Using 1031 Exchanges in Estate Planning

For purposes of complex estate planning and wealth preservation, a 1031 tax-deferred exchange can provide an effective means of deferring the recognition of — and, hence, the tax liability for — capital gains on the sale of property held for income or investment. The structure of a tax-deferred exchange makes it uniquely useful in estate planning, particularly in light of the increased estate tax exemption created by the Tax Cuts and Jobs Act of 2017. When a tax-deferred exchange is structured correctly, you may be able to successfully defer capital gains tax liability indefinitely and potentially eliminate it.

How Do 1031 Tax-Deferred Exchanges Work?

Section 1031 establishes the basis for a tax-deferred property exchange. Upon the sale of real property held for income or investment, you must immediately reinvest your gains into another property of like kind, which must be of equal or greater value than that of the relinquished property. The parameters of this program require that you never take possession of the gains — otherwise you become liable for taxes. To facilitate this aspect of the transaction, you must have the sale proceeds deposited directly into an IRS-approved safe harbor. This can be a qualified intermediary (QI), a qualified escrow account or some types of trusts.

How 1031 Exchanges Can Benefit Estate Planning

You can legally continue to defer the recognition of capital gains indefinitely this way, either by holding the exchanged property or making subsequent exchange transactions. Should you elect to pass a 1031 exchange property to an heir or designee upon your death, they receive the property at stepped-up basis value with no recognition of appreciation. In other words, they will not be subject to capital gains tax upon the sale of said property. Your tax attorney can advise you as to how any tax liability may affect your heirs, but with the increased estate tax exemption included in the Tax Cuts and Jobs Act, the exemption for a single person is $11 million, and for a married couple, $22 million.

When Should You Consider a 1031 Exchange?

If you have unused capital in an income or investment property, consult your tax attorney or investment advisor about the potential benefits of a selling the property in a 1031 exchange transaction. Although this strategy is not appropriate for everyone, your estate planning lawyer can help you explore the potential of how an exchange could benefit you. It is important to note that the 2017 Tax Cuts and Jobs Act made several significant changes to Section 1031. Most notably, personal property is no longer eligible for deferral. In addition, licenses, franchise agreements, distribution rights, antiques, artwork and collectible items are now exempt also. However, the Act did implement a new, short-term deferred exchange program known as Qualified Opportunity Fund (QOF) investing. QOF funds offer several substantial benefits in terms of reducing and potentially eliminating capital gains tax liability on certain types of investments. The program ends soon, so it may be worth having a conversation with a tax attorney ASAP. To determine whether a 1031 or another type of tax-deferred property exchange might be appropriate in the context of your estate plan, contact one of the tax attorneys of Cantley Dietrich today.

What Business Owners Need from Their Tax Attorney

As a business owner, you understand the importance of expert legal representation for your company, particularly as it concerns taxation and compliance. But do you take the same level of care with your personal financial matters? As complex as corporate taxation issues can be, business owners and highly compensated individuals face their own risks and liability issues. For that reason, you want a personal tax attorney who can capably deliver the diverse suite of services you need. Finding a lawyer with a solid grasp on laws and issues regarding taxation is imperative. However, you must ensure that your tax attorney is truly committed to getting and keeping you compliant with the IRS and applicable state taxation entities.

In-Depth Knowledge of Complex Subject Matter

With somewhere in the range of 7.7 million words of tax law and approximately 60,000 pages of case law related to tax matters, the complexity of the federal tax regulations alone is mind-boggling. Despite this overwhelming level of complexity, business owners look to their tax lawyer to know and understand the laws and regulations as they apply to their situation. In addition, lawyers must have an equally strong grasp on state-specific taxation matters.

An Up-to-Date Handle on Recent Tax Changes

The federal tax code changes every year in dozens (sometimes hundreds) of ways. Some of these changes are high-profile and substantive. However, others are more subtle and unheralded — but critical to understand, nevertheless. Business owners need their tax attorney to be aware of every change and update, no matter how inconsequential they may seem. Otherwise, you won’t be able to adequately plan for the future. You could miss out on tax savings to which you’re entitled, or worse, find yourself in trouble with the IRS, facing penalties, interest and even the potential for legal action.

