Act Number 323 of the 2011 Regular Session of the Louisiana Legislature modified the rules on small successions in Louisiana. In addition to some other changes, the law allows the use of the small succession procedure, which generally involves filing an affidavit rather than opening judicial proceedings, to transfer title to immovable property in Louisiana if the property has a value of $75,000.00 or less as of the date of death. Further, this new rule applies to successions of individuals who died either before or after the effective date of the legislation. Under this new rule, if a decedent was domiciled outside of Louisiana at the time of death and had a testament that has been probated by a court order of another state, then title to the immovable property in Louisiana, including mineral interests, can be transferred through the small succession procedure if the property has a gross value of $75,000.00 as of the date of death.

The new legislation may need some modification as it appears to only apply to ancillary probate proceedings that are testate and not intestate while it applies to Louisiana residents who die intestate. Given the fact that immovable property in Louisiana would be governed by Louisiana’s rules of intestacy, a non-Louisiana resident who dies intestate should be able to benefit from the same procedure. In any event, the new legislation is a step in the right direction to assist with ancillary probate proceedings in Louisiana, particularly when the property in Louisiana of nominal value. Often, the costs of an ancillary probate can be greater than the property involved.
 

After a long delay, Congress has passed and President Obama has signed into law the new federal estate and gift tax legislation. It has been very difficult for some individuals to prepare an appropriate estate plan not knowing what the potential federal estate and gift taxes will be. For the next two years, 2011 and 2012, there is some certainty. Parts of the new legislation may not impact everyone, but questions always abound concerning "death taxes". Now is an excellent time to review your estate planning documents to determine whether or not they continue to carry out your intentions.

Federal Estate Tax Exemption Amount and Federal Gift Tax Exemption Amount

Beginning January 1, 2011 and continuing through 2012, the federal estate tax exemption amount will be $5 million and the federal gift tax exemption will also be $5 million. This essentially means that a married couple can pass $10 million in assets to their children without any federal estate or gift tax, with proper estate planning. The top tax rate for the federal estate and gift taxes for 2011 and 2012 will be thirty-five percent (35%). The new exemption and rate provisions are applicable only for deaths or gifts in 2011 or 2012.

Effectively, the exemption for the federal estate and gift taxes are unified again. The gift tax exemption and the estate tax exemption will be the same $5 million amount. Also, the Generation Skipping Tax (GST) Exemption is now $5 million, making it easier to transfer wealth to grandchildren.

For decedents dying after December 31, 2010, the last predeceased spouse’s federal estate tax exemption that is unused at that spouse's death will carry over to the surviving spouse's estate. This concept is called portability. Therefore, if a surviving spouse remarries, he or she must look to the unused exemption of their latest spouse to die. It is critical to file an estate tax return for the estate of the predeceased spouse in order to get the portability benefit.

Decision to Make Large Gifts

With the federal gift tax exemption increasing to $5 million, persons having significantly large estates can consider gifting significant amounts to children in order to remove future appreciation or income from the parents' estates. It should also be pointed out that there is no more Louisiana gift tax. This tax was repealed effective July 1, 2008.

IRA Distribution to Charity

For 2010 and 2011, the new tax law allows the tax free distribution to a charity from an individual retirement account of up to $100,000.00 per taxpayer per taxable year. The legislation allows individuals to make charitable transfers during January of 2011 and treat them as made during 2010.

Other Considerations

While most of the above matters concern federal estate and gift taxes, you should consider whether or not your estate planning documents currently carry out your wishes and desires. Also, have there been changes in your situation, such as any of the following, which would require a review of your estate planning documents?:

1. Has there been a death in the family involving a legatee under the will?
2. Has there been a change in your choice of executor under your will or agent under your power of attorney? 
3. Are your children now all twenty-four years of age or older without any mental or physical incapacity which would allow you to modify your will which previously provided for satisfaction of forced heirship?
4. Is the financial institution which you named as trustee of a testamentary trust still doing business in Louisiana?
5. Has there been a divorce or other change in family circumstance?
6. Has there been a significant change in the value of your estate?
7. Does the new law allow you more flexibility in your estate plan without negative estate tax consequences?

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As estate planning attorneys, we receive calls from clients concerning the use of revocable living trusts in estate planning. The general public is invited to seminars on the subject, they receive literature in the mail, and, in some cases, receive in-home visits from parties, who are usually not attorneys, who advocate the use of the revocable living trust. Over the years, we have responded to clients to answer their questions concerning what the living trust will do and what it will not do. What follows is a discussion of what we call the “Six Myths” of the revocable living trust. 

