Brown & Streza Blog
Author: David Keligian Created: 5/13/2011 10:52 AM
David Keligian, Partner at Brown & Streza LLP
By David Keligian on 5/21/2013 2:28 PM
The end of 2012 was a tumultuous time for estate planning. No one—Congress, planners, or clients—knew anything for certain other than the high estate and gift tax exemption might (and temporarily did) go away at the end of 2012.

Congress and the administration soon agreed that for 2013, both the estate and gift tax exemptions would be “permanently” set at $5,250,000, with inflation adjustments. Some people who rushed into 2012 planning may have thought that the rush was unnecessary. Those who procrastinated breathed a sigh of relief, thinking they could wait to do their planning.

President Obama’s fiscal year 2014 budget illustrates how uncertain the situation remains, and how quickly the rules for estate planning can again change. While budgets represent something of a “wish list” for different types of tax increases, there are several key points about the 2014 budget.

First, President Obama has proposed returning the 2018 estate tax rates to the 2009 levels—estate and gift tax rates...
By David Keligian on 11/9/2012 10:19 AM
The uncertainty about the recent presidential and California elections has vanished and one thing is absolutely clear—taxes are going to be much higher. Unlike the situation two days ago, there is now a very strong possibility that one of the most powerful wealth transfer vehicles will soon be legislated out of existence.

Intentionally defective grantor trusts (or “IDITs”) are among the most powerful estate and gift tax saving strategies in existence. IDITs have been used successfully over the past 20 years. They let you get assets out of your estate, provide asset protection for your children, grandchildren, and great-grandchildren, and allow continuous wealth transfers (by the grantor’s payment of income taxes on the trust’s assets) without further gift taxes. They can be used to pass wealth which will greatly exceed the $1 million gift and estate exemption which will automatically take effect on January 1, 2013.

The problem is that President Obama’s Fiscal Year 2013 revenue proposals included...
By David Keligian on 8/30/2012 11:43 AM
Everyone (especially us at Brown & Streza) is encouraging their wealthy clients to make use of the $5,120,000 per person gift tax exemption which will automatically revert to $1,000,000 at the end of this year. However, some wealthy clients are concerned that even if they have $20 million or $30 million dollars of wealth, gifting $10,240,000 may be too radical a step. They may be concerned about parting with the cash flow generated by the gifted assets.

An excellent solution is an irrevocable gift made by each spouse, in trust to the other. The benefits to this planning, which must be completed before the end of this year, are:

1. First, assuming no “fraudulent conveyance”, the assets in each irrevocable trust enjoy the strongest creditor protection available under California law. 2. Both spouses have made maximum use of available gift tax credits that are probably the highest we’ll ever see. The trusts are drafted so that the gifted assets are excluded from both husband and wife’s estate...
By David Keligian on 8/20/2012 11:25 AM
We get frequent questions about how to avoid California’s high income tax rates by claiming residency in another state. Since California is very aggressive in residency matters, it is important to understand the basic rules determining California residency.

BASIC RULES. There are two basic rules you need to keep in mind if you wish to avoid California tax. The first rule is that a California resident pays California tax on their worldwide income.

For example, if you are a California resident and own part of a Nevada LLC, you will pay California tax on your distributive share of the Nevada LLC’s income, even if that LLC earned all of its income completely outside the state of California.

The second rule is that California will tax California-source income, regardless of where you live. Thus, if you live in Florida but own California real estate, you will still have to pay California tax on the California real estate income.

WHO IS A RESIDENT? California has a very expansive definition...
By David Keligian on 2/27/2012 5:24 PM
One of the most powerful techniques for the transfer of wealth to children and grandchildren is the intentionally defective grantor trust, or “IDIT”. The IDIT offers the following benefits:

• An opportunity to transfer significant wealth by getting assets out of your estate at the cost of little or no gift tax.

• Asset protection for the IDIT beneficiaries.

• Exemption from the generation skipping transfer tax for the IDIT, meaning the transferred wealth can be passed down to grandchildren and great-grandchildren without exposure to additional estate or gift taxes.

• The ability for the grantor to pay all income taxes on the IDITs taxable income. This amounts to an additional wealth transfer to the IDIT beneficiaries each and every year, without any gift taxes.

