In this issue, we continue our series on business exit planning by examining some frequently used charitable planning tools and some common pitfalls.

Tools for Business Exit Planning Involving Charitable Giving
Three tools involving charities are typically used in business exit planning: charitable remainder trusts, gift annuities and charitable lead trusts.

A charitable remainder trust (CRT) is a tax-exempt trust. It is primarily an income tax planning tool with some estate and gift tax benefits. With a CRT, the appreciation in assets can be realized without immediate gain recognition tax-free, a stream of payments created for the donor and a deferred benefit provided to a charity. An income tax deduction, gift tax deduction or estate tax deduction is based on the remainder value that passes or is projected to pass to charity at the end of the trust term. Certain private foundation rules apply, which can be problematic.

A gift annuity is essentially a bargain sale in which the consideration paid by the charity is in the form of annuity payments. Code Section 72 specifies how the income is categorized; i.e., how much is return of principal and how much is ordinary income. Code Section 1011 specifies how gains are recognized, for example if the gift annuity is funded by contribution of appreciated assets. Code Section 415 limits payments to one or two persons. Private foundation rules do not apply to gift annuities.

A charitable lead trust (CLT) is the opposite of a charitable remainder trust in that the income stream is paid to charity with the remainder going to private individuals. A CLT is primarily an estate or gift tax tool. If it is set up as a grantor trust, it can also provide some income tax benefits. Unlike a CRT, a CLT is not a tax-exempt trust. Some private foundation rules apply to CLTs.

Business Succession Pitfalls
When trying to do charitable planning in conjunction with business exit planning, there are three potential pitfalls: having the transaction treated as a prearranged sale, the unrelated business taxable income (UBTI) rules, and the rule against self-dealing, which is one of the private foundation rules.

Prearranged Sales
Most business owners want a high degree of control, especially when it comes to selling their business. Often they will want to negotiate the sale, execute a binding sale contract, and then transfer the property subject to the sale obligation. That will not work because it violates the prearranged sale rule. Violating that rule means that the IRS will treat the donation as but one step in a unified transaction. Revenue Ruling 78-197 provides:

[The IRS] will treat proceeds of a redemption of stock…as income to the donor only if the donee (charity) is legally bound or compelled by the corporation to surrender the shares for redemption.

(Emphasis added.) Under Rev. Rul. 78-197, the key then is whether the charity (or the Trustee of the CRT or CLT) is obligated to sell the donated property to the buyer that the donor has identified.

If the donor violates the prearranged sale rule, the sale proceeds will be income to the donor and the donor will not avoid recognizing the capital gains on the sale.

Planning Tip: The donor can identify and let potential buyers know that the business is for sale and even negotiate a sale price as long as the charity or Trustee is not obligated to go through with that sale.

Unrelated Business Taxable Income (UBTI)
All tax-exempt organizations and charitable trusts are subject to tax on UBTI. UBTI is income from a trade or business that is owned and regularly carried on by a charity or charitable trust that is not substantially related to the tax-exempt function of the charity.

Exceptions include dividends, interest, annuities, royalties, certain rents from real and personal property and capital gains – unless they are derived from debt-financed property.

Income from debt-financed property is UBTI regardless of whether the organization is actually engaged in a trade or business. Debt-financed property is any property held to produce income and with respect to which there is acquisition indebtedness. Acquisition indebtedness generally means indebtedness incurred when acquiring or improving the property.

A charity has acquisition indebtedness when it acquires property (by a gift or purchase) that is subject to debt or borrows against the property to make improvements. Property is considered “debt-financed” even when the charity or trust acquires the property “subject to” the debt.

There are, however, a couple of exceptions:

• An organization will not recognize UBTI solely because the property is debt-financed property for 10 years after receipt if the transfer occurs because of the donor’s death.
• Lifetime gifts are not considered “debt financed” if three conditions are met: the organization does not assume the debt, the donor had owned the property for more than five years at the time of the contribution, and the debt had existed on the property for more than five years at the time of the contribution.

The Income Tax Impact of UBTI
A charity, including one with gift annuities, must pay tax on all of the UBTI it receives.

For CRTs, any UBTI is confiscated through a 100% excise tax. (The rule used to be different – that if a CRT received any UBTI in a year, all of its income for that year was treated as UBTI.)

For CLTs, when it makes a distribution of the unitrust or annuity amount to the charity, it takes a 100% deduction. However, if the CLT has UBTI, this deduction drops to 50% if paid to a public charity and to 0% if paid to a private foundation.

Self-Dealing
Code Section 4941 lists six specific acts of self-dealing for a private foundation:

1. The sale, exchange or leasing of property between a disqualified person and the foundation, regardless of the size of the transaction;
2. Loans of money or any other extension of credit between a disqualified person and the foundation;
3. The furnishings of goods, services or facilities between a disqualified person and the foundation;
4. The payment of compensation or reimbursement of expenses by the foundation to a disqualified person;
5. The transfer of income or an asset from the foundation to a disqualified person for the disqualified person’s use or benefit; and
6. An agreement by the foundation to pay a government official, other than an agreement to employ the official for any period after the termination of his government service, if the official terminates his government service within a 90-day period.

