Annuities Allowed in 401(k)s

From CNBC and Bank Rate comes this news that the Treasury Department is now allowing annuities in 401(k)s, at least in some circumstances. This may be a useful retirement, financial and/or estate planning tool for various Americans.

If my law firmJohnson 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) 2014, Stephen M. Johnson, Esq.

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Estate Planning Like a Billionaire

Bloomberg has this fascinating article exploring grantor retained annuity trusts (GRATs) and grantor retained income trusts (GRITs) and how they are used by very wealthy business owners to pass assets to the family without incurring estate or gift taxes. (Longtime readers may recall our discussion of Mitt Romney’s large scale estate planning for his family’s estimated $750 million fortune.) Many estate planning attorneys and accountants make a sport of devising creative methods to help clients save money and pass their wealth on to future generations. The ideas aren’t illegal or unethical, they simply utilize gaps in the IRS Code that Congress and/or the Treasury haven’t solved that yield big savings to clients when multiplied by millions of shares in a given company. Estate planners are careful when practicing on the cutting edge of tax law to gauge how much risk the client is willing to take on (e.g. whether the IRS will void a transaction and send the client a tax bill), how much money is at stake, and how reliable/tested a technique is. While the estate planning techniques discussed in the Bloomberg article have been blessed by various authorities (the IRS, the Tax Court, or others), many advanced trust or tax techniques are in a legal grey area – we know X is illegal and we know Y is OK, but what about something between X and Y?

In law school, the first day of estate planning class with Prof. Martin Dickinson, he told us a story about a family business in a small town where a father gave his wife and each of his 4 children a 20% stake in the family business (worth about $5,000 each at the time, the annual gift tax exemption) in 1953. 60 years later, that family business is called Wal Mart and each 20% stake is worth $20 billion. So $100 billion was transferred without estate or gift tax liability. Sam Walton relates the story in his autobiography Made in America and credits his fraternity brother and banker, R. Crosby Kemper Jr., of UMB Bank with helping him develop the business. Here’s Bloomberg’s visual of some of the tricks of the estate planning world.

Inheriting in trust is better than inheriting money in your individual name, as it protects your inheritance from lawsuits, creditors, and divorcing spouses, among other unpleasant life surprises. Inheriting in trust using a discretionary trust provides asset protection. Asset protection uses a separate entity (e.g. a trust or LLC) to hold an asset and protect it from your creditors, divorcing spouses, spendthrift kids, or others. Asset protection trusts are not allowed under Kansas law (see K.S.A. 33-101), but Kansas and Missouri residents can use a Missouri trust to protect assets for generations. Missouri (unlike Kansas) welcomes dynasty trusts – irrevocable trusts designed to pass wealth across families for generations – and allows them to last indefinitely. For clients who anticipate inheriting over $400,000, we recommend a Missouri inheritor’s trust. An inheritor’s trust allows you to protect the assets and keep them off your balance sheet for tax purposes (so you don’t have to worry about estate, gift, or generation-skipping taxes) while having the assets available for your use and enjoyment.

My firm has experience working with individuals and families to serve their business, estate planning, and nonprofit/charitable/philanthropic needs. I enjoy working with a variety of clients – ranging from single young professionals with minimal assets to multimillionaire business owners with complex trusts. My firm has strong relationships with local and national trust companies to help administer all types and ranges of trusts. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, including a Walton GRAT, a GRIT, or other sophisticated trust planning, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

IRS CIRCULAR 230 Disclosure: Unless expressly stated otherwise, any U.S. federal tax advice contained in this blog post or links is not intended or written by Johnson Law KC LLC to be used to avoid IRS or other tax penalties, and any tax advice cannot be used to avoid penalties that may be imposed by the IRS.

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

Supreme Court Applies Valuation Misstatement Penalties

The U.S. Supreme Court unanimously decided this morning, per Justice Antonin Scalia‘s pen, that an IRS penalty applies for misstating a value on property (U.S. v. Gary Woods, 2013), reversing the Texas-based federal 5th Circuit Court of Appeals. Mr Woods and his employer, Mr McCombs, participated in an income-offsetting tax shelter in the 1990s marketed to high income earners. The tax shelter used a complicated series of investments and partnership interests to reduce their income for tax purposes. The district court found their partnership a sham – not surprising, since partnerships or corporations must have a legitimate business purpose, and avoiding taxes isn’t a legitimate business purpose. (Partnerships, corporations, or LLCs with legitimate business purposes are great for streamlining taxes, but the IRS doesn’t allow shams just to lower the tax bill. Lowering your taxes can be the icing, but you need a cake underneath the frosting, not just a pile of frosting you dub a “cake.”) But the courts wrestled with interpreting the IRS Code: the taxpayers had misstated property values. Could the IRS penalize them for misstating property values (e.g. “you lied about the value, and now owe a penalty for your dishonesty”), or would the IRS say “oops, you wrote down the wrong number, just pay us the difference”? The Supreme Court decided 9-0 that the IRS could penalize them for misstating the property value. The moral of Woods is the IRS can exact penalties for misstating property values, so be sure you have accurate appraisals and carefully prepare or review your tax filings. While Woods has some nice statutory interpretation quotes that legal eagles will enjoy (Justice Scalia has strong views on interpreting texts and statutes that often surface in scathing and witty dissents on various cultural issues, and is a lively writer and speaker – see A Matter of Interpretation (1997), Making Your Case (2008), and Reading Law (2012)), it’s not clear that Woods will have much impact beyond deciding that the IRS can penalize misstatements in property value.

