ISSUES FOR ADVISORS

Friday, August 1, 2008

“Farm Bill” Creates a Short, but Wide Open “Window”

Conservation Easements create an opportunity for a landowner to own and use their land, pass them to successive generations, and realize substantial tax benefits.

Traditionally, the Federal Tax Code has allowed deductions for the value of a “Qualified Conservation Easement”, for Income and Estate Taxes. These provisions apply to any landowner who creates an easement for permissible conservation purposes, as defined by the code and regulations. A “Qualified Conservation Easement” must be a permanent restriction on land, generally limiting its use to conservation (open space, wetlands, nature preserves, etc.), agriculture or historic preservation purposes. The easement itself must be donated to either a unit of government or a qualified charitable organization (often, a Land Trust). But the landowner continues to own and use the land.

The value of the easement, is eligible for a charitable deduction. The deduction may be taken in the year of the donation, and any unused amounts carried forward for additional years. Traditionally, this carry-forward has been limited to 5 years, and, because land is a capital asset, the amount of the deduction has been limited to 30% of a taxpayer's adjusted gross income.

The 2008 Farm Bill dramatically changes this, but only for a short time! "Qualified Farmers and Ranchers" may now deduct up to 100 percent of their Adjusted Gross Income, and may carry forward the unused deduction for 15 years. Unfortunately, this very favorable provision applies only to donations made before January 1, 2010. A "Qualified" Farmer or Rancher is one whose gross income from Farming is more than 50% of his total gross income in the year of the contribution.

There is good news for other landowners, too (subject to the January 1, 2010 deadline). Now other donors of “Qualified Conservation Easements” may deduct up to 50% of their adjusted gross income and may carry unused deductions forward for 15 years.

Other tax benefits from Conservation Easements still remain. A deduction from Federal Estate Taxes may be taken (even on easements created post mortem, by an estate or heirs). The easement, itself, should also reduce the value of the property for real property tax purposes (A 2006 Michigan State Tax Commission letter in fact, directs assessors to take this into consideration). And, there is currently pending Michigan Legislation which would allow a tax credit of up to $10,000 for a donated conservation easement.

This Newsletter is intended to be informational, only and does not constitute legal advice. If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

Thursday, May 1, 2008

Michigan’s New Position on The Professional Corporation Act - "The Fix" - Part II

What does the Miller decision mean to your clients and what can be done to “fix” the problem?

The case raises practical concerns. Who must now incorporate under the Michigan Professional Corporation Act? What existing corporations may be deemed to be improperly incorporated?

The Bureau’s current policy is that if the entity does not involve a traditional “learned profession,” and was incorporated prior to the court ruling in May of 2007, they will not require the entity to take any corrective action.

New entities are less clear. Entities listed under the Professional Service Corporation Act, under the Michigan Public Health Code and those services referenced as "professional" under the Michigan Occupational Code, must now incorporate under the Professional Service Corporation Act. Occupations which are and which are currently not included, can be found at www.michigan.gov/documents/cis/Website_update_re_Miller111_203547_7.pdf.

Occupations which may surprise, include Funeral Director, Mortician, Real Estate Appraiser, Real Estate Brokers and Salespersons. Notably (and perplexing to me) is the list of not included occupations including Insurance Agents, Insurance Counselors, Investment Advisors and Mortgage Brokers. It is unclear to me how these services are less professional and personal in nature than those included!

It should be noted that there is pending “corrective” legislation in the Michigan Legislature. It appears, however, that the legislature will wait until the case, currently on appeal in the Michigan Supreme Court, is finally decided, before acting.

Some advisors are concerned that third party litigants may attempt to use the Miller decision as a basis to “pierce the corporate veil” and find personal liability. One possible “fix” that has been suggested is for the corporate entity to form a subsidiary Limited Liability Company (LLC) and move its operations into the LLC. At this time, there has not been a court ruling regarding the improper organization of an LLC. Currently, an LLC is not subject to the Miller ruling (note that in “companion” litigation--Allstate v A & A Medical Transportation Services, Inc., in an unpublished opinion the court “sidestepped” the LLC issue when raised by the insurer). Again, the bureau’s official policy is that the Miller decision does not apply to LLC formation.

Obviously, “do not try this at home” is applicable here.

Andy Richards

Michigan’s New Position on The Professional Corporation Act - Who must be Incorporated as A Professional Corporation - Part I

In what many believe to be an unfortunate trend by insurers to avoid payment for services otherwise properly and reasonably delivered, a Michigan Insurer sought to avoid payment to a provider of Physical Therapy Services under Michigan’s “No-Fault” insurance statute [Miller v Allstate, 275 Mich App 649 (2007)]. Claiming that the provider was “improperly incorporated” under the Michigan Business Corporation Act, the insurer argued that the provider was not entitled to payment.

