Profits Interest – Info You Need to Know

You’ve probably heard of “stock options” that enable an individual to buy into a company at a future time. However, if you work for a limited liability company (LLC), you also have the option of utilizing a unique form of equity compensation known as “profits interest” which represents an actual current ownership interest in the LLC.

Tax Free Equity Compensation

A profits interest, when structured to be in compliance with relevant IRS “safe harbors,” is effectively tax free for the recipient, according to a great article published by Hutchison PLLC. This is because a profits interest basically represents an ownership interest in the future growth of the company but not an interest in the current value of the company.

Example of How a Profits Interest Works

Let’s say an LLC has three owners. Each owns one third of the company. Then, the company grants a 10 percent profits interest to an employee at a time when the company was worth $2 million. Five years later, the company sells for $5 million. Of the $5 million, the first $2 million is divided equally among the three original owners. Nothing from that $2 million goes to the holder of the profits interest because that money represents the value of the company when the profits interest was granted. However, the remaining $3 million is distributed 30 percent to each of the original members and 10 percent to the profits interest holder, who would receive $300,000 of the proceeds from the sale.

Profits Interest and Vesting

Profits interests can be subject to vesting in the same way as a stock option. Vesting can be time-based, so that the equity is earned as the employee continues to provide services over a period of years. Another option is to make vesting performance-based so the employee vests in the equity when they attain predetermined performance goals.

Who Is Eligible for a Profits Interest?

Profits interests can also be granted to non-employee service providers, such as managers, consultants, scientific advisors and the like. As with profits interests granted to employees, the holder of the profits interest becomes a member of the LLC for tax purposes.

Should You Consider Offering a Profits Interest to Your Employees?

Profits interests, especially those that are formulated to be in compliance with IRS safe harbor provisions, can be a very important compensation tool for LLCs. They do have complications, so it is important to consult with an experienced and professional business advisor before embarking on a profits interest grant program for your LLC. Contact InSight Law today to learn more.

Administering a Small Estate in Virginia – Important Info You Need to Know

Virginia has a set of unique rules that allows you to avoid probate if an estate is comprised of “small” assets (defined as assets totaling under $50,000). According to VA Code § 64.2-601, when the total estate does not exceed $50,000, a successor in interest, usually an heir-at-law or a beneficiary of the Will, can collect and distribute the assets without having to go through the full probate process.

If there is a Last Will and Testament, it must be admitted to probate, but there is no requirement that an executor or personal representative be appointed, according to the Virginia Academy of Elder Law Attorneys.  This is known as “recording” a Will.

To claim assets without being appointed executor or personal representative, the person collecting the assets must provide an affidavit signed by all the lawful successors in interest (usually the heirs-at-law or the beneficiaries under the Will) stating the following:

  1. The total estate, wherever located, does not exceed $50,000.00;
  2. At least 60 days have passed since the decedent’s death;
  3. No application for the appointment of an executor or personal representative is pending or has been granted in any jurisdiction;
  4. The Will, if any, has been admitted to probate;
  5. The claimant is entitled to collect the asset and the basis of that entitlement;
  6. The names and addresses of all other successors in interest;
  7. The name and addresses of the successor, or successors, designated to receive the assets on behalf of all the successors; and
  8. An acknowledgement that the claiming successor has a fiduciary duty to safeguard and promptly pay the assets to the lawful successors in accordance with Virginia law.

Assets Valued at Less than $25,000

According to VA Code § 64.2-602, if an asset is valued at less than $25,000, it is possible to pay or deliver that asset to a successor without an affidavit.  The only requirements to accomplish this are the following:

  1. At least 60 days have elapsed since the death of the decedent; and
  2. No application for the appointment of personal representative is pending, or has been granted, in any jurisdiction.

Mandatory Versus Permissive

Keep in mind that VA Code § 64.2-602 is permissive while VA Code § 64.2-601 is mandatory.  Many practitioners advise potential personal representatives of estates valued under $25,000 to go ahead and qualify as executor or personal representative. Doing this gives the executor or personal representative the Letter of Qualification they’ll need to collect assets and take any other action for which a Letter of Qualification may be necessary, such as accessing a safe deposit box.  This does, however, require the payment of the Court’s fees and probate tax, which is typically nominal in total.

Reach Out to InSight Law for Guidance

If you have been named a personal representative of a smaller estate, it is important to take the necessary steps to get the estate settled properly, which is why you should reach out to InSight Law. Our team of legal professionals are here to help.

Info You Need to Know About Moving Your Business Domicile To A Different State

If you decide it makes sense to relocate your company from the state of formation to a different state, there are a series of steps that must be taken in order to change the company’s domicile. This process is known as domestication. You are able to change the domicile from any state, but can only domesticate to a state that recognizes domestication.

Benefits of Domestication

The benefits of domestication include keeping the same tax ID (EIN), the same company structure, and with some states also the original date of formation. The disadvantage is cost and relative complexity of the process, compared to such alternatives as foreign qualification.

