—For Couples Only— ALL ABOUT TENANCY BY THE ENTIRETIES How to Use It – How to Lose It Alan S. Gassman, J.D., LL.M. Thursday, July 28, 2011 5:30 p.m. [email protected]Additional materials available at: www.gassmanresourcecenter.com/ previously.recorded.webinars.html
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—For Couples Only— ALL ABOUT TENANCY BY THE ENTIRETIES How to Use It – How to Lose It Alan S. Gassman, J.D., LL.M. Thursday, July 28, 2011 5:30 p.m. [email protected].
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—For Couples Only—ALL ABOUT TENANCYBY THE ENTIRETIESHow to Use It – How to
Lose ItAlan S. Gassman, J.D., LL.M.Thursday, July 28, 2011
To order a copy of the book please visit BNA Tax & Accounting at:http://www.bna.com/estate-tax-planning-2011-2012/
Introduction• Tenancy by the Entireties TBE• TBE “immunity” & English Common Law• Hold property as an indivisible unit• Joint tenant presumed to have an equal share that is
severable by either spouse• Not divisible on behalf of one spouse alone• Creditors owed monies by both spouses have access
to TBE property• Recognized (at least to some extent) by: Florida,
Arkansas, Delaware, Michigan, Pennsylvania, Rhode Island, Washington, D.C., Missouri, Tennessee, Hawaii & Vermont
• If spouse lives outside of Florida, treatment subject to law of where the other spouse resides
Joint Accounts• Beal Bank, SSB v. Almand and Associates
– Florida Supreme Court: “What has been termed a morass in the common law… We hope to bring greater predictability and uniformity to the common law governing accounts held at financial institutions and to eliminate the confusion that has arisen from our prior decisions.” … “Not only must the form of the estate be consistent with entireties requirements, but the intention of the parties must be proven.”
– The burden will be on the creditor to prove by a preponderance of evidence that a tenancy by the entireties is not createdClients should be careful in simultaneouslyestablishing TBE accounts and labeling them as
8 COMMON LLC PLANNING ERRORSBy: Alan S. Gassman, J.D., LL.M.
Steve Leimberg's Asset Protection Planning Email Newsletter - Archive Message #83Date: 16-May-06 From: Steve Leimberg's Asset Protection Planning Newsletter Subject: 8 Common LLC Planning Errors Alan Gassman of Gassman, Bates & Associates in Clearwater Florida is a frequent LISI contributor. Alan is on the Board of Advisors of the Research Institute of America, Journal of Asset Protection.
Alan warns LISI members of 8 common asset protection planning mistakes made when setting up and running LLCs.
EXECUTIVE SUMMARY:
Limited liability companies are quite often the entity of choice for investment and business holdings.
Problems can arise, however, where structuring does not take important risks and federal and state law requirements into account.
FACTS:
Some of the most common problems we encounter in reviewing LLC arrangements for clients are:
1. TENANCY BY THE ENTIRETIES" DESIGNATION THAT WILL NOT QUALIFY AS TENANCY BY THE ENTIRETIES. Many married couples in states that protect tenancy by the entireties assets from the creditors of one spouse or the other have their LLC interests titled jointly as tenants by the entireties. But they don't realize that there are provisions in the operative documents which are inconsistent and would thus annul tenancy by the entireties characterization and protection..
Common examples of this are:
(a) By the rules of tenancy by the entireties, the joint interest must pass outright solely by the surviving spouse in the event of the death of the surviving spouse. Oftentimes an operational document will provide that on the death of a member, the interest of that member must be sold. Agreements are commonly not drafted to explicitly provide that on the death of a spouse, the other spouse will be the owner of the joint interests, without any inconsistent member agreement provisions.
(b) Similarly, provisions under an operative document which restrict transfers may actually be read to prevent one spouse from owning the entire member interest on the death of another spouse. (c) While the certificate of ownership may be issued to both spouses as tenants by the entireties, oftentimes the Operating Agreements or Articles of Organization will provide for only one spouse or the other to be an owner. 2. ENTITY DOCUMENTS CAN DISQUALIFY S ELECTION. Limited liability companies may be treated as S Corporations under the federal income tax law if certain very strict requirements are met and an S election is made. If the S election is made but the S Corporation requirements are not met, then the company will be taxed as a "C Corporation," therefore exposing properties and income to double tax.
Common causes of this catastrophic treatment are as follows:(a) An operating agreement does not provide for all income to be distributed pro rata to ownership. Commonly "partnership style" clauses assure members that they will recapture their original investment or have some sort of an income sharing that would reflect a "second class of stock," which is not permitted under the S Corporation Rules. (b) Although state law permits a limited liability company to have non-citizens, corporations, and other entities own LLC interests, these and certain other entities are not permitted owners of S Corporation stock, and will thus cause disqualification. (c) Too high of a debt equity ratio could cause disqualification from S Corporation status.