Disqualified persons (also defined in Section 4941) are the donor; the trustee; family members (which include the grantor’s spouse, ancestors, children, grandchildren, great-grandchildren and the spouses of these individuals); and controlled business organizations (those in which 35% or more of the ownership interest is controlled by disqualified persons).

The tax code makes the private foundation self-dealing rules applicable to CRTs and CLTs. This essentially prohibits all transactions between a CRT or CLT and the donor (and the donor’s family) and any business in which the donor and his family have a 35% or greater ownership interest.

Planning Tip: Charities are not disqualified persons, so the remainder charity could purchase something from the trust and that would not cause a self-dealing problem.

Planning Tip: Self-dealing does not apply to transactions involving gift annuities that are maintained only by public charities. This makes gift annuities an important planning tool in business succession planning.

Conclusion
Incorporating charitable planning tools in business exit planning provides unique opportunities for the business owner who is already interested in charitable giving, as well as providing excellent opportunities for the professional advisors to work together.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances

A good estate plan helps you to organize your life around the things that are the most important to you. It is about protecting your assets, providing security for your family and helping you to accumulate wealth toward your retirement. It is about providing for your children when they are young and beyond, providing for you and your spouse during health, in retirement and during any years that you may need care.  Those are things we all need, even if we don’t yet have a lot of property.

So the answer to the Question of “Who Really Needs An Estate Plan?” is Everyone!

Wills.  A simple estate plan might involve just a simple Will.  A Will is a legal document that tells those you leave behind who you want to take care of your children, who you want to be your conservator if you become unable to take care of yourself and who you want to receive your property on death.

Probate.  In general most people know that Probate is public and expensive, and something to be avoided.  Many have the misconception that if they have a Will, they can avoid probate.  That is not true. In fact a Will only becomes effective on death and it has to be probated to be effective.  So if a will doesn’t avoid probate what does?

Trusts. A Trust avoids probate so long as it is funded. While a Will is only effective on death, most Trusts are effective when they are set up and funded.  They are effective now, not later on death and if properly established can avoid probate, but even Trusts have their problems.  One of the biggest mistakes I see with Trusts is that they are often not funded and a trust is only effective for property that is in the Trust.

The lesson is really that a Trust and the estate plan that it is a part of are not static; they are in fact dynamic and should be monitored annually to make sure that all the property they are to control is in fact placed in them and also to make sure that there has not been any changes in the lives of the Trustors (the ones who set up the trust).  Since a good plan aligns with the family needs, goals and objectives, it must be adjusted as the goals and objectives of the family change and as the laws change.

Trusts are workhorses.  They manage not only the property of the Trustors, but they designate who is going to be on your “team” if anything happens to you.  For example, statistically if you are a 40 year old male, the risk of a disability of 90 or more days before you turn 65 is 43%.[i] Such disability may also include a loss of capacity, or the ability to make decisions on your own behalf.  Having a clear set of instructions in place in the event that happens and having someone to immediately step in and take over until you recover, is very important.  A revocable living Trust can do just that.

Health.

An estate plan includes a whole list of documents, some of the most important of which are your health related documents.  Where a Trust governs who makes property decisions for you in the event your are unable to do so for yourself, you must have an Advanced Health Care Directive (California) or a medical power of attorney and HIPPA waivers, to appoint a medical agent to direct your treatment and care if you are not able to do so yourself.

Summary.

Those are just some of the basic elements in a foundational estate plan.  Beyond the basics there are many more advanced issues involving minimizing transfer and income taxes, charitable planning and gifting, private foundations, family business structures, and assuring that the legacy of your life (including your property, your values, your beliefs, etc.) are preserved and passed on to your chosen heirs.

[i] Statistics Provided by New York Life; www.newyorklife.com.

I recently read an interesting book called Clear Your Clutter With Feng Shui[ii].  The basic concept is that “clutter” drains you of good energy and creates a kind of low stagnant and confusing energy that can negatively influence or even completely block the flow of events in specific areas of your life.

Now I know talk about energy, qi and the like are not necessarily an everyday part of business speak here in the West, and I am not trying to make them so, but merely to draw some interesting observations and apply some of these principles to make business operations more effective.

From personal experience I have observed that clearing away physical clutter has an amazing freeing effect on the mind.

I have also observed that businesses frequently become bogged down with their own sort of clutter, such as unresolved issues, outdated systems that don’t work that well, mixed messages, day to day struggles, operating and delivery problems, tax disputes, employee disputes, customer complaints, partner friction, family friction, a loss of focus and direction, a loss of purpose, poor business structures, lack of effective long term planning, etc. and the list goes on and on.

All of these unresolved and broken elements are business clutter and they can drain the very energy from a business, its owners and its employees.

Part of the process that I use with businesses, involves identifying, and clearing away such business clutter. I recommend this to all business owners as a first important step. By refocusing and realigning the business, its legal structures and legal vehicles around the core objectives, purpose and goals of the owners, and by getting rid of distractions and obstacles an amazing resurgence often occurs.  With clarity, focus and direction and a clearing away of the “clutter” it is much easier to make better and more successful choices.  Do yourself a favor and start clearing away your business clutter.

