Tag Archives: Income Tax

Careful with Deathbed Planning

As death looms, people become much more focused on arranging their affairs.  Even those with few assets will develop a laser-like focus on leaving a suitable legacy.  There are pitfalls to death-bed estate plans or revisions to existing plans.  In a perfect world, an estate plan is constructed carefully after much thought and revisions are made regularly.  However, lawyers and financial advisors are often solicited to make changes when a client fears an imminent demise.

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Recently, I helped clients update their revocable living trust after the wife was diagnosed with terminal cancer.  They created their trust 20 years ago and had not made any updates since that time.  In the intervening years, one of their five children had passed away and numerous grandchildren had been born.  The prior version of their trust provided that if one of their children predeceased them, the surviving children would receive the estate equally.  The clients instead wanted the trust share that would have passed to the deceased child to be held in trust for the deceased child’s children or the clients’ grandchildren.  If nothing had been done, the clients would have disinherited their grandchildren.

When making near-death amendments or creating new estate plans, advisors and clients must consider the income tax ramifications. A common mistake is to transfer a home or real property to children or grandchildren prior to death.  Such a transfer results in loss of the step-up in basis of the property to the date-of-death fair market value.  The child or grandchild receiving the property steps into the shoes of the transferring parent or grandparent and takes the transferor’s basis in the property.  Usually, the basis is much lower than the present day fair market value.  When the child or grandchild sells the property, he or she will incur a much higher capital gains tax than necessary.

Finally, to avoid a contest, a medical or mental competency examination can assure that the client is competent to make the change.  These exams can be administered by the client’s regular physician.  By using their normal physician, the client will feel more at ease and the physician will already have a history with the client and be able to differentiate whether the client lacks capacity.

Death-bed planning can be done effectively but there are numerous considerations and precautions to follow.

Billion Dollar Tax Bill for Facebook CEO Zuckerberg

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Facebook CEO Mark Zuckerberg will soon become a billionaire when the social media giant completes its initial public offering (IPO).   Despite the enormous benefit to his personal wealth, he will face some severe tax consequences from his proposed exercise of millions of stock options.

Zuckerberg currently owns almost 414 million shares of Facebook, but he also holds options to buy another 120 million shares at the bargain price of 6 cents a piece. Facebook said in its IPO paperwork that Zuckerberg plans to exercise those options and will sell some of his shares during Facebook’s initial offering to cover the tax bill.

Zuckerberg will pay ordinary income tax on the spread between the fair market value of Facebook shares when he exercise his options and the price he pays for the shares  – 6 cents.  Private analysts estimate the shares will go for $40 per share during the IPO.  At such an elevated price, Zuckerberg will owe roughly $1.5 to $2 billion in taxes.

Needless to say, Zuckerberg will pay tax at the highest marginal federal income tax rate of 35% .  In addition, as a California resident, Zuckerberg will pay state income tax at a 10.3% rate.  Why is Zuckerberg willing to shell out billions in tax?  Control.  The 27-year old CEO wants to retain as much control as possible over the continually growing Facebook empire.

Only in the twisted world of taxes could one go from paying what many believe to be the largest tax bill ever to paying no tax at all.  Zuckerberg may not pay any federal income taxes in 2013.  The Facebook Board of Directors, at Zuckerberg’s urging, has reduced his salary to $1 for 2012.

Choose Lawyers Instead of the Internet

The Internet has changed numerous industries including the legal market.  Despite the many advantages of online services, there are considerable drawbacks when comparing the use of web-based estate planning forms versus hiring a competent attorney. The following list comes from a North Carolina attorney. Rather than relying on the bare information fed into a computer, a skilled lawyer can:

  1. Listen to your goals and desires and incorporate them into your plan.
  2. Offer advice, not just words on paper.
  3. Help with referrals to other trusted professionals.
  4. Make sure that the documents are properly executed.
  5. Make sure that any trusts are properly funded.
  6. Make sure that beneficiary designations are properly completed.
  7. Make sure that accounts and real estate are  properly titled.
  8. Help with managing assets of incapacitated family members.
  9. Help with probate and trust administration.
  10. Help with income, gift and estate tax matters.
  11. Help ensure governmental benefits for disabled or incapacitated family members.
  12. Serve as an advocate in dealing with financial institution and governmental bodies.
  13. Care about you and your family.

Of course, there is a sinister view that attorneys embrace computer-based estate planning programs because such planning generally leads to a much more costly probate proceeding.  To avoid the added cost and delay involved in a probate,  and enjoy the benefits listed above, consult with an estate planning specialist today.

Advantages of Nevada Limited Liability Companies (LLC’s)

Many know that Nevada has a tax favorable climate for business and legal entities.  Nevada does not collect individual, corporate, inventory, franchise, gift, business occupation or stock transfer taxes.  One of the preferred forms of operating a business is through a limited liability company (“LLC”).

An LLC is a hybrid entity offering the legal protection of a corporation combined with the “pass through” taxation advantages of a partnership.  The owners of an LLC are called “members” (rather than partners or shareholders).  A Nevada LLC does not pay taxes and the tax consequences pass through to the LLC members.  Yet, like a corporation (and unlike a limited partnership) all of the members enjoy limited liability.  In other words, there is no one similar to the general partner in a limited partnership that must be fully liable for the debts and obligations of the LLC.  Thus, if administered properly the LLC enjoys the benefits of partnership taxation without exposing anyone to unlimited liability.

Nevada is one of the most difficult states in which to “pierce the corporate veil” or enforce personal liability for the debts and actions of the LLC on its members.  Just like a corporation, if the LLC’s owners treat it as a separate entity (e.g., they observe certain formalities, do not commingle assets, do not make personal use of company assets, etc.), then the courts will generally treat the entity as separate from the members and will not hold them responsible for liabilities of the LLC.

Under Nevada law, a charging order is the sole legal method for creditors suing you personally to attack your assets held in an LLC. For example, if you are a member of a Nevada LLC and have a day trading account, a boat and a duplex held in an LLC and are sued personally, a creditor would not be able to seize your assets. They would instead have to obtain a charging order over your membership interests in the LLC, entitling them to receive a portion of income earned by that LLC.  If the LLC did not earn any income, then there would be no profits to be distributed.  The judgment creditor cannot compel any such distribution that is not required by the company’s operating agreement and cannot force a dissolution of the company.

Members (owners) and manager of the LLC need not be residents of Nevada (or even U.S. citizens) and do not need to come to Nevada to form the LLC.  Member meetings may be held anywhere in the world.

A Nevada LLC can own property in any state without having to be incorporated in that state. Nevertheless, the Nevada LLC may need to qualify to do business in the foreign jurisdiction.  Such qualification could lead to paying foreign taxes.

The Managing Member of an LLC can deduct 100% of the health insurance premiums he or she pays, up to the extent of their pro-rata share of the LLC’s net profit, because the profit is considered earned income.  If a member has earned income, he or she will also qualify.

When considering whether to form an LLC, you consult with a trusted attorney.  Beyond the filing documents required by the Secretary of State, you must prepare appropriate governing instruments.