CBS Money Watch has a useful guide for initial steps to take when a person dies - Death In the Family: 12 Things to Do Now. This is a good list to follow. The article also includes a link to a more comprehensive list of actions that an executor may need to take to administer an estate.
In PLR 200937028, the IRS concluded that property held in an irrevocable grantor trust that was not included in the grantor’s estate at death does not receive a step-up in basis. Most individuals who own property in their own name at death receive a step-up in the tax basis of that property. For example, if you paid $200,000 for your home in 1995 and you die today with the house valued at $500,000 the tax basis increases to today’s value. Therefore, capital gain on the sale or future sale of the asset is either eliminated or minimized. However, if you transfer an asset to an irrevocable trust, even a grantor trust where the trust income is still taxed to the grantor, the asset is out of your estate and not eligible for a step-up in tax basis upon death. The beneficial trade off is that with the asset outside your estate, it is not included for estate tax purposes.
We’ve been waiting for changes to the federal estate tax for some time, however, we really have no idea what the changes will look like. Over the weekend the Wall Street Journal reported the issue is stalled in Congress with seemingly no consensus about what to do. The administration apparently wants to lock in the current exemption level of $3.5 million per person with a 45% tax rate and some Republicans are still looking for a complete repeal. Now there is a newer proposal for a $5 million dollar per person exemption with a 35% tax rate. But with so many members of Congress focused on the health care debate, this issue is decidedly low priority. Another very real possibility is that the Bush tax cuts will run their course as planned. With no action, the estate tax will be repealed for 2010 only, then return with only a $1 million federal exemption per person. Regardless of what happens at the federal level, Washington State appears wedded to its current $2 million per person exemption. If the federal exemption is rolled back to $1 million, I would expect a large number of estate plans will need to be updated.
This past weekend, the Wall Street Journal ran an interesting article about rolling a Roth 401k to a Roth IRA on an annual basis. This strategy can be useful for small business owners saving for retirement or just about anyone looking to maximize their retirement contributions. Click here to read the article: Roth 401K to Roth IRA Transfer Sound Move
In a recent ruling, the U.S. Tax Court concluded that transfers of LLC interests were in fact transfers of LLC interests. If this conclusion sounds obvious, it isn’t. In Pierre, the owner of certain assets formed a single member limited liability company, or LLC, contributed those assets to the company, then both gifted and sold portions of the company to trusts for her children – a fairly standard estate planning strategy.
When forming such an entity the IRS allows the selection of several different ways to be taxed. Among the options are for a LLC to be taxed as a corporation or as a “disregarded entity.” Here, the owner opted for the LLC to be taxed as a disregarded entity. That means that “for tax purposes” the entity is viewed not to exist and all tax aspects flow directly to the sole owner of the LLC. For ownership and liability purposes however, the entity very much exists. Under New York law (where the company was located) the owner of an LLC has no interest in the assets held by the LLC, she only had a personal property interest in the entity itself. It is these two conflicting legal concepts on which Pierre turned. The IRS argued, unsuccessfully, that a transfer of an interest in a disregarded entity was actually a transfer of the underlying asset(s) held by the LLC because “for tax purposes” the LLC doesn’t exit. Pierre argued that, under state law, she had no interest in the underlying asset to transfer, only LLC interests and therefore could not transfer the underlying asset(s). A rather divided tax court ultimately agreed with Pierre saying the entity selection rules, otherwise referred to as the “check-the-box” rules, that allow the entity to be “disregarded for tax purposes” did not apply to transfers of an interest in the company. Accordingly, a transfer of a LLC interest is a transfer of an interest in the entity and not a transfer of any specific asset owned by the entity.
There are two questions you should be asking yourself. First, what is the significance of this ruling? Well, if you gift a piece of real property worth one million dollars the gift tax would generally be based on the full one million dollar value. However, when the same asset is owned in a LLC and an interest in the LLC is gifted the tax code allows you to discount the value of the LLC interest transferred. So in this example you might get a 20% discount and only have to pay tax on $800,000 and not one million dollars (this is an oversimplified example). Second, does this ruling apply to Washington state LLC’s? The answer presumably is yes. Washington State’s limited liability company act contains a provision very similar to that of New York where the owner of the LLC has only an interest in the company and not in the assets owned by the company.
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