[ii] By7 Karen Kingston

In this issue, we will examine a case study of how you can benefit from selling non-voting stock in a closely held business to a specific type of “grantor” dynasty trust.

Our Case Study
The Facts: Harry the husband, age 62, is married to Wilma the wife, age 58. This is a second marriage for both of them. They have no prenuptial agreement and no estate plan. Steve, who is Harry’s son, is actively involved in Harry’s business. Wilma’s daughter Dottie is unemployed and not involved in Harry’s business, which Wilma and Dottie resent. Harry and Wilma have one joint child, Mark, who is a minor and is also not involved in Harry’s business. Neither Harry nor Wilma has used any of their $1,000,000 lifetime gift tax exemption.

Harry owns 100% of a business that is an S-corporation. It is very successful and has a current fair market value of $10 million. It also has significant cash flow and high growth potential. Harry’s desire (which Steve shares) is for Steve to own and continue the business after Harry retires or dies.

There are significant other assets in the estate, including their home and other investments. Some are owned jointly by Harry and Wilma, and some are owned solely by Harry.

Under the probate laws of the state in which they live, if Harry dies intestate Wilma will receive half interest in each of Harry’s assets and Steve and Mark will each receive a one quarter interest in each of them. As a result, Wilma, as Mark’s guardian, will end up controlling 75% of the business while Steve will only control 25%. In addition, assuming Harry does not die in 2010, there will be a potentially huge estate tax liability. This is not what Harry wants to happen.

Harry’s Goals and Objectives: After meeting with his team of advisors, Harry has defined his goals and objectives as:

1. To have a comprehensive plan that will ensure ownership of the business will pass to his son Steve. (Steve also wants the security of knowing the business will one day become his.)
2. To be in control of the timing of the transfer of the business.
3. To treat his stepdaughter and his younger son fairly.
4. To have enough cash flow for now and to provide for Wilma if he dies first.
5. To save estate taxes.

Harry also understands that Steve does not have the cash to buy the business from him.

To meet Harry’s goals and objectives, here is the plan his advisors recommend and why:

Phase 1: Reorganize and Recapitalize the S-Corporation
In a tax-free reorganization, convert the S-corporation to a limited liability company taxed as an S-corporation with voting and non-voting common units.

Harry owns all of the 1,000 outstanding shares of the company. They are all voting shares. After the reorganization and issue of voting and non-voting membership units, Harry still owns 100% of the business, only now it is 10 LLC membership units (1%) that are voting and 990 (99%) that are non-voting. Why reorganization of the S-corporation into an LLC is part of the plan will be explained later.

Phase 2: Create Dynasty Trusts
Establish an irrevocable trust for each child that is designed so that its income is taxable to Harry and make initial contributions to the trust.

Harry creates three irrevocable grantor trusts, one for each child, in a jurisdiction that permits perpetual private trusts. The trusts are all “grantor” trusts for income tax purposes, but not for estate and gift tax purposes. These are known as Irrevocable Deemed Owned Trusts (IDOTs). Some call them Intentionally Defective Grantor Trusts (IDGTs).

Planning Tip: It is possible (and an excellent idea) to design the IDOTs so that their income being taxed to Harry can be stopped if that becomes desirable later.

Harry makes a $600,000 cash gift to the trust established for Steve. This is a taxable gift that must be reported on a Federal gift tax return (IRS Form 709). However, no gift tax will be due because $600,000 of Harry’s $1 million lifetime gift tax exclusion will be used to shelter the gift from taxation.

Harry will also allocate $600,000 of his generation skipping transfer tax exclusion to Steve’s trust. Steve’s trust will therefore have a zero inclusion ratio (i.e., have a 0% tax rate) for generation skipping transfer tax purposes.

Planning Tip: In 2010, because the generation skipping transfer tax is suspended, this allocation cannot be made. Therefore, consider making late GST exemption allocations in 2011 when the GST returns, if Congress amends the tax code to permit doing so. Alternatively, delay implementing Phase 2 until 2011.

When Harry and Wilma make gifts to the trusts for Dottie and Mark, they do the same kind of allocations.

This trust structure provides a huge benefit to their descendants because the trusts’ assets will never be included in their descendants’ estates for estate tax purposes.

Phase 3: Sell Non-Voting Membership Units to Steve’s Trust for an Installment Note
To give Steve ultimate ownership of Harry’s business, start by selling all of the non-voting membership units to the dynasty trust for Steve.

To make a private sale or gift between family members of something valuable that does not have a known value, the IRS requires that a qualified valuation expert determine its fair market value. When what is sold or given away is an interest in a business, there are two steps to the valuation. First, the balance sheet assets owned by the business (real estate, specialized equipment, inventory, etc.) are valued. Then a business evaluation is performed to determine whether and to what extent the value of the assets underlying an interest in the business needs to be adjusted for lack of control over the business and lack of marketability of the membership interests.

The reason that the S-corporation was reorganized into an LLC taxed as an S-corporation is that limitations on the transferability of a business interest are disregarded in the valuation if they are greater than the default provisions of the state law that govern the business. The default provision for corporations is that there is no limitation on transferability. On the other hand, some states’ default provision on LLC membership transfer is that all members must consent.

