Category: Succession Planning

As we approach the fourth quarter of 2023, clients will start receiving end-of-year checklists from their financial advisors, CPAs, and attorneys. One item we strongly recommend be added to these lists, which may require the coordination of all a client’s team of advisors, is Annual Exclusion Gifting.

Annual Exclusion Gifting is a small, but powerful, tool that should be part of a client’s “legacy building” tool belt. For 2023, an individual can gift up to $17,000 to as many different people they want while not eating in to their Estate & Gift Tax Exemption Amount. This is essentially a “freebie” gifting option that expires at the end of each year. Utilized over a long period of time with appreciable assets, this strategy can move millions of dollars worth of assets through to the next generation without even touching a client’s Gift Tax Exemption Amount.

By way of example, consider a family of 5 (mother, father, and 3 young children). Each year, the parents can gift a combined $102,000 to their children using the Annual Exclusion. If the parents do this each year for 40 years, over $4M can be passed using this technique outside of the estate and gift tax system while still leaving the parents with their full Estate & Gift Tax Exemption Amount, untouched. Furthermore, all future appreciation on those gifts also pass gift and estate tax free as well. When families grow and grandbabies arrive, even more can be used to shift generational wealth through this technique.

When implementing Annul Exclusion Gifting, it is important to plan with your team of advisors and select the proper vehicles to use for gifting (SLATs, Family Limited Partnerships with Voting/Non-Voting Units, Children’s Trusts, etc.) and target appreciable assets that will grow over time. Here at Stewart Law, we’d love the opportunity work with your advisors and help plan and grow your family’s legacy through these techniques.

 

About the Author

John J. Long, Jr.,  JD
Partner

Critical to the success and smooth administration of any estate plan is proper funding and allocation of assets.  Generally this means making sure that each account, vehicle, parcel of real property, or any other asset is titled in such a way (or has a beneficiary designation) such that the asset will pass as the owner intends with as little delay, cost, and general harangue as possible.

Ensuring that title to real property parcels is proper most often requires transferring real property – into tenancy by the entirety with a spouse, jointly with another owner, or into a trust, limited liability company, or other entity.  Transferring real property in North Carolina takes place by execution and recordation of a deed.

When deeds are drafted, signed before a notary public, and recorded in the Register of Deeds of the County in which the property lies, it becomes a public record.  Certain unscrupulous predators will scrape the public records, either the Register of Deeds or the County Tax Assessor, to look for recent transfers of property.  These malicious actors then use the information on those deeds, namely the mailing address of either the grantor or the grantee (transferor and transferee of the property, respectively) to send mailings or even phishing emails in an attempt to create victims of the parties to the transfer.

Whenever you transfer real property, be on the lookout for unusual correspondence claiming there has been a problem with the transfer or related insurance matters.  Often, the scammer will send correspondence that appears to be from a legitimate government agency claiming that action needs to be taken to avoid some dire consequence.  If you receive a letter stating that you must pay a service fee for your deed, do not pay it without independent verification – it could be a scam.

These mailings often feature language such as a claim that the letter is a “Recorded Deed Notice.”  The letter may look like an invoice and include a document number or recording identification number – and it may even be correct!  Remember that these scammers have used legitimate government records to try and spoof government communication.  The letters will also generally include a “respond by” or other due date, often with a short time horizon, in an attempt to create pressure.  Other accurate details about the property, including address, parcel number and date of recordation, purchase, or transfer, often make the letters appear official. Sometimes, you may see in fine print a disclaimer that the mailing is not a bill from a government agency and there is no obligation to pay unless you want to purchase a property assessment profile.  The Register of Deeds, or the attorney or title agent assisting you, should return a recorded copy of the deed to you free of charge.  When you retain our firm to prepare and record deeds, we will provide a copy of the recorded deed as soon as we receive it back from the Register of Deeds.

About the Author

S. Blaydes Moore, JD
Attorney

Two of our attorneys attended the 44^th Annual Estate Planning and Fiduciary Law meeting at Kiawah Island, South Carolina in July.