Stock Certificates• Cacciatore v. Fisherman’s Wharf Realty Ltd.
Partnership, 2002– Presumption of TBE extends to shares of stock
held in certificate form titled in the joint names of spouses
• What if the choices are: Tenants By The Entireties Joint With Right of Survivorship Other
• In re Matthews, 2009• The choices were:
Individual Tenants in Common Other Joint Tenants with Rights of Survivorship Uniform Gift to Minor
• Ownership of entities often reflected for federal and state tax reporting purposes– Often inadvertent inconsistencies– Ex. IRS instruction: TBE owners of a
partnership interest should receive 2 separate K-1 forms.
• No harm in issuing a single K-1 form to the spouses as TBE, and listing one of their SSNs, particularly where the spouses file a joint return
• In re Kossow: A federal tax refund resulting from a joint tax return would be considered TBE property, unless affirmatively disclaimed as such by the spouses
• If state does not recognize TBE, ownership of real property should be converted to an intangible asset so Florida law applies– Most States (including Georgia, Colorado and
Washington) do not recognize TBE– Some States recognize TBE, but don’t provide “full
protection” for those assets (Alaska, Tennessee)– Some states recognize TBE law (Delaware, North
Carolina) and in these states the creditors of one spouse cannot touch TBE property owned by the other spouse
• Make sure organizational documents are consistent with the law of TBE
to a By-Pass trust to benefit surviving spouse – Not subject to federal estate tax on their
estate– Present allowance is $1,000,000
• IRS regulations allow surviving tenant to disclaim survivorship interest in joint tenancy property if certain steps are followed and in compliance with state and tax rules
• You can ask an independent agent who writes for many carriers to have the client take the physical so that they can get quotes from several carriers.
• You can ask that all results and quotes be confidential and not given to the bureau that all carriers belong to and share information with. Once a carrier turns the client down or "rates" the client all other carriers know.
• This is called an "informal application" and then the carriers can each give informal quotes for term coverage. If the client likes the quote then he or she can buy it.
• You might spread this among 2 or 3 carriers in case one goes under. • Sample term rates for "preferred", "standard" and "standard smoker"
individuals at ages 35, 40, 45, 50 and 55 are as follows:
Determining Best How To Allocate Assets As Between A Married CouplePart I
General Rules:-Typically want each trust funded with at least $3,500,000 worth of assets on death for estate tax planning.- May be funded from ½ of tenancy by the entireties assets via disclaimer and probate or by life insurance/pension/IRA assets.
Husband WifeTrustee other than Husband or Wife
Wife could be Trustee if Husband is sole grantor
(or vice versa)
Husband’s
Revocable Trust
Protected life insurance and annuity contracts “owned by the insured.”
Wife’s Revocable Trust
Gifting Trust
(Irrevocable)
Lifetime By-Pass Trust
(Irrevocable)TBE
(Tenancy by the Entireties)
1. Assets held directly by revocable trust are subject to husband’s creditor claims.
2. Direct ownership of limited partnership or LLC not in TBE may have charging order protection (meaning that if a creditor obtains a lien on the limited partnership or LLC, the husband cannot receive monies from the limited partnership or LLC without the creditor being paid).
1. Only exposed to creditors if both spouses owe the creditor or if one spouse dies and the surviving spouse has a creditor, the spouses divorce, or state law or the state of residence changes.
2. On death of one spouse, surviving spouse may disclaim up to ½ (if no creditor is pursuing the deceased spouse) to fund By-Pass Trust on first death.
1. Safe from creditors of husband but exposed to creditors of wife (Maintain large umbrella liability insurance coverage to protect these assets.)
2. On wife’s death, can be held under a protective trust, which will continue to be safe from creditors of husband and subsequent spouses and “future new family”
1. Safe from creditors of both spouses.
2. If divorce occurs, should not be subject to rules for division of property between spouses.
3. May be controlled by the “entrepreneurial spouse” by using a Family Limited Partnership.
1. Safe from the creditors of the Grantor’s spouse.
2. If funded by one spouse, may benefit other spouse and children during the lifetime of both spouses.
3. Otherwise can be identical to gifting trust pictured to the left.
SEE NEXT PAGE FOR SECOND TIER PLANNINGA COMMON SOLUTION - to use a limited partnership or similar mechanisms and have no assets directly in the “high risk” spouse’s trust, half to two-thirds of the assets held as tenants by the entireties, and half to two-thirds of the assets directly in the “low risk” spouse’s trust.
A COMMON SOLUTION - to use a limited partnership or similar mechanisms and have no assets directly in the “high risk” spouse’s trust, half to two-thirds of the assets held as tenants by the entireties, and half to two-thirds of the assets directly in the “low risk” spouse’s trust.
Determining Best How To Allocate Assets As Between A Married CouplePart II
Subsidiary Entity Techniques:-Limited partnerships can be used to facilitate discounts, for estate tax purposes, and for charging order protection.-Limited partnerships and LLCs can also be used to provide “firewall protection” from activities or properties owned.