What is important to advisors is that the case raised the question whether a particular occupation may incorporate only under the Michigan Professional Corporation Act. This law essentially provides that certain “professional services” are so personal in nature that the professionals will not be allowed to shield themselves from liability for negligence in the provision of such services by incorporating. The Professional Corporation Act allows them to take advantage of other corporate “advantages,” but limits the corporate protections. Traditionally, based on a 1968 Attorney General Opinion, this limitation was restricted to “Learned Professions.” The list was relatively short, including doctors, dentists, lawyers, accountants, etc.

The Michigan Court of Appeals did not decide the real issue brought before them: whether the payments were proper. Instead, they “remanded” the case for consideration of other issues under the “No-Fault” statute. In fact, they decided that it was unnecessary to determine whether the PT service was “properly incorporated.”

In a rather bizarre turn of “jurisprudence” which bewilders most observers, they then proceeded into the murky waters (some believe they were clear until churned up by this decision) of corporation issues.

Two important new developments come from their opinion. First, they ruled that a corporation that can be formed under the Professional Corporation Act cannot be formed under the general corporation act. This is a significant departure from existing law and the way the Michigan Department of Labor and Economic Growth’s Corporations Division has historically treated incorporation. They have announced that they will not accept for general incorporation, entities which can form under the Professional Corporation Act. Second, the Court significantly expanded the range of occupations which are considered “professional service providers” under the Professional Service Corporation Act.

So what does this all mean to advisors and their clients? Part 2 of this Article attempts to address that.

Andy Richards

Friday, February 1, 2008

Dismaying New Rules for Employer-Owned Life Insurance

During the nearly 25 years I have practiced law in the area of Estate Planning and Business Succession Planning, No “technical” tax change has personally caused me more dismay or made less sense than Congress’ most recent blunt instrument approach to “fixing” a perceived abuse of life insurance policies. New IRC §101(j), added by the Pension Protection Act in 2006, is ostensibly directed toward major public corporations’ practice of insuring virtually any employee (so-called “janitor insurance”). It has, I believe, unfortunately unfair and far-reaching consequences for the 1000's of closely held business companies in the United States.

Ownership of life insurance on key participants has long been an important tool for funding Buy-Sell obligations. In many cases, it is the only way a business can insure that upon the untimely death of a participant, his or her family will receive fair payment for the decedent’s interest in the business.

Like life insurance proceeds in the hands of individuals, the proceeds of such business-owned policies have always been income tax free under §101(a) of the IRC. Now, Congress has set a major trap for the unwary!

New Section 101(j) reverses the time-honored rule that such proceeds are income tax free and replaces it, instead, with the presumption that the proceeds will be income taxable, unless the employer meets certain exceptions and new requirements created by the section.

Under §101(j), in order for such proceeds to be received by the business free of income tax, the insured employee must be (1) employed by the business during the 12 month period prior to death, or (2) a director or (3) a “highly compensated employee,” (4) or used to purchase an equity interest from the decedent’s family or estate.

It may seem that this will not be a problem in most cases. However, the section additionally imposes Notice and Consent requirements, which require that the employer give written notice to the employee of the intent to obtain insurance, of the maximum face amount of the policy, and that the employer will be the owner and beneficiary of the policy--and which require that the employee sign a written consent to such insurance, before the issuance of the insurance contract. It does not appear that the IRS would accept a confirmation of such intent at any time after the contract has been issued. This seems to go far beyond addressing the problem it was intended to address.

When advising your clients regarding the purchase of “Buy-Sell” insurance policies, it will be important that all the advisors are aware of this issue and that the written consent and notice requirements are followed and well-documented.

Andy Richards

Saturday, December 1, 2007

Beneficiary Designations on “Tax-qualified” investments

Wow. Its hard for me to believe is has been a year since my last newsletter! I owe readers a huge apology. About 9 months ago, I asked a number of you if you would like to receive this as a “pdf” document in your e-mail and the response was mostly affirmative. I had the best of intentions of sending out at least one last mailing asking for a choice between e-mail and regular mail. Obviously, the e-mail route is (currently) a more “economic” choice for me.

But I digress. The apology. I promptly dropped the ball and never produced a newsletter during the 2007 calendar year. What can I say that doesn’t ring of “dog ate my homework,” and acknowledge that the “road to Hell is paved by good intentions?”

Being near the year-end, it may be a good time for a reminder on beneficiary designations for qualified retirement plans, individual retirement plans, and certain non-qualified annuities.

Those of you who know me, have worked with me or heard me speak know that I am an advocate for the revocable living trust as a planning tool. However, every “rule” has at least one, notable exception.

In this case, these “investments” create a very significant exception which may militate against using the revocable trust with them. They are, as a general rule, the only assets clients have which have an “unpaid” income tax component to them. Qualified retirement assets are generally all income taxable to the recipient (whether the plan participant, or an heir). Non-qualified annuities are at least partially income taxable. Both are subject to regular income tax rates.

