Considerations and Strategies in Selecting Business Entities STEP Program David J. Dietrich Dietrich & Associates, PC

Transcription

1 Considerations and Strategies in Selecting Business Entities 2016 STEP Program David J. Dietrich Dietrich & Associates, PC

2 Overview of Materials Replace pp 1 to 5 of Main Outline The Legal Zoom Practice Environment Spectrum of Unplanned, Tenancy in Common, to Hyperplanned LLLP, LLC, IDGT, DAPT LLC OA s, LLLP, Closely Held SA, C Corp Bylaw; Review ACTEC SA, NIIT Comments, Exhibits A and B Review of Supplemental Bibliography

3 The Legal Zoom Practice Environment Like the Weather Channel Says Its Amazing out There Applies to Large and Small Firms Technology fire hose A Profession if You can Keep it Less than One Percent of US population has a federal estate tax problem Historic amounts of wealth moving via wills, trusts and otherwise; Protected? Targeted? The Modern Family: Windsor,

4 Planning Environment in Achieving maximum step up on basis; 2. Reducing if not eliminating the 3.8% (Net Investment Tax) by insuring maximum material participation to a trust or estate, 3. Insuring that the business entity achieves the clients objectives for shared control at the boardroom or limited liability company operating agreement level, 4. Insuring the maximum level of limited liability protection thus separating personal assets from business assets with appropriate observance of business entity formalities, 5. Observance of state law default rules governing business entities such as limited liability companies, limited partnership and domestic asset protection trusts;

5 Planning Environment in 2015 Cont d 6. Preventing partition or further fractionalization of real estate among heirs through the use of a limited liability company, limited partnership, tenancy in common agreement or conservation easement. 7. Preservation of valuation reduction options such as alternative use valuation under I.R.C. 2032A and post mortem conservation easement elections; 8. Preservation of the ability to use I.R.C and defer the payment of Federal Estate Tax over a 15 year period with interest only paid in the first 5 years; 9. Last but not least, enhancing the ability of the client to gift business interests in the corporation, limited liability company or limited partnership by navigating the requirements that the gift be one of a present interest, that the gift no be disallowed under Chapter 14 Rules, and that the gift not be drawn into the decedent s estate under the hook inclusion provision of I.R.C and 2038.

6 Does Opportunity Comes Dressed in Overalls or Overhauls? Thomas Edison; or, The Light at the End of the Tunnel 1976 C Corp with pre 1990 Stock Purchase Agreement at 1.0 Million in stock now worth 8 Million; Share Restriction Agreement is entity purchase not cross purchase; modify? Tenancy in Common owners reporting Income on IRS Form 1065 in RUPA State; one is terminally ill;

7 Carpenter Livestock, Inc (355?) Carpenter Livestock, Inc., a C corporation existing since 1957 with 20 thousand acres of highly appreciating real estate. The cost basis of the real estate is $750, and the current fair market value is $15 Million Dollars. Brothers Mark and Larry Davis have functionally divided the ranch into two separate operations using, according to the corporate accountant, division accounting. Mark is a visionary marketer and entrepreneur; Larry is a confident farmer and mechanic. Neither of them wants to be in business any longer and the company has not had corporate meetings for over four years. There is no shareholder restriction agreement;

8 Information Systems, Inc. (Redemption, Sale, 355; LLC) Information Systems, Inc. Owned equally by two shareholders, Michael Siegers and William Kennedy. The company is a 50/50 subchapter S corporation generating gross profits of $15 Million a year with net profits of $2 Million per year. It has 15 employees and develops computer software code for small hospitals in the upper Midwest. Mr. Kennedy has a serious gambling problem and Mr. Siegers just learned that the I.R.S. intends to levy upon his stock in the corporation to satisfy a $200, Federal Income Tax liability. Mr. Siegers is 70 years old, recently was diagnosed with pancreatic cancer and has asked you to do his estate planning. There is no share restriction agreement. What if this were an LLC?

9 Brandt Ranch (LLLP; Gift; CE?) The Brandt Ranch consists of 5,000 acres in Carter County Montana which is prime white tail deer hunting habitat. Mr. Brandt is a retired hospital executive. He estimates the fair market value of the ranch to be $9 Million in wealth. Mr. Brandt is no longer married having divorced over 10 years ago. He has three children. The ranch is leased on a cash basis to a neighboring rancher. Mr. Brandt resides in Florida except during October and November when he visits Montana for hunting. Mr. Brandt has been approached by the Rocky Mountain Elk Foundation a 501C(3) Land Trust interested in obtaining a conservation easement on his property. He is also interested in forming a limited partnership or limited liability company which his son, an attorney practicing in Philadelphia, believes is necessary. His son has also requested that you investigate whether the formation of a business entity could avoid his father s potential medical creditors, because he has advanced diabetes liver cancer; he is not expected to live more than 3 years. The son desires to transfer the ranch into a limited liability company or limited partnership and gift a 20% interest to each of the children, immediately, leaving the father with a 40% interest.

10 Tenancy in Common Agreements 1. The agreement specifies a specific term of the agreement. 2. The agreement specifies that an entity, usually a limited liability entity such as a limited liability company, may manage the property to handle the leasing operation and maintenance of the property. 3. The agreement provides that if additional operating capital be needed from the owners to operate, improve or otherwise manage the property, the manager may notify the owners of the requirement of such additional funds. The failure of any owner to make such additional contributions within ten days after the notice, may constitute a default under the agreement. Any non defaulting owner has the right, not the obligation, to pay the defaulting owners pro rata share of the requested contribution.

