10.30.09
Posted in Uncategorized at 3:50 pm by Eric
Have you ever heard of “ToD” or its brother, “PoD”? They mean “Transfer on Death” and “Payable on Death.” They’re basically beneficiary designations that you can attach to all sorts of investment properties. You, for instance, can set up your savings account the following way: “Your Name, PoD Your Daughter.” Upon your death, your daughter would receive the savings account, as though she were a joint owner (read: without probate), but while you’re alive, she has no rights over it (which has many benefits: prevents fraud, precludes estranged spouses from trying to claim it in a divorce, no bankruptcy problems if the daughter files Chapter 7, etc.).
The procedure has one major drawback: It doesn’t apply to real estate. Therefore, the only way to avoid probate with real estate is to put your offspring on the real estate title as a joint owner (which has many risks) or put the real estate into a trust.
But that’s changing. Effective July 1, 2009, Indiana enacted legislation that allows people to transfer real estate into a ToD designation, as long as you follow the statutory requirements. If you do so, your heir will receive the real estate without the need for probate.
This a huge development for Indiana estate planning. Michigan is supposedly considering similar legislation. We’ll keep you posted.
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10.26.09
Posted in Uncategorized at 2:08 pm by Eric
Happy one-year anniversary to this blawg. We’re averaging two posts a week, which is double the initial goal (update at least once a week). We hope everyone is enjoying it.
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10.22.09
Posted in Tax at 11:56 am by Eric
Looking to find the schemes and plans of the devil himself? Try IRS publications. They’re typically not hard to read (as far as tax prose goes), and they’ll tell you how the devil interprets the Internal Revenue Code. Of course, the IRS puts a slant that’s most favorable to collecting taxes, but in most matters, you’re safer being safe . . . and normally, you’re not looking to scam a tax dollar, you’re just looking to find your way through the daggone maze.
For a publication that affects most people at one time or another, check out Publication 590 (pdf). It’s considered the koran of retirement plans and benefits.
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10.20.09
Posted in Tax at 1:26 pm by Eric
“The IRS doesn’t recognize limited liability companies.” I’ve told clients that a hundred times, and it almost always evokes a blank stare, so I’m going to try to summarize the reality here.
The Technical Background. The Internal Revenue Code is divided into Subtitles. The Subtitles are then broken down into Chapters, and each Chapter is further broken down into Subchapters (which are then broken down into Parts, then Subparts, and then Sections). Subtitle A deals with “Income Taxes.” Chapter 1 deals with “Normal Taxes and Surtaxes.” Among Chapter 1’s Subchapters are “Corporations” (C), “Exempt Organizations” (F), “Partnerships” (K), “S Corporations” (S). There is no Subchapter for limited liability companies. That’s what tax planners mean when they say “The IRS doesn’t recognize limited liability companies.” Although the IRS certainly realizes that LLCs exist and have even modified their forms somewhat to reflect that many taxpayers are limited liability companies, there is no designated tax treatment for them.
What It Means. It’s a good thing. Because the IRS doesn’t recognize LLCs, you can select whatever tax designation you want. If you’re a one-person LLC, you can select C corporation, S corporation, or nothing (referred to as a “disregarded entity,” which means your profits/losses from your business will go on Schedules C, E, or F of your IRS Form 1040). If your LLC has two or more people, you can be a partnership, C corporation, or S corporation.
How to Decide What to Be. You need to talk with your attorney or accountant to determine how your LLC should be taxed to maximize post-tax profits. If you don’t make any elections, a one-person LLC will be taxed as a disregarded entity, and a two-person entity will be taxed as a partnership. Those are the defaults. As a practical matter, most clients want their LLCs to be taxed as S corporations, but that’s not always the best choice. Fringe benefit issues, self-employment taxes, and entity flexibility are just a few of the things that play into the final decision.
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10.15.09
Posted in Tax at 11:17 am by Eric
Congress’ 2001 estate tax provisions have created delays and uncertainty. For the past three years, if estate planning clients have come to my office with a net worth over $2 million, I’ve told them (i) not to die and (ii) to hold off on a comprehensive estate plan until 2009 because that’s when everything gets changed (in the meantime, we stay with their existing plan or put simple Wills and related documents in place). My rationale: if things don’t get changed, the estate tax gets repealed entirely on 1/1/2010 (meaning that anyone who dies during 2010, no matter how rich, escapes estate taxes), then on 1/1/2011, the estate tax exemption goes back to $1 million. Both scenarios–the no estate taxes and the low exemption–aren’t desired by many people in the Beltway, so everyone thought new estate tax provisions would be passed in 2009.
But 2009 is nearing the end, and nothing is happening. Congress is embroiled in health care, job creation, and other socio-economic scheming. The estate tax situation isn’t being addressed at all.
So what’s going to happen? According to John L. Buckley, the Chief Tax Counsel of the House Ways & Means Committee, Congress will probably just “kick the can down the road a bit.” Speaking at the 2009 Notre Dame Estate Planning Institute, he said Congress will likely extend the 2009 rules into 2010–in effect, buying themselves another 12 months to deal with the situation.
