Watch Our Webinar on Estate Planning for Owners of Closely-Held Businesses

Streamed: Wednesday September 22, 2021
Duration: 1 hour
Language: English



About This Webinar

This webinar will cover the special estate planning opportunities available to small, family-owned, or ‘closely-held’ businesses



Webinar Transcript

Liz Prehn:
Hello, everyone and welcome to today’s webinar, Estate Planning for Owners of Closely-Held Businesses. Thank you for taking the time out and being here today. Our founding partner, Steve Moskowitz and managing attorney, Cliff Capdevielle will be presenting today. There will be a Q&A at the end, but feel free to submit any questions you have along the way. Thank you.

Cliff Capdevielle:
Good afternoon, everyone. This is Cliff Capdevielle. I’m here with Steve Moskowitz and Liz Prehn regarding estate planning for closely-held businesses. This is an extremely important topic these days because the Biden Administration is considering dramatically changing the way estates are taxed for closely-held businesses. This has not been an issue for some time. We’ve had an exemption of over $11 million per person, which means that most closely-held businesses did not need to worry about this issue too much. Now that is all changing. So Steve, I’m sure you’re getting a lot of questions and I hear you talking on the radio about this issue. What are you hearing from your clients? What are their concerns about the Biden Administration’s proposed changes to the estate tax?

Steve Moskowitz:
The concerns are very simple. What I’ve heard over and over and over again is, “I didn’t work my whole life and sacrifice and do all this to hand this over to the government. I don’t want this. What can you do to keep me out of Biden’s claws?” And that’s what this webinar is all about, is tax planning to go ahead and distribute it how you want it. For example, oftentimes we want to distribute to the kids, and there’s a lot of personal thought put in here. Some people say they have three kids, one third for each. Other people say one kid’s really interested, one kid’s not, or sometimes somebody has some special challenges and things are not always equal. And again, when we do this estate planning for brothers, oftentimes their goals, their wants, their hopes are very, very different.

So one of the things we do is we’re not just technical people and say look, we can save you the nth penny here by doing this and this and this and setting up something you don’t want. The first thing we do is we listen to you and say tell us your hopes, wants, dreams, and then we tell you how to achieve it legally and legally keep this out of the hands of the government because President Biden is looking at you and let’s face it, he’s giving away trillions of dollars with a “T”. Cliff, you remember back when politicians only gave away billions with a “B”? I guess that’s not enough anymore. Everything now is trillions with a “T”. Well, where’s that coming from?

Well, one of the places it’s coming from, President Biden also announced he wants to literally double the number of IRS employees. He told them that he wants them to collect trillions with “T”, and the bottom line is what we say in the office is we don’t want you doing that with our clients, and there’s so much we can do to avoid that. And on that happy note, I’m going to turn the floor back to Cliff.

Cliff Capdevielle:
Thanks, Steve. So we’ve got just an hour to present here. We have over 70 slides. These slides and this presentation will be available on our website, and if you send an email to us, we can send you the slides as well. So we’re going to go through these quickly, cover as much as we can, but probably you’re going to need a second or third look at this and if so, feel free to request the slides or the full presentation.

So what are the goals of the small business owner? Certainly in terms of succession, and this is true for many closely-held businesses, we deal with construction companies, restaurants. All the time these are businesses that the owners want to keep in the family. They want to make sure that they’re able to pass their business to their kids and their grandkids. It’s a challenge for a number of reasons, so what we do when somebody comes to us with a succession planning question or project is that we first want to assemble a team of advisors. So that’s going to include the team at Moskowitz, and we are lawyers and accountants. We can help with that piece. We also might be dealing with insurance people, pension plan designers. We also deal with appraisers and sometimes we have more complicated situations where perhaps brother and sister together own a business and we want to make sure that the business passes to the kids in a way that makes the most sense. So as Steve said, sometimes you have children who want to participate and run the business, sometimes you don’t.

So there are many ways to go, but we want to look at the big picture. Somebody comes in for an initial consultation, what are the goals for the business? Who are the stakeholders? And then what is the appropriate team to make this happen? So there’s a number of options and usually the first choice for the business owner is to transition to one of the family members. Typically it’s going to be children who have been working in the business, but not always. Sometimes it makes more sense to sell the business to employees, sometimes you sell to a third party and other times none of those options are realistic and so we’re looking at winding up the business and selling the assets. So those are all options, and in our initial consultation we’re going to go through all the options, trying to identify for you which option makes the most sense for you and your family.

