A DST is a structure that sellers can implement to take the “bite” out of a tax bill. Generally, when owners sell their business, a large, one-time tax bill accompanies the sale. An owner is subject to tax because the business sold an asset with a low tax basis, but the asset’s fair market value was much higher. The difference between the fair market value and the tax basis is where tax is applied. For owners who have labored to grow their business, getting stuck with a hefty tax bill may cause them to feel like they are getting the short end of a deal.

Typically, when owners sell their business, the value of the business is greater than its tax basis. A classic example is the stock of a family-owned corporation. If a business owner sells the stock (and this stock likely has a very low tax basis), that same owner will owe capital gains tax on the difference between the purchase price and the tax basis. Despite the owner being taxed at capital gain rates on the asset appreciation, the tax bill could still be a tough pill to swallow. Instead, the selling owner may have saved money if the transaction had been structured differently.

By engaging a DST, an owner sells the business to the irrevocable trust in exchange for a promissory note. Now, the irrevocable trust owns the business, and the owner holds a promissory note payable by the irrevocable trust. Then, the irrevocable trust will sell the business to an end-buyer for cash. With the end-buyer holding the business, the irrevocable trust now has the cash, and the irrevocable trust can pay down the promissory note to the now-former owner. While the irrevocable trust makes payments on the promissory note, the proceeds from the sale are invested, and those investments can generate income to help pay down taxes on the original sale.

A DST structure is a complex arrangement. Before an owner implements a DST, an owner should engage a sophisticated advisor familiar with the tax code, mergers and acquisitions, and estate planning. Without proper implementation, a DST could come under the scrutiny of the IRS. This means that the IRS could challenge the tax deferral of the sale of the business and instead find that the taxes cannot be stretched over a period of years. A skilled advisor, well-versed in structuring these transactions, can help advise owners if preparing for sale with a DST is appropriate for their business.

While a DST is not a panacea for every owner, under the right facts, this structure may provide value to legacy business owners on exit. Because a DST defers taxes while creating an opportunity to invest proceeds, a DST may be the right tool for you to preserve the value on sale.

For more information or to seek counsel from our Mergers & Acquisitions group, please reach out to request a consultation or call us at 216-696-1422.

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*This article was originally authored for publication in Crain’s Cleveland Business. To view this article on the Crain’s website, follow this link.

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Why You (Yes, You) Need an Estate Plan

If you’re over 18 and own anything (a house, a car, a dog, a collection of rocks stashed at your parents’ house), you need some kind of estate plan. Even if you’re not an eccentric billionaire with a secret wine cellar and a yacht named after your college roommate, your loved ones – and your belongings – deserve a plan. Without a will, state law will govern the disposition of your assets. And obvious cynicism aside: your state government might not be great at guessing your intentions.

What’s the best way to combat the inevitable? Planning. Implementing an Estate Plan, which can be changed and updated as often as needed, is a safeguard against the unpredictable.

What’s Actually in an Estate Plan?

A proper estate plan may include the following:

• A Will – The most common instrument
• A Revocable Trust Agreement – My personal favorite and designed primarily to avoid probate and keep your private things, well, private
• A Durable Power of Attorney – To handle financial affairs when you are unable; who pays your bills if you’re in a coma?
• Healthcare Directives/Healthcare Power of Attorney – Who is responsible for making medical decisions on your behalf
• Guardianship Designations – For your kids or a spoiled Pomeranian

But Wait, Let’s Talk Tax!

I wouldn’t be living up to my reputation as a tax attorney if I didn’t somehow bring everything back to tax.  A solid estate plan can help you:

• Use lifetime gifting strategies – Give now, avoid tax later
• Set up irrevocable trusts – Protect assets and reduce taxable estate
• Consider charitable giving vehicles – Do good and lower your tax bill (a win-win!)
• Take advantage of spousal portability – Romantic and tax-efficient

Remember, the IRS is not known for its flexibility or “do-overs.”