And what then? That’s where it becomes interesting. If Congress then does nothing, the low $1 million estate tax exemption would be re-instilled on 1/1/2011, meaning that far more middle class Americans get stung by it. This would please people on the further reaches of the left aisle in Congress like Charlie Rangel. Rangel and his ilk want more people to pay estate taxes. Democrats could also deflect criticism for it by simply pointing out that they didn’t do anything. They merely left in place the tax scheme implemented by Republicans back in 2001.
Interesting stuff.
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10.12.09
Posted in Uncategorized at 7:13 pm by Eric
I hear it all the time: “That guy who owes me money filed bankruptcy, but don’t worry about it. He’s going to pay me. He didn’t list me on his schedules.”
Problem is, the mere fact that you’re not listed on the schedules doesn’t mean your claim isn’t discharged in the bankruptcy. If you’re listed on the schedules or you have notice of the bankruptcy, your claim is extinguished during the bankruptcy (unless you file an adversary proceeding to prevent it from being discharged).
And even if you’re not listed on the schedules and don’t have notice, you’re probably out of luck. The debtor must merely file a Motion to Reopen the case. It’s an easy Motion to file, and in the Western District of Michigan, they make it real easy: The judge will enter an order that says, “This case will be re-opened, but only if the omitted creditor first files an adversary proceeding to contest the discharge, along with an affidavit that swears the creditor didn’t know of the bankruptcy while it was pending. If the creditor doesn’t file the adversary proceeding and affidavit within 60 days, the claim will be deemed discharged.”
In other words, the bankruptcy court puts all the work on the creditor, instead of the debtor. As a practical matter, unless you have grounds to object to the debtor’s discharge (such as fraud, criminal act, etc.), it’s not worth hassling the debtor. Just assume your claim got wiped out with everyone else’s.
Aside: If you attempt to collect a discharged debt, you’ll be in violation of a federal court injunction. It’s serious stuff. You’re probably better off messin’ with Sasquatch.
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10.05.09
Posted in Uncategorized at 6:47 pm by Eric
I have a friend out in the stix. He has neighbors, but it’s definitely rural; nothing but woods and fields. He’s an individualist with a unique personality, but lots of friends. He likes to work a little, farm a little, and drink a little.
One day, he decided to combine all three: He was going to make vodka. He’d take corn, turn it into mash, let it ferment, distill it many times, filter it, and dilute it to 80 proof. As of today, he’s only a few months away from going commercial. As his attorney, I visited his still a little while ago and talked about the process . . . the legal process.
I was disgusted. Not surprised, mind you, but disgusted. The maze of regulations and requirements he had to traverse made my head spin. It took him over a year just to jump all the hurdles. Here’s a partial list:
Submit application to Michigan Liquor Control Commission, along with $1,000 application fee.
Obtain local governing body’s approval.
Confirm proper zoning and obtain necessary exceptions.
Attend training class(es).
Install specialized electric connections under the micro-management of a local bureaucrat, which was pretty much the electrical equivalent of an IRS audit.
Pass a local equipment inspection.
Pass a state equipment inspection.
Apply for a permit under the Federal Alcohol Administration Act.
Install an explosion-proof light (found on eBay for $2,000; new ones cost over $3,000)
Install appropriate locks and surveillance cameras to protect distillery from burglars.
Post a surety bond.
Submit bottle label to feds for approval, with application.
All that is just to get started. When he starts selling, the abuse continues:
He can only sell to state package dealers who enjoy a state-imposed monopoly, who will then charge a fixed price to retailers (bars and liquor stores).
When he sells his vodka to the state package dealers, he has to pay a 16% federal liquor tax. When the retailers later buy it, they have to pay heavy state taxes. The consumers later pay a six percent sales tax. On top of all that, of course, he has to pay state and federal income taxes on his net earnings, plus social security and medicare taxes. He already pays real estate taxes on the still. I didn’t have the heart to tell him that, once he goes into commercial gear, his local township can start imposing a personal property tax.
Only use corn produced by a farm that complies with Department of Agriculture requirements.
If he wants to market his vodka at a local bar, he can’t merely give away free shots. He has to pay the bar for a shot, then he can give it to the patron. Even if the bar owner doesn’t mind if he gives it away, he has to buy it.
Annual licensing fees.
Ongoing surety bond premiums.
And if he expands to the point of hiring employees, watch out: labor posters, minimum wage laws, overtime laws, Americans with Disabilities Act, workers compensation, discriminatory hiring/firing practices, bogus lawsuits for sexual harassment.
Neither of those lists, by the way, is complete. I didn’t keep notes when he told me about all the requirements. I’ve done some Internet research to make it comprehensive, but I guarantee you that I’m missing things. A guy can no more catalog all the legal requirements than he can catalog every single thing he does in an average week
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