Commitment to Compliance

In the process of tax planning, complex estate planning, asset protection and related matters, compliance is non-negotiable. Failing to remain in compliance with federal and state taxation laws and regulations inevitably leads to both financial and legal liability. Non-compliance triggers audits, fines, compounding interest and the potential for criminal prosecution, not to mention the time required to answer to the IRS. Business owners need a tax attorney who is committed to keeping them compliant. The highly experienced team at Cantley Dietrich assists business owners and highly compensated individuals with tax-related matters, including tax planning and estate planning. Our focus on asset protection assists our clients in minimizing their tax liability within the confines of applicable laws and regulations. If you are a business owner, particularly a small to medium-sized, closely held business, you need a tax lawyer who understands the unique challenges you face on a personal level. Contact one of our offices today to schedule your personal consultation with one of our knowledgeable, experienced tax attorneys.

Using Buy-Sell Agreements for Business Continuity

If you have business partners, planning for business continuity is essential to ensure that operations continue uninterrupted, should something unexpected happen to one of the partners. A business buy-sell agreement is one way to accomplish this imperative, especially if the company is closely held. The reasons you should plan for such a contingency are logical and sound. However, if you have not implemented a continuity plan, negotiating the terms under which partners may exercise their rights to buy out one another can become a source of tension. Using the services of an asset- and tax-planning lawyer can ease those tensions and help business partners achieve a meeting of the minds.

Why Businesses Need Buy-Sell Agreements in Place

Planning for unexpected events helps keep your business running smoothly, no matter what happens. Death or incapacitation of a partner is only one of the potential issues that could arise and derail your operations. A contentious divorce could cause problems, especially if the spouse attempts to legally obtain a partner’s assets. Legal action against a partner could also put that individual’s ownership share at risk of outside interference. Personal creditors and even the IRS could introduce complications that put you and other partners legally and financially at risk. With a buy-sell agreement in place, any such occurrences, known as triggering events, give the other partner(s) the right to buy out the beleaguered partner’s ownership interest. Consequently, the business is taken out of harm’s way, maintaining continuity.

Understanding Buy-Sell Agreements

Buy-sell agreements are essentially a type of legal contract that defines the terms under which one partner’s business interest can be — or must be — purchased by other partner(s). In many cases, business owners struggle to determine how a given partner’s ownership share will be valued at the time a buyout becomes reality. Other key details that should be included are specifics about triggering events, how much (if any) input from heirs and designees will be involved and whether the buyout will be perfected by the remaining partners or by the entity itself. Once the business owners have agreed on the terms of the contract, however, each partner must ensure that they have the financial capacity to fulfill their obligations, should a triggering event take place — often this can be accomplished with insurance or other financial products. Financial capacity of the partners is critical when more than two partners are involved.

Implementing Buy-Sell Agreements

If you do business with one or more partners who are actively involved in the daily operations and decision-making of the company, you need to have contingencies in place for unexpected events. If you have not implemented a succession or business continuity plan, talking to a tax attorney is imperative. At Cantley Dietrich, we specialize in helping closely held business owners protect what they have worked so hard to build. Our team provides assistance with income tax planning, complex estate planning and asset protection. Contact us today to learn more about buy-sell agreements, succession planning and business continuity.

Estate Planning Overview

Most high-net-worth people recognize the importance of estate planning. However, many more business owners and highly compensated individuals don’t have the time or in-depth knowledge to undertake this complex process. Worse, long hours and weighty responsibilities may tempt some into putting off what they know they should do, but often can’t find the time to get started. Understanding the basic principles of estate planning can help clear up some of the mystery and provide the necessary impetus to consult with an estate and tax-planning attorney.

Why You Need Estate Planning

You have worked your entire life toward what you have today, and it is important that your hard-earned assets become your legacy and a testament to your efforts. It is also important that you preserve as much of your wealth as possible to transfer to your heirs or to causes that matter to you. No matter how young and vibrant you may be today, life can change in an instant. You simply cannot risk having your assets eaten up by probate fees and unnecessary tax liabilities. You also do not want to risk having what’s left of your assets go somewhere you never intended. Aside from the disposition of your estate upon your passing, you need a comprehensive plan in place in the event that you become incapacitated or otherwise unable to make your own financial decisions.