So Steve, when somebody comes to you and they say, “I want to keep this business in the family. One of my kids is interested in running it, the other one not so much,” how do you approach that conversation and what are your recommendations about how to begin this discussion?

Steve Moskowitz:
So again, what I ask is what is somebody’s personal wishes. If somebody says, “Look, I have two kids and I want to take care of them equally,” we go ahead and do that. But if I say one kid is really going to earn it and the other kid isn’t interested, we might want to consider leaving it all to the one kid and not the other. And not only are there tax considerations here, but there what I call human considerations, and that’s what I want to stress and that’s one of the things that separates us from most of the other firms. Most of the other firms that I know of everything is cut and dried and here’s the rule and what do you want to do and hurry up and we know more than you, sign here.

With us, it’s wait a minute, we can do whatever you want, or almost anything that you want, but what is going to satisfy your personal needs? And a lot of times people say if the kid doesn’t want to work in the business, maybe he or she shouldn’t get part of it. On the other hand, some people consider another thing that comes up all the time. You have two kids, one kid is wealthy, the other kid is in poverty. Do you reward the one that’s in poverty and punish the one that’s been successful? Do you do it equally? And I’ve had lots of people that tell me their feelings and their feelings are different. There are other people, some famous celebrities you’ll see that believe that if you give your kids anything you’re ruining them and they give it to charity. Well, if you want to give it to charity we’ll say, “You know what? If you want to give it to charity, we can set up a CRT, charitable remainder trust. And basically, we can get you the benefit of an income tax deduction today for doing something that you want to do.” And there’s all kinds of combinations.

Somebody says, “You know what? I really like that idea and I’d like to go ahead and get that big tax deduction now. I could pay less taxes. I could live better during my lifetime,” because these things only happen when you designate them and a very common time is at the death of a second spouse. But sometimes people come back and say, “You know what? My kids say that they thought they were going to inherit it and now they’re very disappointed.” I say, “Well, you can’t run your estate based on what your kid wants. However, if you say you do want to please the kid, there’s some middle ground where you can set up something like and ILIT, irrevocable life insurance trust, and give the kid, through insurance, the value of the asset while you’re giving the asset to someone else.” Maybe it’s the other kids or maybe it’s the charity to get the income tax deduction.

So again, that’s why it’s so vitally important that we talk to people and say what do you want to do, and so many times I’ve dealt with somebody that says, “My kids said I should do X, Y and Z.” And I say, “You know what? That’s very beneficial to your kid, but not so much for you. What do you want to do?” And that’s the importance of talking to our clients. Communication is so very important in any type of relationship whether it’s business, personal [inaudible 00:10:32], and that’s what we do with our clients. Talk to us and then we want to give you what you want and we’ll tell you all about the tax ramifications.

Sometimes tax drives it where we say, “Look, we could save a substantial amount of tax by doing this, this and this.” Other times somebody says, “I just don’t want to do that.” And then we say we’ll get you the best deal even if we have to do something different, but we want to do what you want. And now Cliff, back to you.

Cliff Capdevielle:
Thanks, Steve. So if it doesn’t work out with the family, if you don’t have a child who is working in the business or interested in the business, then probably the second choice is going to be an employee buy-out, and in that case, you want to identify those key employees who would be careful with the business and who would be interested in taking over. So oftentimes we will help clients identify those key employees and then draft shareholder agreements. So if it’s a stock sale for example, it’s typically going to be the case in an employee buy-out, make sure that all of the employees are properly incentivized and that you have shareholder agreements in place so when the owner is ready to retire, it’s an easy transition. Oftentimes the owner will stay around either part time or full time until the transition is effective, and we can make sure that the contracts are in place so that that happens smoothly without any disruption in the business.

If that’s not possible, then we look to an arm’s length transaction. This is common in the case where you don’t have a son or daughter or employee who’s ready to take over, and that can happen because the owner doesn’t have children or there aren’t any employees who really have the management skills to run a business. They might want to stay on as employees but they’re not interested in owning or managing a business. So in that case, we work with business brokers and the buyers’ attorneys to make sure that that transition happens smoothly and that we identify an appropriate buyer for the business and then we help negotiate those sales.

We have several of those in the office right now and it’s a different process because typically what it means is we have a more sophisticated buyer. Oftentimes that’s going to be somebody’s who’s been in the business or owns companies like this. Sometimes it’s an investment group that wants to buy an existing business.