Here are 3 takeaways to consider in your own estate planning:

Living Probate.
We almost universally hear from our clients who are parents how important it is to them that their children “get along well” after their deaths. There’s no question that putting wealth on the table can jeopardize this. If you think this may present a special concern in your family, then know that there are some solid legal solutions. “Living probate” is a procedure where a court determines the validity of your Will before you die, not after. Thus, any disputes are known by you and can be addressed by you. In North Carolina this procedure is now available for both Wills and Revocable Trusts.

Income Tax Minimization in Trusts.
There are tradeoffs in the ways that Trusts can be used to minimize estate taxes while in some cases increasing income taxes for beneficiaries. Especially while the estate tax exemption is high, so that estate taxes are less of a concern in many cases, it’s important to know that there are features that can potentially be added to some older trusts that will reduce the income tax burden on those who will next benefit from the Trust. Example: when your father died, he set up a Trust for your mother who is still alive and receiving income from it. Consider in this case whether the Trust could be better positioned for income tax minimization for the next generation.

Federal reporting for closely-held entities. 
The Corporate Transparency Act passed in 2021 will require most small business entities, such as corporations and LLCs, to report their beneficial owners to U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). Generally, unless the company is a bank or insurance company or employs more than 20 full-time employees, then it will have to report all of its beneficial owners to FinCEN. “Beneficial owners” in this case means individual persons, not entities. Existing entities will have a year from January 1, 2024 to report. New companies formed after January 1, 2024 will need to file the report within 30 days of formation. We’ll be communicating more with our clients in the coming months on this topic and best practices to comply with the rule.

If you wish to discuss your Estate Plan, whether for updates or creating a new one, please contact Stewart Law and ask to speak with one of our attorneys.

About the Author

Todd A. Stewart, CPA, JD
Managing Partner

Now that summer is here, many of us are taking vacations, looking into purchasing our dream vacation home, or visiting our own vacation home.

From a wealth planning standpoint, a first question is: “How should my vacation home be titled?”  To answer this, we want to consider some key goals you probably have including:

1. Protecting the property’s equity in case of lawsuits against the owner(s) of the home
2. Avoiding unnecessary court proceedings, like probate
3. If the home will be rented, protecting the owner(s) against liability arising from its use by others
4. State-specific rules, in particular we see questions about qualifying for the best property tax rates and avoiding unnecessary deed transfer fees

Vacation Homes that are 100% Personal Use.

For married couples who own a North Carolina vacation home, all four of the above objectives can often be covered by holding the property in the names of both spouses, joint with right of survivorship (also referred to as Tenants by the Entirety.)   For couples who wish to take an additional step and avoid court supervision even in the case of simultaneous death, we can help them title the property into their Revocable Living Trusts.  Some states, however, like South Carolina, do not give the same protection to jointly held marital real estate.  In these cases, we look to Trusts to help achieve some or all of these goals.  Where a Trust is the right answer, our firm can often assist by preparing a simple deed transferring the property to your Trust.

An advantage of having your vacation home titled to your Trust is that its subsequent transfer at your passing will avoid probate and streamline your beneficiaries’ access to that property at your death.  Even if you have a relatively simple estate, probate can eat up time and resources that not only delay your loved ones’ receipt of your assets but can also add significant stress in settling your estate.  Typically, if you own a vacation home, there are additional probate proceedings that must be completed in the county of the vacation property in addition to the probate proceeding in the county of your primary residence.  This can become a costly endeavor which can be avoided with relatively straightforward planning on the front end.

Vacation Homes that are NOT 100% Personal Use.

Do you rent your vacation home when you aren’t using it?  If so, we suggest forming a limited liability company (“LLC”) to own your home and operate that rental property.  This helps protect your personal assets from liability arising from the rental of that property (e.g., slip and fall, unsafe condition, etc.).  If a well-structured LLC is in place, the person suing can generally only go after the assets held in the LLC, and not the other personal assets held in your name.

