New Year, New Name! Please read our winter newsletter for updates on the firm, a look at changes to the law, and insights on our practice. Contact us with any questions!
Legacy Family Office founder Tony Vaida will join a handful of other estate planning experts on Friday, Dec. 8 to teach about the latest updates to the Colorado Orange Book, the go-to resource for trusts and estates attorneys in Colorado. Join Tony and other estate planning experts to learn about updates to this essential book.
You will receive a copy of the brand new edition of Orange Book Forms, formally known as Orange Book Forms: Colorado Estate Planning Forms, Eighth Edition. This full-day program will go through the new Eighth Edition of Orange Book Forms, cover-to-cover. Members of the CBA Trust & Estate Section’s Orange Book Forms Committee will discuss the various forms and how you can use them in your day-to-day practice. The day will close with a panel discussion by committee members giving practical tips as to how they use the book in their practices. Don’t miss this informative program!
Learn more here: http://cle.cobar.org/Seminars/Event-Info/sessionaltcd/PR120817L.
Legacy Family Office is proud to announce that is a founding member of the Independent Trust Alliance. The Independent Trust Alliance is an organization of Private Trustees who have banded together to provide independent trustees whether they are professional or come by their status as a Trustee by a will or appointment by a Grantor with informational exchange opportunities and educational programs to learn how to perform their duties with a high degree of professionalism.
Learn more here: https://www.linkedin.com/company-beta/16208627
According to the Family Business Institute, more than 60% of family businesses fail upon the first generational hand off, so successful entrepreneurs face a significant challenge when deciding whether to hand their business off to the next generation and/or recruit new leadership. Join us to learn guidelines for how to preserve the value and legacy of your family business.
In this workshop you will learn:
- How to identify and establish a system for the leaders of the business to approach and solve tomorrow’s challenges - Avoiding key family and key employee conflict - Retaining key employees
- Driving profitability, cash flow and business value
- Developing Key Performance Indicators (KPI’s) that focus on the future business goals
- Understanding the impact of change in leadership on employee and customer retention
- The Family Office Concept and its utilization for governance of both the business and the family affairs
Your Presenters: Ken Greenberg Actus Search Partners, LLC Cindy Gomerdinger CPA CGMA Gomerdinger & Associates, LLC Tony Viada. Learn more here.
April 21 | 11:30 a.m. - 1 p.m.
Register Here: denversbdc.org/friday-focus-on
Now that the results are in, what can we expect in the way of policy from the new administration on Estate and Gift Taxes and your Estate plan? These are a few of the highlights in my view.
The Estate Tax may be repealed. That was one plank in the Republican Platform, and with majorities in both houses it is at least likely to get to the floor of the House. The current amount of the Unified Gift and Estate Tax Credit is $5,640,000. As an alternative, Congress may also be raised the amount of the credit to $10,000,000 per person. At any rate, it is unlikely to be lowered as has had been proposed in the Democratic Platform.
If the Trump administration carries through with it’s promise to reduce regulations and burdensome taxes, you can expect Congress to revisit the IRS adoption of amendments to Section 2704 of the Code, that eliminated minority discounts for Family Limited Partnerships and other Estate Planning vehicles used to transfer business interests to children and grandchildren. A bill was introduced in the House this summer to overturn the regulation change but was never considered prior to adjournment this fall.
The subject of Family Limited Partnerships and the tax implications of the amendments to Section 2704 were covered in my Fall 2015 and 2016 newsletters, and can be found at:
http://www.legacyfamilyofficellc.com/legacy-blog/2016/9/1/fall-2015-newsletter.
The Trump Administration is also unlikely to accept the IRS proposal for an increase in Capital Gains Taxes to at least 25%, and to eliminate the “step-up” in basis for inherited assets. This will be beneficial for all taxpayers who pay capital gains tax, not just the ultra-rich.
Though we do not know how much of the Republican Platform tax proposals will succeed, at least they have a chance of becoming law. The result would be a reduction in the estate and business tax burden on families and businesses planning to pass on their hard earned wealth to their children.
