Suttons Bay Law

Proposed “Carried Interest” Tax Purports to Soak Wall Street But Hits Family Businesses

For the time being, the Senate has again abandoned efforts to impose a “carried interest tax” on venture capitalists, investors, and managers of family businesses. The tax would have increased the 15% capital gains tax rate on certain investors’ profits to the top income tax rate, which is scheduled to hit 39.6% on January 1st (H.R. 4213). The share of investors’ profits is called “carried interest.” It might appear at first glance that it’s perfectly fine for investment managers to be taxed at higher rates on their “carried interest.” But venture capitalists and investors don’t reside exclusively on Wall Street. The law was written so broadly that it could have hit approximately 6.5 million people invested in real estate partnerships that own anything from a single dwelling to sizable commercial properties.

The proposed legislation attempts to sway middle America by couching the carried interest tax as imposing a higher rate on “investment management services” and “investment managers” who work for Wall Street houses. In reality, the proposed legislation could have imposed a higher tax rate on any partnerships invested in particular assets. The higher rates would apply to investment gains and also to gains from the sale of the partnership, and therefore, a sale of the family business would not qualify as a capital gains transaction. Family operations are commonly formed as partnerships and managed by a family member. Under the proposed legislation, the managing family member could be subject to the “carried interest tax.” For a family partnership to gain liability protection and also not be subject to the higher taxes, an outsider – not a family member — would have to manage the partnership. The House version of the legislation exempted family farms and ranches held in partnerships. Other family partnerships would have had to wait for the Treasury Department to exempt them through regulations.

Although the proposed legislation is dead for now, it is likely to reemerge as efforts to plug the federal deficit mount. The increased carried interest tax may be reintroduced in some other form. If so, watch carefully to see how the “carried interest” tax will hit families that are well beyond the alleged targets of the legislation, and communicate any concerns to your representatives in Congress.

Dan A. Penning

Tags: Agribusiness, Asset Protection, Business Management/Law, Business Succession, Cottage Law, Know it Now, Real Estate by Dan Penning
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Wright Penning & Beamer is pleased to announce that Dan A. Penning has been named a FIVE STAR Wealth Manager by HOUR Detroit magazine in its June, 2010 issue.

As detailed below, more than 11,000 wealth managers practice accounting, business planning, estate planning, financial planning, insurance and investments in the metropolitan Detroit area. Out of the 11,000 wealth managers, only 686 of the top-scoring wealth managers were named a FIVE STAR Wealth Manager for 2010. Out of the 686 wealth managers, only 50 attorneys were included in the list and Penning was named as 1 of the 50 attorneys.

The following is an excerpt from the article accompanying the naming of the FIVE STAR Wealth Managers in HOUR Detroit magazine and reprinted with permission:

” . . . Well over half of the consumer responses in the Detroit area indicated it is difficult to find a wealth manager they trust and rely on. Wealth managers, broadly defined, are those individuals who help you manage your financial world and/or implement aspects of your financial strategies. Common examples of wealth managers are financial advisers, life insurance agents, accountants, tax advisors, attorneys, etc. With more than 11,000 wealth managers in the Detroit area, how do you find someone who listens to you, represents your interests and operates with an emphasis on integrity and service? HOUR Detroit magazine can help. The magazine formed a partnership with Crescendo Business Services to find out which wealth managers scored highest in overall satisfaction.

The Selection Process

Crescendo administered a survey, by mail and phone, to approximately 1 in 5 high-net-worth households within the Detroit area. An additional 4,200 surveys were sent to financial services industry professionals.

On the surveys, recipients were asked to evaluate only wealth managers whom they knew through personal experience, and to evaluate them based upon nine criteria: customer service, integrity, knowledge/ expertise, communication, value for fee charged, meeting of financial objectives, post-sale service, quality of recommendations and overall satisfaction.

Both positive and negative evaluations were included in the scoring. Only wealth managers with five years of experience in the financial services industry were considered. . .

Then, before finalizing the list, wealth managers were reviewed by a blue ribbon panel. The blue ribbon panel was comprised of individuals from within the financial services industry. Although panelist comments were incorporated into the final score, safeguards were built into the review process to reduce the ability of panel members to influence the composition of the final list on the basis of company affiliation.