Unfortunately, President Obama’s fiscal year 2013 revenue proposals (read: “big tax increases”) propose doing away with the IDIT. In the proposal’s words: “The lack of coordination between the income and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences”.

By David Keligian on 2/17/2012 1:15 PM
Businesses that use independent contractors have always been in the crosshairs of federal and state taxing agencies. Taxing agencies are unusually aggressive, because they feel it is easier to collect taxes from the companies who use independent contractors rather than the independent contractors themselves.

Independent contractor audits are again becoming a hot priority for the IRS. The legal rules really haven’t changed, it’s just that the IRS is becoming increasingly aggressive in targeting companies that use independent contractors to raise revenue. The state of California is even worse, because the state rules for independent contractor treatment are even less favorable than the federal rules.

The federal rules incorporate a “safe harbor” that most taxpayers don’t know about. The “safe harbor” is contained in the provisions of the Revenue Act of 1978. There are definite strategies involved in positioning businesses to take advantage of the safe harbor. The safe harbor allows a taxpayer to...
By David Keligian on 1/31/2012 3:55 PM
The IRS recently won a court argument allowing it to summons property transfer records from the California State Board of Equalization. The IRS is searching for unreported taxable gifts. This move, like so many others by the IRS and the Franchise Tax Board, are parts of ongoing attempts to grab the lowest hanging fruit on the tree to bring in more tax revenue.

Especially in Southern California, many parents end up providing assistance to their children with home purchases. They sometimes take joint title to homes to help their children qualify for loans, or take sole title to the home then transfer title to the children at some future point.

Right now, the IRS appears to be looking at people who transferred real property for no consideration to children and grandchildren from January 1, 2005 through December 31, 2010. However, in estate tax audits, we’ve seen auditors go back through all of someone’s recorded property transfers (sometimes for more than 20 years) attempting to find transfers of...
By David Keligian on 10/28/2011 2:38 PM
The $5,120,000 per person gift tax exemption is supposed to last until December 31, 2012. Why use it now if you still have next year? Here are two good reasons.

The first is that given our country’s economic and fiscal situation, the Joint Select Committee on Deficit Reduction, also known as the “Supercommittee”, may reduce the gift tax exemption sooner than 2012. At least half the members of the committee are insisting on tax increases as part of the deficit reduction “solution”. (As one wag put it, where do all the “solutions” go after politicians get elected?)

The Obama administration has not only proposed tax increases in its jobs bill, but is also calling for a return of the estate and gift tax rates and exemptions to their 2009 levels. That means an estate tax exemption of $3,500,000 per person, but a gift tax exemption of only $1,000,000 per person. So it is possible a significant reduction in the current $5,120,000 gift tax exemption could occur sooner than the end of 2012.

By David Keligian on 10/6/2011 10:53 AM
Many politicians have repeatedly talked about the need for “the rich” to pay more income taxes. Even Warren Buffet has joined the debate. Regardless of whether Congress acts, the IRS has already taken matters into its own hands and has started scrutinizing wealthy taxpayers to an unprecedented degree.

The audit rate for taxpayers with an annual income of more than $1,000,000 is already eight times higher than the general population, which had a 1.1% audit rate. For those with $10,000,000 or more in annual income, the audit rate climbs to almost one in five returns—almost 20 times higher than the general population. However, the IRS is planning on increasing audit rates on wealthy taxpayers even more.

The IRS effort involves a new “wealth unit”. Audits will be conducted by a team of IRS agents who will focus not only on a taxpayer’s individual return, but the returns of all related entities. The scope of these audits will be much wider than a typical income tax audit.

For example, the...
By David Keligian on 5/13/2011 11:29 AM
We tax lawyers like to talk about all the creative ways our clients can transfer wealth and save millions in taxes. For transfers of operating businesses (including a real estate portfolio), there are a number of often overlooked business issues.

For example, does the next generation have the management capability to run the business? How will new lines of authority be established? (You can’t have three CEO’s). Does the next generation have the desire to manage the business? What about all the interpersonal dynamics—sibling rivalry, spouses, etc.—that can affect business operations after the founder is gone?

There are also external business issues. How will key customers react if the founder of the business is no longer around? What will the reaction of key employees be? Has the next generation had a chance to establish independent relationships with key employees, or are those personal to the founder? What will the impact of successor management’s relationships with banks and key vendors be?...