The IRS will treat any “loan” with a below market interest rate (below the AFR) as a gift of the foregone interest from the lender to the borrower.  The amount of the foregone interest will be treated as though it was transferred from the lender to the borrower as a gift and retransferred from the borrower to lender as income on the last day of the calendar year.

How may this apply to the purchase of your Humboldt County business by your beneficiaries?

In making it easier for beneficiaries to purchase a business or other asset, owners often have unknowingly charged a below market interest rate to the beneficiary.  If the purchase comes to the attention of the IRS, the owner will be required to recognize the foregone interest as income and will be assessed interest and penalties on that amount.

However, the AFR is at a historically low level so the purchase of your business by your beneficiaries can be at interest rates that are more affordable to the beneficiary.   Coupling this low interest rate with the depressed values of many assets in today’s market, it is easier for a business owner to transfer a business or other asset to his/her beneficiaries at a cost and on terms more affordable to the beneficiary while still maintaining some stream of income to the owner.

You should plan for the succession to your business over a long period.   Primary concerns include determining your children’s interest in the business and their ability to run a business.

You may want to transfer an interest in the business during your lifetime.  This strategy may be particularly useful if you believe your business is substantially undervalued at the time of your transfer.

If retaining control of the business is an issue, you may want to consider a buy-sell agreement to address who will be allowed to receive shares in the business.

If you would like any assistance in developing a succession plan for your business, please contact us.

1.  Revocable Transfer on Death Deed (TOD). In Assembly Bill 699, the Assembly made another attempt to allow for the transfer of real property at death by the pre-death executing and recording of a deed. This is at least the fourth attempt by the Legislature to provide this opportunity for owners to transfer their property at death by way of a deed recorded prior to death. This estate planning tool could be very effective for persons whose primary asset is their family residence. This could eliminate the need for these persons to incur the expense of a revocable trust in order to avoid a probate upon  death.  Concerns that that this type of deed would be procured by fraud or undue influence have apparently kept the Legislature from providing this type of estate planning tool in its previous attempts.

2.  Small Estate Administration. The Legislature is proposing an increase in the maximum values for transferring small estates without administration. In Assembly Bill 1305, the Legislature has voted to increase the size of an estate that can be collected by affidavit from $100,000 to $150,000. (The Assembly version of this bill increased the amount to $200,000.)

The Bill also increases the size of an estate that can be transferred by court order from $100,000 to $150,000 and has increased the maximum value of real property that can be transferred by affidavit from $20,000 to $50,000.

If these Bills are passed and enacted, they would be of particular benefit in lowering the cost of administering small estates.

For those of you in Humboldt, Mendocino and Del Norte Counties who own family businesses, take heart.  A new study finds that by dealing with these family issues, a family business may have a significant competitive advantage over a non-family business.

In an article in Trusts & Estates (April 2011), under Family Businesses, entitled “Is Blood Thicker Than Water?”, the author reports that a family business’ special competitive weapon is its family culture.  The family culture can open communication, streamline decision making and create an environment with strong standards and values.

In this article, the author, David Thayne Leibell, a partner in the Stamford, Connecticut and New York offices of Wiggin & Dana, LLP, writes that stewards in family businesses are often motivated to serve organizational interests and as a result receive intrinsic satisfaction when the businesses  advance and succeed. Mr. Leibell cites a recent study published in the November 2010 issue of Entrepreneurship: Theory and Practice (Volume 34, Issue 6, pages 1,093-1116), “Is Blood Thicker Than Water?, A Study Of Stewardship Perception in Family Businesses”, by James H. Davis, Mather R. Allen and H. Davis Hayes.  In applying the concept of “stewardship” which emphasis that leaders should serve a greater good, rather than themselves, the study finds that in the case of family businesses, the greater good is the collective good of the family and the business. (Trust and Estates, April 2011, Family Businesses “Is Blood Thicker Than Water?”, page 12-14.)

So for those of you in family businesses, be it in Eureka, Arcata, Fortuna or other cities of Northern California, while you are considering which family member or members will ultimately own and manage the business, or how to provide for family members who may not be active in the business, take a moment, and recognize that being in a family business may give you an advantage: family owners and family employees are usually more willing than non-family owners and employees to work harder for the business because it is good for the family.

This legislation gave tax payers a 2-year income tax reprieve by extending into 2011 and 2012 the lower income tax rates and many of the other tax incentives that were enacted in 2001 and 2003. These were commonly called the Bush Tax Cuts.

In 2013:

• The highest federal tax rate on investment income (interest, rent) will increase from 35% to 43.4%
• The highest federal tax rate for wages will increase from 36.4% to 41.9%.
• The highest federal tax rate on dividends will increase from 15% to 43.4%.
• The highest federal tax rate on long term capital gains will increase from 15% to 23.8% in 2013.

In 2013, a new health care tax of .09% will apply to individuals who have over $200,000 of income ($250,000 on a joint return).

For federal income taxes, the lowest marginal tax rate will be increased from 10% to 15%.

For 2011, most workers will experience a 2% pay increase because of a temporary reduction of social security and self-employment taxes. The 6.2% rate that an employee pays on the first $106,800 of earned income will be cut to 4.2%, although employers must continue to pay the full matching 6.2% payroll tax. Self-employed individuals will also experience a tax cut from 12.4% to 10.4%. In 2012, the rate will return to 6.2%.

1.         What is the price and how was the price determined?  Is the price based on the seller’s opinion?  Is the price based on the opinion of a business valuation expert or accountant, and, if not,  should one be hired or consulted regarding the sales price?

In determining the sales price, you should also consider whether the price will be paid in cash and/or property, and,  if the payment is to be made over time, what assurances, if any, can be given to the seller that the payments will be made.