An Elite Award

The resulting list of 2010 FIVE STAR Wealth Managers is an elite group, representing less than 7 percent of the wealth managers in the Detroit area. Only 686 of the top-scoring wealth managers made this year’s list. . . . ”

Penning offers his experience and expertise in estate, business and cottage law planning to Wright Penning & Beamer’s northern Michigan clients through our offices located in the historic “Train Depot” in Suttons Bay, Michigan.

Tags: Asset Protection, Business Management/Law, Business Succession, Commercial Real Estate, Cottage Law, Estate Planning, Personal Management, Real Estate by Dan Penning
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A large portion of the businesses in the United States are closely held companies, and many of the closely held companies are family owned enterprises. The long term perpetuation of the family business is a common and laudable goal of most founders. Developing strategic and successful transitions to subsequent generations largely centers on who will control the company and whether the control will be concentrated in one family member or a small group of family members, or if the control of the company will be spread out among a large group of family members or all the family members. Limiting control to a sole shareholder or a concentrated group of shareholders that are involved in the company is usually the preferable option. The founder’s decision to select the most advantageous successor(s) is hardly adequate, however, and many founders approach this first order of business tepidly and do not make the difficult decision due to the attendant consequences that include a possible disruption of the business and family relationships. A successful transition inevitably involves addressing the possible conflicts that will arise within the company itself and among the family members involved. Conflicts can emerge from the most expected and unexpected sources, and a founder that is willing to plan for and manage potential conflict will provide a more secure foundation for the business to continue successfully beyond his or her lifetime.

A part of a lawyer’s arsenal in assisting the family business owner is to formulate a succession plan and draft a buy-sell agreement that determines the steps and the results of various shareholders buying out other shareholders and under what circumstances a shareholder may or may not continue as a shareholder in the business. In many family situations, however, the inherent conflicts that arise and come to the surface are because the family has not been taught the intangible character development and emotional fortitude that is necessary to successfully navigate and resolve disagreements. Personality clashes, the history of family members’ childhood relationships, opposing perspectives on the management and operation of the family business, and the founder’s choice of who will succeed to the control and ownership of the company have the potential to ignite family blow ups.

Lawyers provide legal advice in these unfortunate situations, however, lawyers also have a unique perspective in that we also see successful family enterprises implement transition plans that go beyond the necessary buy-sell agreement. Successful family transitions are usually the result of cultivating cooperation, understanding, and forgiveness amongst family members. Founders who succeed at fostering personal growth and character development, including honesty, respect and leadership alongside teaching business acumen generally observe a more successful and peaceful generational transition of the control of their business. The founders themselves must make a deliberate and long term dedication to cultivating a family culture that brings in and nurtures the emotional intelligence necessary to perpetuate a successful family business. There are a myriad of resources available to business owners who desire guidance in this area. The Family Firm Institute, Inc. is an excellent starting point. The attorneys at Wright Penning & Beamer are committed to helping our clients successfully transition their businesses to the next generation, and we can provide you with resources that will complement a comprehensive buy-sell agreement.

Dan A. Penning

Tags: Asset Protection, Business Succession, Know it Now by Dan Penning
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Over the last several years, Michigan has experienced extraordinary job loss. One fruit of those job losses has been an unusual number of business start-ups. All over the state, laid off workers have “reinvented” themselves, sometimes going back to school to pursue a different or more advanced degree, and sometimes going into business for themselves doing either the kind of work they have always done or something entirely new.

Online Resources
The federal government continues to develop online resources for the benefit of business owners. Among the recent resources posted by the Internal Revenue Service is a virtual small-business tax workshop that you can access at http://www.tax.gov/virtualworkshop. The virtual workshop consists of a series of nine videos covering a number of topics of interest to small business owners, particularly those who are just getting started. Lessons cover topics such as how to set up and run your business, how to file and pay your taxes using your computer, how to set up a home office or a retirement plan and how to manage payroll.

Taking Advantage of SBA Loan Programs
The U.S. Small Business Administration also has a number of online resources for small business owners. Several videos and podcasts can be accessed at http://www.sba.gov/training. Among the topics covered by the SBA are how to develop a business plan, how to survive in a down economy, and how to take advantage of SBA loan programs and federal government contracting opportunities.

