I often receive questions about forming limited liability companies, corporations, and limited partnerships in other states besides California. The reason being that California imposes a minimum $800 franchise fee and a gross receipts tax on limited liability companies. Furthermore, many jurisdictions such as Delaware, Nevada and others have preferential corporate codes that would apply to businesses formed in those states. With these facts, many people would say that they should form any and every business entity outside of the state, but California also has rules regarding when a foreign entity (a business entity formed in another state) has to register to do business in the state of California.
If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.
If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.
Thursday, March 26, 2009
Tuesday, March 17, 2009
2nd Orange County Asset Protection Society Meeting
The date for the second Orange County Asset Protection Society Meeting has been set. It will be on Tuesday, May 12, at 7:00 PM. The website for the Asset Protection Society is here: www.assetprotectionsociety.org . The members are both advisors and individuals who have a desire to learn about and implement various asset protection structures for protection. If you would be interested in attending or have questions about the meeting or the society, contact me to discuss.
Friday, March 6, 2009
First Asset Protection Society meeting in Orange County
For any potential client or advisor who would be interested, we are having the first local meeting of the Asset Protection Society (http://www.assetprotectionsociety.org) in Orange County, California, on Tuesday, March 10, 2009, at 7:00 PM. The location will be at the Law Office of Ferruzzo and Ferruzzo, LLP, which is located at 3737 Birch, Suite 400, Newport Beach, CA 92660. The initial meeting will be to discuss options for having ongoing meetings in Orange County and many of the members of the asset protection society who are in this area have decided to attend. If you are not a member of the asset protection society but would be interested in meeting some of the advisors who are members of the society, please email me for more details and I will give you more information for the March 10 meeting.
H.R. 436
A few advisors that I work with have asked me to give my opinion on one of the proposed bills in the House of Representatives (HR 436) and specifically on the proposed changes to transfer tax valuation rules contained in the bill.
You can find the proposed text of the bill here: http://www.opencongress.org/bill/111-h436/text
While the bill does propose changes to the estate tax exemption amount, the proposed changes to the valuation rules are on the minds of many advisors. If you look at the Bill, it states,
"In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)
(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and
(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity."
The first item to consider is what is a transfer "in an entity" and second, the issue of eliminating valuation discounts. The first issue is explained simply by pointing to many different kinds of estate planning techniques that advisors have used in the past and are currently using today. These vehicles for transfer planning are generally called family limited partnerships, family limited liability companies, or some other type of business entity owned primarily by one member of a family who begins gifting or selling those interests to younger individuals in the same family.
The second issue is the lack of valuation discounts for these types of transfers. In the past, the value of the business interest that was transferred could be reduced under several theories. These theories are usually discounts for lack of marketability (as closely held business interests generally do not have a market in which they are bought and sold) and lack of control (as the interest that is transferred by gift or sale is usually a minority interest).
The good news is that this bill has not yet been passed in the House of Representatives, but it continues to gather support from Representatives across the country. The bad news is that if this bill passes, then many estate plans or planning techniques that have used a family entity (Limited Liability Company or Limited Partnership) may lose their effectiveness for transferring future interests. If this bill passes, it is unlikely that it would have any kind of retroactive effects upon transfers, but any future transfers would be subject to the bill itself.
Based on this, I am recommending to my current clients that have family entities to consider completing their gifts or transfers before this bill is passed into law, or if they are not comfortable or able to conclude these transfers at the present time, to understand that future estate planning will be needed to eliminate any additional estate taxes based on the elimination of these discounts. If you or any of your family members or friends have been using a family limited partnership or family limited liability company to transfer wealth, it is as important now as it ever has been to make sure all of the administrative requirements are fulfilled (proper valuations of the interests, gift tax returns filed on an annual basis, interest payments made on installment sale promissory notes to trusts for the benefit of family members, etc.) and to continue to speak to your advisors about this Bill to find out if it passes in the future.
If you have one of these kinds of entities and you are uncertain as to whether or not you have been handling the administrative aspects of the entity correctly, or if you have questions about this proposed bill or any other estate planning question, do not hesitate to contact me.
You can find the proposed text of the bill here: http://www.opencongress.org/bill/111-h436/text
While the bill does propose changes to the estate tax exemption amount, the proposed changes to the valuation rules are on the minds of many advisors. If you look at the Bill, it states,
"In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)
(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and
(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity."
The first item to consider is what is a transfer "in an entity" and second, the issue of eliminating valuation discounts. The first issue is explained simply by pointing to many different kinds of estate planning techniques that advisors have used in the past and are currently using today. These vehicles for transfer planning are generally called family limited partnerships, family limited liability companies, or some other type of business entity owned primarily by one member of a family who begins gifting or selling those interests to younger individuals in the same family.
The second issue is the lack of valuation discounts for these types of transfers. In the past, the value of the business interest that was transferred could be reduced under several theories. These theories are usually discounts for lack of marketability (as closely held business interests generally do not have a market in which they are bought and sold) and lack of control (as the interest that is transferred by gift or sale is usually a minority interest).