The First Steps of Estate Planning

One of the most challenging parts of developing an estate plan is knowing where to start. Estate planning lawyers begin by helping their clients quantify their assets and determine their goals for the disposition of those assets, both during their lives and after they end. Assets to be evaluated might include property, stocks, bonds, investment accounts, retirement accounts, insurance policies, business interests and personal property such as art or jewelry. Disposition of assets could include establishing charitable trusts or gifts, setting up secure legal vehicles to provide for the needs of individual beneficiaries, transferring real property ownership, planning for succession of a business and bequeathing specific items of personal property to specific heirs.

Creating an Estate & Wealth Preservation Plan

Once you have determined what you have and what you hope to do with it during and after your lifetime, your estate planning attorney can explain any potential threats to your accumulated wealth. These might include probate fees, estate and inheritance taxes and transfer taxes. These and other liabilities have the potential to significantly erode your assets, unless you take the proper steps to protect them legally. Using wills, trusts and other safe, legal strategies, a complex estate planning lawyer can help you establish a comprehensive plan. This may involve powers of attorney, choosing an executor for your estate and selecting trustees as appropriate for your situation. Your attorney can also assist you in setting up contingency plans in the event of your incapacitation, such as strategies to care for minor children and continuing your business operations. Cantley Dietrich, a national boutique law firm, assists business owners and high-net-worth individuals with tax planning and compliance as well as asset protection. Contact us today to speak to one of our highly qualified tax advisors to learn more about how we can assist you with complex estate planning.

Beckett Cantley Recognized for Authorship Expertise

Professor Beckett Cantley, JD, LLM, senior partner at Cantley Dietrich, P.C., has been acknowledged by the Social Sciences Research Network (SSRN) as being among the top 10% of authors on SSRN, based on all-time downloads. Prof. Cantley is an internationally recognized expert in administrative tax, insurance and financial matters, as they relate to the law. As a subject matter expert and prolific author, Prof. Cantley regularly publishes on these and related topics.

What is the Social Sciences Research Network (SSRN)?

SSRN is an online data library of scholarly research, specializing in social sciences, humanities, economics, corporate governance and the law. Partnering with almost 2,000 scholarly journals, SSRN provides download access to papers from researchers and authors that have appeared — or will soon appear — in a published journal. By agreement with their journal partners, SSRN provides the majority of these works at no cost to the user.

Professor Cantley’s Work on SSRN

To date, Prof. Cantley has published 24 scholarly papers on SSRN. These works have been included for publication by renowned scholarly journals that include:

• The Houston Business and Tax Law Journal
• The Brigham Young University International Law & Management Review
• The U.C. Davis Business Law Journal
• The Hastings West-Northwest Journal of Environmental Law & Policy
• The Journal of Transnational Law & Policy
• The Fordham Journal of Corporate and Financial Law
• The Oregon Review of International Law
• The South Carolina Journal of International Law & Business

Although much of his work focuses on issues concerning taxation and compliance in the captive insurance market, Prof. Cantley has written on a variety of subjects that include:

• Using conservation easements in lieu of eminent domain action
• The legality of governmental seizure of unpatented mining claims
• Capital control efforts through tax enforcement, gold regulation and retirement reform
• The U.S. attack on the sovereignty of Swiss banks

You can find Prof. Cantley’s body of work on his SSRN author page.

Getting to Know Prof. Beckett Cantley

Beckett Cantley obtained his undergraduate degree from the University of California, Berkeley. He earned his J.D. from the Southwestern University School of Law and his LLM (taxation) at the University of Florida. Currently, Prof. Cantley is an associate professor of law at Atlanta’s John Marshall Law School and an adjunct professor at Northeastern University, where he teaches International Taxation as a part of the school’s master’s in taxation degree program. Prof. Cantley publishes multiple white papers, journal articles and scholarly papers each year. He is regularly invited to present at legal conferences around the world, addressing topics related to captive insurance, organizational risk management and international taxation issues. Prof. Cantley counsels clients that include law firms, CPA firms and financial planning firms, assisting them with individual, family, business owner and business entity matters relating to taxation, captive insurance companies, trusts, estates, corporate entity structures, probate and international business transactions. Contact the Salt Lake City location of Cantley Dietrich today to schedule a consultation.