The Need for Tax or Legal Counsel
These online tools don’t replace the need for tax or legal counsel, but they can help you make better and more efficient use of both your time and our office, which in turn can save you money. If you are considering a new business venture or you need our assistance with a legal matter affecting your ongoing business, please contact any of the attorneys at Wright Penning & Beamer. We would be pleased to help you!

Dan A. Penning

Tags: Asset Protection, Business Management/Law, Business Succession, Employment Law, Know it Now, Personal Management by Dan Penning
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I’m pleased to announce that one of Michigan’s premier business journals, DBUSINESS, recently announced its 2010 “Top Lawyers” in metropolitan Detroit - and three of the principals with Wright Penning & Beamer made the list.

DBUSINESS compiles its list as a resource and reference guide for its readers. Selection criteria include:

• legal knowledge
• analytical capabilities
• judgment
• communication ability, and,
• legal experience.

The list was published in the journal’s November/December 2009 edition.

According to the publication, selected lawyers “possess the highest professional ability and ethical standards.”

Dirk Beamer, Lee Flaherty and I were selected this year. Beamer for his expertise in business and commercial litigation; Flaherty for her work with non-profits and charitable organizations, and I was recognized for business and estate planning.

As a founding shareholder of the firm I’ve focused my practice areas primarily in planning for business entities including family businesses, estate planning for business owners, individuals, families with special needs children, and succession planning for family cottages and farms. Through these practice areas our firm has become a leading resource for individual and business clients.

Beamer oversees our firm’s diverse litigation practice, focusing primarily on business and commercial litigation. He spearheads the firm’s efforts in insurance law, unfair competition, trademark infringement, employment matters and contract disputes. Dirk has litigated in state and federal courts across the country. He also counsels business owners and managers concerning employment practices and management.

In addition to her work with non-profits, Lee Flaherty is well versed in real estate, business law, estate planning and probate. Lee’s business expertise encompasses the support of ongoing businesses, business purchases and sales, and representation in commercial real estate transactions. Her estate planning practice focuses on the preparation of a wide variety of trusts and other documents to assist clients in avoiding probate, preserving assets and minimizing taxes.

I take pride in my colleagues’ accomplishments and wanted to share this good news with you. As a firm we continue to strive daily to deliver the highest quality legal services to our clients throughout Michigan and beyond.

Dan A. Penning

Tags: Agribusiness, Business Management/Law, Business Succession, Cottage Law, Employment Law, Estate Planning, Know it Now, Personal Management, Special Needs Children, Suttons Bay Depot by Dan Penning
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It has long been said that the only things certain in life are death and taxes. While most Americans pay any number of local, state and federal taxes while living, depending upon the extent of one’s property and the estate planning techniques used, additional taxes may be owed at death. According to the IRS website, “The Estate Tax is a tax on your right to transfer property at your death.” While the federal estate tax, therefore, has an impact on estate planning, the extent of that impact is currently in a state of flux. While death remains a certainty that all will face, the amount of federal estate tax is not.

In 2001, the Economic Growth and Tax Relief Act of 2001 (the “2001 Act”) was signed into law, significantly changing key provisions of the Internal Revenue Code dealing with the federal estate tax. Changes included an incremental increase in the estate tax unified credit exclusion from the pre-2001 amount of $650,000.00 per person, to $3.5 million per person in 2009, with no federal estate tax at all in 2010. In addition, the top estate tax rate declined from 55% to 45%. However, the 2001 Act contains a sunset provision and is set to expire on December 31, 2010. At that time the federal estate tax exclusion is scheduled to revert to $1 million per person and the maximum tax rate of 55% will be restored.

At 2009 rates, only inheritances above $3.5 million for an individual and $7 million per married couple were subject to the federal estate tax, at a tax rate of 45%. While it was estimated that only 1% of all inheritances would exceed those thresholds (encompassing an estimated 6,000 estates), Congress expected the federal estate tax to generate upwards of $25 billion in taxes in 2009.