So those are… it’s a much more business-like transaction, and in that case, we’re identifying the best approach. Is this going to be an asset sale versus a stock sale? Oftentimes it’s going to be an asset sale because the new buyers are going to be rebranding or they want to capture and manage any potential liabilities as part of this process.

So Steve, what would you say to a business owner who maybe they don’t have any kids interested and they don’t have any employee who’s likely to take over the business? What is your recommendation? What do you say to that?

Steve Moskowitz:
I would talk to him about a sale. And I know this is going to sound like a funny reference, but there’s a reason for it. When Hugh Hefner sold his house, he made a deal that he sold it, he got the money, but he got to live in it for the rest of his life, and businesses are a very valuable asset. Sometimes the most valuable asset around. So if that’s the case, I would say to the owner, “Let’s go ahead, find a buyer, but the buyer doesn’t have to take over now. If you want to continue to work for X number of years or even the rest of your life, that’s okay.” That just is the time value of money and we can set an actuarial value there and then you could sell the business and you could leave today or you could leave next year or five years or ten years or when you go to reward, and that is a way that the owner could go ahead and cash out now, and that might be very attractive to the owner.

Then the owner can go ahead and say now that I’ve done that, you have other offsets that we could set. For example, he might set up a new company to manage his investments. We set up a company within that. We set up a retirement account within that. So all of a sudden, somebody is getting money, but they’re legally avoiding the taxes on it. Or maybe this is going to involve exchange of some real property, and you say it would be nice to do a 1031 so I wouldn’t have to pay the taxes, but I’d still have a property. I’d like to cash out or begin cashing out. Then I’d say let’s look at a DST, Delaware statutory trust, because it’s recognized as 1031 property so it wouldn’t be taxed, however, what I have in essence is I’m no longer a landlord. I no longer have to worry about that sink that’s stopped up. I basically have shares in a mutual fund of real properties, but because it’s qualified for 1031, I don’t have to pay any taxes and now I only get taxed when I sell the shares.

A lot of times when people are retiring, when they finally cash out on that property, they sell the property. They get taxed on the entire property and they’re not going to use that money for many years, usually the rest of their life. Well, with a DST you say even better. I can hold most of the shares with a DST for all these years, just sell the shares as I need the cash and only get taxed on that. So there’s so many areas here. That’s why I’d say to people don’t be frustrated. We have dedicated our professional lives to this, and it’s just like a physician or a dentist or an architect or anything else. That person has dedicated their professional life to something. Basically, tell us what you want to do with your life and we’ll tell you the best way to do it to save taxes. And now back to Cliff.

Cliff Capdevielle:
Thanks, Steve. And sometimes it doesn’t work out. You don’t have a son or daughter who’s interested in the business or you don’t have an employee and you don’t even have a third party buyer. So in that case we are going to help the business owner wind up the business, and this could be a sale of existing assets and also we want to help the buyer wind up any obligations. So this would involve negotiating with vendors, creditors, any employee issues, we would resolve those for the client and then of course, file the tax return and make sure that when that owner retires that they don’t have any lingering issues with the business. No outstanding taxes, no outstanding debts, creditor claims, et cetera.

It could be outside of bankruptcy. Sometimes it makes more sense to file a bankruptcy and be done with it. Have a court review it, have a trustee in place who sells the assets. So we can help the business owners in that situation as well.

So the best situation, of course, is if you’re able to transfer to your children, and so you want to make sure that all of those family issues are resolved. Steve and I are working on right now a very contentious matter between a brother and his sister and that’s our focus. So in other words, in addition to those business considerations, we’re actually dealing with relationship issues and trying to figure out a way to transition this business to the children, at the same time avoid a law suit or claims by any other family member. So those are all considerations that we look at when a family transition is the first choice.

We also want to look at the assets. So sometimes it makes sense to sell the assets outside of the business sale. Sometimes the owner wants to keep an asset. Maybe there’s a building that’s owned by the business and the owner wants to keep that building. Maybe it’s going to generate income in retirement. So we help clients manage those kind of issues and then of course, the financial considerations. What are the income cash flow needs for the family? Maybe the business owner has plenty of assets and is part of the sale, want to make substantial gifts to children and grandchildren. Other times the business owner needs cash flow. Maybe they don’t have enough in terms of pension savings and retirement savings and they need help planning cash flow into retirement, so we can help the family negotiate those kind of issues.

Finally, there could be geographic issues. Oftentimes we are dealing with business owners who own property and businesses in multiple states outside of California and even outside the United States. So those are issues that are going to involve additional international cross border tax planning and that creates opportunities and it also presents some additional challenges.

