Decrease in the Gift and Estate Tax Exemption

One proposal includes a decrease in the gift and estate tax exemption. The gift and estate tax exemption allows a certain amount of gifts during a person’s life and at their death to be made without imposing the gift and estate tax. Currently, any gift made over $15,000 during the year is taxable and reduces a person’s overall exemption.[1] However, the total amount that can be exempted in a lifetime is $11.7 million for individuals or $23.4 million for married couples.[2] The exemption was increased to this amount in 2017, but only for a limited period of time and is set to decrease back to $5.49 million for one person or $10.98 for married couples in 2026.[3] This total amount is reduced by any taxable gifts that have been made in previous years.

President Biden’s campaign proposed to reduce the gift and estate tax exemption back to $3.5 million per person or $7 million for married couples, which was the amount in previous years.[4] A decrease in this exemption can result in increased tax liability for those with large estates. This, in combination with a proposed tax rate increase to 45% can significantly affect any intended estate planning.[5]

Elimination of the Step-Up in Costs Basis Benefit

Another proposed change includes elimination of the step-up in costs basis benefit. This benefit limits capital gains taxes by not taxing the increase in value on certain asserts that are transferred at a person’s death. The “step-up in costs basis” for capital gains tax allows the inherited property to be valued at the fair market value time of the decedent’s death, rather than at the time that the decedent acquired the property.[6] Then if the beneficiary sells the property, the income tax is determined by the difference between the sale price and the value of the property at the decedent’s death (the “stepped-up” basis.)[7]

This “step-up” allows the beneficiary to avoid a large tax on assets that have grown in value. If this is eliminated, the beneficiary would be taxed on the same basis that the decedent was subject to at the time of their death (“carryover basis”).[8] As a result, a beneficiary would have to pay capital gains tax if and when they sold the assets.[9] The capital gains tax could also be increased to 39.6% which further increases the burden on the beneficiary if the assets grow in value.[10]

There are some creative solutions that can be adopted to avoid these ramifications such as selling assets and gifting cash or paying the income tax on the intended gift so that it is no longer treated as gift. An experienced estate planning attorney can help you make decisions as to whether you should take advantage of the current law by making a large gift this year or if it is beneficial in your circumstances to wait.

What Now?

Another outstanding possibility is that the changes can be made retroactive to January 2021, which would impact those who plan to make any large transfers in the coming year and requiring them to pay gift tax on transfers that occur.[11]

Recent legislation was introduced in March in the Senate that adopts the decrease in the gift and estate tax exemption by decreasing it to $3,500,000 per person and $7,000,000 for married couples.[12] As of right now, this current bill does not propose to eliminate the step-up basis. However, it is uncertain if the details of the bill will become law or if it will change substantially. Under the current language, the changed would not take effect until January 1, 2022.[13]

Due to these uncertainties, it is important that you examine your estate planning strategy to determine if you need to make any significant changes before the end of the year to devise a gifting and estate plan that best protects you and your family.

[1] https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

[2] Gassman, Alan, “Senate Estate And Gift Tax Bill Will Reduce Exemption To $3,500,000 And Take Away Many Opportunities,” March 27, 2021 at https://www.forbes.com/sites/alangassman/2021/03/27/senate-estate-and-gift-tax-bill-will-reduce-exemption-to-3500000-and-take-away-many-opportunities/?sh=2c1efcf04712

[3] https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-personal-taxes

[4] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html

[5] Id.

[6] https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc

[7] Id.

[8] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html

[9] Id.

[10] Id.

[11] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html

[12] Gassman, Alan, “Senate Estate And Gift Tax Bill Will Reduce Exemption To $3,500,000 And Take Away Many Opportunities,” March 27, 2021 at https://www.forbes.com/sites/alangassman/2021/03/27/senate-estate-and-gift-tax-bill-will-reduce-exemption-to-3500000-and-take-away-many-opportunities/?sh=2c1efcf04712

[13] Id.

The post To Gift or Not to Gift, that is the Question: Possible Changes to Tax Law appeared first on MorganTheeler LLP.

Probate can be costly and time consuming. A transfer at death deed allows you to avoid this process, while also identifying the intended beneficiaries of your real estate. In order to create a transfer on death (“TOD”) deed, a person must be at least 18 years and of sound mind.[2] The deed itself must state that the property will transfer to the designated beneficiary at the property owner’s death, and it must also be recorded with the register of deeds in the county where the property is located.[3] The TOD is created during your lifetime and is also revocable by you at any time.[4]

The designated beneficiary does not have accept or even know about the deed when it is made.[5] Nor does a designated beneficiary have to provide anything to the transferor in exchange for the deed being created.[6] The transfer on death deed only becomes effective upon the transferor’s death.[7] When a transferor dies, the property that is subject to the TOD transfers to the beneficiary, as long as the beneficiary is still living.[8]

A great advantage of a TOD is that it does not affect a transferor’s interest in their property while they are alive.[9] You are free to otherwise transfer or encumber your property, even if a transfer on death deed has been created and recorded.[10] At the same time, it does not create a legal interest in the property for the beneficiary while the transferor is still living.[11]

A transfer on death deed can also be used to split property between more than one beneficiary. In that case, the beneficiaries then share the property equally between them.[12] If you intend a more complicated ownership split, the transfer on death deed may not be the right choice for your estate planning. A transfer on death deed is also a useful tool to retain ownership of land that you wish to flow into an irrevocable trust after your death.