Although there is no federal estate tax in 2010, the 2001 Act replaces the federal estate tax with a 15% capital gains tax on property inherited in 2010. Prior to 2010, beneficiaries of appreciated assets received those assets at their fair market value at the time of the decedent’s death (”stepped-up basis.”) Under stepped-up basis rules, the difference in the value of the asset from the time it was acquired by the decedent (the decedent’s “basis”) and the value of the asset at the time of the decedent’s death (the “gain” or “appreciation”) was not taxed as capital gains to the beneficiaries. This total exclusion no longer applies in 2010. While the capital gains scenario for 2010 is complicated and has its own system of exemptions, experts agree that many who thought that the elimination of the federal estate tax in 2010 would amount to a windfall may be in for a surprise.

The new capital gains treatment in 2010 notwithstanding, it is uniformly acknowledged that Republicans and Democrats alike are not going to accept the total elimination of the federal estate tax in 2010. In fact, on December 3, 2009, the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Business Act of 2009, making permanent the $3.5 million per person exclusion, the 45% top tax rate, and stepped-up basis rules. However, the Senate, while focused on healthcare reform in the closing weeks of 2009, did not address the federal estate tax. As a result, the 2001 Act remains controlling — at least for now. Some Democratic Senators have vowed to reconvene early in January in order to pass an act that will be retroactive to January 1. As of this writing, the only thing that is certain is uncertainty.

We at Wright Penning & Beamer will continue to monitor this situation and the impact of future federal legislation on the estate planning needs of our clients. Stay tuned.

Dan A. Penning

Tags: Asset Protection, Business Succession, Estate Planning, Know it Now by Dan Penning
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Important events require careful planning. For example, what happens to your assets, who will care for your children, will your business survive or will your children be able to protect a legacy asset such as a cottage or vacation property in the event of your incapacity or death all involve critical decisions. Planning “in time” does not necessarily mean that the planning is “on time.” Any ambulance driver will tell you that lying on a stretcher on your way to the hospital is not the time to begin working on your estate plan or business succession plan. On a number of occasions, the importance of timely planning has been dramatically presented to me. In each situation, clients with entirely different types of estates and needs had one thing in common, they waited to plan until it was almost too late. Sometimes the risk of delayed planning “on time” becomes “in time”.

Each of these examples involve critical decisions and require careful planning.

One such client was a mother of two minor children, a business owner and estranged from her husband who suffered from a substance abuse problem. In this article, I will give her the assumed name of Sarah. Sarah cared for her children on a full-time basis, was the sole means of financial support and was self-employed in her own business. Tragically, Sarah was diagnosed with cancer two years ago. She was losing a valiant battle with her illness and had been hospitalized on several occasions prior to the day we met at my office. A mutual friend suggested Sarah contact me to develop and establish an estate plan and business succession plan to protect Sarah, her children and to preserve her business that employed several people.

I first met Sarah on a Thursday morning. She came to my office in a wheelchair accompanied by her sister. This same sister was also caring for Sarah and her children during Sarah’s illness.

After listening to Sarah’s explanation of her situation, I recommended to Sarah that she establish an estate plan to protect Sarah’s assets, provide for the appointment of her sister as Sarah’s children’s legal guardian and adopt a succession plan for her business to give a key employee the chance to purchase the business in the event of Sarah’s death. This planning would insure that Sarah’s assets would not be subject to a claim by her estranged, addicted husband, and that the assets be managed and support her children so that their lives, as much as possible in her absence, would remain stable and financially supported into the future. The business succession plan, notably, provided additional proceeds to be paid over time to support Sarah’s children, but also protected the jobs of her employees who relied on Sarah’s business to support their families.

I copied and collected all the information I needed from Sarah to draft her estate and business plan documents. I advised Sarah that although the process of completing these plans typically can take weeks or even months, given her declining health, I would draft her documents right away. I sked if she could return the following day to review and sign her plans. Sarah responded that she might not live to sign the planning documents the next day. Based on my observations of Sarah during the initial part of our meeting, I had no reason to doubt that possibility.