Myth No. 1: A living trust saves taxes.

A blanket statement that a living trust saves taxes is subject to examination. First of all, what types of taxes are being discussed? One should know that the Louisiana inheritance taxes disappeared in 2004. Accordingly, State of Louisiana inheritance taxes do not come into play with respect to a trust or a will. The Federal Estate Tax may be applicable whether there is a will or a trust. Some parties advocating the revocable living trust indicate that the trust is necessary in order to obtain the benefit of the $5 million Federal Estate Tax exemption. This is not true. The $5 million Federal Estate Tax exemption can be obtained without the use of a will or a trust. The exemption is not utilized when bequests are made through a trust or a will to a surviving spouse; however, federal law for the years 2011 and 2012 provides for “portability” of the exemption of the spouse whose Federal Estate Tax exemption has not been used. This portability applies to the estate of that deceased spouse’s surviving spouse, at least for 2011 and 2012.

Many assets in an estate are referred to as “non-probate assets,” such as annuities, IRAs, and 401k plans. In the event that a trust is made the beneficiary of such accounts, there could be potentially higher federal income taxes. This is clearly a trap for the unwary. Income tax consequences will turn on the design of the trust and, in particular, the design for distribution of income from the trust assets.

Most of the parties who advocate the revocable living trust also indicate that the settlor of the trust needs to make a “pour-over will.” The purpose of the pour-over will is to leave to the trust any assets that were not otherwise placed into the revocable living trust before death. The existence of the will itself requires that the will be filed with the court. Louisiana law requires that anyone having a will of the deceased must file it with the Clerk of Court’s office. The will cannot be left aside. Additionally, the major part of “probate” or the succession of an individual involves the valuation of the assets of the succession in order to get a step up in basis, not only for the deceased spouse’s community property half, but also for the community property half of the surviving spouse. Therefore, placing assets in a trust does not do away with the cost of having appraisals prepared, valuing stocks and bonds, and valuing other assets in order to obtain the benefit of a step up in federal income tax basis which can reduce future income tax costs when such properties are sold. If assets are placed in the trust, then at some point when the surviving spouse dies the assets need to be distributed, and if it involves real estate, then acts of conveyance must be prepared and recorded for the conveyance to actually be accomplished.

Myth No. 3: The cost of the living trust is less than the cost of a will.

The cost of a will depends upon what the testator wants to accomplish. If the testator simply wants to leave all their assets to a surviving spouse, then a very simple will is all that is necessary. The cost of a living trust can be anywhere from $2,500 to $3,500, even with some of the so-called living trust services.

As stated above, if a pour-over will is prepared, then such must be filed with the Clerk of Court’s office. The cost of valuing all the assets in the succession, whether a trust or a will, is involved. Unfortunately, the “upfront fees” with respect to a trust when added to the work that still needs to be done after death make the cost of the living trust substantially higher.

Myth No. 4: The living trust allows for immediate access to succession assets and management of such assets, but a will does not.

Approximately ten years ago, Louisiana adopted the concept of “independent administration.” If the executor is appointed in a will as an independent executor of an estate, then the executor may sell, lease or otherwise dispose of assets of the succession without having to obtain court authority. All that is required is for the original will to be filed with the court, and the court will “qualify the executor as the independent executor.” This allows the executor to manage the succession assets in an unimpeded manner. Therefore, real estate can be sold, as well as stocks and bonds and other securities, without having to petition the court for authority.

Myth No. 5: The living trust protects all assets.

As succession attorneys, we see that the largest asset involves non-probate assets, such as IRAs, annuities, life insurance proceeds and other retirement-type assets. Since these are non-probate assets, these assets are not transferred into a living trust and items such as IRAs and retirement plan accounts cannot be transferred into living trusts because of negative tax consequences. Therefore, the living trust is wasted because the majority of the assets are non-probate assets. During the lifetime of the settlors, the assets transferred to the trust are still subject to the claims of creditors. Most of these trusts do not attempt any type of Medicaid planning. Additionally, we have found that some “door-to-door” salesmen usually obtain the services of an attorney that is not experienced in estate planning, estate taxes or the use of trusts. These trusts have been “cobbled together” from forms obtained from Texas, or they continue the same defects and problems because they are simply copied from other documents. As always, consumers should be cautious of things that sound too good to be true.

Myth No. 6: A living trust is better than a will because the living trust cannot be contested.