Another aspect to consider is if you intend the property to pass to more than one beneficiary, but one of the beneficiaries passes away before you, then the entirety of the property goes to that one remaining beneficiary upon your death.[13] As an example, if a mother intends for her home to pass on to her daughter and son and properly creates and records a transfer on death deed, the home will be owned equally by the daughter and son upon her death. However, if the son dies before the mother, and the mother does not revoke the transfer on death deed or otherwise specific that the interest should survive, then upon her death, the home will go entirely to the daughter. This might be of concern if the mother wanted some interest of the property to go to her son’s family, such as his wife and children, which is more complicated. In the event the transfer on death deed does designate the property to be distributed to the descendants (children) of a deceased child, and those children are minors, a separate legal conservatorship action may be needed to arrange for signature authority to lease or sell the minor’s share of the property. In such circumstances, using a testamentary trust or a living trust may be a better estate plan tool.

It also important to know that while the property that is the subject of the transfer on death deed does not go through probate, it is still subject to claims by the transferor’s creditors.[14] A transfer on death deed is still subject to estate taxes, as well as capital gains tax.[15] However, due to the step-up in costs basis benefit, the capital gains taxes is limited by allowing the inherited property to be valued at the fair market value time of the transferor’s death, rather than at the time that the beneficiary intends to dispose of the property.

For many, avoiding probate with a transfer of death deed may be beneficial option. An experienced estate planning attorney can help you determine if a transfer on death deed is the right strategy for you.

[1] SDCL 29A-6-401

[2] SDCL 29A-6-407

[3] SDCL 29A-6-408(2-3)

[4] SDCL 29A-6-405

[5] SDCL 29A-6-409(1)

[6] SDCL 29A-6-409(2)

[7] SDCL 29A-6-403

[8] SDCL 29A-6-415(2)

[9] SDCL 29A-6-414

[10] SDCL 29A-6-414(1)

[11] SDCL 29A-6-414(2)

[12] SDCL 29A-6-415(3)

[13] SDCL 29A-6-415(4)

[14] SDCL 29A-6-416

[15] “Transfer on Death Tax Implications.”https://www.findlaw.com/estate/probate/transfer-on-death-tax-implications.html#:~:text=Estate%20Taxes,avoid%20or%20minimize%20estate%20taxes.

The post Another Estate Planning Option: Transfer on Death Deeds appeared first on MorganTheeler LLP.

Does My State Allow Non-Compete Clauses?

Not all states are created equal with respect to their non-compete clauses. Due to this, it is important to have an attorney representing you who is familiar with the intricacies of each state’s noncompetition clauses. 

Some States Will Not Enforce a Non-Compete Clause

If you are looking at a job in California, North Dakota or Oklahoma, the good news for you that covenants not to compete are unenforceable in those states.[1] 

In other states the law is not so clear cut. For example, the District of Columbia recently passed an almost total ban on the enforcement of non-compete agreements; however, it explicitly excludes “medical specialists” from this ban. This does not mean everyone in the medical field is within this category, either. In order the be excluded you have to be a licensed physician, have completed a medical residency, AND have a total compensation of more than $250,00 per year.[2]

Other States Exempt Medical Professionals

To keep you guessing, some states allow the enforcement of a covenant not to compete but exempt some medical professionals from that enforcement. Arkansas does not allow a covenant not to compete to be enforced against licensed medical professionals.[3] Colorado and Delaware also fall into this category but allow a physician to be liable for damages resulting from competition in certain instances.[4] 

A covenant not to compete in an employment agreement with a physician in New Hampshire or Massachusetts is void.[5] This is also the case in New Mexico and it is extended to dentists, osteopaths, podiatrists, and certified registered nurse anesthetists.[6] However, this does not apply if you are a shareholder, owner, partner or director of a practice.[7] Rhode Island also allows a covenant not to compete when there is a sale or a purchase of a practice, but not for the average physician contract.[8] Texas also exempts physicians in certain circumstances.[9]

The law continues to be in flux in South Dakota where a recent bill was introduced to now allow a covenant not to compete for any physicians, physician assistants, certified nurse practitioners, certified nurse midwifes, certified registered nurse anesthetists, and registered nurses.[10] This bill recently passed the House and Senate and has gone to the South Dakota governor to (hopefully) be signed.[11]

States that Allow Restrictive Covenants

What if you find yourself looking for a job in one of the other 30+ states that allow employers to enforce covenants not to compete against physicians and other medical professionals? It is important to know that not all geographic and duration limits are created equal as some states allow for larger limits while others are more restrictive. 

