FUNDAMENTALS OF ESTATE AND BUSINESS PLANNING FOR...

FUNDAMENTALS OF

ESTATE AND BUSINESS

PLANNING FOR CPAS

Michael A. Passananti, J.D.

DUGGAN BERTSCH, LLC

303 West Madison, Suite 1000

Chicago, Illinois 60606-3321

e-mail: mpassananti@dugganbertsch.com

website: www.dugganbertsch.com

(312) 263-8600

Michael A. Passananti, J.D

© 2014 Michael A. Passananti, of DUGGAN BERTSCH, LLC All rights reserved.

Michael Passananti serves as general counsel to entrepreneurs/business owners, successful

families and family offices, professional athletes, executives, and privately owned businesses.

Michael’s general counsel representation includes trust and estates planning and business and

corporate matters. Michael’s comprehensive trust and estate planning roles includes wealth

transfer planning, estate and gift tax planning, asset protection planning and charitable giving.

Michael pays a high level of attention to his private clients so that their respective estate

planning goals are achieved, their wealth is protected and their wealth passes in the most tax

efficient manner. Michael’s corporate/business practice entails business succession planning,

buy-sell planning, corporate compliance/maintenance, corporate governance, and general

business transactions. Michael advises and counsels on the diverse business interests and

holdings relating his clients positions as majority investors, minority investors, board members

and/or executives. Michael has been selected as a Rising Star by Super Lawyers in his areas of

practice for 2012, 2013 and 2014.

Michael earned a Bachelor of Arts in Business Administration with a concentration in Finance

and Management from Augustana College, where he graduated Summa Cum Laude and

graduated as the top business student in his class. While at Augustana College, Mr. Passananti

served as the Captain of the Men’s Basketball Team. He obtained his Juris Doctorate from

DePaul University College of Law in Chicago, Illinois.

Comprehensive Planning

Comprehensive planning is the rarely engaged-in exercise

of collaboration among the various disciplines to achieve a

thoughtful, complete, and fully integrated planning structure

to optimize the following:

• Asset protection

• Core estate planning

• Estate tax minimization

• Income tax minimization

• Wealth succession and management

• Business and corporate planning and compliance

Asset Protection – Proper Insurance

First Line of Protection

Reviewing insurance coverage with clients is the first line of protection.

1. Proper business coverage includes:

a) Property and casualty

b) Professional liability?

c) Errors and omissions

d) Liability coverage

e) Excess liability coverage (umbrella)

f) EPLI

g) Cyber liability

h) Workers compensation

i) Director and officers liability

2. Personal Coverage

a) Property and casualty

b) Liability and excess liability coverage

c) Vehicle insurance

d) Director and Officer liability

Asset Protection Planning

Comprehensive asset protection

planning requires planning in two

distinct areas:

1) Business Protection

2) Personal Protection

Business and Corporate Planning -

Limited Liability Business Structures

Asset Protection in the business arena may

be accomplished through conventional entity

planning:

• Corporations – S or C

• Limited Partnerships – with

corporate GP

• Limited Liability Companies – multi-

member, single-member, series

• Limited Liability Partnerships –

professional and non-professional

Business and Corporate Planning -

LLCs vs. Other Entity Forms

Corporations:

• do not have charging orders (except Nevada)

• can lose stock in lawsuit

Limited Partnerships:

• no general partner

• no unlimited liability

Limited Liability Partnerships:

• often are carve-outs of General Partnership Acts

• LLC statutes are stand-alone

Business and Corporate Planning -

Multiple Benefits of LLCs

LLCs should be considered because the one vehicle offers multiple benefits in the following areas:

• Asset Protection

• Wealth Transfer

• Opportunity to offer selection of

S-corp or C-corp status

Business and Corporate Planning -

Asset Protection with LLCs

The asset protection benefits of LLCs are derived from the following:

• Typical entity veil

• “Charging Orders” – a second level of protection

• Phantom Income Potential – Rev. Rul. 77-137

• Isolate Separate Property – pre-nuptial planning

• Gifts are of “indirect” interests, not actual assets

Business and Corporate Planning -

Charging Order Statutes

1) Non-Exclusive Remedy Statutes – e.g., MI,CO

a) A court “may” charge the membershipinterest of a member

b) Either allows other remedies or issilent on the matter – e.g., judicialdissolution, judicial foreclosures,equitable remedies, etc.

2) Exclusive Remedy Statutes – e.g., AK, NV, Nevis, Cook Islands

a) A court “may” charge the membershipinterest of a member, plus,

b) This is the “sole remedy” available tocreditors of a member

Business and Corporate Planning

General Corporate Governance Checklist

1) Filing annual reports

2) Annual meetings

3) Annual minutes/resolutions

4) Special meeting, minutes/resolutions

5) Related party analysis and documentation

a) Separation of business and personal

b) Separation of related businesses

c) Agreements with related parties

d) Promissory Notes

e) Lease Agreements

6) Employment Agreements

7) Confidentiality Agreements

8) Restrictive Covenant Agreements

9) Intellectual property maintenance/review

Business and Corporate Planning

Business Succession Planning Options Include:

1) Trust and estate planning?