“I’m Good, I’ll Just Write Something Down…”

Sure, handwritten notes on a napkin might make for great courtroom drama, but in real life, a Do-It-Yourself Will is often a recipe for disaster (and family feuds, probate delays, and possibly a contract for your next box office hit).

Wills need to follow your state’s specific requirements for drafting, signature, validity, and contents. One misstep and your entire plan could change or be ignored after your death.

How to Get Your Estate Planning Started

Estate planning doesn’t have to be overwhelming. At its core, it’s about protecting the people and things you care about. Finally, a goal we can all agree on!

So, during National Make-A-Will Month, consider this your gentle nudge (or legal guilt trip) to:

• Get your documents in order.
• Talk to an estate planning attorney (hi!).
• Take control of your legacy.

Final Thoughts (Before You Update Your Will)

Recommending an estate plan isn’t novel: everyone knows they should do it, most people avoid it, and those who actually do it feel a lot better afterward. Trust me, even we, as legal professionals, can be guilty of putting off our own estate planning far longer than we should.

Together, let’s make this August the month you finally check “get a will” off your to-do list. Your future self and your loved ones will thank you.

Ready to get started? Reach out – our estate planning group will make it easier (and more fun) than you think.

For more information or to seek counsel from our Trusts & Estates group, please reach out to request a consultation or call us at 216-696-1422. 

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Estate planning is especially important for business owners because it addresses both personal and business assets.  Failing to plan can result in legal obstacles and financial risks for your heirs and business partners.

Proper estate planning protects your business, ensures that your wishes are honored in the event of incapacitation or death, and minimizes tax liabilities.

When addressing your estate plan, consider the following essential elements.

Wills & Trusts

Individuals can utilize both wills and various types of trusts, such as revocable trusts, in transferring business assets. Without a proper estate plan, the probate process can take several months, during which time your business could suffer. A revocable trust allows you to bypass the probate process, ensuring that your business continues to operate without delay. Holding your business interest in a trust helps your heirs avoid likely administrative bottlenecks.

Power of Attorney & Healthcare Directives

A durable financial power of attorney and an advance healthcare directive ensures that a trusted individual will manage your business and personal affairs if you become incapacitated. These documents should be prepared in compliance with Ohio law to ensure enforceability.

Business Succession Plan

Ohio law allows for the seamless transfer of business interests through a well-designed and implemented succession plan. A succession plan specifies who, whether a family member, business partner, or key employee, will take over the business. Without a succession plan, probate courts may step in to determine ownership, which can be both costly and time-consuming. Succession planning ensures business continuity and minimizes the risk of disputes.

Tax Considerations

While Ohio does not impose an estate or inheritance tax, federal estate taxes may apply to estates over the federal exemption limit. Gifting business interests before death or implementing charitable remainder trusts are strategies that may reduce taxable estate size and help preserve wealth. Business owners can ensure their estate plan minimizes federal tax liabilities by working with experienced legal and tax professionals.

As a business owner, taking the time to create or review your estate plan is a critical step to secure your family’s future and to safeguard your business interests. Rest easy during the holiday season by planning early.

To seek counsel from our Trusts & Estates group, please reach out to request a consultation or call us at 216-696-1422.

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Asset Protection

Asset protection is the foundation of financial stability. The purpose of asset protection is to preserve what your business has accumulated. In today’s litigation-happy climate, even LLC membership may not protect you from being named as an individual defendant in a lawsuit.

To begin the process, your trusted advisor will ask you a number of questions that include:

• Existing debts & possible claims
• Personal & business assets
• “Exact ownership” of assets
• Unique facts & circumstances

The ultimate goal is to protect your personal and business assets from individual creditors.

Personal Asset Protection

There are four tools for protecting personal assets from creditors: trusts, retirement accounts/IRAs, and adequate insurance.