Contact me to learn more about FLP’s, minority discounts, and how they can be of use to you and your family.
Last Fall, my newsletter focused on Family Limited Partnerships (FLP) and how they can be used to reduce both estate taxes for your family and your income taxes during your lifetime. A description of FLP’s and how they work can be found at:
http://www.legacyfamilyofficellc.com/legacy-blog/2016/9/1/fall-2015-newsletter.
This quarter’s newsletter discusses the need for families that have an active family business to do their estate planning NOW. Later, in this case, may be too late. The reason: final changes to the IRS regulations governing FLP’s that are likely to become effective on January 1, 2017.
Here is the background: In the August 4, 2016 issue of the Federal Register, the Department of the Treasury proposed and then made final amendments to Section 2704 of the Internal Revenue Code. The department is eliminating a taxpayer’s ability to apply valuation discounts, also described as “minority interest” discounts, to all intra-family transfers of interests in certain entities (such as corporations, FLP’s, other partnerships, or Limited Liability Companies (LLC)).
“These proposed regulations affect certain transfers of interests in corporations and partnerships and are necessary to prevent the undervaluation of such transferred interests,” the Treasury stated.
In short, the IRS believes that the tax advantages of an FLP and other transfers of business entity interests to family members and the ability to transfer minority interests at a discount to current market value should be ELIMINATED.
A “minority discount” is an interest in a business entity that represents less than the majority interest necessary under state law to exercise control over the business. Most of the time, this means that a gift or bequest to one child or family member (“family member” hereinafter) of an interest that represents less that 51% of the operating entity is a “minority interest.”
Under current law, a parent can create an FLP, transfer all or most of the ownership of his or her family company to the FLP. The parent can then begin gifting limited partnership interests to family members. These gifts of limited partnership interests do not transfer enough of an interest in the business for the receiving family member to exercise control over the business, nor would a third party pay full market value for the interest, if instead of gifting the interest, the FLP were to market the interest on the open market.
Say for instance, that a business owner decides to sell the business and the business has a market value of $5,000,000. After discussions with the family, he decides instead to create an FLP. The FLP is made of 1000 shares, or as they are named in FLP’s, “units”. If the company is worth $5,000,000 on the open market, each unit would have a market value of $5000. Instead of selling the FLP the owner starts to gift units annually to his children. The first gift is of 50 units having a market value of $250,000 and representing 5% of the FLP. The units are not worth full market value however, because a third party would not pay full value for a minority interest in a company and the 50 units do not give the third party buyer control of the business. Under current regulations the FLP is permitted to take a minority discount when valuing the gift for estate and gift tax purposes. In some cases, a discount of up to 40% can be applied to the valuation of the gift, thus the gift instead of being valued at $250,000 is valued at $150,000. The discount rules currently apply both to lifetime and testamentary gifts of minority interests in an FLP.
Under the final regulations, parents cannot transfer their company interests to children with a “minority interest” discount valuation for purposes of making either a lifetime or a testamentary gift to family members. By eliminating the minority discount, the IRS is eliminating a core component of the FLP vehicle, which has been a tax-favored entity, intended to encourage families who have valid non-tax reasons to keep the business in the family.
Since at least 1990, when the original FLP regulations were adopted the IRS has recognized the “minority discount” to encourage families to continue to run the business with the knowledge that when the business owner passed away, the business would stay “in the family.” Further, once the business owner has the gifted the limited partnership interest to another family member, the proportionate share of the income earned by the family business is distributed to the family member who presumably is paying income tax in a lower income tax bracket.
As often happens with favorable estate planning vehicles, some abuse of the strategy occur, leading the IRS to characterize the regulation as a “loophole” that should be eliminated. Since the adoption of the, FLP regulations some taxpayers, their attorneys and planners have utilized the discount provisions to transfer FLP interest at a discount when no discount could reasonably be defended.