When the adjustments for lack of control and lack of liquidity are made to non-voting interests in an LLC, it is not uncommon that their cumulative effect is to depress the fair market value by a significant amount. In this case, we assume that the non-voting units’ value will be depressed 40% because of lack of control and lack of marketability. Thus, the non-voting units will have a value of $6,000 per unit, making the total value of the 990 non-voting units $5,940,000.

Voting units will have a premium value to reflect the control value. In this example, the voting units have an appraised value of $12,000 per unit, making the total value of the 10 voting units equal to $120,000.

The fair market value of the entire company, sold as a unit, is still $10 million, but the value of the parts does not add up to $10 million! That it is only $5,940,000 + $120,000 = $6,060,000.

In this phase, Harry sells his 990 non-voting units to the dynasty trust for Steve using a 20-year installment note, payable annually. The note is for $5,940,000 (the fair market value of the 990 non-voting units) and is at a rate of 4.26% (which is slightly above the current long-term AFR rate). Based on the value and terms of the note, the trust will pay Harry $447,197 every year for 20 years. This is a legitimate arms-length business transaction because Steve’s dynasty trust is a creditworthy borrower since its assets ($600,000 initial gift + $5,940,000 in LLC units) exceed the value of what it has bought by more than 10%.

Planning Tip: There is no “bright line” test for what is a commercially reasonable loan-to-value ratio. Many practitioners use 10%, but some are more comfortable at 20%.

Planning Tip: Make sure the installment note is handled just like an installment sale to a non-family member or to a bank. Have a signed pledge or security agreement, pay any tax required, do any filings required. Make sure you have a documented paper trail.

The Outcome
Company Ownership and Control
After Phase 3 is completed, Harry owns 10 voting units, which gives him 100% control of the business and 1% of the equity. The dynasty trust for Steve owns 990 non-voting units, which gives it no control over the business and 99% of the equity. The dynasty trust also has $600,000 in cash that Harry gifted to it as seed capital.

Income Tax Reporting
Harry is deemed to be the “owner” of the dynasty trust for Steve for purposes of reporting its income. As long as that is so, the dynasty trust for Steve does not have to file a Form 1041 fiduciary income tax return. Instead, an information return is filed, with the dynasty trust income tax information reported to Harry as the trust’s deemed owner, for reporting on his personal Form 1040 income tax return.

Income Tax Effect of Sale of Membership Units
Harry’s sale of LLC units to the dynasty trust for Steve is a “non-recognition” event. Because Harry is the deemed owner of the trust for income tax purposes, it is treated as a sale by Harry to himself. Thus no gain is recognized on the sale of the stock and no interest income is recognized on the installment note payments. Of course, the trust does not receive a deduction for interest payments made either.

“Pass Through” Dynasty Trust Income
Income from the LLC will be allocated to the unit holders based on their unit ownership percentages. Let’s assume the business has $500,000 in net income. Harry owns 10 voting units, which is equal to 1% of the equity. Therefore, Harry will be allocated $5,000 in K-1 income. The dynasty trust for Steve owns 990 non-voting units, which is equal to 99% of the equity. Therefore it will be allocated $495,000 in K-1 income.

Because the dynasty trusts are structured as grantor trusts for income tax purposes, Harry must pay the income tax attributable to all of their income, including the S-corporation income that is allocated to the trust for Steve. But that is what he was doing before the sale of his non-voting units to Steve’s trust, so he is paying the same income tax before and after the sale of the units. Harry’s payment of the trusts’ income tax is not an additional gift to the trusts, which means that every year Harry is transferring, gift tax free, additional estate assets to the trusts for the children.

How the Dynasty Trust Makes the Required Note Payments
We assume for this case study that the LLC will have $500,000 per year of cash flow to distribute to its unit holders. That will provide Steve’s dynasty a cash distribution of $495,000 ($500,000 x 99% = $495,000). Thus at the end of year one it will have $1,095,000 in cash ($495,000 from the LLC and the $600,000 that was gifted to it as seed capital). The trustee can thus easily make the $447,197 note payment to Harry.

Planning Tip: If the company does not generate enough income to pay the note, take the same approach as if a borrower can’t repay a bank loan. Options would include deferring payment until such time as the business recovers or renegotiating the term or interest rate of the note.

Results After Year One
At the end of the first year, the note has been reduced to $5,745,847 and the dynasty trust has a cash balance of $647,803. The trustee of the dynasty trust could use this cash to:

• Invest and save. (Income taxes on the earnings would be taxed to Harry.)
• Make distributions to the trust beneficiaries. (Distributions would be gift tax-free.)
• Buy life insurance on Harry’s life.

Harry has received $5,000 from the LLC and $447,197 from the note payment, for a total of $452,917 in income. He will pay income taxes on this full amount. For example, if he is in a 25% effective income tax bracket (after all deductions), he would pay $125,000 in income taxes, leaving with him $327,917 income to support his and Wilma’s lifestyle and/or make annual exclusion gifts to the dynasty trusts for Mark and Dottie, which they could use to buy life insurance on Harry’s life. (This would be an excellent way to provide for Mark and Dottie. See explanation under “When Harry Dies” below.)