The Process

To change your company’s domicile, you must first be in good standing with the original state of registration. If your company is not in good standing, you need to first bring it to good standing by completing the necessary filing paperwork and paying specific fees. You might also be required to pay fines that have accumulated, or go through the process of reinstatement if the corporation was administratively dissolved.

There are several steps necessary to complete domestication. Those steps vary from state to state. Generally, the first step you need to take after ensuring your company is in good standing is to obtain a certified copy of your company’s articles of incorporation and a certificate of good standing from the original state of formation. Next, you need to draft the Articles of Domestication and file with the new state. After that, you need to dissolve the corporation in the old state and submit confirmation of dissolution with the state of domestication.

Many states, including the original and destination states, have various additional filing requirements that must be satisfied before domestication is complete, including:

  • Publications
  • An Initial list
  • Statements of information filings
  • Notifying the IRS

Various licenses and permits should also be obtained from your corporation’s new state of domicile.

States Supporting Domestication

Currently, 27 states support domestication in one form or another. But keep in mind, the exact rules will vary from state to state. For example, some states only allow domestication of corporations. In addition, there are some states that do not allow domestication from other specific states. For example, you cannot domestic a corporation that was formed in New York and domestication is sought in California.

In the DMV, both Virginia and the District of Columbia recognize domestication, but Maryland does not. Since Maryland has no provisions for entity domestication, if you plan to move your corporation to this state, you would need to choose between qualifying your existing company as Maryland Foreign Entity or dissolving it in the original state of registration and forming a new company in Maryland.

For more information about business entity formation, domestication, and other business planning issues, contact InSight Law. Our law firm is focused on client-first service. Take a moment to watch this video featuring an actual client discussing their experience with our business and estate planning law firm:

 

Which Small Businesses Get the 20 Percent Deduction?

When tax reform legislation was signed into law, a 20 percent deduction for owners of a variety of pass-through businesses, including limited liability companies, partnerships, so-called S corporations and sole proprietorships was created. The deduction effectively lowers a small business owner’s top rate to 29.6 percent from 37 percent.

However, when the legislation passed, there was ambiguity as to which “small businesses” would qualify for the preferential tax treatment. Well, the Treasury Department recently issued guidance that helps bring some clarity to this issue.

Those Who Qualify for the 20 Percent Deduction

The deduction can be claimed by business owners whose taxable income is $315,000 or less if you file your taxes jointly, according to a fantastic article published in the Wall Street Journal. This means owners of partnerships, S corporations, limited-liability companies (LLCs) and sole proprietorships with taxable income of $315,000 or less can get the 20 percent deduction for joint filers. If you are a single filer, you can get the 20 percent deduction if you make $157,500 or less.

Another benefit is that the 20 percent deduction is allowed under the Alternative Minimum Tax so the tax write-off will not be counted as a way of triggering the AMT.

If you own multiple business entities, you will have the option of aggregating those companies for tax purposes to claim the deduction. To qualify, you need to have (i) common ownership over the various entities, (ii) file in the same tax year and (iii) meet certain other requirements. This ability to aggregate will make it less burdensome for larger companies structured as pass-through businesses to take advantage of the benefit.

If your income is higher than $315,000, the break would be phased out over the next $100,000 of income for service-business owners such as doctors, attorneys and consultants. There are also restrictions associated with the level of wages paid and capital investment.

Those Who Do Not Qualify for the 20 Percent Deduction

Many owners of “specified service” businesses will not be able to claim the deduction, especially “high earning” owners. This means professionals such as doctors, dentists, pharmacists, lawyers, accountants, financial advisers, etc. will not qualify for the deduction.

The Treasury Department proposed a set of rules allowing business owners with gross receipts of $25 million or less to claim the tax benefit, but only if less than 10 percent of receipts are from one of the “specified service businesses.” Owners with gross receipts of greater than $25 million can claim the benefit if up to 5 percent of receipts are from such a business.

Can I Split My Business, or Businesses, to Get the 20 Percent Rate?

Generally, no. The concept of splitting up a business to meet the requirements for the 20 percent deduction has become known as the “crack and pack” strategy.  The Treasury Department published proposed rules containing anti-abuse provisions meant to prevent firms from simply being split into pieces in order to qualify, or maximize, the 20 percent deduction.

Important Questions Remain Unanswered

The proposed rules from the Treasury Department are helpful for planning purposes, but there remain an array of important questions concerning the new tax law. For example, can a business owner claim the 20 percent deduction on their state income tax return? The answer is not clear and will depend primarily on the state.

Speak to an Experienced Business Attorney Today

As you can see, federal tax laws have become even more complex and it is extremely important, in the wake of new tax provisions, to have the best legal advice possible. That is why you should contact InSight Law today to schedule a meeting with one of our team members. We are here to help.

The Importance of a Health Care Directive

As we age, there is a risk that our mental faculties will decline substantially or we’ll suffer a sudden, unexpected health issue that leaves us incapacitated and unable to make important healthcare decisions. I’ve confronted this harsh reality with members of my own family. My father developed Alzheimer’s and got to the point where he needed someone to step in and making important decisions on his behalf.