So oftentimes the preferred structure of a family business or a set of assets owned by a family is what’s called the family limited partnership. So a family limited partnership is just like any other partnership except that typically the owners are going to be parents and children and/or grandchildren. Oftentimes the parents want to maintain control. They’re still managing the business. They are still in there day to day, yet they want to start doing some estate tax and gift tax planning. Now, in this current political situation, we have competing interests. We have the Biden Administration, which is pushing for a reduction in the estate tax and gift tax exemption, and we have Republicans who are trying to maintain those higher exemption levels. So we have clients who want to hedge their bets. They want to make sure that their kids don’t have to sell the business or take out a huge loan if the estate tax exemption is reduced. So they are gifting interests typically through a family limited partnership to their children and grandchildren.

Now, they want to take advantage of the current high exemption, its $11.5 million per person, and make those gifts in 2021 rather than waiting to see what congress and the Biden Administration does, which could mean a dramatically lower estate tax exemption and as a result, much higher taxes on those families when those businesses do transfer to the children and grandchildren. So the plan is typically that the parents transfer their existing business into family limited partnership in exchange for a management and an ownership interest. Oftentimes a parent become the general partners. They maintain control of the business that way and the make gifts over time to the children of those limited partnership interests.

So let’s talk a little bit about how the IRS has attacked that plan and what to do about it. So for the most part, if the IRS audits a family limited partnership transfer, it will be on a few basis. The first is that the parents didn’t really transfer control. In other words, they maintained too much of an interest in the business so that it didn’t constitute a completed gift. Second, it is often subject of a challenge if that transfer comes on a deathbed or near the time of death. In other words, if this looks like an entirely tax-motivated transaction, it’s much less likely to survive an IRS attack.

So the first case we’ll talk about is the Strangi case, and the IRS challenged just for those exact reasons. So the decedent really didn’t transfer control to the kids before death and the transfer happened very close in time to the decedent’s death. For that reason, the IRS brought that transfer back into the estate and that estate was subject to estate taxes that could’ve been avoided with better planning. So what did we learn from that case? Obviously avoid the deathbed transfer and setup. So you want to get in early.
So Steve, you probably want to talk about why planning early rather than later is so important.

Steve Moskowitz:
You know, a lot of reasons, and one of the things that always strikes people as funny, there’s a lot of things, and Cliff was just talking about them, where if you do them only to save taxes, the IRS says no good, can’t do it. But if you do it for other reasons, other economic reasons, and it just so happens that you’re stuck with a tax savings, the IRS says well, that’s just fine. So that’s one thing.

Next thing is with all tax planning, you want to do it as soon as possible because a lot of times with tax planning your savings begin when you start the plan. So if you do something in November, you say I have benefit for November and December, but if you start in January, you’d have it for the whole year.

Next, another thing is that you never, ever want to hear from anybody that’s advising you, whether it’s an attorney, accountant, anything else, is too bad you did it that way. So you don’t want to hear that, but here’s something else you don’t want to hear. You don’t want to get a call from your lawyer who says, “You need to make a decision involving your life, your next life, a tremendous amount of money and I need to know in the next half hour because the law is going to change tomorrow. If we got to do it, we got to do it by tonight.” You don’t want to hear that. You want to have time because one of the things that we do in our firm when we do this type of planning, we say here’s these different alternatives. You might want to think about them. And usually, remember I talked to you about good communication? After you’ve thought about them, discussed them with your spouse, then you want to talk to use about it.

So if the law changes, and that’s one of the things we’re talking about now, you’ve already thought all this out, you’re ready to pull the trigger. So we can say this passed and we have to know by next Thursday, you’ve already made the decision. You’re not struggling saying how much would it be and what about this ramification and what about that ramification? How will it affect it? That’s already been thought out. So that’s just part of the reason why you want to do this, and you want to have as much time as possible because you’ll feel best about that. Cliff, thank you.

Cliff Capdevielle:
Yeah. So you want to respect all the formalities if it’s a partnership or a corporation. You want to make sure all the paper work is in place because that is typically where the IRS starts their attack. They say you weren’t really running this like a business, so we’re not going to give you the benefit of the doubt here, and they will attack the partnership agreement and partnership transfer. So you got to make sure that you’re absolutely careful about all of the partnership formalities, the partnership agreement. All that has to be respect, and as I said, you don’t want to do this at the last minute.