Considerations for Choosing a Trustee or Executor

When setting up the complex structure of an estate plan, choosing a trustee, executor and other fiduciaries can pose a daunting challenge. Working closely with a tax and estate-planning lawyer can help you understand the implications of these decisions, so that you can make informed choices. Although fees are always a consideration, it’s important to understand the types of decisions your fiduciaries will have to make and how you can help ensure that they honor your wishes.

Choosing Trustees in the Estate-Planning Process

For each trust you use in your estate plan, you must designate a trustee to handle the duties specific to that trust. Trustees may make decisions about investing the assets of the trust, handling tax preparation and filing, making distributions to beneficiaries, protecting the trust’s assets and overseeing the recordkeeping and other administrative matters. Because trustees carry so much responsibility, choosing the right individual or entity is paramount to the success of your estate plan. You must also designate a successor, should your first choice become unable to fulfill their obligations. Although you may be tempted to designate a trusted friend or family member for this role, discuss your options with your estate-planning attorney to determine the best course of action for your beneficiaries and your goals.

Choosing an Executor or Personal Representative

An executor — sometimes called a personal representative, depending on the state where you live — will be responsible for overseeing the disposition of your estate upon your death. Specifically, an executor handles directions in accordance with your will. This may involve the distribution of assets detailed in your will, reconciling any debts of the estate, filing final tax documents, etc. To accomplish this goal, your personal representative may work closely with other members of your team, including your CPA, attorney and trusted advisors. Although you can choose a close friend or family member to act in this capacity, most estate-planning attorneys recommend designating a professional fiduciary. This helps remove pressure from family members as they cope with an already challenging time in their lives. It can also help prevent hard feelings and disputes among your heirs and designees.

Other Estate-Planning Fiduciaries

In addition to trustees and a personal representative or executor, you may also have to designate other individuals or entities in a fiduciary role. For example, if you have minor children, you may want to designate a guardian in the event that you (and the child’s co-parent, if applicable) can no longer fulfill those duties. You may also want to name agents for handling health care and financial decisions via a power of attorney. Working with a tax and estate-planning attorney can help ensure that you have the correct structure and documentation in place. Reviewing your estate plan regularly will also help ensure that, should circumstances change, you keep your named representatives and agents closely aligned with your objectives. At Cantley Dietrich, we assist business owners and highly compensated individuals with asset protection, tax planning and complex estate planning. Our knowledgeable team will help ensure that you designate the best possible trustee, executor and other fiduciaries as appropriate. Contact us today to schedule your personal consultation with one of our experienced estate-planning lawyers.

Continuity & Succession Planning for Business Owners

When you own a closely held business, continuity and succession planning is critical for protecting the value you have built in your company. In fact, this consideration is an important component of comprehensive asset protection and estate planning. Have you considered what would happen if you died suddenly or became incapacitated and unable to continue the day-to-day tasks of running your business? Although this is a topic that few business owners want to consider, planning for the worst-case scenario is critical, if you hope to preserve as much of your accumulated assets as possible. And that includes the business you have worked so hard to build.

Considerations of Family Business Succession Planning

Few closely held businesses have the right infrastructure in place so the principle decision-maker can seamlessly step in if needed. Even if you have family members involved with day-to-day operations, they might not be read-in on all the tasks you handle or decisions you make. Continuity and succession planning help ensure that, no matter what happens tomorrow, your company will continue to grow and thrive. In most cases, the closely held business comprises the principal asset of the family. Implementing a comprehensive plan will not only ensure that your company keeps running effectively, but it also protects your heirs from the potentially steep probate fees and estate taxes they might face — especially if your business has appreciated in value.