Husband WifeTrustee other than Husband or Wife
Wife could be Trustee if Husband is sole grantor
(or vice versa)
Husband’s
Revocable Trust
Wife’s Revocable Trust
Gifting Trust
(Irrevocable)
Lifetime By-Pass Trust
(Irrevocable)
TBE(Tenancy by the
Entireties)
1. Assets held directly by revocable trust are subject to husband’s creditor claims.
2. Direct ownership of limited partnership or LLC not in TBE may have charging order protection (meaning that if a creditor obtains a lien on the limited partnership or LLC, the husband cannot receive monies from the limited partnership or LLC without the creditor being paid).
1. Only exposed to creditors if both spouses owe the creditor or if one spouse dies and the surviving spouse has a creditor, the spouses divorce, or state law or the state of residence changes.
2. On death of one spouse, surviving spouse may disclaim up to ½ (if no creditor is pursuing the deceased spouse) to fund By-Pass Trust on first death.
1. Safe from creditors of husband but exposed to creditors of wife (Maintain large umbrella liability insurance coverage to protect these assets.)
2. On wife’s death, can be held under a protective trust, which will continue to be safe from creditors of husband and subsequent spouses and “future new family”
1. Safe from creditors of both spouses.
2. If divorce occurs, should not be subject to rules for division of property between spouses.
3. May be controlled by the “entrepreneurial spouse” by using a Family Limited Partnership.
1. Safe from the creditors of the Grantor’s spouse.
2. If funded by one spouse, may benefit other spouse and children during the lifetime of both spouses.
3. Otherwise can be identical to gifting trust pictured to the left.
TO: CLIENTS AND ADVISORSDATE: JUNE 3, 2011RE: CHARGING ORDER REPAIR BILL SIGNED BY GOVERNOR******************************************************************************
Concerns over the Florida LLC charging order law have been resolved in favor of multiple member LLCs and their owners.
On Tuesday, Governor Scott signed the new bill which took into account the Florida Supreme Court Olmstead case, which will no longer be pertinent for multiple member LLCs.
It will still be important that LLC Operating Agreements and other documents be appropriately worded and structured.
Single member LLCs will not have charging order protection.
Our 18 page article on the new law and matters associated therewith will appear in the LISI financial advisor system shortly, but if you would like an advance copy, please let us know.
By way of background, Charging order protection means that upon receiving a judgement against an LLC member a creditor cannot take over part ownership or take assets out of the LLC, but is instead limited to being paid as and when the LLC makes distributions, with the LLC not having any obligation to make any distributions at any time.
Last summer, the Florida Supreme Court held in the case of Olmstead v. Federal Trade Commission that a charging order was not the sole remedy for a judgment creditor of the sole member of a single member LLC. The Court’s reasoning also indicated that charging order protection may not apply for multiple-member LLCs.
The new legislation makes it clear that charging order protection will apply in a properly structured multiple-member LLC situation. The legislation is retroactive to the initial passing of the LLC statute in the 1990s. Single member LLCs will not be accorded any substantial treatment, although the new legislation provides that a creditor of a single member LLC owner will not be able to seize assets or control of the LLC if the Court is convinced that the creditor will be paid in full within a reasonable time.
It is important to note that an improperly drafted or structured multiple-member LLC arrangement may not qualify for charging order protection. Many LLC members and managers may, therefore, want to have their LLC operating agreements reviewed to be certain that the legislative fix will be beneficial to them.
BiographyAlan S. Gassman is an attorney practicing in Clearwater, Florida with the firm of Gassman Law Associates, P.A. Mr. Gassman’s primary practice focus over the past 26 years has been the representation of high net worth individuals, physicians and business owners in estate planning, taxation, and business and personal asset structuring. Mr. Gassman speaks often for national and state sponsored continuing education programs and publishes several articles each year in publications such as such as BNA, Estates and Trusts Magazine, Estate Planning Magazine, The Florida Bar Journal, Leimberg Estate Planning Network (LISI), and Medical Economics, and has presented dozens of Webinars for professionals on a variety of topics.
Mr. Gassman has a law degree and a Masters of Law degree (LL.M.) in Taxation from the University of Florida, and a business degree from Rollins College. He is board certified by the Florida Bar Association in Estate Planning and Trust Law, has the Accredited Estate Planner designation for the National Association of Estate Planners & Councils, has been and is a commentator for the Leimberg LISI Estate Planning Network, past President of the Pinellas County Estate Planning Counsel, and co-chair and lecturer for two annual Florida Bar Tax Section conferences (Wealth Conservation and Physician Representation). Mr. Gassman holds a prestigious AV rating from his peers on the Martindale Hubbell attorney listing.
Mr. Gassman can be contacted at [email protected], or by phone at 727-442-1200. The Gassman Law Associates, P.A. website is www.gassmanlaw.com.