2) Gift Planning

3) Buy-sell planning

a) Death

b) Disability

c) Voluntary transfer

d) Involuntary transfer

4) Control planning

a) Majority vote?

b) Voting Trust?

Business and Corporate Planning –

Potential Simple Structure

Succession Plan in Place

Promissory Notes?

Lease Agreement

Dad’s

Revocable

Trust

Real Estate

Mom’s

Revocable

Trust

COMMERCIAL

/OFFICE

BUILDING,

INC. OR LLC

OPERATING

BIZ, INC.

OR LLC

Promissory Notes?

Estate Planning - Personal Asset

Protection Optimization

Aside from acting in a manner that will

avoid lawsuits, and carrying sufficient

insurance, personal asset protection

optimization has two principal

components:

1) Maximizing Exempt Assets

2) Transferring Non-Exempt

Assets to Asset Protection

Vehicles

Estate Planning - Asset Protection with

LLCs

Real EstatePrivate

Investments

Business

Interests

Public

Investments

Family Limited

Liability

Company

Parents Children

Manager

Members

(1) Statutory “Veil”

Protects Members from Claims

Against LLC Assets

Creditor

• Step into Economic Shoes

• Pay Tax on Phantom Income?

• Rev. Rul. 77-137

• Statutory assignee

• Settlement is Advisable

•Substitute for pre-nuptial agreement

(2) “Charging Order”

Protections LLC Assets from

Claims Against Members

Creditor

• Preferred Jurisdictions:

U.S. – AK, NV, AZ, DE, WY

Int’l – Nevis, Anguilla, Cook

Islands

Suit

Estate Planning - Personal Asset

Protection Combination

ABC Enterprises,

LLC

SEPARATE

LLC

Cliff Gift

Trust

ABC

Family

Company

Stock

Real

Estate

* Charging Order

Exclusivity

Members

100% Member

Alexandra

Gift Trust

MaryAlexandra Cliff

DanPatrick

Patrick

Gift Trust

Dan/Mary

Living Trusts

SEPARATE

LLC

Private

Equity

Investments

SEPARATE

LLC

Liquid

Assets

SEPARATE

LLC

Estate Planning – Estate Tax

• $5.34M Unified Federal Estate

and Gift Exemption

• 39.6% marginal rates

• $5.34 GST Exemption

• State Estate, Gift and

Inheritance Tax

Estate Planning – The Core Estate Plan

LIVING WILLLife Support Declaration

HEALTH CARE

P.O.A.All Health Decisions

if incapacitated

PROPERTY

P.O.A.All Financial Decisions

if incapacitated

POUR-OVER WILL

Pours All Assets into

Living Trust

MARITAL TRUST

(Marital Deduction)

FAMILY TRUST

(Estate Tax

Exclusion Amount)

@ 2nd

spouse's

death

@ 1st spouse’s

death

LIVING TRUST

“A/B” Planning

Other Documents

DESCENDANTS

TRUST #1DESCENDANTS

TRUST #2

(Asset not included in the

Probate Estate)

Remainder

1st Lifetime Exclusion Amount less

Lifetime Gifts

SHELTER

TRUST

2nd Lifetime Exclusion Amount less Lifetime

Gifts and Remainder after GST Gifts, if any.

Estate Planning - for a Non-Taxable

Estate

Core Plan implementation recommended

Includes:

• Will

- Appoints Guardians for Minors

- Appoints Executor

• Living Will

• Power of Attorney for Health Care

• Power of Attorney for Property

• Revocable/Living Trust (DEPENDS ON

THE INDIVIDUAL)

Estate Planning - for a Non-Taxable

Estate

A CLIENT MAY WANT TO IMPLEMENT A REVOCABLE/LIVING TRUST IF HE/SHE WANTS TO AVOID PROBATE.

The probate process has the following unattractive attributes:

• Publicity – public record.

• Time Delay – probate estate must remain open at least 6 months.

• Costs – 4-9% of estate value.

• Notice – must give public notice to creditors.

The Revocable/Living Trust is:

An ownership form which removes assets from your personal ownership and places them in a trust for your benefit. The primary benefits of the Revocable/Living Trust are:

• Privacy – no probate is required.

• No Delay – can be administered immediately.

• Less expensive – hourly attorney fees and less time generally.

• No Notice – no public notice to creditors.

• Defining how client wants assets to pass.