With respect to capacity to make a donation “mortis causa” which involves making a will, La. Civil Code art. 1477 provides as follows: “To have capacity to make a donation inter vivos or mortis causa, a person must also be able to comprehend generally the nature and consequences of the disposition that he is making.” Further, the capacity to donate mortis causa must exist at the time the testator executes the testament. See, La. C.C. art. 1471. Also, a testament may be declared null upon proof that it is the product of fraud or duress, or is the product of influence by the donee or another person that so impaired the volition of the donor as to substitute the volition of the donee or other person for the volition of the donor. See, La. Civil Code arts. 1478 and 1479.

With respect to capacity concerning a person establishing an inter vivos trust, La. R.S. 9:1763 provides as follows: “A person having capacity to contract by onerous title may be a settlor of an onerous inter vivos trust. A person having capacity to contract by a gratuitous title may be a settlor of a gratuitous inter vivos trust.” The Comments to La. R.S. 9:1763, Comment D, provide as follows: “A person must have the capacity to make donations inter vivos and the capacity to contract in order to be a settlor of a trust gratuitous as to one beneficiary and onerous as to another.” As to the capacity to make a contract, La. C.C. art. 1918 provides as follows: “All persons have capacity to contract, except unemancipated minors, interdicts and persons deprived of reason at the time of contracting.” Accordingly, a person making a will or a person establishing an inter vivos trust must have capacity in any event. Comments by those selling living trusts that a trust is harder to overturn than a will are completely without merit.
 

The federal First Circuit Court of Appeals recently rejected a taxpayer’s claim for a refund based on recharacterization of a payment for a non-competition agreement. Muskat v. United States, 2009 WL 211067 (1st Cir. 2009).

In connection with the sale of a business structured as an asset sale, the Buyer and the CEO (who was also the largest shareholder of the Seller) agreed in definitive documents that $1.0 million of the retained CEO’s new compensation package would be allocated to his non-compete covenants. Although the CEO initially recorded that payout as ordinary income for his 1998 taxes, in 2002 he filed an amended return for 1998, recharacterizing the $1 million payment as consideration of his personal goodwill, which he argued entitled him to capital gain treatment (which would have entitled him to a refund of over $200,000). The IRS denied Muskat’s request so he brought an enforcement action against the IRS. The district court, too, denied his request, finding that Muskat lacked “strong proof” that the non-competition payment was intended as payment for personal “goodwill” rather than as a covenant not to compete.
 

This case, however, raises a point of consideration for drafters and parties to non competition agreements and asset purchase agreements where one of the primary assets is goodwill. Although Muskat had to overcome a significant burden (of strong proof) to reverse the IRS qualification, the First Circuit did note that the compensation under the agreement expressly was for Muskat’s promise not to compete against the Buyer and “to protect [the target’s] goodwill.” Query whether Muskat would have prevailed if the documents allocated a portion of the consideration paid to his personal goodwill. Companies and individuals dealing in non-competition agreements in connection with the sale of a business or goodwill should consult a tax professional for advice about these issues.
 

On December 23, 2008, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 (the Act) into law.  Section 201 of the Act waives any required minimum distributions (RMDs) for 2009 from retirement plans that hold each participant's benefit in an individual account, such as § 401(k) plans and § 403(b) plans, and certain § 457(b) plans.  The Act also waives any RMD for 2009 from an Individual Retirement Arrangement (IRA).

The Act does not waive any 2008 RMDs, even for individuals who were eligible and chose to delay taking their 2008 RMD until April 1, 2009 (e.g., retired employees and IRA owners who turned 70 1/2 in 2008).  These individuals must still take their full 2008 RMD by April 1, 2009.  The 2009 RMD waiver under the Act does apply to individuals who may be eligible to postpone taking their 2009 RMD until April 1, 2010 (generally, retired employees and IRA owners who attain age 70 1/2 in 2009).  However, the Act does not waive any RMDs for 2010.

If a beneficiary is receiving distributions over a 5-year period, he or she can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period.  See IRS Notice 2009-9 which can be found here.  

Historically, the IRS has said that a disregarded entity could (and maybe should) use the owner's taxpayer identification number for income and other tax purposes. For employment tax reporting, the IRS issued Notice 99-6, 1999-1 CB 321 , which said that employment taxes for employees of a disregarded entity could be reported by a disregarded entity in one of two ways:

(1) Calculation, reporting, and payment of all employment tax obligations with respect to employees of a disregarded entity by its owner (as though the employees of the disregarded entity are employed directly by the owner) and under the owner's name and taxpayer identification number; or

(2) Separate calculation, reporting, and payment of all employment tax obligations by each state law entity with respect to its employees under its own name and taxpayer identification number.