Trusts

Trusts come in many forms and can be tailored to fit your needs. This includes gift trusts, revocable trusts for spouses (including prenups), asset protection trusts, inheritances in trust, trusts for the benefit of children, spousal limited access trusts, and trusts for probate avoidance (to prevent claims of creditors at death).

Trusts, like Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts, can be utilized to transfer business assets during life while minimizing gift/estate taxes. These trusts allow appreciating assets to pass to beneficiaries with reduced tax consequences.

Retirement Accounts & IRAs

Retirement accounts and IRAs are powerful tools for asset protection.

ERISA spendthrift protections are included in retirement accounts, which also permit unlimited accumulation free from creditor claims. If possible, they should be limited to the required minimum distributions. On the other hand, retirement IRAs are not ERISA protected, so protection from creditors depends on state law. Self-directed IRAs allow for investments outside the scope of the traditional IRA. In the event of bankruptcy, assets in IRAs and Roth IRAs are protected from creditors, if they do not exceed a certain value.  

Adequate Insurance

Adequate insurance, like D&O and umbrella policies, completes the asset protection strategy.

Business Asset Protection

There are various entity structures to protect from creditors, including LLCs and corporations, which vary depending on your business’s needs. Regardless of entity structure, it is vital to maintain entity formalities, separate assets into different entities (business vs. real estate), and keep personal and business assets separate. Like personal insurance, it’s important to maintain adequate commercial and umbrella insurance coverage – and keep your policy updated after major changes.

Succession Planning

Succession planning is also crucial to the future of your business. First, determine who will take over. Will it be a family member, employee, or an external strategic buyer, customer, or competitor? Then, determine whether the assets or stock of your company will transfer via gift, compensation, or sale. In the event of a sale, it’s important to prepare for the transfer by hiring an advisory team, performing an internal audit, and proactively identifying and addressing potential issues.

Death, Divorce, & Dissolution

All good things eventually come to an end, and when that time comes, it’s crucial to protect your business assets, minimize taxes, and maintain relationships. Well-drafted operating agreements, buy-sell agreements, and trusts are essential to achieving these goals. Without them, default state laws will govern, potentially exposing your business to unnecessary creditor risks, disputes, and public disclosure of records. It’s also important to review your life insurance and installment notes to ensure proper titling and favorable tax treatment.

You’ve worked hard to build your business. Partnering with experienced counsel will aid in its protection.

To seek counsel from our Trusts & Estates group, please reach out to request a consultation or call us at 216-696-1422.

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Facts

Crown C Supply is a closely held corporation owned by two brothers, Michael and Thomas Connelly. Michael owned 77% of the shares, while Thomas owned 23% of the shares. In 2001, the brothers, desiring to maintain control over the corporation in the event either brother died, entered a “redemption” buy-sell arrangement funded with life insurance policies to redeem either owner. The buy-sell agreement granted either brother a right of first refusal in the event the other died, but the failure to exercise this right created an obligation on Crown C Supply to purchase the decedent’s shares. Crown C Supply acquired two life insurance policies, one on the life of each brother to fund the purchase of shares of a deceased shareholder. While the buy-sell agreement provided an appraisal mechanism to value the corporation’s shares at either shareholder’s death, the parties did not follow the terms of the agreement.  Thomas, on behalf of the corporation and also in his capacity as fiduciary of Michael’s estate, agreed on a price of $3 million for Michael’s shares, which was less than the $3.5 million of life insurance proceeds the corporation received.

Michael died in 2013, and under the buy-sell agreement, Thomas declined to exercise his right to buy Michael’s shares, triggering Crown C’s obligation to purchase the shares. The redemption price was to be based on an outside appraisal. Rather than securing the appraisal, Michael’s son and Thomas agreed that the value of Michael’s shares was $3 million. Crown C then used $3 million of the $3.5 million of insurance proceeds to purchase the deceased brother’s shares. Thomas, as executor of Michael’s estate, filed an estate tax return valuing the shares at $3 million.