Planning Tip: A higher income tax rate would mean less income, but there may be other sources of income. For example, Harry is still in control of his company, and he may receive a salary as well as compensation as a Director on its Board.

Planning Tip: Harry may be able to reduce his salary from the LLC if he does not need the cash flow. This would save payroll tax and would give the business more cash flow. However, make sure he receives enough in salary to continue to qualify for group health insurance coverage.

When Harry Dies
If Harry has either consumed or gifted the net after the tax note payments that he receives from Steve’s dynasty trust, only the unpaid balance of the note will be included in his taxable estate; there is no asset “build-up” inside his estate as the company grows.

The dynasty trust for Steve is GST “exempt” so that following Harry’s death its assets will never be subject to estate, gift or GST taxation (unless the Congress changes the rules).

So are the dynasty trusts established for Dottie and Mark, so the life insurance proceeds received by them on Harry’s death are also GST “exempt,” providing a legacy for them and their descendants.

Harry could leave the 10 voting units (1%) to Steve in trust, too.

This arrangement would leave Steve’s trusts owning 100% of the business and the other children’s GST exempt trust shares owning cash.

Harry’s wife Wilma will continue to receive the remaining note payments for her support.

Estate Tax Results
1. Harry has removed $10,600,000 of appreciating assets from his gross estate that, at his death, would be subject to estate tax. Unless the Congress acts quickly, the top rate after the catch-up tax will be 55% in 2011.

2. Harry has received an asset (the self-amortizing note) that is based on a discounted asset value, frozen (will not appreciate in value) and depreciating (the note principal will decrease over the 20-year note amortization term).

3. If Harry does not accumulate the note payments, then at the end of the note term (20 years), he will have totally removed the $10,600,000 (plus all future appreciation on this amount) from his gross estate without making a taxable gift other than the initial $600,000 seed capital gift.

4. The trust assets are in a generation skipping tax-exempt trusts that can include asset protection features. These trust assets are not included in the children’s or grandchildren’s gross estates at their deaths.

Conclusion
Using this technique, all of Harry’s goals and objectives were met. His son Steve would receive the business without having to buy him out, yet Harry could control the timing of the business transfer. He was able to provide for his other children and his wife. In addition, Harry saved substantial estate taxes.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this post was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

You have worked for 20 years to build your business, you have 100 employees and one of them comes to you for help. Joe is a supervisor and one of your better workers. He’s hardworking, always on time – someone you can depend on. He’s gotten into some financial problems and he asks you if you could just take him off payroll and pay him cash (under the table.)

You are a nice person. You want to help. It’s such a little thing. DON’T!

DANGER, WILL ROBINSON! DANGER!

10 years later Joe who is still working off book is injured on the job. It’s a serious injury and he won’t be coming back to work. He gets a lawyer and files a Workers Comp claim, but Joe is off book so he is not on your Worker Comp Insurance.

You could potentially have to pay Joe out of your pocket.  The protections on the amount an employee can recover is gone and juries can be very generous.

But Joe’s an employee, even though you didn’t treat or pay him like one and you paid him quite a bit over 10 years, but you didn’t withhold or pay any payroll taxes on Joe.

The amount not paid to the IRS or the FTB is quite substantial, but that amount actually pales in comparison to the penalties and interest that has built up. That’s a civil matter, but there is potentially a criminal tax fraud issue here as well as the Department of Labor, who is responsible for protecting employees could well get involved and audit your payroll.

When an employee asks for a small favor, be very careful to judge the favor in light of the risk that it may expose you as the business owner too. There are other ways to help out employees.

Predictions of new estate tax legislation over this last year have proved to be little more than guesses.  As we sit here in August of 2010, nothing has changed really.  We still don’t know if there will be a new law in 2010, if there is, we don’t know what it will look like and we don’t even know when it might be made effective or whether it will be retroactive, but we do know one thing with a fair degree of certainty.  We will have an estate tax in 2011 even if Congress is unable to pass new legislation.

Returning to the Past-(Who Says You Can Never Go Back). If Congress does nothing before January 1, 2011, then the estate tax law we had in 2000 will automatically become the law in 2011. That will mean a 55% tax rate for estates larger than $1,000,000.

Now it is still possible there will be new legislation.  If there is then it will most likely look pretty similar to the law that applied in 2009.  There will almost certainly be a $3,500,000 exemption (possibly as high as $5,000,000) and a 45% tax rate, at least for the smaller estates.  It is possible that as the size of the estate increases that the rate will increase. That would be consistent with the Obama administrations vow to tax the richest of Americans more. For example estates over $10,000,000 might be charged at a 50% or 55% rate.

Politics, Not Governing. How likely is such legislation?  That is an interesting question.  Governing seems to have become entirely political, or maybe politics has replaced governing. So the question is not whether Congress will act so that Americans can plan their lives and business affairs, but whether there is a political advantage for either party in taking up the estate tax issues at this time.  Frankly, estate taxes have become small potatoes in today’s politically charged climate.  In other words there are a lot of bigger fish to fry with jobs creation, the economy, the expiration of the Bush tax cuts (which could include the estate tax), aid to small business, adding to the stimulus, the implementation of the health care legislation, not to mention immigration reform.