Estate Planning - For the Taxable

Estate

When confronted with a taxable estate, an individual generally has 3 options in planning for the corresponding estate taxes:

• Pay them – with own assets or with life insurance

• Reduce them – gifting, freezing, discounting

• Avoid them – charitable contributions

Estate Planning – Pay the Estate Tax

The Irrevocable Life Insurance Trust:

If paying the estate taxes with one’s own assets is not

desirable or possible, an Irrevocable Life Insurance

Trust (“ILIT”) can be used to help facilitate the

payment of such estate taxes by providing liquidity at

the time of death. Properly structured, the ILIT is

outside of the Decedent’s Estate. An ILIT can also be

used to create an estate.Client

Life

Insurance

Irrevocable

Life

Insurance

Trust (ILIT)

IRS

Children

$

$

Estate Taxes

Gifting of Annual

Premium Payments

Remainder

(Estate)Beneficiaries

Insured

Owner & Beneficiary

(Collects Proceeds at Death)

Estate Planning - Reduce the Estate

Tax Through Direct Gifting

Simple direct gifting strategies include:

• Formalized Gifting Programs (using the annual and lifetime exclusions)

• Qualified Tuition Expenses

• Qualified Medical Expenses 529 College Saving Plans (5-year front-loading)

• UGMAs/UTMAs/CrummeyTrusts/2503(c) Gift Trusts

• Etc.

Estate Planning - Reduce the Estate

Tax with Discount Planning

Public

Investments

Private

InvestmentsReal Estate

Personal

Property

Life

Insurance

Business

Interests

ParentsChildren/

Grandchildren

Members (Limited Liability)

* Members enjoy 2 layers of

liability protection:

1) Statutory Limited

Liability – protects LPs

from creditors of entity

2) Charging Order

Protection – protects

entity from creditors of

LPs * With LLCs, no Member or

Manager has to assume

unlimited liability

DISCOUNTED Gifts of Membership Interests

Family Limited

Liability

Company

Transfer of assets into LLC at DISCOUNTED value

Estate Planning - Reduce the Estate

Tax through Freeze Techniques

Freezing Asset Values with GRATs

and IDGTs:

Family LLC

Client/

SpouseGRAT/IDGT

Children

Discounted Gift or Sale

of Ownership Interests

• Lack of Marketability

• Minority Interest

• Grantor Retained Annuity Trust or

Intentionally Defective Grantor Trust

• Serve as “freeze techniques”

• Further Leveraging of Discounts

• Maximize Annual and Lifetime Exclusions

• Additional Asset Protection

Annual Income Interest

or Promissory Note

Repayment

Estate Planning - Gifting Closely Held

Business Interests

Potential Gifting Leverage:

1) Depressed market value?

2) Lack of marketability discounts

3) Lack of control discounts

PROS:

1) Moving valuable generational asset outside estate.

2) Growth of company and income related thereto outside of estate.

3) Illiquid asset will not have to be sold at discount to pay estate taxes.

4) Gifting of non-voting interests transfers value but not control of business

Estate Planning - Gifting Closely Held

Business Interests

CONS:

1) Transactional costs

- Legal

- Accounting

- Valuation

2) Control/management succession issues

Checklist:

1) Business Valuation

2) Adjust corporate records, stock ledgers and stock certificates

3) Determine control issues related to business

4) Determine management succession issues related to business

5) Determine gifting vehicle (IDGT, GRAT, outright, etc.)

6) File gift tax return

Estate Planning – Real Estate

Pros:

1) Depressed real estate values?

2) Potential discounts depending on title of property

Cons:

1) Client loses control and potentially usage to property

2) Appraisals needed

Checklist:

1) Real estate valuation required

2) Quit claim or warranty deed to gifting vehicle or individual

3) Record the new deed

4) Lease agreement with mom, dad, and/or other family members

5) New insurance on property insurance

6) New title insurance?

7) Beware of local real estate transfer taxes

Estate Planning – Charitable options

1) Specific charitable bequests

2) Donor advised funds

3) Family foundations

4) Charitable Trusts

Estate Planning - Gift Tax Compliance

• Form 709

• Due when personal tax return is filed

• Are proper elections made?

- GST

- Valuation discounts

• Appraisals attached?

• When in doubt – FILE

• Filing starts statute of limitations

Estate Planning - Compliance for

Lifetime Gift/Sale of LLC Interests

1) See Adequate Disclosure Rules under Reg. 301.6501(c) -

1(e). On a pure gift, it is good practice to disclose:

a) Appraisal of all underlying assets (property, land,

equipment, etc.)

b) Valuation of LLC by a qualified valuation

professional.

c) All related transaction documents

2) Avoid the Step-Transaction Documents (let some time

pass) to ensure discounts are honored.

3) On a sale or part sale of LLC interests, do you provide the

kitchen sink on your gift tax return?

a) Pro – statute is running and adequate disclosure is met.

b) Con – too much information, which is NOT required.

Polling Questions

1) Do you discuss estate planning matters with your clients as part of the client interview?

– Yes

– No

– Not Applicable

2) Have you considered asset protection when advising on tax related matters for your

clients?

– Yes

– No

– No Applicable

3) What percentage of your time do you spend consulting with respect to LLCs?

– 25%

– 50%

– 75%

– 100%

4) For estate planning purposes, what size estate do the majority of your clients have?

– Non-taxable estate (less than the estate tax exclusion)

– Taxable estate (more than the estate tax exclusion)

– Not Applicable