The regulations provide the following example:

(i) LLCA is an eligible entity owned by individual A and is generally disregarded as an entity separate from its owner for Federal tax purposes. However, LLCA is treated as an entity separate from its owner for purposes of subtitle C of the Internal Revenue Code. LLCA has employees and pays wages as defined in sections 3121(a), 3306(b), and 3401(a).

(ii) LLCA is subject to the provisions of subtitle C of the Internal Revenue Code and related provisions under 26 CFR subchapter C, Employment Taxes and Collection of Income Tax at Source, parts 31 through 39. Accordingly, LLCA is required to perform such acts as are required of an employer under those provisions of the Internal Revenue Code and regulations thereunder that apply. All provisions of law (including penalties) and the regulations prescribed in pursuance of law applicable to employers in respect of such acts are applicable to LLCA. Thus, for example, LLCA is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. See sections 3402 and 3403 (relating to income tax withholding); 3102(b) and 3111 (relating to FICA taxes), and 3301 (relating to FUTA taxes). In addition, LLCA must file under its name and EIN the applicable Forms in the 94X series, for example, Form 941, “Employer's Quarterly Employment Tax Return,” Form 940, “Employer's Annual Federal Unemployment Tax Return;” file with the Social Security Administration and furnish to LLCA's employees statements on Forms W-2, “Wage and Tax Statement;” and make timely employment tax deposits. See §§31.6011(a)-1, 31.6011(a)-3, 31.6051-1, 31.6051-2, and 31.6302-1 of this chapter.

(iii) A is self-employed for purposes of subtitle A, chapter 2, Tax on Self-Employment Income, of the Internal Revenue Code. Thus, A is subject to tax under section 1401 on A's net earnings from self-employment with respect to LLCA's activities. A is not an employee of LLCA for purposes of subtitle C of the Internal Revenue Code. Because LLCA is treated as a sole proprietorship of A for income tax purposes, A is entitled to deduct trade or business expenses paid or incurred with respect to activities carried on through LLCA, including the employer's share of employment taxes imposed under sections 3111 and 3301, on A's Form 1040, Schedule C, “Profit or Loss for Business (Sole Proprietorship).”

These regulations do not change the fact that a disregarded entity will continue to be disregarded for other Federal tax purposes.
 

1. The taxpayer must own each of the properties (the two properties exchanged) for the "qualifying use period," a term defined in the Revenue Procedure as either the 24 month period before the exchange (for the relinquished property) or the 24 month period after the exchange (for the replacement property). Therefore, for the relinquished property, the taxpayer must have owned the property for at least 24 months immediately before the exchange and for the replacement property, the taxpayer must continue owning it for at least 24 months immediately after the exchange.

2. Within the qualifying use period, in each of the two 12 month periods immediately preceding the exchange (for the relinquished property) and in each of the two 12 month periods immediately following the exchange (for the replacement property), the taxpayer must rent the dwelling unit to another person at a fair rental for 14 days or more and the period of the taxpayer’s personal use of the dwelling unit cannot exceed the greater of 14 days or ten percent of the days during the 12 month period that the dwelling unit is rented at a fair rental.

The Revenue Procedure is effective for exchanges occurring after March 9, 2008.

In general, for qualified GO Zone property, taxpayers can claim a 50% bonus depreciation deduction for the qualified Go Zone property. However, this depreciation deduction is subject to recapture if the property ceases to be substantially used in the GO Zone or in the active conduct of a trade or business by the taxpayer. If GO Zone property is no longer GO Zone property in the hands of the same taxpayer at any time before the end of the GO Zone property’s recovery period under the normal depreciation rules, then the taxpayer must generally recapture in the taxable year in which the GO Zone property is no longer GO Zone property (the recapture year) the benefit derived from claiming the GO Zone bonus depreciation deduction. The benefit derived from claiming this bonus depreciation deduction is equal to the excess of the total depreciation claimed, including the bonus depreciation, for the property for the taxable years before the recapture year over the total depreciation that would have been allowable for the taxable years prior to the recapture year under the normal depreciation rules. The recapture amount will be treated as ordinary income in the recapture year.