The IRS challenged the estate’s $3 million valuation of Michael’s shares. The IRS’ position was that the life insurance policies were a corporate asset that increased Crown C Supply’s value prior to the redemption. Connelly’s position was that the buy-sell agreement created an offsetting obligation to purchase the estate’s shares, a net neutral, where the receipt of the life insurance proceeds would be offset by the corresponding obligation. Both the Eastern District of Missouri and 8th Circuit Court of Appeals agreed with the IRS that the life insurance proceeds increased Crown C Supply’s value prior to redemption. The Connellys filed and were granted certiorari by the Supreme Court.

Court’s Decision and Reasoning

The Court framed the issue presented as one of valuation: is life insurance that funds a buy-sell Agreement a corporate asset? Unanimously, the Court said yes. The Court reached this conclusion by reasoning that the redemption was not a liability that reduced corporate value. The Court held that life insurance was a corporate asset since no willing buyer or willing seller would pay a depressed value when Crown C Supply had an influx of cash from life insurance proceeds. Therefore, because the life insurance proceeds were payable to the corporation, the Court held that life insurance proceeds were a corporate asset that increased the corporation value of Crown C Supply.

Consequences of Connelly

It is very common in closely held corporations in order to provide for orderly succession to plan for the death of a shareholder to maintain control within a family or those who are active in the business.  The parties together with the corporation typically enter into a buy/sell agreement to address that contingency with many cases as in Connelly the corporation being obligated to purchase the deceased’s shares through a redemption buy/sell agreement to avoid economic hardship including sale of the businesses or critical operating assets to fund that obligation, life insurance is used as a funding mechanism to address the obligation.

Connelly raises two key issues with life insurance funded by buy/sell agreements: corporations with existing life insurance arrangements, and prospective planning. First, all buy/sell agreements should be reviewed.  Before taking any precipitous action consider if the current agreement is appropriate and if not consider the consequences of the buy/sell agreement.  For example, if businesses transfer life insurance policies, the transfer for value rules may apply to curtail the tax-free receipt of life insurance proceeds. Future arrangements involving life insurance could include a cross-purchase arrangement, or potentially a special purpose life insurance LLC. All these options for existing and future arrangements require intricate planning. Further, while Connelly may seem to have the biggest impact on life insurance funded redemption agreements with individuals who have taxable estates, all closely held businesses with life insurance funded redemption agreements are affected by Connelly.

Consulting with experienced tax and estate planning attorneys will assist you in the development of an effective strategy if life insurance is anticipated to be a funding mechanism in the purchase of a deceased owner’s shares. If you have questions on the implications of Connelly for your business, please reach out to request a consultation with our Wealth Management Team or call us at 216-696-1422.

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Lack of Legal Estate Planning Expertise & Education

One of the primary concerns with DIY estate planning through online services is the absence of experienced legal expertise. Estate planning involves complex legal and tax concepts and varying state-specific laws that can significantly impact the validity and effectiveness of your estate plan. Without proper knowledge, there’s a risk of creating documents that don’t comply with legal requirements or fail to address specific needs, potentially rendering them invalid or subject to legal challenges. Further, you don’t know what you don’t know. Our attorneys are here to help educate you and your family on the consequences of each decision you make as it relates to your plan. That will help you feel confident that your plan is the right one for you.

Failure to Address Individual Circumstances

Estate planning is not a one-size-fits-all process. Everyone’s situation is unique, with different assets, family dynamics, and goals. Online services may provide generic templates that don’t account for your specific circumstances. DIY estate planning often lacks the option for personalization and customization necessary to ensure your wishes are accurately reflected in your estate plan. Neglecting to consider individual factors in your estate plan can lead to unintended consequences or overlooked details that may present significant implications for your beneficiaries.

Inadequate Consideration of Tax Implications

Estate planning involves careful consideration of tax implications, such as transfer taxes, capital gains taxes, and ordinary income taxes. Online services may not provide the necessary guidance to optimize your estate plan in a tax-efficient manner. An estate planning attorney can help you understand the tax consequences of your decisions and implement strategies to minimize tax liabilities, potentially saving your beneficiaries significant amounts of money.