2.         Is the buyer going to assume all the seller’s liabilities including contingent or unknown liabilities, or will these liabilities remain as the seller’s responsibilities?

3.         Is the seller going to indemnify the buyer for any misrepresentations made in the transaction?  If the seller is going to indemnify the buyer, will there be a time limit to be applied for any claims and/or will the indemnity be limited to a certain dollar amount?

Other matters to consider include:

A.         Is the retention of the seller’s employees material to the agreement?

B.         Is there a need for noncompetition agreements with the seller(s)?

C.         Are there any pending or threatened litigation, claims or tax audits?

D.         Are there any relevant environmental issues or licensing issues?

So if you are thinking of buying a business anywhere in Humboldt County – be it in the Eureka, Arcata or Fortuna areas – these are a summary of significant issues that need to be considered before you enter into the transaction.  The Janssen Law Firm has an experienced business department that can assist you with questions you may have.

The income included on a decedent’s final return is generally determined in the same manner as if the individual were still alive, except that the taxable period ends on the date of death.

Please also note that if you are a fiduciary of a decedent’s estate, trust or bankruptcy estate, you must also file a tax return (Form 1041) if the estate has a gross income of $600 or more during a tax year.  A trust income tax return must also be filed if the trust has any taxable income for the year or gross income of $600 or more.   If one or more of the beneficiaries of a trust or estate is a non-resident alien individual, the personal representative must file Form 1041, even if the gross income of the estate is less than $600.   For tax years beginning in 2010, the requirement to file a return for a bankruptcy estate applies if the gross income is at least $9,350.

If you live in Humboldt County, Del Norte County, Trinity County, or Mendocino County, and have a question regarding the income taxation of trusts, estates and beneficiaries, please contact us at the Janssen Law Firm so that we can assist you in these matters.

If so, do you have a Buy-Sell Agreement that provides for the transfer of your ownership interest if you die, retire, become disabled, or want to sell your interest in the business?

The purpose of a Buy-Sell Agreement is to provide for an orderly transition of ownership interest on the occurrence of any number of events.  In addition to those events mentioned above, a Buy-Sell Agreement can also be important when an owner files for bankruptcy, loses a required license or is voluntarily or involuntarily terminated from his or her employment in the business.

Typically, a Buy-Sell Agreement controls the circumstances under which an owner may sell his or her interest, who is a permitted buyer, and how the price paid will be determined.  A well drafted agreement will anticipate potential conflicts that may create an issue in the operation of the business when an owner desires or is forced to sell his or her interest in the business.

The Buy-Sell Agreement benefits the business and its owners by allowing the remaining owners to determine with whom they will work and share control of the business; preventing outsiders or heirs, whose interests may conflict with those of the remaining owners of the business, from obtaining an ownership interest; insuring the continuation of management and control by the remaining owners;  and providing for the orderly transfer of the owners’ interests in the event of death, disability, retirement or other forced or voluntary withdrawal.

A Buy-Sell Agreement can also create a market for the shares of the deceased, retiring, or withdrawing owner, and it can generate cash to pay for estate taxes and estate settlement costs.

The attorneys of the Janssen Law Firm are experienced in assisting clients in the preparation of these types of agreements, as well as providing advice with most issues that present themselves to small business owners.   If you need legal assistance in preparing a Buy-Sell Agreement, or in any other aspect of your business, please contact us

An elder is defined as any person residing in California who is 65 years of age or older.   A dependent adult is anyone residing in California between the ages of 18 and 64, whose physical or mental limitations restrict his or her ability to carry out normal activities or to protect his or her rights.  This includes, but is not limited to, persons whose physical or developmental disabilities have diminished because of age.

Elderly and dependent adults are vulnerable for many reasons.

Persons or entities most likely to commit financial elder abuse may include agents under durable powers of attorney, conservators, representative payees, long term care providers such as nursing homes, and other persons or entities that provide services to the elderly.

Generally, financial abuse occurs when a person or an entity takes or assists in taking or retaining the real or personal property of an elder or dependent adult for a wrongful purpose or use.

Financial abuse cases usually consist of one or more questionable transactions regarding property that at one time belonged to the elder or dependent adult.   In these transactions, a caregiver, relative, or other person in whom the elder or dependent adult person has placed trust improperly obtains ownership of the person’s property.

If you know of a relative or a friend who has been a victim of elder abuse, including financial elder abuse, we suggest that you have them contact us.

As of January 1, 2010, a significant change occurred in the conversion rules for Roth Individual Retirement Accounts. The $100,000 adjusted gross income limit that has prevented many individuals from converting a traditional IRA to a Roth IRA has been lifted enabling all individuals to take advantage of conversion without any income or filing status limits.

Taxpayers are now able to convert their traditional IRA (and funds that have been rolled from a qualified plan) to a Roth IRA, regardless of their income or filing status.  Prior to 2010, only individuals with adjusted gross income of $100,000 or less could convert amounts of their traditional IRA to a Roth IRA.   In addition, the tax on the taxable income generated from a conversion from a traditional IRA to a Roth IRA may be deferred until 2011 and 2012.

A Roth IRA offers a number of benefits, including some that are not available with a traditional IRA.

There is tax-free growth.  Once your money is invested in a Roth IRA and the related taxes are paid, the money in the account grows tax free if certain conditions are met.

There are tax free withdrawals.  If you keep the assets in a Roth IRA for at least five years and wait until you are 59 ½ or older to make withdrawals, your distributions from a Roth IRA are tax free.

There are no required minimum distributions.   With a Roth IRA, since there are no required minimum distributions you do not have to take mandatory withdrawals.   This means you can grow your total account value over a longer period of time, which could result in more significant retirement savings.

If a conversion to a Roth IRA sounds like it might work for you, it is recommended that you consult with your financial advisor to see if a conversion is appropriate for you.