The good news is that this bill has not yet been passed in the House of Representatives, but it continues to gather support from Representatives across the country. The bad news is that if this bill passes, then many estate plans or planning techniques that have used a family entity (Limited Liability Company or Limited Partnership) may lose their effectiveness for transferring future interests. If this bill passes, it is unlikely that it would have any kind of retroactive effects upon transfers, but any future transfers would be subject to the bill itself.
Based on this, I am recommending to my current clients that have family entities to consider completing their gifts or transfers before this bill is passed into law, or if they are not comfortable or able to conclude these transfers at the present time, to understand that future estate planning will be needed to eliminate any additional estate taxes based on the elimination of these discounts. If you or any of your family members or friends have been using a family limited partnership or family limited liability company to transfer wealth, it is as important now as it ever has been to make sure all of the administrative requirements are fulfilled (proper valuations of the interests, gift tax returns filed on an annual basis, interest payments made on installment sale promissory notes to trusts for the benefit of family members, etc.) and to continue to speak to your advisors about this Bill to find out if it passes in the future.
If you have one of these kinds of entities and you are uncertain as to whether or not you have been handling the administrative aspects of the entity correctly, or if you have questions about this proposed bill or any other estate planning question, do not hesitate to contact me.
Monday, January 19, 2009
A Great Time to do Advanced Planning
With the current economic slowdown and the very real losses that have been incurred in people's retirement and other investment accounts, many people feel that this is not a great time to do estate planning. Most of the people that I have spoken with are waiting to see what the new congress and president do once they are sworn in, and they are happy and content to sit by and watch what happens.
Unfortunately for many of them they are missing a great time to do some advanced planning. I have not had an opportunity to blog on many advanced estate planning techniques yet, but there are several that depend on several key federal interest rates. Two important rates for many advanced planning techniques are the applicable federal rate and the 7520 rate. Future blog posts will investigate both of those rates and how they are used for various planning techniques, but for January of 2009, the long term applicable federal rate compounded annually is 3.57% and the January 2009 7520 rate is 2.4%. These rates are very low and are used for various planning techniques such as installment sales to defective grantor trusts, Grantor Retained Annuity Trusts, and other techniques.
In addition to the above, the fair market value of businesses, real estate, and investments in general are extremely low. These lower fair market values, coupled with the low rates described above, have made it a very good time to do advanced planning if you are a candidate for business succession, or are a high net worth individual who wants to transfer as much of your estate to your heirs in a tax efficient manner as possible. If you have additional questions about these issues, feel free to contact me to discuss and I will be expanding upon these issues in future posts.
Unfortunately for many of them they are missing a great time to do some advanced planning. I have not had an opportunity to blog on many advanced estate planning techniques yet, but there are several that depend on several key federal interest rates. Two important rates for many advanced planning techniques are the applicable federal rate and the 7520 rate. Future blog posts will investigate both of those rates and how they are used for various planning techniques, but for January of 2009, the long term applicable federal rate compounded annually is 3.57% and the January 2009 7520 rate is 2.4%. These rates are very low and are used for various planning techniques such as installment sales to defective grantor trusts, Grantor Retained Annuity Trusts, and other techniques.
In addition to the above, the fair market value of businesses, real estate, and investments in general are extremely low. These lower fair market values, coupled with the low rates described above, have made it a very good time to do advanced planning if you are a candidate for business succession, or are a high net worth individual who wants to transfer as much of your estate to your heirs in a tax efficient manner as possible. If you have additional questions about these issues, feel free to contact me to discuss and I will be expanding upon these issues in future posts.
New Years Resolutions
Believe it or not, but I had a New Year's resolution to blog more often. I've heard from a few people that the posts are helpful in thinking about what they should be planning for, and the idea was that I would try to write at least a post or two per week in the new year. Well, it is now January 19, and here is the first post of the new year. My point is not that we should be focused on any type of failure on a New Year's resolution, but from a planning perspective we often have the best of intentions and we often leave them incomplete thinking that we will have another day, another week, another month to finish them. While it is difficult for us to think about what would happen to our families if we do not plan for the worst, things do happen that show us how important it is to plan and complete the planning that must be completed.
One example is of a client of mine. This client came into my office at least six months ago and we discussed several things that he and his wife needed to do in order to clean up their existing planning that a prior attorney had drafted for them. The changes were mostly things like changing trustees (due to the fact that the people who were named as successor trustees had all moved out of the area and had lost contact with them), their health directives were missing the relatively new HIPAA authorizations, and they had no powers of attorney for asset management. However, the biggest portion of the clean up work was trust funding. Very few of their accounts were titled in the name of their trust and only one of their multiple real estate holdings were properly titled. We started working on these items and I had draft documents to them in a matter of weeks. Unfortunately life happened and the weeks turned into months and my messages, emails and phone calls were continually returned with excuses such as "we haven't read them yet, we need more time, life is really busy at the moment".
Then the holidays arrived and they asked me if we could set a meeting after New Years in order to finalize the drafts that they had had for six months. Unfortunately for the clients, the husband passed away over the holidays and we are now dealing with the ramifications of not completing the documents that they had had for over half of a year. When I tell this story to friends and colleagues they almost all ask about the age of the decedent. Would you be amazed if I told you he was in his mid fifties?