Complex Family Dynamics

Many families have unique dynamics, such as blended families, minor children, or individuals with special needs. These complexities require thoughtful attention and tailored solutions. Online services typically do not offer the level of guidance needed to navigate intricate family situations effectively. Failing to address these unique complexities can result in unintended consequences, disputes, or inadequate provision for vulnerable family members.

Insufficient Ongoing Estate Plan Support & Legal Updates

Estate planning is not a one-time event. It is an ongoing process that should be reviewed periodically to ensure your estate plan remains current and reflects any changes in your circumstances. Additionally, changes in the law should be reflected in your estate plan as well. DIY estate planning through online services often lacks the ongoing support and guidance necessary to keep your estate plan up to date. Not updating your plan in a timely manner can lead to outdated provisions or the unintentional omission of crucial plan elements.

While online services may offer convenience and cost savings, it is essential to recognize the potential risks associated with DIY estate planning. Estate planning involves intricate legal considerations, customization, and ongoing support that online services cannot adequately provide. To ensure your wishes and your unique situation are accurately reflected, your assets are protected, and your loved ones are provided for, it is highly advisable to consult with an experienced estate planning attorney. The expertise and personalized approach of McCarthy Lebit’s Trusts & Estates attorneys will help you navigate the complexities of estate planning and give you peace of mind that your plan is robust, valid, and tailored to your individual needs.

To seek counsel from our Trusts & Estates practice group, please reach out to request a consultation or call us at 216-696-1422.

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You did it! You completed your estate plan. Now that you have your plan in place, is it safe to mentally file it under “things I don’t need to worry about”?

How often should you update your estate plan? Jen Hallos, a Principal in our Trust & Estates and Taxation practice groups, recommends that, outside of certain events, clients should generally review their plan every four to five years. This review should occur more frequently for high-net-worth individuals. But this does not mean you repeat the entire process every handful of years. Having a foundation for your estate plan ensures that most future changes will require minimum attention.

Every several years, Jen sends a summary to her clients that details their current plan. At that time, she lets them know what has changed in the law since the plan was last updated, and she informs them if those changes have affected their plan. Additionally, she inquires about significant life changes that should be reflected in their plan. Some life changes will require more immediate attention than every four to five years.

Examples of life changes that should be reported upon their happening include the birth of a child, a divorce, a notable income event, the death of an individual listed in the plan, or the start of a new business, to name a few. In order to properly protect the assets of the client, these events should be accounted for in a timely manner.

Clients often ask whether an out-of-state move invalidates their Ohio based estate plan. The short answer is no, but Jen suggests that just because relocating doesn’t invalidate the document, doesn’t mean you shouldn’t update your plan. The Full Faith and Credit Act essentially says that states will honor the laws of other states as long as the documents were completed in accordance with the law of the state in which the document was created. However, depending on where the individual moves, an update to their plan could be as simple as adding an amendment that says the document is now governed by the state law of the new residence. Consulting with your attorney regarding your change in address can be beneficial in case there are laws to be aware of in your new state. For example, some states have a state estate tax. Ohio does not have this tax, but the state you are moving to might, and you want to be sure that your plan provides for the managing of that.

Overall, not changing your plan to reflect life events, such as moving out of state or experiencing an income event, will not invalidate the document. However, without updating it, the document may no longer service you in your best interest based on the laws of your new state or in consideration of your new situation.

Please reach out to request a consultation, give us a call at 216-696-1422, or visit Jen’s bio for her contact information to reach out to her directly.

The post Preparing for Certainties in Life (Death & Taxes): Part 3 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Ben Franklin once said, “…nothing can be said to be certain, except death and taxes”, and Jen Hallos, a Principal in our Trust & Estates and Tax Law practice groups, certainly agrees. Planning for the inevitability of both death and taxes is vital in best handling the associated outcomes of these events. Many people push the process of getting their affairs in order to the bottom of their to do list because, from their perspective, death seems like a faraway event. However, Jen advocates that establishing a plan is not solely about planning for what is going to happen to your assets when you die, but it’s a way to preserve and protect your assets during your lifetime, and everyone can benefit from that.