Oftentimes these IRS audits are very expensive because these transfers and all this planning that’s done at the very last minute and that doesn’t look to the IRS like this was a real business transaction, it looks like a tax dodge, as Steve said. So yeah, maintain those partnership books and records, have the regular meetings. Separate the personal assets from the business assets and make sure that all the paper work is done, all your tax returns are filed, all the other formalities are followed as well.

You want to make sure those distributions are happening according to the partnership agreement. Oftentimes partnerships get into trouble because the distributions are just not done. They’re not done according to the partnership agreement. And finally, the big one is that the owners, the parents, typically done give up control. So if you’re really going to make a gift, that means you’re going to give up control of the business.

So in Powell it was a similar situation and the decedent died seven days after the funding and was determined to be incapacitated. So this was again, deathbed planning that was done. The other piece that got the taxpayer trouble was that they essentially transferred all the assets, including personal assets into the lender partnership right before death. So the IRS again found the fact that the decedent had so much control over the assets up until the time of death, those assets were included in the decedent’s estate.
So what did we learn? Again in Powell, don’t do the deathbed planning. It’s going to cause you problems. If you’re entirely tax-motivated, you’re going to have a problem in the audit. And you’ve got to have a real transfer of the assets.

So what do we do? You got to use real business planning here. It can’t just be transferring of cash or securities. You got to transfer the business and the transfer has to include control of the assets. So this is a requirement that the kids or grandkids are actually managing the business after the transfer, and the capital contributions and distributions have to follow the partnership agreement.

What do we do, Steve? So a client comes in, first thing we’re going to do is review the partnership agreement and what else are we going to do?

Steve Moskowitz:
Once again, we go back to the partnership agreement could’ve been written years ago. Most relationships evolve; does this partnership agreement still reflect that you guys want to do? If the answer is yes, that’s fine. If the answer is no, then we want to rewrite it as to what the current want is, and then we can even show the IRS look, this isn’t something we’re just giving lip service to. We have these meetings and we decide and there’s a very good business reason, and economic reason why we shifted what we shifted from Partner A to Partner B. Again, with the IRS, so much of this is involved, there’s a good economic reason, a good business reason and by the way, okay, I’m stuck with a tax benefit, so be it. That’s one of the ways that first of all, we really doing what’s best for your business. We are reflecting reality and it benefits you in the taxes, so you benefit all the way around. You win all the way around.

Cliff Capdevielle:
And so as part of our planning, we use the annual gift tax exclusion. The gift tax exclusion is in addition to that estate gift tax exemption. So in addition to the $11.5 million that you can give through your estate or through lifetime gifts, you can give an additional $15,000 a year to whoever you want. So you want to make sure you’re taking advantage of that. If you are giving… it could be in the form of a life insurance premium or other asset, but you want to make sure that you’re taking advantage of that.

So we’ll get into a little bit of guesswork here. We don’t know what’s going to happen with the estate tax and the gift tax law in the next year or two, but you certainly want to take advantage of the current law if you can. So we have proposals to reduce the estate tax down to $1 million, $3 million, $3.5 million current proposals. This would dramatically change the planning that we’re doing for families because oftentimes if you own a business, certainly in California, you may have businesses often worth a lot more than $3 million or $4 million. So what does that mean? You either have to buy insurance to pay for the estate tax or you have to do some lifetime gifting now before the law changes.

So some of the proposals are likely to eliminate this certain discount. So we have now in place a way to give business interest to kids using lack of marketability, transferability discounts. Those may be going away. We may have limits on the generation skipping tax exemption. That may be going away. We may have limitations on step-up. Step-up means that at the date of death, the grantor or decedent assets are stepped up to the value of the date of death. What that means is that the new owners, the kids or the grandkids, can sell those assets tax free because the basis is equal to the fair market value on the date of death. That may be going away. So a lot of issues are in play right now and all of this planning is valuable right now, and if you wait, these opportunities may be gone.

Steve, do you want to talk about some of the Biden proposals and how that could affect your clients?

Steve Moskowitz:
Yes, I do. Thank you. Basically, I’ve seen these cartoons where there’s a form with two lines on it, what do you have and the second line is give it all to the IRS. Biden’s proposals are close to that because he wants to take away so much. For example, step-up in basis is a big deal. What step-up in basis is, suppose grandpa bought a building for $10,000 and it’s worth $1 million today. If grandpa gives you that building through his estate, you get what’s called a step-up in basis, meaning the fair market value at date of death or return to valuation date. So to keep it simple, in my example grandson sells the property the next day. He says sales price $1 million. Even though grandpa’s original cost was $10,000, the step-up in basis means that grandson’s adjusted basis is fair market value at date of death or alternative valuation date, $1 million. Capital gain zero. President Biden wants to take that way and say you’d have a capital gain of 990. As we know with capital gains rate is much lower than the ordinary income rate. Whoops.