My firm has experience working with individuals and families throughout the business and estate planning processes. If my law firm can help you or your family with your estate planningelder lawasset protectionbusiness law needs, or digital estate planning, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

IRS CIRCULAR 230 Disclosure: Unless expressly stated otherwise, any U.S. federal tax advice contained in this blog post or links is not intended or written by Johnson Law KC LLC to be used to avoid IRS or other tax penalties, and any tax advice cannot be used to avoid penalties that may be imposed by the IRS.

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

Small Business Law 101

There are 3 stages in the business law cycle, all of which my law firm, Johnson Law KC LLC, can help you and your business by coming alongside to provide experienced, friendly counsel leavened with an understanding of business, economic, and financial issues. The 3 business stages are: (1) formation, (2) maintenance/compliance, and (3) succession.

(1) Formation – At the formation stage, choice of entity and other considerations arise. Should the business be a corporation (C corporation or S corporation), a partnership, a limited partnership (LP), a limited liability partnership (LLP), a limited liability company (LLC), a series LLC, a professional corporation or professional association, or a family limited partnership (FLP)/family LLC? How will the business’ owners and employees, and other players relate to each other?

  • A sole proprietorship is the simplest form of business, where the owner gets all the profits, but is liable for all debts and losses, and doesn’t enjoy any limited liability.
  • C corporations and S corporations take their names from respective IRS Code chapters. Corporations have to follow corporate formalities, but get limited liability for their actions in return. Kansas corporations are formed under the Kansas General Corporation Code (K.S.A. 17-6001 et seq.), patterned after Delaware corporate law, while Missouri corporations are formed under The General and Business Corporation Law of Missouri (V.A.M.S. 351.010 et seq.).
  • A partnership (a/k/a general partnership) is a joint business venture between 2 or more equal partners. Both partners are entitled to a share of the profits, but both are also liable for the partnership’s losses and debts. Since 1998, Kansas partnerships have been governed by the Kansas Uniform Partnership Act (K.S.A. 56a-101 et seq.), while since 1949, Missouri partnerships have been formed under the Uniform Partnership Law (V.A.M.S. 458.010 et seq.).
  • A limited partnership (LP) has a general partner (who has voting rights and is liable for the partnership’s losses and debts) and one or more limited partners (who have limited liability, but don’t have voting rights). Kansas LPs can be formed under the Kansas Revised Uniform Limited Partnership Act (1983) (RULPA) (K.S.A. 56-1a101 et seq.), while Missouri LPs trace their lineage to the Uniform Limited Partnership Law (1985) (V.A.M.S. 359.011 et seq.).
  • A limited liability partnership (LLP) is a group of limited partners who enjoy voting rights and limited liability – many law firms, accounting firms, and other professional organizations are organized as LLPs. Kansas LLPs are formed under the Kansas Uniform Partnership Act (1998) (K.S.A. 56a-1001 et seq.), while Missouri LLPs are formed under the Uniform Limited Partnership Law (1985) (V.A.M.S. 359.172 et seq.).
  • A limited liability company (LLC) has members who have an interest in the firm, where a corporation has shareholders who own shares of stock or a stake in the firm. An LLC can be a single member or have multiple members. Single member LLCs are usually disregarded for IRS tax purposes (and taxed as a sole proprietorship) unless they elect S corp tax treatment. LLCs with multiple members are taxed like partnerships (flow through to individual partners) but with the limited liability of a corporation. Kansas LLCs are formed under the Kansas Revised Limited Liability Company Act (1999), part of the Kansas General Corporation Code (K.S.A. 17-7662 et seq.), while Missouri LLCs are formed under the Missouri Limited Liability Company Act (1993) (V.A.M.S. 347.010 et seq.).
  • A series LLC is a new business form in Kansas and Missouri. A series LLC has a parent LLC that acts like an umbrella to consolidate administrative and tax treatment into 1 entity, and an unlimited number of daughter series under the parent LLC’s umbrella, which can each have distinct business purposes, ownership, and functions. My law firm, Johnson Law KC LLC, is on the cutting edge of counseling local companies, small businesses, and entrepreneurs on using series LLCs. Kansas series LLCs (2012) are governed under Kansas LLC law (K.S.A. 17-76,143), while Missouri series LLCs (2013) are governed by the Missouri LLC law (V.A.M.S. 347.186)
  • A professional association (Kansas) or professional corporation (Missouri) is a special corporate form for regulated professionals – accountants, attorneys, doctors, etc – in a particular state. PAs and PCs can have one or multiple members, but each member must be licensed in the particular profession that the PA or PC practices.
  • A family limited partnership (FLP) or family LLC is an LP or LLC often used among family members for various business purposes. A family may own land, a second home, or a business property in a FLP or family LLC. A FLP has a general partner (with voting rights and unlimited liability) and limited partners (no voting rights but limited liability). Many FLPs will have a parent or grandparent as the general partner owning 1% (or so) of the FLP and children or grandchildren as the limited partners owning a majority of the FLP. FLPs and family LLCs can be advantageous for business and estate planning purposes, but must have a valid business purposes and must be carefully designed and maintained to avoid audits and heightened IRS scrutiny.