Jen has three main goals for each of her estate planning clients:

1.) Probate Avoidance

We want to avoid the probate process at all costs because it is time consuming, expensive, and emotionally draining. Ohio law requires a probate estate to be open for a minimum of 6 months after the date of death, however, this process can take years, and time means money. Additionally, all details regarding the process, including financial information, become public record. Above all, the process is emotionally exhausting. When a loved one dies, time should be spent mourning the loss, not filing paperwork with the court for months, or even years. Establishing a plan will aid in avoiding this process. If there are minor children involved, the potential complications are exponentially greater.

2.) Asset Protection

The next goal is to protect the assets from outsiders. Proper planning protects the assets both during lifetime and at death for the next generation. Asset protection planning provides protection from creditors (personal and business), divorcing spouses, and sometimes even from the beneficiaries themselves.

3.) Tax Minimization

Jen firmly believes that nobody should pay a penny more to the IRS than they are legally required to do. As part of the planning process, Jen will identify potential ways to save clients money – both in life and at death. And who doesn’t want to benefit from that?

Most of us tend to assume that death is a far-off hypothetical. It is important to remember that death is not an ‘if’, it’s a ‘when’. In case something unexpected happens, the sooner a plan is in place, the better. Ideally, when an individual starts working and accruing assets of their own, they should begin to consider establishing a plan to preserve those assets. This plan becomes more crucial when children come into the picture. In the event of a death, if minor children are left behind, having detailed custody arrangements minimizes the amount of time the family of the deceased needs to spend in court working out those details. Additionally, from a practical standpoint, the planning process is emotionally easier for young and healthy people to tackle, whereas, for elderly or terminally ill clients, planning becomes too real and the emotion of it makes the process difficult.

Jen is here to help clients tackle the emotional, practical, and technical issues that come with estate and tax planning. Like most things in life, proper planning is an investment and not just an investment of time and money, but also an emotional investment for your family.

Please reach out to request a consultation, give us a call at 216-696-1422, or visit Jen’s bio for her contact information to reach out to her directly.

The post Preparing for Certainties in Life (Death & Taxes): Part 2 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

You’re ready to embark on the journey of securing your assets with an estate plan and Jen Hallos, a Principal in our Trust & Estates and Tax Law practice groups, is here to help you along. What does her estate planning process look like?

1.) Information Gathering

Jen will begin by sending you her EPQ (Estate Planning Questionnaire). This form asks for basic information like names, dates of birth, addresses, names of children, etc. The form also asks for financial information. Gathering this information allows for a more efficient introductory meeting.

2.) Introductory Meeting

You will then meet with Jen for an educational and informative introductory meeting. Using the information provided in the EPQ, she will provide her recommendations and explain the reasoning for them. She will outline the decisions the client needs to make such as who is going to serve in the various roles of the client’s plan. Such roles include executors, trustees, guardians, and powers of attorney. Jen explains what these roles mean and makes recommendations for who may be the best fit for each.

3.) Summary of Information, Objectives, and Deliverables

After your meeting, she will follow up with a letter summarizing your discussion as well as outlining the decisions that need to be made.

4.) Estate Plan Document Drafting

Once the client provides Jen with their decisions, Jen and her team begin the drafting process. She then provides copies of the drafts along with an easy-to-understand summary of the same.

5.) Finalization

Jen and the client then meet to review the documents in detail. Once approved, the documents are signed.

Jen often receives client feedback expressing how glad they are to have gotten their estate planning checked off their to do list. Now that you have the foundation set, any adjustments to be made in the future won’t require repeating the process all over again. Moving forward, Jen will check in with you every four to five years to review the contents of your plan and adjust as necessary.