President Biden wants to take capital gains rates away too so if he gets his way, look at this. Not only would you have a gain of 990 where you had none today, instead of paying at the lower tax rate, you’d pay at the higher tax rate. That’s for starters. Also what Cliff was talking about earlier, the $11.5 million exemption, he wants to bring that way down and they’re talking about should it be $2 million, $3 million, I’ve even heard $1 million. With the cost of things today, especially real property, there’s lots of people that have a simple house that’s valued at over $1 million. He wants to take those away, and basically what’s happening is what we talked about earlier. He’s giving away these trillions of dollars and where is it coming from? It’s coming from us, those of us that pay taxes.

Now, I don’t want to turn this into a political discussion, but we can see that what he’s trying to do is basically have a shift from one class of taxpayers to another. Well, what we need to do as taxpayers, say look, what are these proposed new laws and be ready, so if we have to pull the trigger, again, over and over and over again everybody in the firm has heard, “I didn’t work my whole life to give this money to the government.” Our job is to make sure that happens within the bounds of the law. Thanks, Cliff.

Cliff Capdevielle:
Thanks, Steve.

So what does this mean? It means a combined tax rate of over 50% on assets that are right now transferring tax free. So if it’s possible, we want to help everybody get this planning done before the law changes. Do we know it’s going to happen? No. If Biden can get this done as part of the infrastructure bill or through reconciliation, that is going to happen. He’s struggling right now. It looks like some of his agenda is going to be stalled, but certainly these changes or proposal are on the deck and certainly we have to be aware of these.

One way around it is what’s called the spousal lifetime access trust, or SLAT. That’s essentially a gift to the spouse in a business, and this is done through a post-marital agreement, and we do this to take advantage of the spouse’s exemption. Some challenges, of course, is the risk of divorce. You have decrease in the step-up in basis, so when you make a lifetime gift that is not subject to the step-up at the death of the first spouse. So there are some pros and cons and we can walk you through those if that is a planning opportunity you want to look at.

Going to rush through here. We’ve got not quite 20 minutes left and we have 35 slides. I’ll go as fast as we can. But again, if you want a recording of the webinar or if you want copies of the slides, let us know, we can get that out to you.

Next I want to talk a little bit about the asset protection, aspects of limited partnership and Steve, you have clients, they come in and even though they have insurance, they may be worried about claims that could exceed the insurance and how do you counsel clients in that regard?

Steve Moskowitz:
That’s an easy one, Cliff. How much is enough insurance? No such amount exists because whatever number you have, some jury can decide to give away more than that. And you can see that, if you’ll remember the wrestler Hulk Hogan, his son took the family car, Hulk’s car, for a drive, turned his friend into a quadriplegic and the amount that they sued for, had they gotten that or even close to it, it would’ve wiped out everything that Hulk Hogan had worked for. You know, Hulk had considerable assets. So the bottom line is insurance is great and I believe in having lots of it, but it doesn’t change the fact why have that open-ended liability? The beauty of setting up an entity is you can limit your loss to the net equity of that entity and all your other assets are safe.

So if you said to me you had a zillion dollars worth of insurance, I’d still say why take the chance? By the way, there’s something else with insurance. Suppose you said you know what, Steve? I have three zillion dollars of insurance. I’m not worried that any jury would give anything near about that. Suppose you have a big claim, what do you think the insurance company is going to do? They’re going to say sure, we don’t mind paying that. They say okay, we pay pursuant to the contract. You’re canceled or we’re not going to renew. Now you have no insurance.

So the bottom line is the fact that you have insurance today doesn’t mean that you’ll have insurance tomorrow. Again, you want to set up this entity, and there can be all kinds of reasons because you want to have it in place. Somebody can go ahead and sue and say there’s some toxic chemicals on that land and you’ve damaged me and you owe me beaucoup. The bottom line is a smart lawyer can think of all kinds of reasons why you owe money to his client. The bottom line is an entity is so important, and one of the things that we recommend is you set up an entity for every property. So suppose you had 10 properties, you want to set up 10 entities. You don’t want to put multiple properties in one entity because that defeats the purpose of limiting your loss to that one entity.