If I had to guess (and it would certainly be a guess), I would say we are not going to see estate tax legislation passed this year, at least not before the November elections, unless it gets pulled into the attempt to extend the Bush tax cuts for another couple of years.

Lame Duck. There is one additional interesting possibility. At this time it seems quite probable that there will be a change in control in one or both houses of Congress. That could mean there will be an interesting lame duck session after the November elections and estate tax legislation might be pushed by the administration while it still has a majority in both houses, that assumes of course that the majority can come together and act in a short session before the end of the year Holidays.

California ranks 47 out of 50 in the risk of litigation, one of the worst states in the nation. (OC Register, Jan Norman) (Ron Trujillo, Los Angeles Business from bizjournals).  To get some idea of the scope of the problem let’s look at some statistics.  Based on numbers gathered in 2004

• 94 percent of all lawsuits in the world are filed in the United States
• 70 percent of all the lawyers in the world are in the United States
• 41,000 lawsuits are filed in this country every day
• Over 15,000,000 lawsuits are each filed nationwide each year, and
• California accounts for 28 percent of the national total of lawsuits filed each year, that is around 1,400,000 lawsuits.

It can be argued that the system is broken and that one of the first steps to fixing it is better laws and a more balanced approach and tort reform.  But in California “State legislators have done nothing to fix the problem. . .As a result, California businesses are easy targets for personal injury lawyers, costing jobs in the process.”  (OC Register, Jan Norman).

Business owners can’t afford to ignore the problem or wait for a legislative solution and they don’t have to. Every business owner should consider whether asset protection planning makes sense for their situation. Asset protection planning is about leveling the playing field and building defenses for your business and personal wealth, defenses to protect and secure your future against unscrupulous plaintiffs and meritless lawsuits.  It is not about evading creditors and has nothing to do with evading taxes, but it is about pushing back against the litigation assault businesses face in California.

7:53 am: The first wave of 184 planes commences a vicious attack on the US Fleet in Pearl Harbor.

9:45 am: The attack breaks off.

1 hr 52 min. 2,335 servicemen, 68 civilians lose their lives

________________

8:45 am: A passenger jet crashes into the north tower of the World Trade Center, exploding and tearing a gaping hole.

9:03 am: A second passenger jet crashes into the south tower of the World Trade Center exploding into flames.

10:05 am: The south tower collapses sending out a massive cloud of dust and debris.

10:28 am: The north tower collapses from the top down.

1 hr 20 min. 2,752 civilians lose their lives.

_________________

December 7^th, 1941 taught us a hard lesson.  Some 60 years later on September 11^th, 2001, the lesson was no less painful but very similar to its predecessor: security comes at the cost of constant vigilance, and sometimes not even then.

Vigilance. It wasn’t that as a nation we were not monitoring possible threats or that our security systems didn’t pick up chatter and other evidence of imminent attacks in either example.  In hindsight it certainly seemed clear that something was wrong but at the time of each event our guard was somewhat down; our vigilance somewhat lax.  Security is hard work; it takes and lot of effort and it takes constant attention, what we might call vigilance.

Complacency. The longer we go without something bad happening, the more complacent we become and the more fantastic or unreal such a possibility seems.  We let our guard down. We become less vigilant. We may go through the motions but even when evidence starts to mount that something might happen, we discount that information. The possibility of a negative event happening seems much less real than our recent experiences and the result is we don’t act or we don’t act quickly enough.

The Difficulty of Remaining Vigilant. As time passes without something happening, we become desensitized; we are no longer vigilant. In fact, the feared event is no less likely to happen today as it was last year. The probability of the risk materializing is not really changed by the passage of time.  If you take out a coin and decide to flip it to see what side it lands on, the likelihood of heads appearing on that flip is 50 percent.  What if you flip the coin 3 times and it turns up tails all 3 times?  Is it more likely that tails will turn up the fourth time?  Actually not; the likelihood of heads turning up remains 50 percent.

While our attitude about what will happen next may change with time, the underlying risk or likelihood of the event happening remains the same.  Time tends to decrease our vigilance not our risk of suffering from an event.

Businesses need to remain vigilant as well, and business risk is no different than other risks. The fact that something did not happen last year does not mean it is any less likely to happen this year.  So how does a business remain vigilant and avoid becoming complacent about risk?

A Business Owner’s Guide to Remaining Vigilant

First, a business needs to understand what risks it faces.  This is not always as obvious as it seems and a careful business risk audit should be initiated.

Second, once risks are identified, each risk should be viewed from a standpoint of how damaging it would be to the business and how hard it would be to overcome and remain viable.  A serious risk with a low probability is often more of a concern than a nominal risk with a high probability. Many of us have never experienced a fire of our home, yet almost all of us carry fire insurance. Why?  While the probability may be low, the consequences could be catastrophic, and the cost of carrying insurance is relatively low.