Based on this story I have convinced many people to finish their planning or to start if they have not given any of these issues proper attention. The goal that I have with this is that every reader should at least stop and consider what the status of their own planning is and what they need to do in order to finish it. If you haven't thought about your own planning or if you have planning that is less than complete, then make sure that you contact your estate planning attorney in order to finish it.
One example is of a client of mine. This client came into my office at least six months ago and we discussed several things that he and his wife needed to do in order to clean up their existing planning that a prior attorney had drafted for them. The changes were mostly things like changing trustees (due to the fact that the people who were named as successor trustees had all moved out of the area and had lost contact with them), their health directives were missing the relatively new HIPAA authorizations, and they had no powers of attorney for asset management. However, the biggest portion of the clean up work was trust funding. Very few of their accounts were titled in the name of their trust and only one of their multiple real estate holdings were properly titled. We started working on these items and I had draft documents to them in a matter of weeks. Unfortunately life happened and the weeks turned into months and my messages, emails and phone calls were continually returned with excuses such as "we haven't read them yet, we need more time, life is really busy at the moment".
Then the holidays arrived and they asked me if we could set a meeting after New Years in order to finalize the drafts that they had had for six months. Unfortunately for the clients, the husband passed away over the holidays and we are now dealing with the ramifications of not completing the documents that they had had for over half of a year. When I tell this story to friends and colleagues they almost all ask about the age of the decedent. Would you be amazed if I told you he was in his mid fifties?
Based on this story I have convinced many people to finish their planning or to start if they have not given any of these issues proper attention. The goal that I have with this is that every reader should at least stop and consider what the status of their own planning is and what they need to do in order to finish it. If you haven't thought about your own planning or if you have planning that is less than complete, then make sure that you contact your estate planning attorney in order to finish it.
Saturday, October 18, 2008
Trust Funding
The biggest problem that I normally find with estate plans is that the super majority of plans that I review for potential clients (that were done by other law firms) are partially or completely unfunded. As noted in my prior post, a trust is only effective when property is held by the trustee for the benefit of the individuals selected by the settlor.
If no property is transferred, then the property will not pass according to the terms of the trust. You may have the most intricate disposition plan where the trustee is supposed to hold the property for one or more beneficiaries in a manner that took the attorney hours to draft, but if the property is not transferred to the trustee then it is nothing more than a piece of paper that has no legal effect.
Additionally, any property left outside of the trust will be subject to probate proceedings in California if the aggregate value of the property left outside of the trust is over $100,000. This creates a situation where a client paid for some estate planning that may be exactly what they wanted, but the probate still occurs with all of the problems highlighted in my other posts on the probate process in California. If it goes through probate the court will generally apply the intestate succession rules to determine who will receive the property (if no other will exists). This is also problematic as the intestacy statutes generally dispose of assets in a different manner than people do when they choose their own disposition plan.
One way to avoid this problem is to have a certain type of will called a pour over will. This type of will tells the court to place all of the assets into the trust that were left outside of the trust upon the death of the individual. This does not avoid the probate, but it will ensure that the assets pass according to the wishes of the decedent through the trust.
The best way to prevent this issue is to make sure that all real estate is transferred by a new deed to the trustee of the trust, make sure all checking/savings/regular investment accounts are changed from individual accounts to trust accounts, and that proper beneficiary designations are made on assets such as life insurance, 401(k) accounts, IRA's and similar assets with designated beneficiaries. Other assets such as closely held businesses and other unique assets should be discussed with the attorney to determine how to transfer them to the trust or ensure that they avoid the probate process entirely.
If no property is transferred, then the property will not pass according to the terms of the trust. You may have the most intricate disposition plan where the trustee is supposed to hold the property for one or more beneficiaries in a manner that took the attorney hours to draft, but if the property is not transferred to the trustee then it is nothing more than a piece of paper that has no legal effect.
Additionally, any property left outside of the trust will be subject to probate proceedings in California if the aggregate value of the property left outside of the trust is over $100,000. This creates a situation where a client paid for some estate planning that may be exactly what they wanted, but the probate still occurs with all of the problems highlighted in my other posts on the probate process in California. If it goes through probate the court will generally apply the intestate succession rules to determine who will receive the property (if no other will exists). This is also problematic as the intestacy statutes generally dispose of assets in a different manner than people do when they choose their own disposition plan.
One way to avoid this problem is to have a certain type of will called a pour over will. This type of will tells the court to place all of the assets into the trust that were left outside of the trust upon the death of the individual. This does not avoid the probate, but it will ensure that the assets pass according to the wishes of the decedent through the trust.
The best way to prevent this issue is to make sure that all real estate is transferred by a new deed to the trustee of the trust, make sure all checking/savings/regular investment accounts are changed from individual accounts to trust accounts, and that proper beneficiary designations are made on assets such as life insurance, 401(k) accounts, IRA's and similar assets with designated beneficiaries. Other assets such as closely held businesses and other unique assets should be discussed with the attorney to determine how to transfer them to the trust or ensure that they avoid the probate process entirely.
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