The following questions and brief answers are meant to provide you with general information and not legal advice. If we don’t have a written engagement letter, you aren’t my client. Call me if you want more complete information about your particular situation.
Q: What has happened to the federal estate and gift taxes?
After more than 10 years of waffling and confusion, the US Congress finally passed a comprehensive estate and gift tax law that does not have a stated end date. That means that taxpayers can rely on the law staying as it now is, unless the Congress changes it. The last law had expiration dates that made planning even more difficult than it needed to be. The federal tax law exempts up to $5 million from the estate and gift tax. And this exempt amount is available to both spouses. So, if the spouses follow the rules of the current law, they can transfer up to $10 million to their heirs without any federal estate or gift tax. However, there are still some very specific rules to follow in order to have the full $10 million available to married people. We also need to be aware that many states have their own estate or inheritance laws that still impose estate or gift tax on estates substantially below $5 million. For example, the state of Minnesota taxes estates that exceed $1 million; and the Minnesota law does not allow the estate of a surviving spouse to use any portion of the unused $1 million exemption from the other spouse. For this and other reasons it may be a good idea for people with estates under $5 million to consider marital and other trust arrangements, so it is likely that they will continue to be useful for years to come.
Q: Why should I care about estate planning and the tax law?
A: Here's why: If you don't care, the government does.
If you didn't do any estate planning and you didn't die or get disabled, you didn't need any estate planning. Just like life insurance policies. We buy life insurance not because we expect to need it, but just in case we do die, the proceeds of a life insurance policy are nice for our heirs. If you don't die of course maybe you won't need the life insurance.
If you did go through an estate plan process and signed wills some years ago and you haven't updated the plan you could still have problems. The rules have changed a lot. Once, if you had an estate of $1 million you needed to do some fairly sophisticated planning to help your heirs escape some potential estate taxes. This usually involved splitting estates into several pieces and then arranging for those pieces to go into trusts that avoided tax (at least for a while). Now if you have an estate under $10 million you could have few or no federal estate tax worries. But many states (like Minnesota) still levy an estate tax on modest estates. You can still arrange things so that you can minimize death taxes in these cases, but it may be that different methods have to be used. And the provisions in your old wills not only may not minimize the death taxes, they may lead to gifts or transfers that you did not intend.
For example, where an old will or planning document contained formulas that tied gifts to the federal tax scheme, these provisions probably won't work properly today. The new federal estate tax law exempts the first $5 million of an estate from tax. If your old plan left the maximum federal exempt amount to a trust for the benefit of your children, then an estate worth up to $5 million could all go to a children's trust and none would go to a surviving spouse. This is not what most people intend. A new will and trust may be called for.
Q: I have heard that do-it-yourself will and trust packages are available online. Could I use one of these in my estate and succession planning? How do these work?
A: Sometimes these packages can work just fine. The problem is that they will only work sometimes and for some people. These times and people might not be you. Different states have different rules about how wills and trusts are to be set up and administered. The main concern, however, is that whatever you do with one of these programs will probably not be complete. If you are working on a succession plan, a will is just part of the process and will usually not cover even most of the bases. Just a couple examples: you need to be concerned with how much disability insurance and how much life insurance you might need; you also need to consider life insurance beneficiary designations and beneficiary designations on retirement accounts like 401Ks. Some online programs provide forms to set up a trust. A trust can be a fine planning tool, but again the forms usually don't cover even a majority of the necessary bases. To ensure that your estate planning provides what you are intending, talk to me or someone who deals with these things regularly.
Q: I'm thinking of starting a company. How do I set it up?
A: You can set up a business as a sole proprietorship, a partnership, a limited liability company (known as an LLC) or a corporation. Some partnerships and all LLCs and corporations must have materials filed with a state agency like the Secretary of State. Sole proprietorships and general partnerships don't require state filings to set them up. Many states provide basic forms for corporations and LLCs for download. These forms will accomplish a setup but they usually do not include many available optional provisions that might be useful. Nor do they usually provide for the other documents that are necessary in connection with a business formation. Regardless of the business type, a written agreement that outlines the deal among the owners is always a good idea.
Q: What is a limited liability company?
A: A limited liability company is a business that is like a corporation in some ways and more like a partnership in others. The LLC can protect its owners against personal liability on business debts like a corporation but can be taxed like a partnership or a sole proprietorship.
Q: I own a part of an LLC. How am I taxed on the LLC's income?
A: Unless an LLC files a special election with the IRS, it is treated just like a partnership for tax purposes, so the LLC pays no federal income tax. The income is allocated among the owners according to the terms of the LLC's governing instruments. Usually income is allocated based on ownership percentages. But one of the advantages of the LLC form of business is that other allocation methods are permitted. If an LLC has only one owner, it may be taxed like a sole proprietorship. In that case a separate income tax return for the LLC is not usually necessary and the income and expenses will be reported on the owner's Schedule C to his or her income tax return.
Q: I want to expand my business to a new state. Is there anything I have to file in order to do this?
A: Most states require anyone who is doing business there to file documents with a state official like a Secretary of State. The business then is required to maintain a registered agent and registered office in the state as long as it is doing business there. In addition, there are many tax and similar filings required, such as sales tax permits, unemployment tax registration and filings if there are employees in the state. Most states also have their own income tax filing requirements.
Q: I would like my employees to sign a noncompete agreement. What should be in it?
A: It is absolutely necessary to check the local laws concerning noncompete agreements since local laws are variable as to what they cover, how they must be signed, when they must be signed, and what has to be provided to the employee in connection with the signing. Where they are allowed, noncompete agreements always have to be reasonable in order to be enforceable. They can restrict the employee's competition within a reasonable geographic area, over a reasonable time, and with respect to a reasonable number of activities. For example, an agreement could contain restrictions like this: the employee may not sell widgets that are similar to the widgets the employer makes, within the state of Minnesota, during the period of 1 year after the employee leaves employment as a salesperson for this employer. Noncompete agreements depend on state laws and local state interpretations. Some states, such as California, will refuse to enforce any noncompete agreement except under very limited conditions. All noncompete agreements should contain nondisclosure obligations that say that the employee may not use or disclose the employer's confidential or business information.
Q: I am not a US citizen but I want to buy some farm land investment property in the US. Are there problems with this idea?
A: Many US states have laws that say that non-US citizens who are not residents of the US may not purchase any agricultural land in that state. Some states do not have this type of law at all. If you do buy agricultural land in a state that allows it, you will have to file annual reports with the US Department of Agriculture with respect to your property holdings.
Q: My partner and I own a business we started years ago. Now we want to start to transfer the business to our children. Will we be able to do that, without having the government take away the business to pay taxes?
A: Transferring a business to a new generation of owners is a challenge of balancing the concerns of the family members who are in the business, those not in the business, the cash and future cash needs of the business and its owners, and the tax implications to the business and its owners. There are many different methods of doing a transfer to a younger generation, but all of them require planning and time. The use of options like pricing and valuation discounts, periodic transfers and trusts may make it possible to avoid immediate taxation of any portion of the transferred value. Tax laws and the desires of business owners change, so it is important for the plan to be flexible.