Together with my staff, I proceeded to prepare her estate and business succession plans for her signature that day. We also coordinated with her financial advisor the transfer of assets into a Trust created by Sarah for her children’s benefit. It was quite an emotional day. My staff and I raced against each precious moment that passed to consolidate Sarah’s planning process into one day. Sadly, Sarah died the next day. Fortunately, Sarah’s plan continues to govern and support her children and business as well.

During the span of my career, I’ve drafted estate and business plans solving various issues for clients to avoid significant problems. I have reviewed and obtained signatures in critical care units of hospitals, nursing home rooms and literally, in one case, we obtained a client’s signature on his estate planning documents while walking beside his hospital gurney as he was being wheeled to the operating room for emergency heart surgery. While I have many success stories for people who planned “in time”, there are extraordinary risks involved in not planning “on time”.

Dan A. Penning
231.271.4500

Tags: Asset Protection, Business Succession, Estate Planning, Know it Now by Dan Penning
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As we quickly approach the end of the year, you may want to consider the following information that could impact the amount of income tax you pay for the year 2009.

Home Energy Tax Credits

The American Recovery and Reinvestment Act (Recovery Act) enacted earlier this year expanded to home energy tax credits which are the Non-Business Energy Property Credit and the Residential Energy Efficient Property Credit.

The Non-Business Energy Property Credit. The Non-Business Energy Property Credit equals 30% of what a homeowner spends on eligible energy saving improvements, up to a maximum tax credit of $1,500.00 for the combined 2009 and 2010 tax years. Certain high efficiency heating and air conditioning systems, water heaters and stoves that burn biofuel along with labor costs for installation of these items all qualify as energy saving improvements and qualify for the credit. In addition, the cost of energy efficient windows and skylights, energy efficient doors, qualifying insulation in certain roofs also qualify for the credit.

By spending as much as $5,000.00 before the end of the year on eligible energy saving improvements, a homeowner can save as much as $1,500.00 on his/her 2009 Federal Income Tax Return. Due to the limits placed on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings may vary. These tax savings are on the top of any energy savings that may result.

The Residential Energy Efficient Property Credit. Homeowners who are interested in “going green” should also check out a second tax credit designed to spur investment in alternative energy equipment. The Residential Energy Efficient Property Credit equals 30% of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines and fuel cell property. In addition, all labor costs are generally included when calculating this credit. Finally, no cap exists on the amount of credit available except in the case of fuel cell property.

Eligible homeowners can claim both of these credits when they file their 2009 Federal Income Tax Return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Efficient Property Credit to figure and claim these credits. A draft version is available now on irs.gov.

First Time Homebuyer Credit

If you are in the market for a new home, you may still be able to claim the First Time Homebuyer Credit. Congress recently passed the worker, home ownership and business assistance act of 2009 extending the First Time Homebuyer Credit and expanding who qualifies.

Here are the top ten things the IRS wants you to know about the expanded credit and the qualifications you must meet in order to qualify for it:

1. You must buy, or enter into a binding contract to buy a principal residence, on or before April 30, 2010.

2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.

3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

4. A long time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you lived in the same principal residence for any 5 consecutive year period during the 8 year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.

5. The maximum credit for a long time resident is $6,500.00. However, married individuals filing separately are limited to $3,250.00.

6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available for taxpayers with modified adjusted gross incomes up to $125,000.00, or $225,000.00 for joint filers.

7. The IRS will issue a December, 2009 revision of Form 5405 to claim this credit. This December, 2009 form must be used for homes purchased after November 6, 2009, whether the credit is claimed for 2009 or 2010, and for all home purchases that are claimed on 2009 returns.

8. No credit is available if the purchase price of the home exceeds $800,000.00.

9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.

10. A dependent is not eligible to claim the credit. For more information about the Expanded First Time Homebuyer Credit, visit irs.gov/recovery.

Estate Planning Review

Generally speaking, your estate plan should be reviewed at least every 2 years to determine whether it needs to be changed or updated.

Additionally, if any of the following events occur, you will probably need to update your estate plan (i.e., your Living Trust, Will, health care documents, powers of attorney, life insurance coverage and post mortem letters).