Interestingly, Idaho only enforces covenants not to compete against “key employees or independent contractors.”[12] If a key employee, then the covenant cannot exceed 18 months.[13] Illinois only allows the enforcement of a covenant if there is at least two years of continuous employment prior to the time it is to be enforced.[14] In Missouri, it is presumed that a covenant of not more than 1 year is reasonable.[15] Montana says they are enforceable as long as reasonable in time and place, based on consideration, and afford reasonable protection.[16] 

Some states allow for covenants of non-compete to generally be enforced but have certain requirements for their enforcement against physicians. In Connecticut, a covenant not to compete after July 1, 2016, cannot restrict a physician’s activities for more than a year or more than 15 miles.[17] In Florida, there is an exception regarding physicians that voids a covenant not to compete if “one entity employs or contracts with, either directly or through related or affiliated entities, all physicians who practice such specialty” in the same county. These are void for three years after the entry of a second employer into the same geographic market.[18] In Tennessee, a restrictive covenant in a physician contract is reasonable if it is for less than two years and a 10-mile radius.[19] 

Physician Buy-Outs

In Indiana, a recently enacted law allows covenants to be enforced against a physician as long as it meets certain requirements including the ability of a physician to continue treatment of a patient if the patient requests.[20] It also requires the agreement to include a provision that would allow a physician the opportunity to “buy out” their noncompetition agreement.[21] Texas also requires that a physician be given an option to buy themselves out their noncompetition agreement.[22]

As you can see, the landscape of restrictive covenants as it relates to medical professionals can be stressful and shifting. No matter where your job search takes you, you will want an experienced attorney to represent your interests. For more detailed information regarding the law in your respective state, use our interactive map.

[1] Cal. Business and Professions Code, section 16600; 15 OK Stat § 15-219A (2014), N.D.C.C. § 9-08-06 (2019).

[2] D.C. ACT 23-563 (2020).

[3] AR Code § 4-75-101 (2017).

[4] C.R.S. § 8-2-113 (2018); 6 DE Code § 2707 (2012).

[5] NH Rev § 329:31-a (2016). 

[6] NM ST § 24-1l-2 (2015).

[7] NM ST § 24-1l-2 (2015).

[8] RI Gen L § 5-37-33 (2017). 

[9] TEX. BUS. & COM. CODE ANN. § 15.50 (1991).

[10] SD HB 1154 (2021).

[11] SD HB 1154 (2021).

[12] ID ST § 44-2701 (2008).

[13] ID ST § 44-2704 (2016). 

[14] Fifield et al. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327. 

[15] R.S. Mo. § 431.202 (2001).

[16] Wrigg v. Junkermier, 265 P.3d 646 (Mont. 2011). 

[17] Conn. Gen. Stat. § 20-14p (2016). 

[18] FL ST § 542.336 (2019). 

[19] TN ST § 63-1-148 (2008). 

[20] Ind. Code § 25-22.5-5.5-2 (2020).

[21] Ind. Code § 25-22.5-5.5-2 (2020).

[22] TEX. BUS. & COM. CODE ANN. § 15.50 (1991).

The post “An Ounce of Prevention: Non-Compete Clauses in Medical Employment Contracts” appeared first on MorganTheeler LLP.

Protecting yourself and your assets in South Dakota through a Domestic Asset Protection Trust is a great preemptive way to ensure that your hard-earned assets remain shielded from potential lawsuits.

What is a Domestic Asset Protection Trust?

A Domestic Asset Protection Trust (“DAPT”) is an irrevocable trust that safeguards the assets placed in the trust from potential lawsuits or any other third-party creditors.

In a DAPT, a trustee is appointed to manage the trust and you are named as the beneficiary. The trustee then has discretionary authority to distribute the trust assets to you. However, due to the nature of the DAPT, you as the beneficiary still have a certain amount of control over assets in the trust, this includes: the right to veto a distribution, the receipt of income from the trust, and the right to remove the trustee in certain circumstances.[1] This control does not create third-party liability in the way that a traditional revocable trust would.

Why South Dakota?

Not all states provide the option of a DAPT. Currently, South Dakota is among only 17 states that allow for its creation. Among those states, South Dakota is consistently rated as one of the states with superior trust protection. In 2020, South Dakota was ranked the second-best state in the nation for Domestic Asset Protection Trusts.[2]

South Dakota is a tax-friendly state as there is no state income tax. South Dakota also has strong trust privacy laws. The trust and all court orders relating to it are sealed upon filing and may not be made a part of the public record of the proceeding.[3]

What is required to create a DAPT in South Dakota?

