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.

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.

However, now the IRS will treat the income earned by California registered domestic partners as community property income for federal income tax purposes.   This means that each partner must report to the IRS one half of the total income earned between the two partners, not just his or her separate income.   While this does not change the format in which the domestic partners must file their California state taxes, it may have significant federal tax benefits for partners with very disparate incomes.

Furthermore, the two main areas of the federal transfer tax system affecting registered domestic partnerships—gift taxes and estate taxes—could also change.   Due to the federal government’s disallowance of a marital deduction between domestic partners, domestic partners’ ability to use many commonplace estate planning vehicles was stymied.  For example, because of an unlimited marital deduction, heterosexual married couples avoid gift taxes when they transmute their separate property into community property.  However, this ease is not available to domestic partners.   By a strict reading of the code provisions, any lifetime transfer or payment by one same sex domestic partner to the other, above the annual exclusion (currently at $13,000), would be a taxable transfer.  Also, any transfer at death by a same sex partner would be subject to estate tax without an offsetting deduction.

Now, the logical next step would be for the IRS to expand its policy to these types of transfers with regard to domestic partnerships.  In such a case, transfers of community property assets from one partner to another will not be considered taxable transfers (like in a marriage).

For now, however, the ruling only applies to income earned.   In other words, if domestic partners have been keeping separate bank accounts to avoid the threat of taxation lest the funds be mingled, this will not be necessary any longer.  Partners now have more freedom to transfer half of earnings during the partnership to the other partner without the fear that they will be considered a taxable transfer.  The decision is a significant step for domestic partners, but still only applies to future earnings and those since 2007.   Also, significant ambiguity persists regarding how the ruling will affect gay couples who married in California when it was legal to do so but did not register as domestic partners.

The Janssen Law Firm encourages domestic partners in Humboldt County to keep abreast of the changes to these tax laws.   A good attorney is essential for sorting out the current laws and planning the best strategies for you, your family, and your estate plan.

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.

A provision of 2008’s Filing Fees legislation has significantly increased the number of probate filing fees for many probate proceedings.

This legislature has significantly reduced the number of exemptions for papers filed by personal representatives after issuance of letters.   Government Code Section 70658(a) now applies to fourteen specific petitions, including filings relating to allowance of compensation, settlement of accounts, sale or exchange of estate property, and preliminary and final distributions.   The legislation increased the filing fees for these and other papers filed after the issuance of letters from $180 to $355.

This legislation is in response to the Court of Appeal decision in Estate of Claeyssens, 161 Cal.App.4^th 465, 74 Cal.Rptr.3d 304 (2008).  This case invalidated the graduated probate filing fee as a violation of Proposition 6. Proposition 6 repealed the inheritance tax in 1982.

The costs of administering a probate (exclusive of executor fees and attorney fees) may now exceed the cost of a revocable trust.

If you have questions regarding how you can avoid probate, please contact our Estate Planning Department.

Estate planners (and their clients) would like to know what Congress is going to do with the Federal estate tax exemption.   For 2009, the estate tax applicable exclusion is $3.5 million ($7 million per married couple).   The estate tax rate is 45%.

As we near the end of a 10-year piece of legislation, if Congress does not act, there will be no estate tax in 2010 and the Federal estate tax exemption will be $1 million ($2 million per married couple) in 2011.

A recent budget proposal of President Obama and the House of Representatives would extend the current $3.5 million exemption and 45% estate tax rate.   In a narrow vote, the Senate passed an amendment to its version of the budget resolution that would increase the estate tax applicable exclusion amount to $5 million ($10 million per married couple).   It’s believed the Senate version of the budget resolution is not likely to be successful because it is not supported by the Democratic leadership.   Also, it is estimated that it would increase deficits by $91 billion in the first 10 years when compared with the cost of the President’s proposal. Tax Policy Center Table.

If you have questions regarding planning your estate to minimize the effect of estate taxes,  please contact our estate planning department.