The problem arises because over the years the IRS has been less than clear about how these items will be taxed if payable to a trust. The regulations require special, often complex language be included in the trust document and perhaps in the beneficiary designation. They also require the Trustee or other administrator to be savvy about the elections necessary and the timing of those elections.

My “rule of thumb” advice to clients about treatment of these investments in the estate plan is that if you have responsible adult beneficiaries, you should name them directly, bypassing the trust on these assets. Only if there is a compelling reason (e.g., minor children or other incapacity), should you name a trust as beneficiary, and then only if the trust has been drafted or amended to include particular provisions for proper treatment of these assets.

As another year comes to a close, I want to thank all of you for our professional relationship and your support and friendship through the years.

Best wishes to all for a happy and healthy holiday season.

Andy Richards

Friday, December 1, 2006

Do You Really Want To Read About More Year End Strategies?

Rather than add to your stack of already informative “tips, tricks, traps” and other year end tax and financial strategies, I will make this an opportunity to reflect on some personal and informal issues.

Our firm held its annual meeting on November 17 and 18. One topic involved marketing. We have a diverse mix of areas of practice, and styles. During our discussion, I was impressed by a recurring theme: relationships. Clearly, our most effective “marketing” approach has been the development and maintenance of quality professional relationships with our clients and, importantly, our professional colleagues.

I want to thank all of you who have been sources of information and support (and in many instances, for your friendship) over the years. I also want to thank you for providing our clients with top quality service when we have been able to refer them--and for the trust and confidence you place in us when you refer your important clients to us.

I would like to take this opportunity to do something I do not do often enough: tell you a little about some of the services my firm can provide to you and your clients which I may not personally provide.

We are a 9-lawyer firm with offices in Saginaw and Frankenmuth. In addition to the Business, Tax, Elder Law and Estate Planning, Probate and Trust Administration you are accustomed to hearing me tout, we offer a number of other important services to our clients.

Our attorneys represent individuals, businesses and institutional clients in real estate, municipal, bankruptcy, and litigation. We have trial lawyers in the firm who are highly skilled and have years of courtroom experience in commercial and personal matters (including accident and personal injury, construction, business disputes). We do adoptions. We represent clients in municipal matters, including zoning, condemnation and Michigan Tax Tribunal work. We represent clients doing real estate development, and establish condominiums, but are equally able to assist individuals in personal real estate purchases, sales and leases. And of course, we handle Probate and Trust Administration.

I hope you will continue to consider us a resource for any legal problem or issue you may have. I will be happy to discuss any of these issues which may arise for you or your clients from time to time and if I cannot address them directly, will refer you to one of my partners.

Finally, I want to wish you a blessed holiday season, and a happy, successful and profitable New Year.

Andy Richards

Friday, September 1, 2006

Annuities: Tricks and Traps

Annuities present some unique opportunities for your clients. But for the unwary agent and client, they also present some dangerous pitfalls. The Annuity enjoys its own multiple-page, multiple-subsection, provision in the Internal Revenue Code.

Annuities afford clients a way to “park” assets and let them grow tax deferred. One of the most important aspects, therefore, is to make sure they maintain their tax-deferred status. The tax code is very specific about the limited instances in which a Trust can be the owner of an annuity. Generally, qualified retirement plan trusts and Grantor Revocable Trusts are the only ones which will not cause an annuity to lose its tax exemption. Therefore, when using estate planning trusts as owners of an annuity, care must be taken to consider the consequences of the death of the grantor.

An annuity is a contract. The tax code allows the contract to be structured in a way that causes deferral of taxation of growth. But each annuity contract is created by the underwriting company. Thus, the options available to the owner and/or beneficiary, and the consequences of either changes of ownership, or death of the owner and/or annuitant can vary from contract to contract. Not knowing what those options and consequences are can come back to “bite” the advisor (as well as her/his client).

Some annuity contracts do not directly address what happens in certain circumstances. Take, for example, an annuity in which the annuitant is someone other than the owner and beneficiary. What happens if the owner of the annuity dies, but the annuitant and beneficiary are still living. In one case I am aware of, though the contract did not address this issue, the issuer took the position that the annuity could only be transferred from the deceased owner’s probate estate, to his heirs. One of the “selling” points of an annuity contract is generally its transfer-on-death character, usually avoiding the need for probate.

Another common concern involves how an annuity will be treated in the event the owner is required to go into a long-term care scenario. For purposes of qualifying for Medicaid, annuities are usually countable assets. Medicaid exempts only very specifically structured annuities, and current new law has now even made them no longer viable. There is a misconception out there that an irrevocable annuity will be exempt from Medicaid.

Like any other financial or estate planning tool, the annuity is a powerful planning option in the right circumstances and with the right plan design. But like any powerful tool, care and skill should be exercised when implementing it.

Andy Richards

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ISSUES FOR ADVISORS