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Monday, February 20, 2017

Does the Republican’s Estate Tax Repeal Plan Affect Community Property Trusts?

In 2010, Tennessee became the second state to create an elective community property system through community property trusts. Community property is a system of ownership that provides for equal ownership between husband and wife. However, the property in this type of trust would be subject to the creditors of both spouses. Community property trusts therefore are different than tenancy by the entirety, whereby property held by husband and wife as tenants by the entirety are immune from the creditors of only one spouse (although they are not immune from creditors of both spouses jointly, or if the non-debtor spouse dies first).  
Why would a couple give up tenancy by the entirety protection?  Generally, for tax purposes, i.e., a double step in basis.  Without a community property trust, when one spouse dies there is only a half step-up in basis typically with property owned jointly.  With a community property trust it is possible to receive a full step up on the death of one’s 'spouse for property owned jointly.  Here’s an example: assume Mary Smith and John Smith bought a rental house for $100. At Mary Smith’s death, the property has appreciated in value to $200. If the property is sold at that point for $200 there would be a 50% step up in basis, so there would be tax on $50 of gain ($100. basis plus $50 step up).  If the property had instead been in a community property trust, there would be a full step up at Mary Smith’s death and there would be no tax if the property sold for $200. There would be another full step up at the time of John Smith's death.
A Tennessee community property trust is set up if one or both spouses transfer property to a trust that:
  1. expressly declares that the trust is a Tennessee community property trust;
  2. has at least one trustee who is a qualified trustee and whose powers include, or are limited to, maintaining records for the trust and preparing or arranging for the preparation of any income tax returns that must be filed by the trust (both spouses or either spouse may be a trustee);
  3. is signed by both spouses; and
Tenn. Code Ann. § 35-17-103. 
The issue with the current Republican tax proposal is not in regards to the technical set up of the trust in accordance with the above, and not even in regards to the ability to have elective community property treatment.  Instead, the issue is that it is unclear if the proposal is passed whether or not there would still be a step up in basis at the death of the first spouse.  The reason is that this double step up requires the property to be subject to the estate tax (or fall under the credit amount).  Without an estate tax, it is unknown whether this double step up would be available.  Therefor, more information will need to be forthcoming as the bill or bills progress, but this is definitely a situation that should be monitored by those who have or are contemplating a community property trust.  Fortunately, if the double step up is no longer available, community property trusts are revocable, and as such the property could be deeded out and into a trust that has treatment similar to tenancy by the entirety.
See the article at: Stites & Harbison Learning Center

Wednesday, December 14, 2016

An expanded version of my article on Trump's death tax proposal, as published on Law360:

Many aspects of President-elect Donald Trump’s tax plans are still unclear. But proper estate planning will still be important. Michael Goode of Stites & Harbison PLLC considers what lies ahead with regard to estate and gift taxation, including a prohibition on some transfers to closely held family charities, incentives to keep taxable estates within the family, and whether or not the gift tax will be repealed. 

Wednesday, November 23, 2016

My latest article, on Trump's Death Tax proposal and how it affects estate planning:

Michael S. Goode

As this time, it is difficult to determine what the specific provisions of President-Elect Donald J. Trump’s tax proposals will be; however, it is important to highlight the types of planning that are not likely to be affected, and therefore could, and should, continue.

Sunday, July 17, 2016

An Overview of Important International Taxation Considerations

My article "An Overview of Important International Taxation Considerations" appears on page 20 

The Goods (July 2016):

The latest digital issue of the Kentucky Association of Manufacturers' publication "The Goods"

Friday, June 17, 2016

Don’t Forget to Report Certain Foreign Accounts to Treasury by the June 30 Deadline

Don’t Forget to Report Certain Foreign Accounts to Treasury by the June 30 Deadline

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them.

Wednesday, June 15, 2016

Ready to create your own Tennessee LLC? At the end of our seminar you will have a completely formed company.

Check out "Form Your Own Company - A Guided LLC Formation Seminar" REGISTER AT EVENTBRITE

Form Your Own Company - A Guided LLC Formation Seminar
Don't want to spend your valuable startup capital on your own attorney?  Thought about using a legal website to form your company?  Don't zoom through your company formation just to save a buck!  

Are you ready to form your own company?  
Get it done in two hours during this unique hands-on seminar where two attorneys will walk you through the online process of organizing your own Tennessee Limited Liability Company.

