Many times we shy away from doing the hard things that we need to do to improve.  For example, in golf everyone is trying to get more distance.  Many try to get there by getting a super light driver or buy the latest get long quick training aid.   In reality, you get longer by training the golf muscles hitting golf balls.  One of the best drills for both distance and quality of the strike is one arm golf shots.  You simply can’t consistently make good contact if you don’t have your arm in sync with the torso.  If you can sync your torso and arm swing you will hit better shots.

On August 8, 2018 the Treasury issued proposed regulations under Code Section 199A, a provision that was part of the 2017 tax act that provides a 20% deduction on “qualified business income.”  Code Section 199A is a very complex provision, but every business owner needs to be advised as to whether it applies to the business owner and, if so, whether the business owner should structure his business to claim it or whether he or she should structure the business as a C corporation to take advantage of the lowered corporate tax rate of 21%.

Generally, for taxpayers with taxable income under the threshold amounts of $157,500 single and $315,000 married filing joint, organizing as a sole proprietor or pass-through entity will produce more tax savings than operating as a C corporation.  This is only a generality, however.  A taxpayer needs to sit down with a tax professional and do projections on business income and taxes as a C or as a sole proprietor or pass-through to determine the best course, and it should be noted that differences exist between types of pass-through entities and between pass-through entities and sole proprietors.

These proposed regulations are not law, but can be relied on by the taxpayer.  An analysis of the proposed regulations is well beyond the scope of this blog.  Some of the questions that arose under Code Section 199A have been addressed, however, such as (i) reclassifying employees as independent contractors so that their income is eligible for qualified business income treatment (doesn’t work), (ii) narrowly defining the catch-all for special services, trades or businesses where the reputation of the employees or owners is a “principal asset” to product endorsements, licensing revenue from use of individual’s image, likeness or trademark, and appearance fees and (iii) a business aggregation rule, allowing taxpayer’s to aggregate related businesses.

Code Section 199A has made choice of entity a complex decision.  Let me know if I can help you with that analysis.

The legal role of the probate lawyer is to admit the decedent’s will to probate, advise the newly appointed executor on their responsibilities and duties, help the executor inventory all of the assets of the decedent’s estate, settle debts and distribute the assets to the beneficiaries named in the will.  Of course, numerous legal issues may arise, which complicate this basis process, but that is the essential role of the probate lawyer in the conventional sense.

But there really is more.  In many cases, particularly an unexpected death, the probate lawyer must deal with a client who is emotionally devastated.  The client may be depressed, panicked or angry or some combination of all of the above, and the lawyer must understand this and know how to respond.  The probate process is necessary, but the client may not want to deal with it.  The lawyer must be compassionate, responsive and diligent.   For example, the client may be more comfortable meeting at home rather than the office.  Things have to be done, but how they are done can make all the difference.

Many times I have the family of the second spouse contact me regarding probate of his or her estate.  As I discuss the matter I learn that the first spouse died years earlier, and, since everything passed to the second spouse, no probate was done for the first spouse.

While this isn’t an insurmountable problem, it does complicate the probate process.   If the first spouse died more than four years ago, the first spouse’s will cannot be probated.  An affidavit of heirship can be filed in the real property records, but it must be on file five years to be determinative of title.  In cases where five years have not passed, an heirship proceeding must be commenced for the first spouse.  This increases the cost of probate considerably.

Accordingly, probate the first spouse’s will.  It may be that all you need to do is a muniment of title to pass title to the second spouse, and no administration is necessary.  Regardless, spending the time and money at the death of the first spouse to get it right will save considerable time and money later at the second spouse’s death.

It is golf season again, and I am getting out to the range a bit with my “old stuff.”  I know…why are you hitting that?  The new clubs are so much easier to hit.  Sure I enjoy playing the new stuff, but I always go back to the old stuff.   The new gear seems to minimize the “m” in E=mc2.  The old stuff was heavier and put the weight right at the sweetspot.  That is where the saying “hitting it between the screws” came from.  The old stuff trained you to be precise, and rewarded you for it.  The new stuff enlarges the effective sweetspot, and hollows out the club.  It allows for okay, and reduces the reward for precision.

So go up into your dad’s garage and pull out his old powerbilt and enjoy!  Lots can be learned from the past.

