By James W. Mallonee
I get calls from time to time about individuals who want to avoid estate taxes and how to do it. The short answer is if you do not have greater than a $10 million dollar estate (a single person) or $20 million dollar estate (a married person) you do not need to be concerned with estate taxes in Florida or with the Federal Government. If you do have greater than the amounts stated then you might be open to learning about IRS Section 2036 tax planning under Florida law.
Generally speaking, upon death, all of a person’s assets are grouped together to form the decedent’s gross estate. It is the gross estate that needs to be reduced to avoid Federal estate taxes. The federal government looks at the estate to see who retains power over such assets as to its control or beneficial enjoyment. For example, if a house on the beach is used by both the decedent and children prior to his or her death, then the control of the residence is suspect and may be included in the decedent’s estate. The reason being that the decedent maintained beneficial enjoyment.
How is the beneficial ownership of the beach property (previously mentioned) removed from the decedent’s estate? In many cases it is by transferring the ownership to an LLC where the decedent had no control over the Company except for decisions involving the maintenance of the property. The decedent cannot have the LLC pay for his or her living expenses while alive, nor can any rental amounts be used to pay the decedent’s spouse or decedent while alive as income. The IRS uses the term “Substantial Present Economic Benefit” which is translated to mean benefiting from the property. Once this test is overcome, then placing the LLC into a trust is the next step.
The decedent must also not have any right to designate interests. For example, if the LLC owner designates that the beach house is to be placed into a trust for the benefit of the children then this is a form of designation interests. Which translates into the decedent designating the individuals who will benefit from the use of the property while in the trust. In addition, the person transferring the property into an LLC should not have any control over who will benefit from any of the rental or sale proceeds earned by the property. In essence, the decedent (while alive) could not have any control or benefit over the LLC.
Generally speaking, if a taxpayer desires to protect LLC assets placed into a trust from IRS scrutiny, the following suggestions are recommended:
1. A well prepared and coordinated LLC operating agreement showing the trust grantor did not retain any control over the LLC or trust instrument.
2. A well-documented control sheet showing trust administration along the lines of the trust agreement and the operating agreement of the LLC.
3. Clearly defined duties and documentation of those duties being carried out.
4. Limitations to the person who transferred the property to the LLC or trust from being able to determine any allocation of income or property to the members of the LLC or trust beneficiaries.
5. Avoidance of any conflicts of interest among the beneficiaries, trustees or members of the LLC.
In short, to take advantage of moving an estate into an LLC and the LLC placed into a trust to avoid scrutiny by the IRS takes careful planning and review on an annual basis. These types of estates require continuous assurance that the decedent had no real interest in the plan once it is set up. In essence, seek out the attorney of your choice and confer with him or her on what it is that you want to accomplish prior to death to avoid IRS scrutiny.
This article is intended for informational use only and is not for purposes of providing legal advice or association of a lawyer – client relationship
Law Offices of James W. Mallonee, P.A.
Port Charlotte
946 Tamiami Trail
Suite 206
Port Charlotte, FL 33953
Phone: 941-206-2223
Fax: 941-206-2224
Venice
871 Venetia Bay Blvd.
Suite 225
Venice, FL 34285
Phone: 941-207-2223