Change Your Mindset for Effective Succession & Continuity Planning

Too many business owners never differentiate between working to make their company a success and leading it through the growth process. If you want your legacy to live on after you, you must shift your thinking and become a leader rather than a doer. And that can be one of the hardest tasks you will ever face. It requires acknowledging your mortality, but it also requires a willingness to hand over control of what you no doubt view as your territory. Ultimately, however, confronting these realities will improve your life as well as protect your interests. When you can step away — even for a few days or a week — and know that your company is in good hands, you will discover freedom and peace of mind.

Let an Experienced Estate Planning Expert Assist You

If you have no idea how to go about establishing a continuity and succession plan for your business, know that you are not alone. Working with an asset protection and estate planning attorney is a highly effective approach for ensuring that you consider every possibility and plan for every scenario. This is a complex situation that requires in-depth knowledge of business and tax law issues, and you cannot afford to leave any detail unresolved. Foregoing professional advice means you could put the future economic well-being of your loved ones at risk. Cantley Dietrich specializes in complex estate planning, asset protection, wills and trusts. Contact us today to learn more about how effective succession planning strategies can help you protect the assets and the future of your family business.

Compliance & Governance Issues in the Captive Insurance Market

The subject of captive insurance companies (CICs) and tax law violations has been the topic of much discussion over the past year. Matters such as Phoenix 2010 Revocable Trust v. Artex Risk Solutions, Inc., and similar class actions have brought this issue to the forefront of the industry’s mind. But while the discussion regarding CICs and IRS compliance (or lack thereof) grows more cacophonous, a less raucous discussion is taking place regarding compliance, entity governance and the risk of running afoul of state captive insurance regulators, should they choose to increase their scrutiny or impose new rules. Ironically, even as the country is moving in the direction of anti-regulation, recent developments in the risk reduction group (RRG) market are causing regulators to increase their vigilance.

The Demise of Spirit Commercial Auto Risk Retention Group

In early 2019, a Nevada court placed Spirit Commercial Auto Risk Retention Group into permanent receivership, citing insolvency and hazardous financial conditions. Industry experts have called the demise of Spirit a potential “black eye on our industry,” particularly in the eyes of regulators. This could easily invite increased scrutiny and cause unease in the marketplace. It may also discourage states from licensing new risk retention and captive insurance entities. The issues with Spirit and other RRG failures could also trigger greater scrutiny from the National Association of Insurance Commissioners (NAIC). The NAIC previously worked with the states to adopt a universal set of regulations addressing issues of potentially improper relationships between entity directors and managers or vendors. The regulations also sought to limit material relationships with service providers such as management, legal advisors, auditors and anyone else providing professional services for a fee.

Complying with CIC Regulatory & Governance Requirements

In addition to complying with the regulatory requirements of the domicile, CICs are typically subject to some level and type of corporate governance, depending on the unique circumstances of the entity. At minimum, a CIC’s board of directors has a duty to ensure that the entity remains compliant and manages risk in such as way that the company delivers good financial results. Staying on the good side of state regulators is also important. It’s also critical that the board faithfully represents the interest of shareholders. It is doubtful that the board of Spirit Commercial Auto RRG was upholding their duty of care, based on the eventual outcome.

What This Means for CIC Transaction Participants

Today, this discussion might have no direct repercussions on captive transaction participants. However, should regulatory scrutiny increase, RRGs and CICs may be forced to further embrace best practices of governance and compliance. Fortunately, most CICs are doing the right things to distribute risk and provide the intended benefits. Those that are not may be forced to take action that ultimately results in higher administrative and operational costs. It may also mean less freedom to engage in the activities that make CIC transactions attractive to participants. Just as tax compliance issues can pose a threat to individuals involved in CIC transactions — along with their lawyers, accountants and wealth managers — unsuspecting individuals may find themselves embroiled in a messy legal matter if promoters and captive managers fail to exercise the proper operational diligence. If you or your clients are involved in a captive insurance company transaction that you suspect may be cause for concern, contact Cantley Dietrich today to learn more.