In some cases, an FLP was established in a “deathbed” situation, where the family asset owner created the FLP, assets were transferred to the FLP, and “minority interests” were distributed to family members at a discounted value. Within a matter of a few hours, in one case and in others a few days or months, the family asset owner passed away. The beneficiaries of the estate then attempted to apply the “minority discount” to the value of the assets received when valuing the FLP for estate and gift tax purposes. The IRS has rightly believed that these cases have been an abuse of the current provisions, because an FLP cannot take a minority discount if the FLP serves no legitimate business purpose and is solely being used as a tax avoidance mechanism. The agency has argued these points successfully in federal court in a number of these deathbed cases.
In other cases, taxpayers have used the FLP vehicle to transfer marketable securities to an FLP and then transfer a minority interest in the FLP to family members, taking a minority discount in the process. IRS argued that marketable securities were not entitled to a discounted value because the FLP has no legitimate business purpose, and the securities could have easily been sold at market value on a public exchange. Again, the federal courts have supported the IRS position in most cases.
Since the IRS has not always been successful in these cases and has been unsuccessful in getting congress to change the underlying law on which the regulations are based, the IRS proposed and adopted the new rules eliminating the minority discount provisions.
The IRS is scheduled to hold a public hearing on the proposed regulation on December 1, 2016. However, under the regulation adoption process federal agencies are permitted to use, the IRS has made the regulations “final” and they have no obligation to change the regulations before implementation. President Obama has indicated he will permit the IRS to move forward with the change before he leaves office on January 20, 2017.
As a result, as of January 1, 2017, parts of the regulations will go into effect including a new “3 year rule.”
Under the new regulations, a business owner who forms an FLP and transfers assets to the FLP PRIOR to January 1, 2017 may still use the minority discount valuation for the transfers thereafter. However, if the business owner does not survive for 3 years after the creation of the FLP, the discount will be disallowed on the deceased owners estate tax return. Thus for any business owner who creates an FLP now and does not survive until after January 1, 2020 the discount is ineffective. Providing the FLP meets all the other tests of the regulations such as a business purpose, an FLP created before January 1, 2017 by a business owner will continue to be able to take minority discount valuations on minority interest gifts.
One Commentator on the regulations states:
“There is no mulligan. If a family is considering doing some tax planning and they’re putting it off to next year, they can’t go back in time and take advantage of the discounts,” Mark Parthemer, senior fiduciary counsel at The Bessemer Trust, told Joseph Sullivan in the August 25, 2016 New York Times column titled “Treasury Wants to End Tax Deal For Some Family-Owned Businesses.”
The takeaway: do your planning now and get your minority FLP or LLC interests transferred before December 31, 2016 to the family members you wish to take over the business before you retire or pass away.
Contact me to learn more about FLP’s, minority discounts, and how they can be of use to you and your family.
According to the Family Business Institute, more than 60% of family businesses fail upon the fi rst generational hand off; so successful entrepreneurs face a significant challenge when deciding whether to hand their business off to the next generation. Join us to learn guidelines for how to preserve the value and legacy of your family business.
When: Wednesday, June 8, 2016
Where: Hacienda Colorado
4100 E Mexico Ave, Denver, CO 80222
Time: 7:00 A.M. to 9:00 A.M.
7:00 - 7:30, Breakfast Buffet
7:00-8:30, Presentation
8:30-9:00, Q&A
It is not unusual in my discussions with beneficiaries and families who have become dissatisfied with their corporate trustee to find that most are unaware that in many states, including Colorado, the courts have granted requests for a change of a corporate or private (individual) trustee. Learn more about the process in the March newsletter.
Income tax planning is more than ever a critical part of overall estate and long term planning for the transfer of wealth. As we start 2016 we can breathe a sigh of relief, since Congress enacted permanent extensions to many of the existing provisions of the Code.
This quarter’s newsletter will focus on Family Limited partnerships, and how they can be designed to take advantage of minority interest discounts to reduce potential estate taxes and your income taxes as your business prospers and the income pushes you into higher and higher income tax brackets every year. Read this quarter's newsletter here.