11 Tenancy in Common Agreements Cont d 4. In the event a non defaulting owner elects to pay the defaulting owners share, the non defaulting owner shall be entitled to a percentage of the defaulting owner s interest. 5. In the event of sale, the owner shall have the right to sell or exchange its interest in the property but must first offer to sell such property to other owners. The selling owner shall first offer to the other owners the property for a period of 30 days. In the event the non selling owners reject the offer, then the selling owner shall be free to sell its interest in the property. In the event the non selling owners accept the offer to purchase the property, then the non selling owners shall have 60 days within which to purchase the property. 6. All owners shall have the right to partition the property provided that they first offer to sell their interest to the other owners with an MAI appraisal. In the event the non selling owners decide to name their own appraiser, they may do so and those two appraisers may identify a third appraiser to appraise the property. 7. The sale price, under the attached agreement, carries with it a 25% discount from the appraised owner s percentage ownership. In the event that the non partitioning owner rejects the offer, the partitioning owner is free to initiate a partition action in the appropriate court. 8. The agreement contains an express waiver or statement that the parties do not intend to become partners under the agreement.

12 Uniform Partition of Heirs Property Act Tenancy in Common in the absence of an agreement; see ULC website Likely impacts millions of owners, low and high income alike Creates Statutory option in non petitioning co owners Applies to any unplanned estate Provides for appraisal and marketing period

13 Domestic Asset Protection Trust 1. Is the trust located in a tax favorable jurisdiction for trust income? 2. Who will be the trustee? An individual? A corporate trustee? 3. How will trustee succession be arranged in the future? 4. Can a trust protector be located and paid? 5. What is the consequence of one beneficiary making a capital contribution? Is it a loan and if so on what terms? 6. Will the trust achieve asset protection for a beneficiary s existing or future credit problems? This is particularly a problem for a trust which is self settled in a state that does not recognize a self settled asset protection trust. 7. What about amendments to the trust document? Must amendments be made only by court action? 8. Can the trust assets be decanted? Is the trust located in a Uniform Trust Code state or a jurisdiction which allows amendments or decanting without court action?

14 Traditional Business and Estate Planning Entities Is a new business being created or is the form of an existing business being changed? What is the projected number of prospective owners? Will any of the prospective owners be other business entities? What is the projected nature of the prospective business? What is the projected duration of the prospective business? What are the projected profits or losses of the prospective business? What are the projected capital requirements of the prospective business? Will the prospective owners be active participants or inactive investors? Will the prospective owners make different types of contributions (e.g., cash, property, or services)?

15 Traditional Business and Estate Planning Entities (Cont d) Will the prospective owners or others make loans to the prospective business? What is the income tax bracket of the prospective owners? What is the projected form of compensation to be paid to the prospective owners and others (e.g., salary, interest, rent, dividends, or royalties)? Is it projected that there will be distributions of capital in the near future as a result of refinancings, redemptions, or partial liquidations of the prospective business, or other transfers to the owners? Will there be restrictions on transfers of ownership in the prospective business? What form of management is the prospective business projected to have?

16 Client Goals and Selection of Entity P 19 materials P 27 materials; LP and LLLP P 29 materials; LLP P 30 materials; LLC P. 32 S Corporation P. 32 C Corporation Self employment Tax

17 LLCs in Depth Consult ULC website; Member Managed Manager Managed Voting and not voting Preferred returns Capital Calls; unpaid, loan or dilution? LLC remoteness and protection Chapter 14 impact of state statute; does state statute allow for withdrawal by default?

18 Is an LLC Operating Agreement a contract only? See Seven Points on LLC s Fiduciary Duties v. Contract Drafting; LEGAL STUDIES RESEARCH PAPER SERIES Working Paper No. 61 November 2006, William Mitchell College of Law Daniel Kleinberger Contract remedies are different than breach of fiduciary duty claims Dissolution may be prevented by exclusive remedy of charging order; In Re Albright Foreign jurisdiction if LLC found within another state

19 Annual Exclusion Gifting and Capital Structure P. 41 materials; Hackl P. 46 materials; Turner Case Chapter 14 may become a bigger problem Practical Comments; p. 51 to 54 of materials;

20 Maintenance of LLC s: How to avoid imposition of personal liability of LLC members and unintended liquidation

21 Mathis, Osborn, Sternes & Ricci LLC Ricci Ranch with low basis, high value Ranch Division Letter Opinion on 355 continuity Negotiation for buy in and contributions Sternes to supply 6 Million buy in to LLC Osborn, Mathis, Ricci to supply ranches Business Plan of LLC

22 Mathis, Osborn, Sternes LLC Required capital contributions Distributions v. Preferred Returns Private placement Memorandum Distributions in kind must be preserved Corporate formalities in an LLC? Why Member or Manager managed? Voting Provisions Membership Interests as percentages Membership Interests as units Percentages for operations v. major events Arbitration provisions or not? What process, how much civil procedure

23 Mathis, Osborn, Sternes LLC Dissolution of Mathis, Osborn, Sternes LLC Reason for Distribution in Kind Dissolution of Mathis Osborn LLC Ipso Facto Clause in BR Court Continuing Fiduciary Responsibilities of Ricci and Sternes Silica Mining opportunity Failure to have annual meetings