You, as the beneficiary of the trust, do not have to be resident of South Dakota to establish a DAPT and take advantage of its benefits. In addition, the trust property does not have to be located in South Dakota.

To create the DAPT, you must name only one trustee who resides in South Dakota.[4] This leaves with you option to name other co-trustees that are not residents.[5] The language of the DAPT must: (i) expressly incorporate South Dakota law to govern the validity, construction, and administration of the trust; (ii) state that the trust is irrevocable; and (iii) contain a spendthrift clause (state that the interest of the transferor or other beneficiary may not be transferred, assigned, etc., before the qualified person distributes the property to the beneficiary).[6]

What am I protected from?

In the event that a lawsuit is brought against you and a creditor makes a claim for your assets, a South Dakota DAPT provides you protection as long as your property was transferred to the trust two years before the claim arose.[7] This two-year “look back” period for a fraudulent conveyance claim is one of the shortest time periods in the United States.[8] In addition, the creditor has the enhanced burden of proving their case by clear and convincing evidence.[9]

In contrast, if the claim arises before your transfer of assets, the creditor has until two years after the transfer or six months after the creditor discovers the transfer, whichever is longer.[10]

A DAPT will not protect your assets from claims regarding alimony, child support, or property settlement relating to a divorce that existed at the time of the transfer of assets to the trust.[11] However, if married at the time of the transfer and your spouse is notified of the transfer of property into the trust and the spouse does not object, the spouse cannot become a creditor to the trust.[12]

Why should a physician consider a DAPT in South Dakota?

As a physician, you are both high earner and more susceptible to lawsuits than many other careers. According to the American Medical Association, 34% of all physician have been sued with almost 17% of all physicians having been sued more one time.[13] In addition, “on average 68 liability claims were filed per every 100 physicians.”[14]

These numbers stress the importance of taking proactive steps to ensure that your assets are protected before a claim occurs and a South Dakota Domestic Asset Protection Trust is a great start.

[1] SDCL 55-16-2(2).

[2] Steve Oshins’ 11^th Annual Domestic Asset Protection Trust State Rankings Chart created in April 2020, https://db78e19b-dca5-49f9-90f6-1acaf5eaa6ba.filesusr.com/ugd/b211fb_0e205011bc5f4e4cb9d6232ee68647ca.pdf

[3] SDCL 21-22-28.

[4] SDCL 55-16-3.

[5] SDCL 55-26-4.

[6] SDCL 55-16-2(1-3).

[7] SDCL 55-16-10(2).

[8] SDCL 55-16-10.

[9] SDCL 55-16-10(3).

[10] SDCL 55-16-10(1).

[11] SDCL 55-16-15

[12] SDCL 55-16- 15(3)

[13] Guardado, Jose, “Policy Research Perspectives: Medical Liability Claim Among U.S. Physicians,” page 3, www.ama-assn.org

[14] Id.

The post Great Faces, Great Places, Great Asset Protection appeared first on MorganTheeler LLP.

If your corporate structure has real estate, such as farmland, included as an asset there are important tax ramifications you should consider before distributing that land. When distributed to the shareholders, the transaction is taxed by the IRS as a sale. [1] It is also taxed as a distribution equal to the fair market value of property.[2]

This is an expensive transfer if your family members are the shareholders of the corporation. The corporation pays the income tax on the increase in value of the land and likewise, the shareholders (family members) pay taxes on the dividend on the fair market value of the land.[3]

In addition, there is no “step-up” basis for land held in a C-Corporation.[4] Normally, the “step-up” basis allows a person to limit capital gains taxes by not taxing the increase in value on certain asserts that are transferred at a person’s death. This “step-up” allows the beneficiary to avoid a large tax on assets that have grown in value. Without this “step-up” basis, the beneficiary would be taxed on the same basis that the decedent was subject to at the time of their death (“carryover basis”).[5] As a result, a beneficiary would have to pay capital gains tax if and when they sold the assets.[6]

If you hold your farmland in a corporation it is important to consider all tax repercussions before removing the land from the corporation. To avoid these potential tax liabilities, you may want to consider holding your land in a separate entity then a corporation. An experienced financial planning attorney can help assess your situation and provide you with guidance tailored to your specific needs.

[1] Williams, Elizabeth, “Avoid the Land Trap,” http://dtnpf-digital.com/article/Avoid+The+Land+Trap/1565221/184555/article.html

[2] Id.

[3] Id.

[4] Id.

[5] Sullivan, Paul, “The Estate Tax May Change Under Biden, Affecting Far More People,” January 15, 2021 athttps://www.nytimes.com/2021/01/15/your-money/estate-tax-biden.html

[6] Id.

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