In general, for qualified GO Zone property, taxpayers can claim a 50% bonus depreciation deduction for the qualified Go Zone property. However, this depreciation deduction is subject to recapture if the property ceases to be substantially used in the GO Zone or in the active conduct of a trade or business by the taxpayer. If GO Zone property is no longer GO Zone property in the hands of the same taxpayer at any time before the end of the GO Zone property’s recovery period under the normal depreciation rules, then the taxpayer must generally recapture in the taxable year in which the GO Zone property is no longer GO Zone property (the recapture year) the benefit derived from claiming the GO Zone bonus depreciation deduction. The benefit derived from claiming this bonus depreciation deduction is equal to the excess of the total depreciation claimed, including the bonus depreciation, for the property for the taxable years before the recapture year over the total depreciation that would have been allowable for the taxable years prior to the recapture year under the normal depreciation rules. The recapture amount will be treated as ordinary income in the recapture year.

The Notice provides guidance on the application of the recapture rule in situations involving like kind exchanges or involuntary conversions. Specifically, the Notice provides as follows:

1. If GO Zone property is transferred by taxpayer in a like kind exchange or as a result of an involuntary conversion and the property acquired by the taxpayer in the exchange or conversion is GO Zone property in the hands of the taxpayer, then there is no recapture. Furthermore, as illustrated in Section 3.03(d), Example 4, of the Notice, the replacement property could qualify for additional GO Zone bonus depreciation. This amounts to a "double bonus" because the bonus depreciation was taken on the original property and then again on the replacement property.

2. If GO Zone property is transferred by taxpayer in an exchange or a conversion and the replacement property is not GO Zone property in the hands of the taxpayer and is not substantially used in the active conduct of a trade or business by the taxpayer in the GO Zone, then there is recapture.

3. If GO Zone property is transferred by a taxpayer in a like kind exchange or as a result of an involuntary conversion and the replacement property is not GO Zone property in the hands of the taxpayer but the replacement property is substantially used in the active conduct of a trade or business by the taxpayer in the GO Zone, then there is no recapture.

The above rules make it clear that if a taxpayer enters into a like kind exchange of GO Zone property or is subject to an involuntary conversion of GO Zone property, then the replacement property must at least be used in the active conduct of a trade or business in the GO Zone to avoid recapture. If the replacement property is located or used outside of the GO Zone or is not used in the active trade or business of the taxpayer, then recapture will be triggered. The Notice contains several helpful examples that illustrate the application of the recapture rule as well as the like kind exchange rule.

In IRS News Release 2007-134 issued on July 31, 2007, the Internal Revenue Service has granted an additional year to the time limit for victims of Hurricanes Katrina, Rita and Wilma to sell the vacant land upon which their home had sat and was destroyed as a result of the hurricanes. 

The purpose of due diligence in the acquisition of licensing of intellectual property assets (namely patents and copyrights) is to give a buyer an opportunity to investigate and evaluate the asset concerned in some detail. More particularly, due diligence involving patens and copyrights can present ownership issues if the author/inventor is or was married and resides in a community property state. Whatever level of diligence is required for the particular transaction, the buyer should consider inquiring as to the current and past marital status of the inventor/author of the intellectual property if the inventor/author is either the seller; a direct owner of the seller; or in some cases, even a past owner of the intellectual property.

In the case of patents, federal case law states that the ownership of a patent vests initially with the inventor or inventors. On the other hand, in community property states like Louisiana, Texas, and California, a patent that is developed during the marriage is presumed to be co-owned by both spouses even though the other spouse is not a named inventor. In fact, it is not uncommon for courts to vest partial ownership rights in patents and copyrights to the non-contributing spouse in a binding marital property settlement. Thus far, courts have upheld these types of settlement by holding that federal law does not preempt state law when vesting ownership in the non-contributing spouse.

If the author/inventor of the intellectual property is married at the time of the transaction, it would be advisable to have the author/inventor’s spouse sign as a witness or as party to the assignment or license. Generally, one spouse has the power to transfer community personal property provided the transfer does not defraud the other spouse; however, gaining the non-contributing spouse’s consent would solidify the transaction. If the author/inventor has been divorced, the Buyer will need to determine if the intellectual property was created during the marriage so as to determine the non-contributing spouse’s possible ownership interest.

In the case of a patent, for example, ownership by the non-inventing spouse could be determined by inquiring as to when the invention was conceived; when the patent was filed; and when the patent issued. If either of these events occurred during the marriage, the non-inventing spouse may have a valid claim to an ownership interest in the patent and further diligence will be required by the buyer. At the very lease, any final divorce settlements should be reviewed to determine how the intellectual property was allocated between the two former spouses regardless of what state law controls. Unfortunately, it is common for attorneys to overlook the intellectual property assets when drafting a divorce settlement which may require further research into the controlling state law to determine if the non-contributing spouse has a valid ownership interest. Of course, it is always advisable to insert certain provisions into the contract wherein the seller represents and warrants that the seller is the sole owner of the intellectual property, but these provisions will not be effective against a third-party spouse’s claims of ownership.

