Wednesday, April 25, 2012

Estate and Gift Tax Changes Scheduled for 2013

Late in 2010, President Obama signed into law The Tax Relief, Unemployment InsuranceReauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”) providing significant changes to the tax laws.  This Act contained significant new transfer tax (estate and gift tax) provisions and also extended the so-called Bush tax cuts both of which are set to sunset at the end of 2012.

Estate Tax

2013 and beyond
Top Estate Tax Rate
Estate Tax Exemption
Portability of Estate Tax Exemption
Top Gift Tax Rate
Gift Tax Exemption
Gift Tax Annual Exclusion
$13,000, subject to inflation adjustment
GST Tax Rate
GST Tax Exemption
$1.4 million (approximately)

For 2012, the 2010 Tax Act provides for an estate tax exemption of $5.12 million (increased from the 2011 exemption of $5 million due to a cost of living adjustment) and a top tax rate of 35%.  Portability of the estate tax exemption will continue for 2012.  Portability allows for the unused estate tax exemption of a deceased spouse to be transferred to and used by the surviving spouse.  In 2013, the estate tax is scheduled to revert to an exemption of $1 million with a top marginal rate of 55% (with an additional surtax of 5% for estates between $10 million and approximately $17 million), and portability will expire.

Gift Tax
For 2012, the gift tax exemption and top rate are unified with the estate tax.  Accordingly, the exemption is $5.12 million and the top rate is 35%.  The gift tax annual exclusion remains at $13,000.  For 2013, the gift tax, like the estate tax, is scheduled to revert to an exemption of $1 million and a top rate of 55% (and a similar 5% surtax on certain gifts).  

Generation-Skipping Transfer Tax

For 2012, the GST exemption is the same as the estate exemption, which is $5.12 million.  The GST tax rate, which is the maximum estate tax rate, is 35%.  For 2013, the GST exemption is scheduled to revert to approximately $1.39 million, adjusted for inflation, with a rate of 55%.

Plan Now?

With the understanding that the estate, gift, and generation-skipping tax is ever changing, many clients inquire as to what we anticipate to expect the exemption and tax rate will be in future years.  The answer to that question is very difficult to speculate upon.  For example, many estate planners never would have guessed that they would see the favorable estate and gift tax laws of 2011 and 2012.  President Obama’s proposed budget supports a $3.5 million exemption and a tax rate of 45%.  Republican presidential candidates are in favor of fully repealing the estate tax altogether.  There are those in Congress that see the current tax laws as effective as currently enacted and thus advocating no future changes. 

With all this uncertainty for the future in consideration, what we do know is that the current tax laws afford the wise and prudent client a generous exemption that may be carefully implemented in various planning techniques to meet the needs and goals of said client.  We at Jeffrey Burr are experienced in implementing various planning techniques to optimize a person’s gift and estate tax exemption.  We strongly urge our clients whom have concerns regarding the state of the estate and gift tax to immediately schedule an appointment with our firm to explore the options available to them.

Wednesday, April 18, 2012

California Franchise Tax Board

Several of our clients have in the past created Nevada limited liability companies (LLC’s) or Nevada limited partnerships (LP’s) with the intent of holding investment or vacation properties located in California.  Prior to 2011 the idea of a Nevada entity merely holding investment property in California would not have triggered any California taxes because the entity would not have been classified as “doing business” in California.  However, the Franchise Tax Board, which is California’s taxing authority, has imposed new rules on the taxation of entities conducting business in California. 

As of January 1, 2011, California changed the definition of “doing business” to include, among other things, any business entity who has real or tangible property in California where the value of that property exceeds the lesser of $50,000 or 25% of the taxpayer’s total real and tangible property.  This change will impact clients with LLC’s or LP’s that were formed merely to hold investments in California where the value of the assets in California now exceeds $50,000.  The business entity will now be subject to an annual $800 tax imposed by the Franchise Tax Board.  Please contact us or your tax preparer if you have questions about whether the fee will apply to you and to take steps to begin paying the fee.  Please call our office and set an appointment with an attorney to discuss the possibility of restructuring your entity to avoid the tax in the future.

Monday, April 16, 2012

Nevada Supreme Court Case Protects Nevada LLC Members

The Nevada Supreme Court recently issued a ruling in the court case Weddell v. H20, Inc.  The case addressed the rights of LLC members where a creditor has obtained a charging order against a member of the LLC.  A charging order is a remedy for creditors which directs the LLC to make any distributions to the judgment creditor rather than to the debtor LLC member.  The charging order gives the creditor some recourse against a personal debtor who owns an interest in an LLC. 

In Weddell v. H20, Inc, Rolland Weddell and his business partner Michael Stewart each owned percentages of two LLCs.  An unrelated creditor obtained a personal judgment against Weddell for over $6 million.  The creditor obtained a charging order against Weddell’s interest in the LLCs.  The issue that the Nevada Supreme Court addressed was whether the creditor had rights under the charging order to participate in the management of the LLCs or to solely receive any distributions the LLC made to Weddell. 
In reversing the District Court, the Court ruled that the charging order only allowed the creditor to obtain distributions made from the LLC to Weddell and did not affect Weddell’s managerial rights nor did it give the creditor an interest in the LLC’s assets.
This case is important as it protects the other members of the LLC.  If one member of an LLC has personal judgments against him, the creditors will not be able to step in to the management of the LLC which could affect the other members of the LLC.  The case also reaffirms that LLC’s are an effective asset protection planning tool as the courts will respect the charging order limitations.  If you have any questions about asset protection laws in Nevada, feel free to contact our office for a consultation.