There can be tax benefits to holding the vacation rental property in an LLC as well.  An LLC is normally treated as a pass-through entity for tax purposes, which means that profits and losses flow through to each member of the LLC, usually based on the percentage of ownership.  Members of the LLC then report income or loss on their individual income tax returns and pay taxes based on their personal income tax rate (rather than corporate tax rates).

Another advantage of the LLC is that LLC members can easily transfer their ownership interest by simply giving some percentage of their interest in the LLC to their heirs (either during lifetime or at their death).  In this case, the transfer documents are completed within the LLC and not through a deed transfer or filings with the Secretary of State.  This can be a convenient way to facilitate annual gifting to children or grandchildren where that is desired.

If you wish to discuss the title to your currently held vacation property or what options might fit for your vacation rental property, please contact Stewart Law and ask to speak with one of our attorneys.

About the Author

Hillary E. Mims
NC State Bar Certified Paralegal

Crafting an estate plan is oftentimes like piecing together a complex puzzle.  There are 3 main categories of assets that have to align perfectly to ensure an estate plan is working as a client intends.

The first group of assets is jointly owned assets with rights of survivorship. These assets pass automatically to the surviving joint owner upon the death of the first owner.

The second group is beneficiary designation assets. Typically, these assets include retirement plans, annuities, and life insurance policies. They pass exclusively to the named beneficiary(ies) listed on those plans or policies.

The last group is assets titled individually in a client’s name that do not have beneficiary designations. These assets are governed by and pass through a detailed Will or Revocable Living Trust.

Unless these 3 groups are carefully coordinated with one another, a client’s assets might not necessarily go as they intend upon their death. Some common mistakes we encounter in our estate/trust administration practice are: (1) parents that name only one child as a joint account owner (typically in order to help them pay bills and manage finances), which results in that account passing exclusively to that child to the exclusion of other children, and (2) “stale” beneficiary designations – designations that name people no longer intended as beneficiaries by the client that haven’t been updated in years or even decades.

Here at Stewart Law, we take pride in our work as “planners” of our clients’ estates. Our clients walk away from their signing conference with detailed recommendations to align their jointly-held and beneficiary designation assets with their new estate plans. They leave with the full, clear, and complete picture of the puzzle that is their estate plan.

About the Author

John J. Long, Jr., JD 
Partner

Mistakenly classifying an employee as an independent contractor can result in significant fines and penalties.  The U. S. Supreme Court indicated, on a number of occasions, that there is no single rule or test for determining whether an individual is an independent contractor or an employee. Instead, the Court holds that the total activity or situation controls which label best fits – and which set of rules apply.  The primary factors which the Court considers significant are:

• The extent to which the services rendered are an integral part of the principal’s or employer’s business;
• The permanency of the relationship;
• The amount of the alleged contractor’s investment in facilities and equipment;
• The nature and degree of control by the principal or employer;
• The alleged contractor’s opportunities for profit and loss;
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
• The degree of independent business organization and operation.

Other factors are immaterial in determining whether there is an employee relationship or a contractor relationship, despite how dispositive they may seem:

• Where work is performed;
• The time or mode of pay;
• Whether the worker receives an IRS Form 1099 or an IRS Form W-2;
• Whether there is a formal employment (or contractor) agreement; and
• Whether an alleged independent contractor is licensed by state or local government.

None of these are considered to bear on whether there is an employment relationship.

Additionally, the IRS states that it is the control that the principal or employer has over the worker which is the determinative issue.  The IRS provides guidelines on whether an employer has sufficient control over a worker to consider that worker an employee.  Though these rules are intended only as a guide – the IRS says the importance of each factor depends on the individual circumstances – they can be helpful in determining whether the principal or employer wields enough control to show an employer-employee relationship.

If you are considering creating a business with an expectation of bringing on help, or if you own a closely-held business and are looking to expand, please give contact us.  Our office can review employment or independent contractor agreements or assist you with crafting the right agreement for your situation or business.

About the Author

S. Blaydes Moore, JD
Associate Attorney