Serving Indiana Since 1975

January 2021 Newsletter

| Jan 18, 2021 | Firm News



     The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.

     More On Client Capacity. The last issue and several earlier issues of this newsletter have addressed some of the concerns and legal issues applicable to client capacity and representing people with diminished capacity. As has been noted before, attorneys are held to a very high standard of client confidentiality, and those limitations still apply to clients who are suffering from a degree of incapacity. Although an attorney is authorized to take protective action to assist a client who is perceived to be incapacitated, information can only be revealed about the client to the extent reasonably necessary to protect the client’s interests. Protective action can be taken if the attorney believes that the client has diminished capacity, is at significant risk of substantial physical, financial, or other harm unless action is taken, and if the client cannot adequately act in the client’s own interest. Actions that may be taken include consulting with the family, initiating voluntary surrogate decision making (such as through the use of a durable general power of attorney), consulting with support groups, engaging other professional services, or taking other actions necessary to protect the client. The attorney must be guided by the client’s known wishes and values, the client’s best interests, the goals of minimizing intrusion into the client’s decision making autonomy, and maximizing the client’s capacities and respecting the client’s family and social connections. Some final comments regarding clients with diminished capacity will be offered in the next newsletter.

     Further Discussion Of Buy/Sell Agreements. As noted in the last issue of this newsletter, a buy/sell agreement is an agreement between co-owners of a business that controls the purchase and/or sale of shares or units of ownership as a result of a “triggering event.” A comprehensive buy/sell agreement may be essential to maintain the viability of a business once a triggering event occurs, such as the death of a stockholder of a corporation or a member of a limited liability company. The buy/sell agreement will typically establish the mechanism for the purchase of the stock, or a value for the breakup of the entity. Without a buy/sell agreement, the only options might be to let the business die or to liquidate the business, which may result in the loss of significant value compared to the value of the business as a going concern. Many new businesses do not take the time to develop an appropriate “exit strategy” since there is often a great deal of enthusiasm at the time of the inception of the enterprise, similar to the “honeymoon” period of a new marriage. Time and tribulations, however, take their toll. The cost of a buy/sell agreement can be minimal compared to the benefits offered by implementing an effective and well-structured agreement. It can ward off disputes among co-owners and family members and protect the goodwill and customer base of the enterprise. A buy/sell agreement makes sense for any enterprise, including corporations, partnerships, LLCs, and even in some cases sole proprietorships. We will continue our discussion regarding buy/sell agreements in the next issue of this newsletter.

     Importance Of Date Of Death Valuations. Currently, because of the inapplicability of inheritance tax in the State of Indiana, as well as the fact that the federal estate tax now does not apply to estates having a value for federal estate tax purposes of less than $11.7 million ($23.4 million for a married couple), it is common when a death occurs for family members to receive inherited assets without documenting the value of those assets as of the date of the decedent’s death. In many situations, the property inherited will receive a step-up in tax basis to the fair market value of the property at death, which means that if the property is sold later, there will be no capital gain tax attributable to the sale of that property unless it is sold for an amount greater than the date of death fair market value. As a simplified example, let us assume that a client owns farm or rental property that passes by a transfer-on-death deed to the decedent’s children. Since the transfer-on-death deed is a non-probate transfer, there is virtually nothing that needs to be done, other than the recording of an affidavit after death, in order to transfer the inherited property to the decedent’s children. Let us assume that the children do not document the value of that property as of the date of the decedent’s death. Several years later the children may sell that property, and it may sell for a substantial amount. If the value of the property as of the date of death was not documented, the decedent’s children may find themselves arguing with the Internal Revenue Service over what the value of the property was at death and whether or not there was a capital gain incurred as a result of the sale of the property. The capital gain tax could be very significant. It may be very difficult to argue years later against the IRS assertion that the property had a particular value as of the date of death, and the decedent’s children would be in a much better legal position if they had documented the value of the property as of the date of the decedent’s death by obtaining an appraisal shortly after the parent’s death occurred. The same issues arise in regard to capital stocks and other investments inherited by children and others from a decedent. Because the settlement of estates has been much simplified in recent years, and because many people utilize non-probate transfer devices for the transfer of property at death (including joint ownership, pay-on-death and transfer-on-death arrangements, trusts, and certain other beneficiary arrangements), it is very common for people to disregard some of the legal niceties that should be given attention when a person’s death occurs. My advice to all readers is to be sure that you get proper and effective legal, tax, and financial advice while you are living, and in regard to your children and other beneficiaries, you should be sure that you admonish them to get advice and guidance when your death occurs. Trying to do too much on one’s own can create significant legal and tax complications and disadvantages later because of the many pitfalls which can occur without effective advice and representation.

     Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.