It is important to note that you should report life events, as they happen, to your attorney. Examples of notable life events include the birth of a child or the start of a new business. Keeping your plan up to date to include these changes will ensure that your plan serves you in your best interest.

To help you prepare these documents, protect you and your family, and begin the estate planning process, please reach out to request a consultation, give us a call at 216-696-1422, or visit Jen’s bio for her contact information to reach out to her directly.

The post Preparing for Certainties in Life (Death & Taxes): Part 1 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

As to personal income taxes, effective after December 31, 2021, the BBBA proposes increasing the top marginal rate to 39.6% for individuals making $400,000 per year and married couples making $450,000 per year.  Additionally, a 3% surtax would be imposed on those with a modified AGI above $5 million or $2.5 million for married individuals filing separately.  This rate increase impacts trusts and estates at $100,000.  Essentially, this is a tax increase on the wealthiest of Americans.

Additionally, the long-term capital gains rate would increase under the Build Back Better Act to 25% (from its current rate of 20%) for those taxpayers in the highest ordinary income tax bracket.  This is currently proposed to impact capital asset sales occurring after September 13, 2021, subject to some limited exceptions, so timing year-end transactions may be tricky.  The September 13 date, however, may be a moving target as the bill continues to work through the legislative process.  Historically, the capital gains rate changes follow the date of the law’s enactment, which most likely will be the case for the BBBA.

For trusts and estates, the BBBA seeks to reduce the existing gift and estate tax exemption by more than fifty percent (50%).  The new exemption would be $5 million per person, subject to inflation indexing, resulting in an estimated final figure of $6.02M per person for 2022.  The GST exemption will likewise be reduced.  President Biden originally contemplated eliminating the step up in basis at death, but that proposal seems to have been sidelined for now.

Grantor trusts created after the BBBA is enacted, and gifts made to existing grantor trusts after the law’s enactment, may see a change as well.  Gifts made under these circumstances may be subject to inclusion in the grantor’s gross estate, thereby defeating a common estate tax management strategy.  Additionally, distributions from the trusts to anyone besides the grantor would be deemed taxable gifts under the BBBA.  Finally, sales between the trust and its owner would be considered third-party sales, with any loss disallowed, unless the trust is fully revocable, at least as to trusts created after the law’s enactment.  These are potentially significant changes to the historical tax benefits associated with grantor trusts.

The Build Back Better Act also proposes changes for IRAs.  Individual taxpayers with an AGI above $400,000 ($450,000 for married filing joint taxpayers) would no longer be permitted to contribute to their IRAs, unless it’s a SEP or SIMPLE IRA.  This rule kicks in when the total value of all defined contribution accounts and IRAs is greater than $10 million for the taxpayer.  Also, any taxpayer in this situation would be mandated to take a required minimum distribution (“RMD”) of 50% of the excess value over a $10 million threshold in their traditional retirement accounts with another RMD for the entire amount over $20 million held in a Roth IRA.  This means that IRAs will be subject to drainage under the BBBA, resulting in increased taxes for the Treasury.

Corporations will be impacted by the BBBA as well.  Corporate entities will likely see an increase to the flat tax rate granted under the Tax Cuts and Jobs Act of 2017 (“TCJA”).  Non-corporate entities may see the TCJA’s Section 199A pass-through deduction limited by the BBBA, perhaps to a maximum allowable amount of only $500,000 for those married filing joint or $400,000 for individual returns.

There are other very specific changes to the tax law being discussed in the legislature that may occur in the final passages of the Build Back Better Act.  But again, it has a long way to go before it becomes law, and it remains subject to many hurdles and ongoing political negotiation. As our clients and friends, we ask that you remain calm and patient, and above all else, stay in touch with your legal and financial advisors. We’re here to help you and we will help you create the optimal plan for your situation. Please reach out to request a consultation or call us at 216-696-1422 to discuss your specific situation and being your year-end planning.

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