In summary, it is always recommended to retain an experienced intellectual property attorney when acquiring or licensing intellectual property assets to deal with the pitfalls that can be involved with these types of transactions.

On February 16, 2007, the IRS issued a formal ruling approving a sale of a life insurance policy to a grantor trust. This ruling is a rare formal ruling by the IRS in the grantor trust area. Grantor trusts, or intentionally defective grantor trusts, are used often in a variety of estate planning situations. Grantor trusts are typically used in estate planning situations where the parties want the income of the trust to be taxed to the grantor of the trust (the person who set up the trust) or where they want the grantor to be deemed to be the owner of the trust property for income tax purposes.

However, a sale of a life insurance policy can trigger adverse income tax consequences under the so called "transfer for value rule" which makes the death benefit taxable for income tax purposes. An exception to this rule exists for sales to the insured. Revenue Ruling 2007-13 approves the sale of a life insurance policy from one trust to another trust and indicates that the transfer for value rule does not apply when the purchasing trust is a grantor trust. The Revenue Ruling concludes that the sale to the grantor trust is treated as a sale to the grantor/insured and therefore the exception to the transfer for value rule applies.

There has been some concern that the IRS might begin rethinking its policy on grantor trusts, but this ruling would appear to indicate that the IRS is not doing so. Furthermore, this ruling will be helpful for any grantor trusts transfers involving life insurance policies. 

There are two fundamental objectives which can lead to successful estate planning. The individual interested in estate planning should provide his or her advisor with all pertinent family, business, and financial information so that the advisor can grasp an accurate picture of the circumstances relating to the individual. Second, the individual should generally understand the nature of the estate plan and how it will work. If these two objectives can be accomplished, then a workable estate plan can result.

In examining this summary, you will encounter many new terms. Every effort will be made to define those terms throughout.

Click here to download the entire article.

For more information, contact Carey J. Messina at 225.382.3404 or carey.messina@keanmiller.com or Kevin C. Curry at 225.382.3484 or kevin.curry@keanmiller.com

Louisiana allows the same annual exclusion as the federal gift tax so Louisiana's annual exclusion will increase as well. However, Louisiana has a lifetime exemption of only $30,000, not $1,000,000.

For more information, please contact Kevin C. Curry.

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So you've built a successful business that provides you a good salary and employment for several of your children. Things are going fine, but you are worried about what happens to the business when you retire in a few years, or die. What are you going to do? (i) sell to that "national group" for cash and a nice consulting arrangement; (ii) sell to several loyal employees who have helped grow the business, but have not participated in management; or (iii) transfer the business to the children working in the business.

The Family Feud. Any transfer of the business to less than all of the children has the potential for ill feelings for many years to come. There may always be that underlying feeling that those children who have received the business have received some advantage.

Insurance - the Equalizer. Parents desiring to dispose of their business by gift or bequest to only certain children, may consider life insurance on the parents lives as a way of "equalizing" assets to the children who do not work in the business. To do this, the parents must consider their insurability, the cost of the insurance and how much in insurance proceeds is necessary to equalize the transfers to the other children. One strategy would be to create a life insurance trust for the children who do not work in the business.

Valuation. It is very important to determine the fair market value of the business for transfer purposes. If the parents are making a transfer for consideration, certainly they want to be compensated appropriately. If the business is sold for less than its fair market value, then the parents may be making a taxable gift for the difference. In making transfers of the business over time by gifting, valuations should always be utilized and discounts should be utilized, if appropriate. Keep in mind that the federal gift tax exemption is currently $1 million per donor. Accordingly, a husband and wife could transfer up to $2 million gift tax free. However, the State of Louisiana still maintains a gift tax exemption of only $30,000.00 per donor with a maximum gift tax rate of three (3%) percent. Both the federal government and Louisiana provide for the $11,000.00 annual exclusion per donee.

Community Property. The family business, whether it be in a sole proprietorship, corporation, L.L.C. or partnership, may be community property. If the plan is to transfer the business interest by way of testamentary bequest, then the transfer will have to take place in two parts, one at the first spouse's death and one at the second spouse's death. Louisiana inheritance taxes have essentially gone away, except in those instances where a succession is not opened timely. This eliminates one layer of transfer taxes. The federal estate tax is still viable. The exemption is currently $1.5 million and is scheduled to go to $2 million on January 1, 2006. Possibly the value of the business would fit within the federal estate tax exemptions of both spouses.