Considerations for Contesting a Trust or Will

With estate planning, it is important to take steps to prevent potential legal challenges to your will and any trusts you have set up. But what if you find yourself on the other side of the equation, considering whether you should contest the estate of another? Determining whether to move forward with a legal challenge to a family member’s estate can present an agonizing dilemma. However, if you believe that you have a valid reason to contest, an experienced probate lawyer can help you sort out the facts and determine the best course of action.

When Would You Consider Contesting a Will or Trust?

In some cases, challenging a will or trust legally is the right choice. One of the most common reasons that people file legal action in this case is that they suspect someone previously exerted undue influence on the decedent. This, unfortunately, is not uncommon, particularly if the deceased suffered from dementia or caretaker abuse. This scenario may provide the basis for a challenge based on the decedent’s lack of mental capacity. You might also consider mounting a legal challenge if a trustee or executor fails to uphold their fiduciary duty or if the original documentation was improper in some way.

When Should You Not Contest a Trust or Will?

Are there times when you should not contest a trust or will? Ultimately, you must make that decision based on the advice of your attorney. However, some trusts and wills are drawn up with a no-contest clause, which effectively bars the contestor from their benefits, should the legal action ultimately prove unsuccessful. Although that should not automatically discourage you from considering a legal challenge, it is important to realize what you have at stake. Another consideration involves the importance of your relationship with loved ones. Would legal action substantially damage your relationship with other involved family members? If so, you should weigh the pros and cons of the situation carefully before moving forward.

Lessons You Can Apply in Your Own Estate Planning

Reflect on the reasons you are considering legal action and put that knowledge to work in your own estate-planning activities. By working closely with your attorney, you can build in provisions to help prevent improper actions by trustees and executors. You can also proactively establish protections that minimize the risk of anyone exerting undue influence over you in the future. Most highly compensated individuals and business owners know they must plan for their eventual death. What they may overlook is the potential that they could become incapacitated or lose their mental faculties prior to death. By planning for these and other contingencies, you can minimize the chance that someone may consider legally contesting your trust or will. Contact Cantley Dietrich today to learn more, or to schedule a consultation with an asset-protection and estate-planning attorney.

The Human Aspects of Estate Planning

Estate planning — particularly for highly compensated individuals and business owners — is often perceived as a complex process of entities, legal documents and tax law compliance. But we often forget how important the human aspects of estate planning can be. When you seek out the assistance of a tax and estate planning attorney, choose a law firm that recognizes that wealth transfer and estate planning can have a profound effect on you, your family and your designated heirs.

Unintended Consequences of Estate Planning

When determining how your accumulated wealth and assets will be distributed — either during your lifetime or upon your passing — you must think about how it will affect your loved ones. One of the most common challenges is infighting among family members, especially if someone feels slighted. Another common problem occurs when one or more beneficiaries fails to make good choices about their lifestyle or behavior once they get their hands on their newfound wealth.

Strategies for Overcoming These Challenges

Although no single strategy is effective in all cases, you have many options for structuring the way assets are transferred to beneficiaries. You can set up specialized trusts that designate distributions for specific purposes, such as university tuition, buying a home, etc. This is where your estate planner can help guide you toward strategies that will provide the maximum benefit to your heirs while helping you achieve your wealth preservation goals. Finding the right balance between your desire to protect your assets and put them to the best possible use in the future is the key to keeping the human aspects of estate planning a central part of the process.

The How and Why of Estate Planning

You trust your lawyer to recommend the best ways to legally minimize your tax burden and preserve your assets. But it will be up to you to identify the reasons you choose to distribute your estate the way you do. Keep in mind how your decisions will affect your loved ones’ future, and communicate with beneficiaries and heirs during the planning process as much as possible. This allows them to ask questions and understand your vision for their future. It helps avoid potentially unpleasant surprises down the road as well, which often come at a highly emotional time in their lives — upon the incapacitation or passing of a beloved family member. Cantley Dietrich specializes in complex estate plans, wills, trusts and asset protection for business owners and highly compensated individuals. Contact us today to schedule a consultation to ask questions and discuss your thoughts on estate planning.