust (a beneficiary defective inheritor’s trust), grantor trust (an intentionally defective grantor trust), a FLP (family limited partnership), or a family LLC (family limited liability company), an installment sale can be an efficient, effective, and integral part of a complex estate plan. A good installment sale will freeze an asset’s value for tax purposes, get it off your balance sheet (for tax and asset protection purposes), and add value to the asset’s legacy for generations.

If my law firm, Johnson Law KC LLC, can serve you or your family’s legal needs, call (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient consultation.

(c) 2013, Stephen M. Johnson, Esq.

Marriage and Taxes

Posted on by under Estate Planning, Estate Tax, Financial Powers of Attorney, Generation Skipping Tax, Gift Tax, Kansas, Living Wills, Medical Powers of Attorney, Missouri, Trusts, Wills

You’ve probably seen news stories about the Supreme Court arguments this Tuesday and Wednesday in the gay marriage cases, Hollingsworth v. Perry and Windsor v. United States. This blog doesn’t take political positions, but the Windsor case presents an interesting marriage and tax question. Windsor involves a lesbian couple who were legally married in New York, where one of the spouses died, and the surviving spouse tried to claim a marital deduction for estate tax purposes. One of the federal tax benefits to being married is that the surviving spouse can claim a marital deduction on the estate tax. The government denied the marriage tax benefit in Windsor because under federal law (the Defense of Marriage Act (1996) (“DOMA”)), marriage is defined as between 1 man and 1 woman, so a lesbian couple isn’t married under federal law. So Ms. Windsor, the elderly widow from New York, doesn’t get the marriage tax benefit, even though she was legally married under New York law (marriage is a state law issue, and New York allows same-sex marriage). Ms. Windsor sued the government, arguing that DOMA is unconstitutional, because it prevents her from receiving the tax benefit she would get if federal law recognized her as legally married (like New York’s law did).

So does Ms. Windsor get her tax benefit, does DOMA’s marriage definition fall, or will something else happen? We will know by the end of June, when the Court issues its opinions. Ms. Windsor’s case may well join the annals of tax law stories.

If my office, Johnson Law KC LLC, can help you navigate the complex labyrinth of tax law and estate planning, give me a call (913-707-9220) or email (steve@johnsonlawkc.com) for a convenient free consult.

(c), 2013, Stephen M. Johnson, Esq.

Gift Tax Traps

Posted on by under Business Succession Planning, Business Transitions, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Generation Skipping Tax, Gift Tax, Kansas, Missouri, Trusts, Wills

The WSJ has this helpful article, entitled “Gift Taxes: What Your CPA Doesn’t Know” about potential gift tax traps. The article helpfully recommends having your CPA and your attorney collaborate on gift tax returns. Specifically, the article zeroes in on reporting large gifts of real estate, business interests, or other non-routine gifts of stocks and bonds.

The gift tax and generation-skipping transfer (GST) tax are complex estate planning issues. If my office, Johnson Law KC LLC, can help you or your family navigate these challenges this tax season, or work with your CPA to review returns, call (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient free consult.

(c) 2013, Stephen M. Johnson, Esq.

Surviving IRS Audits

Posted on by under Estate Planning, Estate Tax, Gift Tax, Income Tax, Kansas, Missouri, Small Business, Trusts, Wills

CNBC has this interesting article about how best to handle an IRS audit. While no one wants to be audited by the IRS, Ms. Washington’s article provides some helpful tips for surviving an IRS audit.

If my firm, Johnson Law KC LLC, can help you with tax or other estate planning issues, call (913-707-9220) or email (steve@johnsonlawkc.com) for a convenient free consult.

(c) 2013, Stephen M. Johnson, Esq.

Preparing Your Kids for an Inheritance

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Financial Powers of Attorney, Generation Skipping Tax, Gift Tax, Gifts to Minors, Illiquid Assets, Kansas, LLCs, Missouri, Probate, Small Business, Trusts, Wills

The WSJ/Barron’s has this fascinating article about the new $5.25 million per person lifetime gift tax exemption that Congress passed as part of the deal to avert the fiscal cliff. But the question that arises, especially as some young, wealthy heirs and heiresses’ antics grace the tabloid and Internet headlines: can a child properly handle their inheritance? If you give your child $5 million, will they save and invest it wisely, or will they spend it frivolously and waste your hard-earned wealth and financial legacy to them? This age-old issue is nothing new – there’s a non-tax reason that custodian bank accounts exist for minors, that trusts are popular, that savings bonds, CDs, and 529 college savings accounts exist – parents and grandparents need to be able to shepherd the money their children and grandchildren will receive. Yes, a gift is giving away money without formal strings attached – not reserving some right to take it back if a financial rainy day comes along, if your child wastes the money on things you don’t approve of, or if the child turns out not to have any financial or investing sense. But legal techniques exist to help protect the gift while your child learns how to work with their inheritance.