Payment of Federal Estate Taxes in Installments. If the business is passed down to children through testamentary bequest or by intestacy, and federal estate taxes are owed, then consideration must be given to determine whether the value of the business in relation to the entire estate of the deceased, qualifies the estate for installment payments of the federal estate tax. The federal estate tax laws do give some relief in allowing installment payments and allowing a reduced interest rate on the installment payments if certain requirements are met. A review of those installment payment rules is a must in this situation.

Leadership Roles. When considering the transfer of the business to the children, one must also look to the survivability of a business with the children at the helm. Do the children have the appropriate management and people skills to continue a successful business? Are there situations where key employees will seek other employment or possibly establish competing businesses if the owner's children control management? If the parents have sold their interest in the business to the company or to the children, the viability of the business may be critical to the parents being paid out in full.

These are just a few thoughts to consider when transferring the family business to children. This is not an exhaustive list by any means as there are numerous other economic, family, tax and psychological issues that must be weighed.

This article originally appeared in the July 19 edition of The Greater Baton Rouge Business Report.

Carey J. Messina is one of the founding members of Kean Miller. He leads the Estate Planning and Probate Group and represents clients in wills, trusts, successions, and federal estate tax matters. Carey works with individuals and families to establish estate plans, including life insurance trusts. He has extensive experience in buy-ins and sales of interests, succession disputes and family business succession planning, gifting, establishing shareholder agreements, establishing wealth transfer entities, and establishing non-profit entities. Carey hold his Certified Public Accountant certificate and is a Board Certified Tax Law Specialist and Board Certified Estate Planning and Administration Specialist by the Louisiana Board of Legal Specialization. He is a Fellow of the American College of Trust and Estate Counsel and is listed in The Best Lawyers in America (Woodward/White) in Estate Planning. Carey Messina can be reached at 225.382.3408 or carey.messina@keanmiller.com

The Governor has signed into law Act no. 79 of the 2005 Louisiana Legislature which creates New Code fo Civil Procedure Article 2904 allowing for the admissibility of videotape of the execution of a testament. The videotape evidence may be entered in a contradictory trial to probate a testament or in an action to annul a probated testament. For the videotape evidence to be admissible, the testator must be sworn by a person authorized to take oaths and the oath must be recorded on the videotape. The videotape of the execution and reading of the testament by the testator may be admissible as evidence of any of the following:

1. The proper execution of the testament.

2. The intentions of the testator.

3. The mental state or capacity of the testator.

4. The authenticity of the testament.

5. Matters that are determined by a court to be relevant to the probate of the testament.

Videotape is defined broadly under the new provision.

This opens a whole new pandora's box to the world of will executions. Here are a few thoughts. Wills are normally not "read" at the time of execution unless the testator is sight impaired. Is there a new requirement that wills be read when videotaping is used? Will there be some inference drawn in a will contest if the videoping is not done? Could heirs make claims against the attorney preparing the will if videotaping would have proved proper execution of the testament? What will be the cost of videotaping? In order to determine the intentions of the testator, or the mental state or capacity of the testator does the attorney have to ask questions of the testator? If so, what questions are sufficient? Will the attorney have to have a script to make certain all issues are covered during the videotaping? How many copies of the videotape do you need? Clearly the videotape can be used to annul a testament, so in effect it can be used against the testator who has requested the taping. Do attorneys have to offer videotaping to their clients, or is it just a tool of the trade for the attorney if he feels there will be an attack on the testament? This list is not exhaustive but shows just some of the issues that may be raised.

The need for "estate planning" is often dismissed by individuals as being a luxury which can only be utilized by the wealthy. However, anyone who owns any property has need for at least some knowledge of estate planning in order to determine who will receive his or her property at the time of death.

There are two fundamental objectives which can lead to successful estate planning. The individual interested in estate planning should provide his or her advisor with all pertinent family, business, and financial information so that the advisor can grasp an accurate picture of the circumstances relating to the individual. Second, the individual should generally understand the nature of the estate plan and how it will work. If these two objectives can be accomplished, then a workable estate plan can result.