One of the changes made by the new tax act was to increase the standard deduction to $12,000 or $24,000 for a married couple filing jointly.  The upshot of that will be that many people will claim the standard deduction rather than itemize.  If they make any charitable contributions but total itemized deductions are still less than the standard deductions, those deductions will no longer be deductible.

There is a way to still achieve the charitable deduction, however, if the taxpayer can bunch his or her charitable contributions into a single year.  For example, if the taxpayer makes charitable contributions of $6,000 per year and has the financial ability to make a contribution of $24,000 in one year, the taxpayer’s contribution of $24,000 will exceed the standard deduction of $12,000 and it will benefit the taxpayer to itemize.

If the charity or charities would benefit more by receiving the $6,000 per year rather than $24,000 in one year, the taxpayer can establish a donor advised fund.  The donor advised fund is a mutual fund in which you make tax deductible charitable contributions to the fund and establish an account.  The contributed funds remain in the account until the taxpayer decides to direct them to charity.  So in this case the taxpayer would contribute $24,000 to the fund in year one, and could direct the fund to distribute $6,000 per year to his or her preferred charity or charities.

The new tax act temporarily increases the lifetime estate exemption to $11.2 million.  This change took effect on January 1, but sunsets on December 31, 2025.  On January 1, 2026, the exemption reverts back to the current $5.6 million, subject to inflation adjustment.  It is quite possible that the larger exemption doesn’t make it to December 31, 2025, if there is a Democratic administration and Congress come January 2021.

The upshot is that for wealthy clients there is a window to make lifetime gifts to take advantage of the temporary increase in the lifetime exemption.  There are many ideas to consider, but in this blog post I want to mention the spousal lifetime access trust (SLAT).   With a SLAT the grantor makes a gift to a trust that benefits his spouse or his spouse and descendants.   The spouse may serve as trustee, if the trustee is limited to an ascertainable distribution standard.

If both spouses do SLATs, a couple has the opportunity to “lock” in the increased exemption amount and transfer a whooping $22.4 million free of estate tax to younger generations.  With discount planning the amount could be even bigger.

If both spouses seek to do SLATs they must avoid the reciprocral trust doctrine, but that can be done with careful planning.

If you own real property outside of your state of residence when you die, you will have to conduct an ancillary probate in that state to transfer title to the property to your beneficiaries.  In some states, like Texas, ancillary probate is a simple process of recording copies of the out of state probate in the state in which the real property is located.  In others, the process is more complicated and will require hiring an attorney in the state and prosecuting a court proceeding.

One way to avoid ancillary probate is to form a limited liability company (LLC) or limited partnership (LP) to own the out of state property.  If the client does this then he will no longer own real estate out of state.  Instead, he or she will own an interest in an entity that owns real estate in that state.  Accordingly, there is no longer the need to prosecute an ancillary probate.  The entity can be formed in the client’s state of residence, the state the property is located or some other jurisdiction.  It doesn’t matter.  Use of the LLC or LP also adds a layer of asset protection for the client.

Note that using an LLC or LP doesn’t mean the client will not owe property taxes or income taxes (if a rental property) in the state in which the property is located.

As we wait to see if Congress can pass a tax bill, we now know that estate taxes for the very wealthy will not be repealed immediately or at all.  The House bill that was passed yesterday bumps the lifetime exemption to $10 million indexed for inflation and retains the estate tax through 2023.   The Senate bill, which is still being debated, doubles the existing lifetime exemption and retains the estate tax indefinitely.   It is important to understand that since 60 votes was impossible in the Senate, a bill will have to be passed through reconciliation.  This means it will be subject to sunset in ten years, so Congress would have to act to make it permanent.  If not, the law will revert to the way it was before the bill was enacted into law.

But any bill may have a much shorter life.  Polls show the bills are extremely unpopular.  Polls also show historic unpopularity for the President and the Republican Congress.  Accordingly, there is a significant possibility that any tax bill would be partially or completely undone by the next Administration and Congress.

Accordingly, if a tax bill is enacted into law, wealthy individuals would be wise to consider taking advantage of the increased exemption amounts by making gifts next year.  As previously noted on this blog, discount planning is alive and well again.  So leveraging the large exemption to migrate wealth downstream presents a compelling opportunity.  This is particularly so when transfers are made to perpetual dynastic trusts.  Next year may be a very busy year.