Here's what to expect

At the end of the seminar, you'll have:
  1. A formed company
  2. Filed Articles of Organization
  3. A basic, Member Managed Operating Agreement
  4. An Employer Identification Number with the IRS
  5. Instructions for Recording the Articles of Organization with the Recorder of Deeds
  6. A completed workbook with all of the relevant information about your company
  7. New entrepreneur friends who have just formed their own companies with you

Before the seminar, you'll need:
  1. To do some research to determine whether a limited liability company is the right legal form for your business
  2. To complete some short homework about your business that you'll use to form your company
  3. To select a few options for your business name

At the seminar, you'll need:
  1. A wifi enabled laptop
  2. Your completed homework questionaire
  3. A debit card or credit card to pay the $300 Secretary of State filing fee 
  4. A few choices for business names
  5. Enthusiasm?

During class, you'll use your laptop to:
  1. Organize your company on the Tennessee Secretary of State's website
  2. Register your Employer Identification Number on the IRS website

What the seminar is not:
  1. You won't receive legal advice or be represented by an attorney; we're just there to walk you through the organization process
  2. You won't receive tax or legal advice about the type of entity to form; you should do some research to make sure that you want to form an LLC as opposed to a corporation, nonprofit corporation, partnership or other type of entity

We hope you'll join us! 


Stites & Harbison, PLLC - 401 Commerce Street, Suite 800, Nashville, TENNESSEE 37219 

Monday, April 25, 2016

Tennessee Series LLC Basics: Liability Separation with a Single Entity

What is a “Series LLC”?  It's a limited liability company that has elected to allow the creation of separate series.  According to the statute:
  • Notwithstanding anything to the contrary set forth in this chapter, or under other applicable law, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing, with respect to a particular series established . . . shall be enforceable against the assets of such series only, and not against the assets of the LLC generally, or any other series of the LLC . . .
T.C.A. § 48-249-309.  This broad provision allows for the segregation of liabilities into each series, without having to form separate LLCs. As stated above, the segregation is allowed notwithstanding other provisions of the Revised Limited Liability Company act, and it's even allowed regardless of other applicable law.
The main attraction of a Series LLC is this: separation of liability using only one entity and paying only one annual fee.  This easily creates and dissolves “series” without having to create new companies.
Although there are requirements as to how to establish a series, none of those requirements include having to file again with the Secretary of State. Thus, the ultimate benefit to utilizing a Series LLC is that it allows a business entity to form separate ‘‘series’’ between which an internal liability shield can be established.  It also minimizes legal, regulatory, accounting, transfer and recordation fees that might otherwise result when forming a new LLC or transferring assets between or among two or more LLCs.  Accordingly, the benefit of the use of a Series LLC in the context of real estate transactions is that it will allow an owner to segregate liabilities among its various properties.
Until 2013 there was some uncertainty as to Tennessee franchise and excise taxes, but this was resolved with guidance issued in 2013, which essentially treats each series separately for franchise and excise tax purposes. Significantly, this will allow each series to apply for the Family Owned Non-Corporate Entity exception if applicable residential real estate is held by a series and thereby avoid the franchise and excise tax.  This makes this structure ideal for someone holding a number of residential real estate properties.  The specific requirements of this exception are outside the scope of this update, but should be explored for family owned residential rental property.
What are the downsides?  Series LLC may not be a great choice if the LLC is going to have business in states (or countries) that do not explicitly recognize Series LLCs, since there would be too much uncertainty of law.  Another downside is that the Tennessee law, unlike Delaware’s Series LLC act, does not specifically state that each series can in and of itself hold real estate, so some title insurance companies will not insure property held that way.  A possible workaround is to hold the property in the name of the LLC but on behalf of a series, since the Tennessee Series LLC law allows the “LLC documents” to establish separate series with “specified property or obligations of the LLC”.  If certainty of law is of particular concern, one might consider using Delaware’s law, or simply using separate LLCs.  However, for many deals the Tennessee Series LLC will be better than simply holding everything in one LLC, when separate LLCs are not practical or economical.  
What are the requirements for the Series LLC? In addition to the notice requirement in the articles of organization filed with the Secretary of State and the requirements that the LLC documents establish a series, the LLC member also must make sure that:
  1. “Separate and distinct records are maintained for any such series”, and
  2. “the assets associated with any such series are reflected and held in such separate and distinct records, directly or indirectly, including through a nominee or otherwise”, and
  3.  the assets are accounted for in “separate and distinct records separately from the other assets of the LLC and the assets of any other series of the LLC”.  
Therefore, a Series LLC is only appropriate for a person willing to keep the proper records. 

Co-authored with J. David Wicker