Consider the following estate planning scenarios:

1.) What about the young married couple with several small children? The first concern is "who will take care of the children if we both die in an accident?" A will can be used to name a tutor (guardian) who will take custody and care of minor children in the event of the death of both parents. In the same circumstance, testamentary trusts can be created in the will for the management of assets and life insurance proceeds for the children until the children reach a certain age. Without a will and testamentary trust in this situation, the children gain control of the assets at age eighteen (18). Also, the testamentary trust can be used to allow the surviving parent to manage the children's forced heirship portion and the will can provide for bequests to the surviving parent. "Forced heirship" is an archaic law which survives in Louisiana and which requires parents to leave their children who are under age twenty-four (24) a portion of the parent's estate. Certain assets such as life insurance, retirement plan accounts and IRAs are not subject to Louisiana's forced heirship law.

2.) Suppose our married couple is enjoying their retirement years and none of the children are forced heirs. The couple may want to each do a will leaving their assets to each other outright. Without a will the children will inherit the deceased parent's assets, subject to the surviving parent's use. With a simple will, the surviving spouse can have complete ownership and control of the assets, as opposed to the use, which could require the children to consent to the sale of assets such as the family home.

3.) If your gross estate exceeds $1.5 million this year ($2 million in 2006-2008), and you are married, you should consider a will in order to at least "defer" federal estate taxes until the death of the surviving spouse and possibly reduce or eliminate estate taxes altogether. Such deferral can be accomplished by outright bequests to the surviving spouse, by the grant of the lifetime use (usufruct) over assets to the surviving spouse, or the use of a marital deduction trust that provides lifetime income to the surviving spouse.

4.) No estate plan is complete without the consideration of a power of attorney and a living will. The power of attorney allows another person, the agent, to handle your affairs, in the event of your incapacity. The agent can be given authority to pay bills, file income tax returns, sell property, make health care decisions and basically perform all other acts provided in the power of attorney. The expensive and time consuming alternative to a power of attorney is the legal process known as "interdiction". Usually in an interdiction, a family member applies to the court to handle the affairs of an incapacitated person. While the interdiction is usually granted if the court is satisfied that the person's incapacity is such to render him or her incapable of taking care of their person or property, the process is sometimes embarrassing and costly.

These scenarios all require some degree of estate planning. Also remember that if you have a will, it may need updating because of state and federal law changes, or changes in family circumstances. An "out of date" will can create unintended results.

Estate planning IS for everyone.

Carey J. Messina is one of the founding members of the Kean Miller. He leads the Estate Planning and Probate Group and represents clients in wills, trusts, successions, and federal tax matters. Carey works with individuals and families to establish estate plans, including life insurance trusts. He has extensive experience in buy-ins and sales of interests, succession disputes and family business succession planning, gifting, establishing shareholder agreements, establishing wealth transfer entities, and establishing non-profit entities. Carey is a Certified Public Accountant and is a Board Certified Tax Law Specialist and Board Certified Estate Planning and Administration Specialist by the Louisiana Board of Legal Specialization. He is a Fellow of the American College of Trust and Estate Counsel and is listed in The Best Lawyers in America (Woodward/White) in Estate Planning. Carey Messina and Kevin Curry are located in Kean Miller's new Bluebonnet office at 5035 Bluebonnet Boulevard, Suite B (between I-10 and Jefferson Highway) in Baton Rouge. Carey can be reached at 225.382.3408 or carey.messina@keanmiller.com. Kevin can be reached as 225.382.3484 or kevin.curry@keanmiller.com

In November 2004, the Louisiana voters approved a new Constitutional Amendment to revise Louisiana's Homestead exemption law for ad valorem tax purposes. While this new law is helpful in clarifying a number of issues, it does create a trap for the unwary. Specifically, the new law has been interpreted to deny the homestead exemption for individuals who transfer their homes into revocable trusts (also known as living trusts).

The new law allows for the homestead exemption for irrevocable trusts but not for revocable trusts. Before the new law was enacted, there had been a number of Attorney General's Opinions allowing the homestead exemption for homes held in revocable trusts when the prior homeowner continued to serve as trustee and/or beneficiary of the trust. In a revocable trust, the settlor (homeowner) can revoke the trust at any time and get the home back. Because of this power of revocation, it would make sense to treat the settlor as the owner of the home notwithstanding the trust. However, because the new law specifically allows for irrevocable trusts but is silent with respect to revocable trusts it has been interpreted to prohibit the homestead exemption for homes held by revocable trusts. Apparently, the tax assessors throughout the state have agreed upon this interpretation and are proceeding to contact individuals whose homes are in revocable trusts to advise them that they no longer qualify for the homestead exemption. While the validity of the assessors' interpretation is somewhat questionable, there may be alternatives to qualify for the homestead exemption and still utilize a revocable living trust when desired.