Now, in some states there’s a franchise fee, a payment for the privilege of being the entity and you say that’s fine, but you mean I have to pay 10 of those fees? The answer is it depends on the state. In certain states you can set up one of those entities with a different type of entity not subject to those fees and get the benefit in my example of the 10 different entities in the asset protection but only paying one fee for that to the government. So that’s something you want to check under your local state law, but there’s all kinds of considerations here and knowing them can not only save all your assets, can even save you the fees that you pay to your state and the taxes you’re paying.

Cliff Capdevielle:
Thanks, Steve.

So we want to protect you against any type of creditor claims, to those could be vendor claims, employee claims, and the way we do that, as Steve described, is to make sure that we are maximizing the use of entities to the extent possible. So what we call choice of entity representation and we can you select the right entities that going to provide the maximum protection from inside creditors/outside creditors.

Some states have what’s called a charging order. Can allow a creditor to potentially get a partnership asset. So we can design your plan to maximize the protection in case of potential charging order creditors and help you with tax planning as well in that regard.
So typically, the charging orders have certain limitations and we’re going to make sure that, to the extent we can, we protect you from the creditor’s attempt to get at the underlying assets or to dissolve your family limited partnership or any other entity. Some of the techniques in terms of drafting that we use is that we can require that the majority of the owners consent. We can require 100% of the owners to consent to any kind of withdrawal. All of these are techniques that create a barrier for creditors and you keep creditors from access to the family limited partnership or the LLCs.

I want to quickly to through some planning that’s still available under current law. It may not be available for long. These are what are called valuation discounts for family limited partnerships. Typically these are going to involve lack of control discounts, lack of marketability. The reason is simple: because a family-owned business may be doing, let’s say $10 million a year in revenue and a business broker may tell you that that business is worth $12 million. However, it is unlikely that a third party would be willing to pay $12 million for a business or let’s say $6 million for half of the business if it’s owned by siblings. Because the last thing that an outside buyer wants to do is deal with a stranger, and particularly one who’s owned the business for a while. So for that reason, the IRS allows discounts when considering the valuation for gift and estate tax purposes. That means that even though a third party sale may be generating income in the abstract of $12 million, because of the lack of control that lack of marketability, the IRS may peg that business value at $8 million. It’s going to require a business appraisal.

Typically, but with proper planning, what that means is that you can transfer a very large asset and potentially reduce your tax liability associated with that transfer. So Steve, do you want to talk about Donald Trump’s family and how they use these valuation discounts?

Steve Moskowitz:

I’m happy to do that and also, I was honored to write the article for the… remember the New York Times story came out about some… people had a few challenges to Donald’s methods of accounting and taxes. I was the one that actually wrote the rebuttal to that that was published by the lawyer’s service, and the bottom line is there can be a great area of dispute here. And when you’re doing valuations, different people have different ideas, use different standards, and if you look at anything, if you hire six experts you can easily get six opinions. So what we’re looking to do here is get an opinion from a respectable, qualified source that we can, to the maximum part possible, show objective proof for. So that’s one of the things that you do, and again, in doing these things, a lot of times a lot of this work is done behind the scenes that people don’t see.

If the IRS doesn’t challenge anything, well, that’s fine, but suppose they did. There’s an awful lot that goes on before these things become public, like in a court where you say look government, you have your ideas, but I have good support for doing something different and look how good it is. Maybe you would be best interested in not doing an all or nothing challenge in court that’s public, but instead making a private settlement with me that we can work out something that both sides can live with.

So that’s one of the big reasons why, as you know, I was a CPA before I was a tax attorney, and with my training as a CPA, things were more solid where there’s a number that goes in a box that’s very solid, whereas an attorney, it’s more of an argument. It’s an agreement. It’s let’s consider these factors, and that’s why oftentimes an attorney can give such a different perspective to something than an accountant that’s looking for a hard and cold number.

Cliff, thank you and back to you.

Cliff Capdevielle:
Thanks, Steve.

So just quickly here because we have 24 slides and just about five minutes. Want to make sure when you’re setting these up, as Steve said, you want to use a qualified appraiser. You want to do this in a way that looks like it’s got a business purpose and that you’re not purely driven by tax considerations. So want to follow what is… appraisers use several different models. Empirical models based on the comparable stock sales. The IRS will often challenge these valuations. You want to make sure that you dot your I’s and cross your T’s. There’s got to be a business purpose. There have to be restrictions on liquidation, and the discounts have to be appropriate. So they’re going to have to pass IRS muster in terms of the percentages for the various discounts.