Third, once a risk is identified and its consequences understood, it is important to take into account how likely the event is to occur. A serious risk that is likely to occur is much more of a concern than a serious risk that is less likely to occur.  An example might be in the construction industry.  Condominium projects built in California have an extremely high incidence of construction defect litigation, when compared to similar single family residential projects.  Adequately addressing the condominium project risk should be a priority for a business that builds both types of projects.

Fourth, take a fresh look at your risk landscape on a periodic basis. A once a year review (at a minimum) is a good habit to get into.

]]> http://www.corliss-law.com/blog/security-comes-at-the-cost-of-vigilance-if-at-all-a-business-owners-guide/feed/ 0 http://www.corliss-law.com/blog/out-of-box-thinking/ http://www.corliss-law.com/blog/out-of-box-thinking/#comments Tue, 09 Mar 2010 02:31:29 +0000 Donald M. Corliss, Jr http://www.corliss-law.com/blog/?p=101 Today seems a lot like the California Gold Rush of the Mid-19^th Century.  Opportunities are everywhere, both to make money and to profit from hugely valuable ideas that are being given away by their creators.  A case in point is a less than 6 minute video clip by Johnny Lee, who describes and shows how to turn a $49 Wii remote and $5 infrared pen into an interactive white board that normally would cost several thousand dollars (of course you do already need to own a projector).  It’s a great clip and well worth the 6 minute investment of your time.  It appears on TED at the following URL:

http://www.ted.com/talks/johnny_lee_demos_wii_remote_hacks.html

Presented as a low cost solution to schools that cannot afford the more expensive commercial white boards, it proved to be a very popular video. What is fascinating is the description of how this idea spread throughout the world with almost lightening speed. Mr. Lee gave away the software he developed to make this work and in the first three months after announcing the idea his software was downloaded half a million times.  Not bad for a totally cost free marketing campaign.

While this was not a commercial idea, it has spread Mr. Lee’s name and credibility around the world almost overnight. What’s the formula? While you may draw your own conclusions, it seems rather simple.  He gave away something of value that could be immediately used by a large number of people in a wide variety of settings.  But on an entirely different level, people just plain like ideas that are fresh and clever. Whether you use Mr. Lee’s idea or not, it is fascinating to see how someone was able to think out of the box and come up with an entirely different application.

Isn’t that a challenge that most business owners face?  What can you do for your business to think out of the box and come up with a totally fresh and original solution? The answer may not be what you think.  Breakthrough moments tend to occur when you have the time to relax and reflect. Business owners need to have the time to be the visionaries of their businesses. You can start by clearing away the underbrush, you know, anything that can cause a distraction to you and those in your business. You can outsource your legal problems; get them off your desk. We provide hands free legal solutions for businesses so that you don’t have to spend your valuable time putting out fires. Visit us at www.corliss-law.com to find out more. Helping You Create A More Certain Future.

The Birth of the New Year’s Resolution. That the celebration got moved to January seems to have arbitrary and dates back to 153 BC when Julius Caesar’s named the first month of the year after Janus, the god of new beginnings. Janus was depicted as having two faces, one looking back and one looking forward. So at midnight on New Year’s Eve, Janus was imagined by the Romans to be looking back at the old year and forward at the new year,[2] a very natural time for reflection and for resolution and the tradition of the New Year’s Resolution was born and has evloved and stayed with us all these millennia.

Look Behind, Then Look Ahead. So each New Year we pause to look behind and then ahead at the new year and what we might want to improve and change. Actually a pretty useful process and one I recommend for businesses and individuals alike at this time of the year.  But, Janus was thought to look in two directions and it is very important we don’t get stuck looking back and never get around to the looking forward to the new.

I happened to catch Andy Rooney’s 60 Minutes segment last week and as always it was entertaining and thought provoking. His topic was New Year’s resolutions and Andy was resolving not to get ahead with anything.[3] Andy begins with:

“The idea of 2010 doesn’t do much for me. It seems like a nice, even round number. But those of us who hate New Year’s Eve and the necessity it brings to have fun are looking forward to New Year’s Day, when New Year’s Eve will finally be over. . . I always go to a very nice party but I don’t even like nice parties on New Year’s Eve. I just want to be alone that night feeling miserable about all the things I didn’t get done in the past year and all the hard jobs I have ahead of me in the next year.”[4]

Should We Even Try? While Mr. Rooney is certainly making a humorous point, how many of us actually feel like that especially after the last two years?  Some recent research suggests that only 12% of us that make New Year’s resolutions actually keep those resolutions and achieve our goals?[5] That is a pretty low percentage over the years can become pretty disillusioning.  If each year we make resolutions that we seldom keep, how can we feel anything but disappointment and a sense of failure at the end of the year?  It’s easy to see how someone might on New Year’s Eve “want to be alone feeling miserable about all the things I didn’t get done in the past year” and to dread the upcoming year as filled with “all the hard jobs I have ahead of me”.

There’s Hope. But there has got to be something else at work here or this tradition would not have survived some 2,000 years.  Perhaps it’s the indomitable human spirit to succeed, to improve and to make the world and our lives better. Perhaps it is that desire to look forward to the coming year and the hope that it might bring.  Whatever it is, we can take heart that achieving our New Year’s resolutions is possible; after all 12% do succeed.

