From groundbreaking court cases to revamped state legislation, the past several months have already seen some major changes in estate planning and business law. In Brian M. Douglas’ latest blog, we’re looking at four recent developments and how they could affect you, your family, or your business.
Adoption of the Uniform Trust Code
The creation and management of trusts can differ from state to state. The Uniform Trust Code (UTC) promotes consistency in estate planning and attempts to provide guidance on common trust questions. However, the UTC is not binding – states must choose to adopt it, and often, they do so with their own modifications.
As of January 2020, more than 30 states and the District of Columbia have adopted a version of the UTC, with Illinois and Connecticut among the most recent adopters. Illinois adopted the UTC largely as-is but made some specific changes to trust reporting requirements, the process for modifying a noncharitable irrevocable trust, and the trustee exculpation clause (which limits trustee liability). Connecticut’s version of the UTC includes guidance on directed trusts, domestic asset protection trusts, and the rule against perpetuities (which limits the length of ownership). Connecticut’s new law may make the state a more popular venue for the creation of trusts. Also, as more states adopt the UTC, it puts added pressure on Georgia to adopt its own version of the law.
State Taxation of Trusts
The case N.C. Dep’t of Revenue v. Kaestner 1992 Family Trust (2019) deals with the taxation of trust income. North Carolina has a law in place that allows the state to tax residents who receive money from a trust. Between the tax years 2005 and 2008, North Carolina assessed more than $1.3M in taxes against the Kaestner family, because the beneficiaries of the trust lived within the state. However, the beneficiaries did not receive any income during those years, and they did not control any of the trust funds.
The U.S. Supreme Court found that North Carolina’s application of its beneficiary residency tax law violated the Due Process Clause of the Fourteenth Amendment. (The Due Process clause acts as a safeguard against the arbitrary denial of liberty and property). The Court did not rule on whether the law itself was valid. It did, however, suggest that settlors (the person creating the trust) should weigh the benefits of the trust arrangement against the future taxation of the trust’s beneficiaries. In other words, think twice before you create a trust, if the state is going to tax the trust income.
IRS Guidance on Trust and Business Law
IRS financial regulations are complex and often easy to misinterpret. That’s why it was helpful for the IRS to recently publish some clarification on its Code Section 199A as it relates to trust and business law. The IRS shared insights about the anti-abuse rule concerning multiple trusts; if two or more trusts share the same grantor, purpose, and beneficiaries, the IRS will treat them as one single trust for tax purposes.
The IRS also offered clarity on the calculation of qualified business income (QBI) and deductions for self-employed health insurance, self-employment tax, and contributions to qualified retirement plans. This new guidance, plus additional insight on W2 wage and aggregation rules, will help business owners with their future financial and tax planning.
Fair Workweek Laws
Fair workweek legislation, sometimes referred to as predictive scheduling laws, require certain large companies to provide predictable work schedules, compensation for last-minute schedule changes, and an appropriate amount of rest between shifts. These laws typically apply to retail and food companies that employ several hundreds of people or more. Over the past couple of years, large cities such as New York, Chicago, and Philadelphia have passed fair workweek legislation. States including Connecticut, Massachusetts, and Washington have considered the law, and a federal Schedules That Work Act has been introduced during the last two Congressional sessions. The federal proposal also calls for the protection of those who work in the cleaning, hospitality, and warehouse industries.
Currently, Georgia has a law in place which stipulates that local governments cannot create or adopt a minimum wage law “requiring additional pay to employees based on schedule changes.” However, a stable schedule and predictable paychecks will continue to be important issues for families dealing with the impact of the coronavirus on the workforce. If the U.S. government passes legislation or if Georgia overturns its law, it may require Georgia business owners to make significant changes in operations and human resources.
Valuation of Pass-Through Entities
A pass-through entity is a business that is structured so that it is not taxed both at the corporate level and at the investor/owner level. Any income “passes through” to the investors/owners, who are then taxed on their individual income. Partnerships and limited liability companies are two examples of a pass-through entity. When valuing these pass-through companies, tax-affecting valuation involves an analysis of the company’s corporate earnings plus a discount factor based on public company data. In other words, pass-through entities are taxed differently from other corporations.
Traditionally, the IRS has opposed the use of tax-affecting valuation, but in the recent cases Kress v. U.S. and Estate of Jones v. Commissioner, the courts allowed it. What does this mean for business owners? For those who need to value their partnership or LLC (ex: for purchase, sale, division), it’s a good idea to work with an appraiser who is familiar with tax-affecting and pass-through entities. You want to make sure the numbers are updated and accurate.
Have Additional Questions? Contact Brian M. Douglas & Associates
Understanding these developments in estate planning and business law will help you close out 2020 successfully. If you have any questions about these updates, or if you would like to schedule a consultation with us, please reach out at (770) 933-9009.