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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: [email protected]
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