* Divorce
* Marriage or remarriage
* Birth/adoption of a child
* Death of a spouse or child
* Sale of residence or purchase of new residence
* Retirement
* Enactment of new tax laws*

*The current law regarding estate tax is due to expire at the end of December 31, 2010. There are several legislative actions being taken to address the estate tax law. Stay tuned for further updates.

Here are some of the steps you may need to take:

1. Change the Successor Trustee of your Living Trust or Personal Representative of your Will.

2. Revise your plan to account for an increase in assets.

3. Reassess your life insurance needs.

4. Add or change a power of attorney.

5. Change legal documents to comply with state laws if you move to a different state.

6. Change Trust and Will instruments to account for changes in beneficiaries.

Pre-Retirement Checklist

In the event that you are considering retirement in the near future, there are various matters that you should consider. Here are some of the items that you should be aware of:

1. Health Insurance. Will you continue to be covered by your health insurance after retirement? If not, you will need to replace that coverage.

If you’ll be eligible for Medicare, you will want to start checking up on “Medigap” coverage. Before you retire, take care of any non-emergency medical, dental or optical needs if your employee plan coverage is broader then Medicare.

2. Other Insurance. Once you retire, you may need to replace employer provided life insurance by added life insurance. You should also consider purchasing long term health care insurance to cover the risk that you will need a lengthy nursing home stay in the future.

3. Social Security. Decide whether you want to take social security benefits if you are retiring before your full retirement age. You can get 80% of your benefits at age 62. For most people, taking social security benefits at their full retirement age makes the most financial sense. Be sure to discuss this with a financial adviser if you think you might need to take early benefits.

4. Company Plan Pay Out. It is important to plan well in advance how you will take the pay out from your pension plan or 401K plan. In most cases, it is advisable to transfer funds to an IRA in that you can transfer the funds “in kind” which maintains the character of the investments but yet allows you to name beneficiaries who could ultimately take advantage of the “stretch out rules” for income tax purposes. You should speak with your legal or financial adviser regarding these strategies.

5. Relocation. If you are planning on moving to another state, check out the various states to see what financial ramifications of living there will be. If you are relocating it may be a good idea to buy a new home before retirement.

Dan A. Penning

Tags: Asset Protection, Business Succession, Cottage Law, Estate Planning, Know it Now by Dan Penning
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On December 3, 2009, the House of Representatives passed a bill introduced by Rep. Earl Pomeroy (D-ND) that addresses the federal estate tax: H.R. 4154 - “A bill to amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.” This straightforward bill, which has no cosponsors, provides for the following:

- Repeal of the 2010 repeal of the federal estate tax as provided in the Economic Growth and Tax Relief Reconciliation Act (”EGTRRA”).

- Maintaining the $3,500,000 federal estate tax exemption in 2010 and beyond.

- Freezing the maximum gift tax rate and estate tax rate at 45%.

Legislation enacted in 2001 gradually phases out the estate tax and ultimately repeals the tax in 2010. However, without congressional action to make the repeal permanent, the tax will revert in 2011 to the pre-2001 rates.

There are currently 16 bills that address estate tax reform in various ways circulating in the House of Representatives and three circulating in the Senate.

Under current law, a $5 million estate in 2009 would pay $675,000 in federal estate taxes, according to an analysis by Deloitte Tax. In 2010, no estate tax would be due, but the estate would be subject to a 15 percent capital gains tax. In 2011, the $5 million estate would pay $2,045,000 in estate taxes, according to the analysis. Under this House bill, $675,000 in estate taxes would be due, regardless of which year the estate is inherited.

With the current estate tax law expiring after 2010, H.R. 4154 provides certainty to help business owners plan for the estate tax and it maintains stepped-up basis. However, a $3.5 million exemption per person and a 45 percent rate do not provide adequate protection for many small businesses and farmers. In addition, the $3.5 million exemption is not indexed for inflation; protection from the estate tax will erode each year.

Often, it is not a pile of liquid assets (cash) that is taxed, but the land of a family farm, personal effects, or the capital and assets of a family-owned small business. Without the cash on hand to pay these taxes, heirs are forced to sell off businesses and small farms that have been in the family sometimes for generations.