Check out our new brochure to learn more about what Legacy Family Office can offer your family.
From my research, in 2015, less than 3,000 estates out of the thousands of estates that will be probated, will be obligated to pay federal estate taxes. Under current law, only a small percentage of the population, (those with taxable assets in excess of $5,430,000 (the Exclusion Amount) will face estate taxes at the time of death. So the question arises: For individuals whose total assets are less than the Exclusion Amount are there estate and tax planning issues that should still be addressed? I explore the answers in my Summer newsletter.
Many family offices offer a range of services to their clients, so it's difficult for some people to know what to expect from their adviser. Legacy's team recently created this useful presentation to help illustrate its services. Please take a look and let us know if you have questions.
Trusts are often used as part of an estate plan or lifetime management of assets. The purposes of the trusts vary, but generally, control of the trust principal by a selected trustee is a major goal. The Spring newsletter discusses various types of trusts and their uses in long term estate planning.
In today’s world, an Estate Plan should be more than just a Will or a Testamentary Trust. The Plan should address all the complex components of our modern lives and our plans for the future, as well as our wishes at the time of death. The Plan should take into consideration the relationship between the person or persons making the Plan and their loved ones, and the structure for management of the family assets both currently and in the future.
At the core of any Plan is not necessarily the amount of money at stake or the technical legal terminology used to implement the Plan, but the relationships during lifetime that define who the family is and their common goals. A well prepared Plan can be the guiding structure for management of family affairs both financial and non-financial, and gives all family members an opportunity to be part of the present and future family goals.
Learn more about estate plans and the role of a family office in this month's newsletter.
I am frequently asked by clients to define a trust, explain what a trust can do for them, and how they should choose a trustee, so my most recent newsletter focused on trusts, their advantages, and the criteria for selecting a trustee.
While a range of publications are predicting the next financial implosion, there's reason to be optimistic as an investor in this market. The Wall Street Journal's recent article, "3 Reasons It's A Good Time To Be An Investor," highlights why you should count yourself lucky to be investing in this economy. Chief among their reasons is that there are now more investing options than ever before, investing is now cheaper than it's been in quite some time, and there's a way to maximize your tax benefits by building a tax-efficient portfolio.
To read more about each of these reasons, check out the Wall Street Journal's article.
While no one wants to believe that a family member may not give the best advice, it's important for families with high-net assets to be leery of outside family members who may want to meddle in their family funds.
This recent Wall Street Journal article points out that if a family member is offering you advice, the first thing to ask yourself is why. Additionally, if your family member's advice contradicts or conflicts with your financial investor or advisor's advice, it's important to take a step back and think critically before making a decision. Remember that your family office or financial advisor is paid to have your best interests at stake, while a family member may be focused on his or her own benefit when giving you advice.
If you're unsure whether you should adhere to your family member's suggestion, run the idea by your advisor to get his or her take before making a decision.
Tony Vaida recently authored an article for Law Week Colorado, the publication of record for the U.S. 10th Circuit Court of Appeals. His article, "The Changing Nature of Estate Planning," focuses on how Tony has translated his career-long experience in estate planning into a family office that focuses on a much broader range of services. Read his article here.
Investors who hold assets in offshore accounts should be on notice that the status quo is about to change. After Credit Suisse in May pleaded guilty to conspiring to aid U.S. tax evaders, many other foreign banks are lining up to help the U.S. government identify U.S. clients who may be using offshore accounts to dodge taxes.
If you have holdings offshore, you should beware that while the landscape for offshore account holders isn’t exactly clear yet, it may be wise to meet with an attorney sooner rather than later.
There are a number of ways your attorney may advise you to move forward, including back-filing of Foreign Bank Account Reports, as this article illustrates. Regardless of what he or she advises, be prepared to come clean with any and all offshore holdings in order to avoid potential criminal prosecution.