(2) Maintenance/Compliance – At the maintenance/compliance stage, the requirements for different kinds of business organizations are vastly different. Talk of maintenance or compliance often conjures up visions (or nightmares) of annual corporate minutes, annual reports, state and federal securities laws. Sole proprietorships have very little, if any, regular maintenance or compliance, but they also offer no liability protection – so no paperwork, no protection. C corporations and S corporations must file annual reports listing major shareholders and other relevant corporate data with the Secretary of State’s office in the state of incorporation (Topeka, Kansas or Jefferson City, Missouri). Likewise, C corporations and S corporations must have annual shareholder meetings, regular board of director meetings, and keep minutes from these meetings. Regular meetings and minutes ensures that the corporation is being honest and transparent with shareholders and giving them a chance to voice their approval (or concern) about the corporation’s leadership and governance direction. Many corporations must also comply with federal securities laws (primarily the Security Act of 1933 and Securities Exchange Act of 1934 and applicable SEC regulations) and state securities or Blue sky laws in the Kansas Uniform Securities Act (dating back to 1911) (K.S.A. 17-12a101 et seq.) and Missouri Uniform Securities Act (2003, dating back to 1956) (V.A.M.S. 409.107 et seq.). Corporations must also comply with applicable state and federal tax laws. Partnerships, LPs, LLPs, LLCs, series LLCs, and FLPs/family LLCs must file annual reports with the Secretary of State’s office and follow other applicable corporate, securities, and/or tax laws.

(3) Succession – at the succession stage, a business owner must decide whether to pursue a merger & acquisition (M&A), wind down, estate/tax planning for owners and/or key members, buy-sell agreements, installment sales, or other succession techniques. A business may be perpetual, but an individual’s ownership is not. Serial entrepreneurs may want to start their next business adventure. An entrepreneur who shepherded a business idea from the napkin drawing to sale to a large company may want to retire or embrace another phase of life. A business owner may want to hand the reins off to his children or her carefully chosen and groomed successors among the management or executive team. My law firm has experience counseling business owners and key executives on M&A issues, wind downs and dissolutions, estate and tax planning, asset protection, and other business succession issues.

If my law firm, Johnson Law KC LLC, can help you or your family with your Kansas or Missouri business law needs, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient appointment.

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

7 Reasons Why You Need a Trust

Fox Business has this brief, helpful article with 7 reasons why a person would want or need a trust.

They are:

1. Don’t Want Children to Inherit at Age 18

2. Asset Protection from Creditors

3. Someone Else at the Helm

4. Complicated Family Situation

5. Avoid the Probate

6. Take Care of a Disabled Child

7. Safeguard Your Privacy

All 7 of these are good reasons to consider a trust. My firm often works with clients wanting or needing asset protection, privacy, avoiding probate, or caring for a disabled child (or parent). Trusts come in a variety of options and are affordable, smart choices for many clients. If my law firm, Johnson Law KC LLC, can serve you or your family’s estate planningasset protectionelder law, special needs trusts, or business needs, call me (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient, complimentary consultation. My firm looks forward to serving you and your family with reliable, friendly experience and counsel at an affordable cost. And there’s no better time than before the holiday rush, amid the beautiful autumn colors, to get your financial affairs settled.

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

Tax-free Retirement?

CNBC has this helpful article about how to plan for a tax-free retirement with lots of good tips and portfolio ideas. Many retirees can expect lower income tax bills than those of us still working (and earning more income), but the article wisely points out the wild card – the Congress/tax wild card.

Thoughts? What are your ideas for planning a tax-free retirement?

If my law firm, Johnson Law KC LLC, can help you or your family on your estate planning or other legal needs, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com) to schedule a convenient and free consultation.

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

Is New York “Offshore?”

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.

IRS Audits

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.

Surviving IRS Audits

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.

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

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.