If you get through it, then you’re going to save a great deal of money and there are several cases on point where taxpayers were permitted to take substantial discounts. The Astleford case is one which involved a tiered real estate partnership, and there are several other cases where the tax court allowed discounts with regard to built in gains that otherwise would’ve been subject to tax.
You also are entitled to what’s called non-voting discounts. This is going to typically involve corporations where the shares are discounted because they don’t include a voting right, and of course, now we’ve got the COVID discount. We don’t know how long this is going to last, but certainly many companies have had substantial reduction in gross receipts the last couple years, and that has substantially affected the valuation and it is very likely that some COVID discount would be appropriate in the estate and gift tax consequence.

Just going to rush through a couple of these slides to get to some other issues. The taxation of the family limited partnership is fairly straightforward. The tax attributes pass through to the individual owner. So there’s no partnership level tax. The owners are taxed based on the partnership agreement which allocates profit and losses. So a 10% owner, let’s say that’s a child of one of the partners, is going to pay tax on 10% of the income. The family limited partnership is required to file a separate tax return and these have attached to them K1s which report each limited partner’s share of the profit and loss in each year, and that’s something we can help you with also. The partners then, of course, pay their share of the tax based on their distributive share.

Very important, just want to emphasize this again, that in the context of an IRS income tax audit or a state tax audit, really to the extent that you have a tightly, carefully drafted partnership agreement and that partnership agreement is followed carefully, you’re going to avoid most of your problems. So Steve, what do you see causing small businesses trouble when they ignore their partnership agreements or their other operating agreements?

Steve Moskowitz:
All kind of unintended results. First of all, unhappiness with the partners, sometimes even causing a dissolution where they’re arguing over who has to do what. Wait a minute, why are you taking this money when I’m doing all the work? No, wait a minute, I have this. You want to avoid those, and also you want to always consider the possibilities for sales of the business. And not to mention, the tax attributes and they all go together, not to mention good business planning because like anything else, like any team, like any group, you have a group of people, well who does what?

Cliff Capdevielle:
Did we lose Steve, Liz or did he come back?

Steve Moskowitz:
I’m right here.

Cliff Capdevielle:
Oh, okay. Sorry. I lost you for a second.

Steve Moskowitz:
As long as the audience didn’t lose us, Cliff, we’re okay, and that’s why we’re a team. When one guy gets lost, the others pull him out of the abyss. For those of you that are listening, if you say oh my god, I fell into an abyss, you know, I know a lot of these slides you’re looking at, you’re saying oh, these lawyers mumbo jumbo. What’s going on? The way I’d summarize it, because I know we’re running out of time, is you can go ahead and look at these slides at leisure and then talk to us and what we’ll do is we’ll take the part that applies to you and say look, we’ll take your facts first. Just like going to a doctor. Doctor knows all kinds of medicine, you don’t really care about any of it other than what affects you. Okay. The reason that this hurst is because of so and so and here’s what we do to fix it. And that’s how I’d summarize this.

There’s a potential here for avoiding a lot of tax hurt and let us go over this. We’ll explain it to you in English the part that affects you and how you can benefit. Because what you have to remember about tax laws, there’s two purposes. One we all know about: extract money from us for the government. But there’s another purpose. In a democracy the government can’t order us to do something they think is good for the economy. So how does the government get people to do something that they want but they don’t have the power to order them? They give tax incentives, and that’s why you see the Fortune 500 so many of these companies making profits in the billions with “B,” not paying any taxes. You see it in the newspaper every year because they call these tax incentives and that’s basically the heart and soul and gist of what this webinar is all about.

There’s all of these laws and rules in how it’s applied. We’re familiar with it. This is the world we live in. Let us take them for you, explain them as to what applies to you and how you can benefit. Cliff, you want to wrap up for us?

Cliff Capdevielle:
Thanks, Steve. So we do have some more slides. We don’t have time to get through all of those today. Liz, do you want to describe how a viewer can get a hold of the slides or a copy of the videotape recording?

Liz Prehn:
Sure. You’ll be sent a copy of the recording by virtue of registering, and you can email me. I put my email address in the chat, if you want some slides. It’ll also be up on our website that you can do it there as well and we’re at

Cliff Capdevielle:
Thanks, Liz. Thanks, Steve.

Liz Prehn:
Thank you, everyone.

Steve Moskowitz:
And thanks to all our viewers.

Cliff Capdevielle:
And feel free to send us emails if you do have any questions about today’s webinar. Thank you.

Liz Prehn:
Great. Thank you very much. Bye.

Steve Moskowitz:
Thanks guys. Bye-bye.