Illinois Civil Unions and Estate Planning

Courtesy of A of D

This is a historic time in the State of Illinois! The Illinois Civil Union Act became effective on June 1, 2011. The Act establishes legal relationships between two people (either same-sex or different-sex partners), providing all of the legal obligations, responsibilities, protections and benefits that the laws of the State of Illinois grant to legally married couples. However, a Civil Union is not a marriage. Therefore, couples who enter into an Illinois Civil Union are afforded state rights, not federal rights. In addition, an Illinois Civil Union will be recognized by certain states which have reciprocity in their state law.

Although the Illinois Civil Union Act will provide certain benefits, it does not address issues that LGBT individuals and couples face regarding estate planning. Establishing durable powers of attorney for health care and for property are still important tools to assure that your wishes are followed in the event you are unable to make decisions for yourself. Because Civil Unioned couples will not enjoy the tax benefits provided under federal law, careful planning with regard to wills and trusts is necessary to ensure the best protection for your estate and beneficiaries. Therefore, estate planning continues to be an important way for same-sex couples to ensure that partners or union spouses have access to their property and records.

The full text of the Illinois Civil Union Bill can be found here.  With decades of estate planning experience, Kovitz Shifrin Nesbit is well-equipped to help all LGBT individuals with their estate planning needs.

Contributed by William B. Levy

The Deal Killers – Part II

Courtesy of SSDG Interiors

The second part in a series of seven of the most common “deal killing” issues and their warning signs…

Negotiation Issues – The way that a transaction is negotiated can determine how quickly and easily a deal moves to completion and can impact the motivation of the parties involved. Often the best approach is to put everything on the table early in the process. New issues, particularly if they are significant, raised midway through the process can damage the spirit and goodwill of productive negotiations. Of course some new topics for discussion will be raised as a normal progression of the negotiation process.

Also, don’t backtrack on issues that seemingly have been “resolved.”  This can prove counterproductive. Instead identify issues that may need to be revisited. 

Finally, if negotiations on certain issues aren’t progressing well, table negotiations for a time. Don’t allow your competitiveness or ego to cloud your sound business judgment. This may result in a “win-at-all-costs” attitude, which could jeopardize the transaction. 

Security Issues - Since a seller’s long- and short-term financial obligations can be substantial, a buyer wants a certain degree of protection from the seller’s obligations/guarantees. Determining who is responsible for what, and the extent of “protection” given to a buyer can be a delicate negotiating issue. The buyer usually resists assuming full responsibility for these “liabilities” and seeks to set aside money from the purchase price that would offset the seller’s obligations. Likewise when the purchase price is paid in installments or other obligations of the buyer extend over a period of time, the seller strives to obtain the guarantee of a well established and substantial party or collateral to secure the performance of the buyer’s obligations.

Insurance Issues – These issues are closely related to risk issues and most often center on matters of exposure and coverage for both the individuals and companies involved. A potential transaction can break down when there is insufficient coverage to limit the exposure to the buyer or seller. The most critical categories of insurance, depending on the type of business and transaction, include: 

• Property Casualty
• Product liability
• Environmental
• Title
• Errors and omissions
• Malpractice

Professional Services Issues – In today’s complex business world, it is prudent to enlist the assistance of professionals to examine the financial, legal and related merits of most transactions. At the same time, it is important that these professionals understand and accept their roles in the process and avoid becoming significant hurdles in the process. These professionals should not control the transaction or the negotiation process (unless directed to do so), but should be involved in negotiating and structuring the transaction. It is wise to get these individuals involved in the process as early as possible to avoid backtracking on issues that may previously have been resolved.

Not all transactions are meant to happen, and for good reasons. But certainly there are transactions that end up being “killed” because something or someone got in the way.

The key to making sure a transaction moves forward is to:

• Be aware of the most common deal-killing issues
• Recognize warning signs that signal trouble is brewing
• Understand how to handle these issues so that, with a little more time, the transaction can be completed

Contributed by Robert A. Sternberg

The Deal Killers – Part I

Courtesy J. Carbaugh

After spending thousands of dollars and countless hours of time working on a major business acquisition or real estate sale, the deal is dead.

How could this happen after you spent so much thought and time planning out your course of action? You employed accountants, attorneys, brokers and other professionals to help you put the deal together and protect your company’s interests. Yet, after many months of planning, due diligence, negotiation and circulation of several drafts of the proposed definitive contract, you find out that your deal is dead and ready to be buried. What could you have done to prevent this?

Control Issues – Defining and negotiating who will have control after a merger or acquisition can be the greatest stumbling blocks in completing a transaction. In many transactions, the deal is not simply about the money. Rather it may be about control.

When a small, entrepreneurial business is acquired by a bigger business, the small business may not be driven strictly by “the bottom line.” Since small business owners don’t always have to justify the bottom line to shareholders, they are used to having more control when making decisions. In most business transactions where control is involved, it is important to create that proverbial “win-win” situation. Both parties have to be flexible and willing to compromise.