If the economic downtown hit your portfolio like high tide hitting a beautifully crafted sand castle on the beach (as it impacted most people’s hard-earned investments, savings, and home equity), or if you’re still working to build up wealth as the economy slowly recovers, you may be looking at smaller gifts for family members. Maybe  you anticipate giving tens or hundreds of thousands to loved ones, not millions. The same principle still applies – can you child or grandchild handle getting a check for $5,000, $10,000, $100,000?

Parents and grandparents need to talk with their children and grandchildren about money, investing, saving, and inheritances. It may not be an easy or fun talk and it might be awkward at first, but it’s a lot easier to discuss now than when you’re gravely ill or when your family is trying to clean up a messy estate after you’ve died. Look for some tips on how to inherit and handling an inheritance soon on this blog. In the meantime, if I can help you or your family with your estate planning, small business, or asset protection needs, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com). At Johnson Law KC LLC, we’re here to serve your needs – now and for many years to come.

(c) 2013, Stephen M. Johnson, Esq.

Happy New Year: The “Fiscal Cliff,” Your Taxes and Estate Planning

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Generation Skipping Tax, Gift Tax, Gifts to Minors, Income Tax, Kansas, Missouri, Small Business, Trusts, Wills

Happy New Year! While the nation technically went over the “fiscal cliff” at 12:01 am Tuesday morning, the U.S. Congress has reached a deal to retroactively avert the fiscal cliff crisis and the bill has passed the House and Senate. Here’s the scoop:

  • Portability survives – you can use your deceased spouse’s unused estate tax exemption. Using portability requires filing an federal estate tax return (even if no estate tax is owed) and careful tax planning with your attorney.
  • Estate and gift tax exemptions are $5.25 million per person (inflated adjusted). Using portability, a married couple can give their children $10.50 million. The maximum estate tax rate is 40% on estates over $5.25 million. See Sec. 101 (c)(2) (page 11) of the Senate bill for exact estate tax rates. See Sec. 101(c)(3)(A) (estate and gift transfers after 12/31/2012).
  • Annual gift tax exclusion is now $14,000 per person/year ($28,000 per couple/year), as the IRS announced an inflation adjustment in November 2012.
  • Generation skipping tax exemption is $5.25 million per person. See Sec. 101(c)(3)(A) (generation skipping transfers after 12/31/2012).
  • Grantor income tax trust rules the same. So intentionally defective grantor and beneficiary defective trusts (IDGTs and BDITs) are legal wealth transfer techniques for estate and business planning. These trusts allow parents to transfer wealth, businesses, farms, and other assets to their families without the assets being included in the parents’ estates, while being income taxable to the grantor or the beneficiary, depending on the trust’s design.

The fiscal cliff deal also includes new income tax rates, capital gain tax rates, and other tax provisions of interest to individuals, couples, small business owners, farmers, and ranchers. Individuals earning more than $400,000 per year, or couples earning more than $450,000 per year, should contact their accountant immediately on these issues. Forbes has this helpful article on how the fiscal cliff deal affects various taxes, IRAs, charitable deductions, and other planning considerations.

If I can help you or your family with estate planning or small business or family farm transfer planning, please contact our office, Johnson Law KC LLC – call us at (913) 707-9220 or email us at steve@johnsonlawkc.com.

In reaching the fiscal cliff deal, Congress delayed until March dealing with the massive spending cuts that are required by law as part of the last budget deal (the sequestration cuts). While it seems unlikely, it’s possible that Congress will revisit some of these rules in March or add additional restrictions to existing estate planning techniques. If Congress did change these rules in March, there’s a small probability of having 2 estate tax regimes (as we did in 2010, where an estate could elect a stepped-up basis and pay estate tax, or use a carryover basis without owing estate tax).

(c) 2013, Stephen M. Johnson, Esq.