How You Can Change It All. If you want to change and make this year different, you can do it! The best place to begin is at the beginning or in this case with the resolution itself.  In Five Steps to Successful New Year’s Resolutions[6], Kit Yarrow set’s out the following basic steps:

• · Have a specific actionable plan.
• · Do, do, do.
• · Shake it up.
• · Tangible, visible cues, barriers and rewards
• · Avoid mental sabotage.

A Specific Actionable Plan

Start by not setting yourself up for failure.  Most resolutions I have heard sound pretty vague: “improve health, lose weight, exercise more, drink less, improve finances, get out of debt, get a better job, improve self, become more organized, reduce stress. . .”[7] Achieving such vague goals is very unlikely; it is not even clear what reaching the goal might look like and  if you don’t know where you are going, it is not very likely you will know when you get there.

Start out by setting a clear and measurable goal with a timeline and an action plan about how you are going to get there.  Instead of “I want to lose weight,” set out a goal of something like I want to lose 24 pounds at the rate of 2 pounds a month and to do that I will go to the gym 3 times a week, control the portions of what I eat and completely avoid eating junk food.  The goal is clear. There are milestones to help measure the progress and success along the way. There are specific actions to be taken to help achieve the result.

Do, Do, Do.

The second part centers on the fact that most resolutions are about not doing something.  It is pretty hard to stay motivated about not doing something. So replace the not doing something with doing something to keep you from turning to the old habit. In other words replace the time spent doing whatever it is you want to stop, with something else. It can be as simple as writing in a journal or going running when you get that urge to eat, watch TV, or impulsively by that new camera.

There should be another part in this step as well.  Most of us are pretty good about sitting around and coming up with a plan or we can learn to do that, but the plan doesn’t mean a thing unless you take action. You have got to do and keep on doing until you are done.  Don’t be an armchair quarterback for your own life. Get in the game.  As the Nike commercial says “just do it” and start today.

Shake It Up.

Things we want to change in our lives are often part of habits we have built up over years.  Habbits are very useful. They not only enable is to cope, but they provide us with a system to get things we need to do done.  But they often keep is doing something we want to stop and they can be very hard to break.  Yarrow says that habits are usually triggered by cues. For example if you have a habit of smoking which you often associate with coffee or bars, the coffee or bar may be the cue to smoke. Shake it up and change those cues that trigger that urge to smoke. Find other outlets than the coffee shop or bar. Don’t do the same things in the same way you always have. You can’t expect to solve a problem by doing the same things that created the problem in the first place. Shake it up.

Tangible, Visual Cues, Barriers and Rewards.

It is easy to have our resolutions dim in the daily swirl of our lives, so it really helps to have some tangible reminders of what you want to achieve. If you are trying to lose weight, maybe you hang a small size dress in the kitchen, if you are trying to balance your budget, maybe you tape a note with your credit card balances in your wallet.  Be creative and give your action plan a boost by creating cues to your new approach to life.

Don’t forget to break your action plan into smaller steps. You need visible evidence that you are succeeding. Crossing the finish line is just one moment in time; it is preceded by thousands of moments of time along the way. Each moment along your journey is important too. Reward yourself as you achieve milestones. Success is more about a better journey than crossing the finish line.

Master Mental Sabotage.

Probably the greatest challenge and the greatest obstacle to achieving anything new is our own minds.  Our mind is very good at making up new games, coming up with excuses and just plain blaming failure on someone or something else. Watch out for these common mind games:

Perfectionism. It has to be perfect. Unrealistic goals are sure to derail us. Don’t try to eat that elephant in one bite. Set more realistic goals and make sure you have smaller attainable milestones to mark your progress.

All or Nothing. Almost everything we do is about the steps we take along the way and we are going to have failures and missteps. If we take an all or nothing attitude, that first failure is going to be an easy reason to latch onto for not continuing. If we can’t have it all why go on? Don’t fall prey to the all or nothing game our mind will try to play.

Blame. When it comes to resolutions, as in most things we accomplish in life, it’s about personal accountability, says Ms. Yarrow. “There are always others and circumstances to blame. Success depends on accountability.”  Don’t look outside and whatever you do, don’t blame.

So if you have a New Year’s resolution or any goal and you really want to achieve it this time around, try the 5 steps set out above and Good Luck. You may be really surprised at the difference this time next year and if you would like to know how learning to achieve a New Year’s Resolution can help you improve your business and your family’s security, visit our blog next week for the sequel.

[2] Gary Ryan Blair (http://www.goalsguy.com/Events/n_facts.html )

[3] Andy Rooney (www.cbsnews.com/stories/2009/12/23/60minutes/rooney/main6015036.shtml )

[4] Andy Rooney, id, emphasis added.

[5] Wikipedia, New Year’s Resolution (http://en.wikipedia.cor/wiki/New_Year’s_resolution )

[6] Kit Yarrow (www.sfgate.come/cgi-bin/blogs/kyarrow/detail??blogid=152&entry_id=54427 )

[7] Wikipedia, id.