Estate taxes fall disproportionately on small business owners and farmers because many of the assets are illiquid. For example, approximately 80 percent of farm assets are land based. Surviving family members may be forced to sell land, buildings, equipment, livestock, etc., to keep their businesses operating. In many cases, however, the assets that must be sold to pay the estate tax are the most important inputs needed to maintain the business.

Employing the proper estate planning techniques can minimize and sometimes eliminate the federal estate tax burden on your estate. The attorneys at Wright, Penning & Beamer have assisted numerous families and businesses in regards to protecting the assets they have worked hard to earn during their life, minimizing the impact of adverse tax consequences. The result is maintaining the value of these assets that our clients work hard to acquire.

Dan A. Penning

P.S. Check out the IRS’ 2010 Auto Mileage Deduction Rates Below:

The Internal Revenue Service has issued the 2010 optional standard mileage rates that are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2010, the standard mileage rates are:

50 cents per mile for business purposes
16.5 cents per mile for medical or moving purposes
14 cents per mile in service of charitable organizations

The 2010 rates for business, medical and moving purposes are lower than last year’s, reflecting generally lower transportation costs compared to a year ago.

Tags: Asset Protection, Business Succession, Estate Planning, Know it Now by Dan Penning
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“…proper planning in most instances can navigate around any estate tax liability…”

There is a long history of debate regarding the federal estate tax. The implementation of the tax originally was to prevent the build-up of wealth that could lead to a creation of large estates and a permanent class of idle rich that would attempt to impose a monarchy.

While I am generally not in favor of raising taxes or the estate tax in general, there is a valid question as to whether the impact of the existence of the estate tax has any real negative impact on the majority of small business owners and family farms. Previously, President Bush tried to repeal the estate tax in his 2001 Tax Bill. President Bush succeeded to include provisions in the Bill that would phase the estate tax out of existence by the year 2010. The goal of the phase-out included in the Bill was to provide Congress with incentive to affirmatively decide the fate of the estate tax before its repeal in 2010. Now that President Obama has been elected, the fate of the estate tax has taken a different turn.

Under President Obama’s proposed new budget bill, there are provisions that freeze the estate tax at its 2009 level. The 2009 estate tax level provides for individuals with estates of up to $3.5 million to be exempt from estate tax which begins at a 45% tax rate, and married couples, with proper planning, can obtain an exemption of up to $7 million. In addition to using the aforementioned estate tax exemptions, there are additional estate planning tools which can, depending on the assets includable in an individual or married couple’s estate, provide for opportunities to possibly avoid estate tax on estates worth as much as $10 – 12 million or more.

The question then becomes is the estate tax a lion roaring down the path to chew up large pieces of individual’s estates, or is it a lamb in most instances avoidable and of no consequence?

According to a study by The Center on Budget Policy and Priorities, a Washington-based think tank, estate tax does not pose a significant problem to small business owners or individuals with family farms. That study claims that almost no small businesses or farm estates would owe any estate tax under the Obama budget bill. Based on the study’s analysis, fewer than .2% of all estates–2 of every 1000–will be subject to tax in 2009. Of the estates that are taxable, only about 1.3% are small business or farm estates. At the end of the day, the study purposes that only 3 out of every 100,000 people who die this year owning a small business or farm will be subject to any estate tax.

On the other side of the debate, the National Federation of Independent Business (NFIB) runs a separate organization, The Family Business Estate Tax Coalition, which primarily focuses its efforts to obtain a repeal of the estate tax. This organization argues that over the life of a business, the government collects income tax and other taxes. As a result, the group argues that the government has taken more than its fair share in taxes prior to an individual’s death. The organization further argues that the assets of a small business or family farm, including real estate, equipment, machinery and other business property can quickly add up to millions of dollars of value and yet only result in the production of a middle class income for the business or farm owner. While the individual, during their lifetime, may have paid for significant business assets, the group argues that the reality is that the individual only received a nominal return in income when compared to the overall value of the business assets.

The debate regarding estate tax will never cease as long as it is in effect. The lesson to be learned by an individual, small business owner or family farm owner is that proper planning in most instances can navigate around any estate tax liability.

Dan A. Penning
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Know Your Business, Grow Your Business, Protect Your Business

Tags: Agribusiness, Business Succession, Estate Planning by Dan Penning
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