Another tragic example is the mental decline of comedian Tim Conway, famous for his role on “The Carol Burnett Show.” Conway was diagnosed with dementia and is “almost entirely unresponsive,” according to MSN News. It does not appear that a health care directive was in place, which has spurred a rancorous legal battle between Conway’s wife and his daughter about the quality of his medical care.

These unfortunate situations highlight the importance of having a detailed health care directive in place. You can have a health care directive drafted and incorporated into your estate plan.

Health Care Power of Attorney

An example of a viable directive is a “Health Care Power of Attorney.” This is a legal document that empowers you to select a spouse, family member or trusted friend to be the decision-maker regarding health care issues, in case you are unable to make medical decisions. This includes the decision where you will receive your care (at home, nursing home, hospital, etc.). The person you designate as the decision maker will be deemed your “agent.” Keep in mind, a proper agent must be at least 18 years of age and should be someone you (i) trust and (ii) is capable of handling the responsibilities associated with being your health care agent.

A health care power of attorney pertains to health care matters only and allows you to specify in writing the types of care you do, and do not, want to receive when you cannot make those decisions independently. This specification has the effect of limiting the discretion or powers of your agent regarding the types of care that are expressly covered in the legal document. It also gives clear instructions to health care providers about the type of care you want to receive.

It is important to remember that a health care power of attorney only takes effect if you cannot make your own health care decisions. In addition, you have the power to change your choices regarding agent or instructions at any time.

Check out this video of Bobby discussing strategies for disability planning:

Living Will

In addition to a health care power of attorney, you can also incorporate a living will in your estate plan. A living will is more limited than a health care power of attorney. It basically describes your choices for medical treatment for when you reach end of life. For example, if you wind up in a persistent vegetative state, do you want to be kept alive artificially? A living will that address this important, sensitive question.

Generally, a living will does not appoint an agent and does not grant discretion for choices independent of those identified in the document. A living will generally takes effect only when you are terminally ill and in need of life-sustaining medical treatment. It states your wishes for the kind of medical care you want should you become unable to state your wishes. Like a health care power of attorney, a living will may be revoked at any time.

Speak to an Experienced Trust and Estate Attorney

Drafting a health care power of attorney and/or living will can be complicated, since there are a myriad of legal requirements that must be met to ensure these documents are legally valid and enforceable. To ensure your health care documents are valid and sufficiently detailed, contact InSight Law today.

The Importance of a Health Care Directive

As we age, there is a risk that our mental faculties will decline substantially or we’ll suffer a sudden, unexpected health issue that leaves us incapacitated and unable to make important healthcare decisions. I’ve confronted this harsh reality with members of my own family. My father developed Alzheimer’s and got to the point where he needed someone to step in and making important decisions on his behalf.

Another tragic example is the mental decline of comedian Tim Conway, famous for his role on “The Carol Burnett Show.” Conway was diagnosed with dementia and is “almost entirely unresponsive,” according to MSN News. It does not appear that a health care directive was in place, which has spurred a rancorous legal battle between Conway’s wife and his daughter about the quality of his medical care.

These unfortunate situations highlight the importance of having a detailed health care directive in place. You can have a health care directive drafted and incorporated into your estate plan.

Health Care Power of Attorney

An example of a viable directive is a “Health Care Power of Attorney.” This is a legal document that empowers you to select a spouse, family member or trusted friend to be the decision-maker regarding health care issues, in case you are unable to make medical decisions. This includes the decision where you will receive your care (at home, nursing home, hospital, etc.). The person you designate as the decision maker will be deemed your “agent.” Keep in mind, a proper agent must be at least 18 years of age and should be someone you (i) trust and (ii) is capable of handling the responsibilities associated with being your health care agent.

A health care power of attorney pertains to health care matters only and allows you to specify in writing the types of care you do, and do not, want to receive when you cannot make those decisions independently. This specification has the effect of limiting the discretion or powers of your agent regarding the types of care that are expressly covered in the legal document. It also gives clear instructions to health care providers about the type of care you want to receive.

It is important to remember that a health care power of attorney only takes effect if you cannot make your own health care decisions. In addition, you have the power to change your choices regarding agent or instructions at any time.

Check out this video of Bobby discussing strategies for disability planning:

Living Will

In addition to a health care power of attorney, you can also incorporate a living will in your estate plan. A living will is more limited than a health care power of attorney. It basically describes your choices for medical treatment for when you reach end of life. For example, if you wind up in a persistent vegetative state, do you want to be kept alive artificially? A living will that address this important, sensitive question.

Generally, a living will does not appoint an agent and does not grant discretion for choices independent of those identified in the document. A living will generally takes effect only when you are terminally ill and in need of life-sustaining medical treatment. It states your wishes for the kind of medical care you want should you become unable to state your wishes. Like a health care power of attorney, a living will may be revoked at any time.

Speak to an Experienced Trust and Estate Attorney

Drafting a health care power of attorney and/or living will can be complicated, since there are a myriad of legal requirements that must be met to ensure these documents are legally valid and enforceable. To ensure your health care documents are valid and sufficiently detailed, contact InSight Law today.