Risk Issues – Every business has inherent risks that may create a certain degree of exposure for a company. As a result, when negotiating the acquisition or disposition of a business, it is important to identify these risks early in the negotiations. Some common risks include:

• Environmental matters
• Pending litigation
• Inventory issues (too much or too little)
• Accounts receivable
• Title matters
• Liens
• Indemnities
• Representations
• Warranties

Tax Issues - Among the most significant financial ramifications of a transaction are the tax consequences to both the buyer and the seller. These issues may in fact be more cumbersome to resolve than determining the price of the asset being sold. While a business or real estate owner may be motivated to sell its assets, it may require flexible terms to avoid significant tax liabilities and penalties.

 Tax issues or consequences that can impact a transaction include: 

• Capital gain to the seller
• Tax treatment by buyer
• Deferral of capital gain
• Allocation of purchase price
• Non-compete agreements
• Employment agreements
• Stock options
• Tax liabilities of the seller

 Contributed by Robert A. Sternberg

Estate Tax Saving Strategies for Single Individuals

Courtesy Alan Cleaver

Under legislation passed in December, 2010, the federal estate tax exemption was increased to $5 million for individuals who pass away in 2011 or 2012.  Traditional estate tax reduction planning strategies have focused on married individuals.  Single individuals can also take advantage of certain strategies:

Make Annual Gifts to Relatives and Loved Ones

The federal gift tax exclusion is currently $13,000.  Making annual gifts up to the annual exclusion amount will reduce the taxable value of your estate without reducing your lifetime $5 million federal gift tax exemption or your $5 million federal estate tax exemption.

Pay School Tuition Expenses (Not Room and Board) or Medical Bills for Relatives and Loved Ones

If your payments are made directly to the school or medical service provider, you can pay unlimited amounts for tuition and medical bills without reducing your $5 million federal gift tax exemption or your $5 million federal estate tax exemption

Gift Appreciating Assets to Relatives and Loved Ones While You Are Still Alive

Under legislation passed in December, 2010, the federal gift tax exemption was increased to $5 million.  You can gift appreciating assets (stocks, real estate, etc. ) without triggering the federal gift tax.  These gifts can be on top of cash gifts to relatives and loved ones that take advantage of the annual exclusion and on top of cash gifts to directly pay school tuition or medical expenses for relatives and loved ones.  Note, however, that gifts in excess of the current $13,000 annual gift tax exclusion reduce your $5 million federal gift tax exemption and your $5 million federal estate tax exemption on a dollar-for-dollar basis.  A significant benefit of gifting appreciating assets is that the future appreciation is kept out of your taxable estate.

Set Up Irrevocable Life Insurance Trust

Life insurance death benefit proceeds are usually federal-income-tax-free.  However, the proceeds from any policy on your own life are included in your estate for federal estate tax purposes if you have any “incidents of ownership” in the policy.  It does not take much to have incidents of ownership.  If you have the power to change beneficiaries, borrow against the policy, cancel it, or select payment options (among other things), you have incidents of ownership.  This unfavorable life insurance ownership rule can cause federal estate tax exposure for many people who believe they have none.

The estate-tax-saving solution is to set up an irrevocable life insurance trust to own the policies on your life.  Since the trust, rather than you, owns the policies, the death benefit proceeds are not counted as part of your estate (unless the estate is named as the policy beneficiary, which would defeat the purpose).  You are still able to direct who gets the insurance money because you get to name the beneficiaries of the irrevocable life insurance trust.

Make Bequests to IRS-Approved Charities

The taxable value of your estate is reduced by donations that the executor of your estate is directed to make to IRS-approved charities.  Of course, increasing charitable donations to avoid the estate tax means leaving less to relatives and loved ones.

Contributed by William B. Levy

Corporation or Limited Liability Company?

Courtesy Earl Wilkerson

I receive a phone call at least once a week from a prospective client telling me they want to form a corporation or a limited liability company (LLC).  This inevitably leads to a conversation about the differences between corporations and LLCs and the differences between S corporations and C corporations from both a legal standpoint and a tax standpoint.

From a legal standpoint, all of these entities provide the owners with limited liability, which means that the owners should not be responsible for the debts, liabilities and obligations of the entity.  However, from a tax standpoint, these entities differ significantly.  S corporations and LLCs are similar in that they are both “pass-through” entities for tax purposes – the income of these companies are passed through to their owners and reported on the owners’ personal income tax returns, thereby eliminating the double taxation incurred by owners of a standard corporation, or C corporation. With a C corporation, the net business income is subject to corporate income tax, and the monies remaining after the corporate income tax are taxed a second time when they are distributed as dividends to its owners who must then pay personal income tax.  There are also significant differences when it comes to employment taxes.

The answer as to which entity is best for you depends on your own unique situation.  If operational ease and flexibility are important to you, an LLC may a good choice. If you are looking to save on employment tax and your situation warrants it, an S corporation could work for you.  Ultimately, we will look at the plans you have for your business, your own personal situation and consult with your CPA to make sure we make the best possible decision for your situation.

At KSN B&E we pride ourselves on collaborating as a team with you and your other trusted advisors.  We would NEVER make the important entity choice decision without consulting with your CPA and together fully exploring all of the alternatives.

Contributed by William B. Levy