Hillary Clinton, Democrat for President, on the Estate Tax

In the first in a series, California Business Law Blog examines the Republican and Democrat presidential candidates' stance on the estate tax, sometimes also know as the death tax or ibheritance tax. First up, Senator Hillary Clinton (Democrat - New York):

Her current presidential platform proposal, which is to some extent inconsistent with her prior voting record, as can be seen below, is to freeze the federal estate tax at 2009 levels, that is, a $3.5 million exemption (she describes this as a $7 million exemption, presumably meaning, for a married couple, the combined total of $7 million in exemptions, which requires proper estate planning to take advantage of). As a result of the "Bush tax cut", the estate tax has been trending downward each year and is currently slated to be completely elminated in 2010 (unlimited exemption amount, 0% tax rate, leading to numerous estate planning jokes centering around solving estate tax problems by planning to die in 2010). However, due to a legislative compromise and other technicalities, it is also scheduled to jump back to tge old, higher tax levels commencing 2011 (only $1 million exemption, 55% tax rate on the balance). It is unlikely give the current political climate that the currently-scheduled death tax rates for 2011 will be allowed to stand unchanged.

For reference purposes, as this is written, in 2007, the exemption amount is $2 million, and the estate tax rate is 45%.

Recently, on the campaign trail in Derry, New Hampshire, Clinton --

answered questions from voters at a town hall at the opera house here, which was her second stop on a two-day swing through the state.

The first question from the audience after Clinton's speech came from a woman who challenged her plan to pay for universal retirement accounts by freezing the estate tax at 2009 levels. The woman said the money from inheritance had already been taxed when it was earned and she felt taxing it again was the wrong way to fund Clinton's plan.

"People disagree about this, but the estate tax, which came into being by Republicans like Teddy Roosevelt and others, and has been part of our tax system for a very long time is there for a real simple reason: In America, we've never liked the idea of massive inherited wealth," Clinton replied. "Part of the reason why America has always remained a meritocracy where you have to work for what you get, where you have to get out there, make your case to people, come up with a good idea, is that we never had a class of people sitting on generation after generation after generation of huge inherited wealth."

Clinton said people like Bill Gates and Warren Buffet were against doing away with the estate tax, because they made it on their own. She went on to explain, to applause, that a married couple could have an estate worth up to $7 million before getting taxed, and said she considered that a "pretty healthy estate to leave to your children."

Source: MSNBC.com: Clinton Questioned on Estate Tax, October 10, 2007

Critics of Clinton's, Gates', and Buffet's argument - not present to state their arguments in New Hampshire - point out that these men are so wealthy that they do not represent the typical high net worth family that is often attempting to pass a family business or farm along to the next generation, and are millionaries, not billionaires. Gates and Buffet deal in publicly traded companies, and cannot pass along Microsoft or Berkshire Hathaway, each worth billions beyond the personal wealth of either businessman and each owned by thousands of investors, to their children.

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As a Senator, she has had the opportunity to vote on the issue serveral times:

Voted NO on raising estate tax exemption to $5 million.

An amendment to raise the death tax exemption to $5 million; reducing the maximum death tax rate to 35%; and to promote economic growth by extending the lower tax rates on dividends and capital gains.

(Proponents recommend voting YES because:

It is disappointing to many family businesses and farm owners to set the death tax rate at what I believe is a confiscatory 45% and set the exemption at only $3.5 million, which most of us believe is too low. This leaves more than 22,000 families subject to the estate tax each year.

Opponents recommend voting NO because:

You can extend all the tax breaks that have been described in this amendment if you pay for them. The problem with the amendment is that over $70 billion is not paid for. It goes on the deficit, which will drive the budget right out of balance. We will be going right back into the deficit ditch. Let us resist this amendment. People could support it if it was paid for, but it is not. However well intended the amendment is, it spends $72.5 billion with no offset. This amendment blows the budget. This amendment takes us from a balance in 2012 right back into deficit. My colleagues can extend those tax cuts if they pay for them, if they offset them. This amendment does not pay for them; it does not offset them; it takes us back into deficit. It ought to be defeated.

Reference: Kyl Amendment; Bill S.Amdt.507 on S.Con.Res.21 ; vote number 2007-083 on Mar 21, 2007);

Voted NO on supporting permanence of estate tax cuts.

Increases the estate tax exclusion to $5,000,000, effective 2015, and repeals the sunset provision for the estate and generation-skipping taxes. Lowers the estate tax rate to equal the current long-term capital gains tax rate (i.e., 15% through 2010) for taxable estates up to $25 million. Repeals after 2009 the estate tax deduction paid to states.

(Proponents recommend voting YES because:

The permanent solution to the death tax challenge that we have today is a compromise. It is a compromise that prevents the death rate from escalating to 55% and the exclusion dropping to $1 million in 2011. It also includes a minimum wage increase, 40% over the next 3 years. Voting YES is a vote for that permanent death tax relief. Voting YES is for that extension of tax relief. Voting YES is for that 40% minimum wage increase. This gives us the opportunity to address an issue that will affect the typical American family, farmers, & small business owners.

Opponents recommend voting NO because:

Family businesses and family farms should not be broken up to pay taxes. With the booming economy of the 1990s, many more Americans joined the ranks of those who could face estate taxes. Raising the exemption level and lowering the rate in past legislation made sense. Under current law, in my State of Delaware, fewer than 50 families will face any estate tax in 2009. I oppose this legislation's complete repeal of the estate tax because it will cost us $750 billion. Given the world we live in today, with clear domestic needs unmet, full repeal is a luxury that we cannot afford.

To add insult to this injury, the first pay raise for minimum wage workers in 10 years is now hostage to this estate tax cut. We are told that to get those folks on minimum wage a raise, we have to go into debt, so that the sons and daughters of the 7,000 most fortunate families among us will be spared the estate tax. We must say no to this transparent gimmick.

Reference: Estate Tax and Extension of Tax Relief Act; Bill H.R. 5970 ; vote number 2006-229 on Aug 3, 2006);

Voted NO on permanently repealing the "death tax".

A cloture motion ends debate and forces a vote on the issue. In this case, voting YES implies support for permanently repealing the death tax. Voting against cloture would allow further amendments. A cloture motion requires a 3/5th majority to pass. This cloture motion failed, and there was therefore no vote on repealing the death tax.

(Proponents of the motion say:
We already pay enough taxes over our lifetimes We are taxed from that first cup of coffee in the morning to the time we flip off the lights at bedtime. If you are an enterprising entrepreneur who has worked hard to grow a family business or to keep and maintain that family farm, your spouse and children can expect to hear the knock of the tax man right after the Grim Reaper.
In the past, when Congress enacted a death tax, it was at an extraordinary time of war, and the purpose was to raise temporary funds. But after the war was over the death tax was repealed. But that changed in the last century. The death tax was imposed and has never been lifted.
The death tax tells people it is better to consume today than to invest for the future. That doesn't make sense.

Opponents of the motion say:

Small businesses and farms rarely--if ever--are forced to sell off assets or close up shop to pay the tax. Under the current exemption, roughly 99% of estates owe nothing in estate taxes. By 2011, with a $3.5 million exemption, only two of every 100,000 people who die that year would be subject to the estate tax.
Today's vote is on a motion to proceed to a bill to repeal the estate tax. Not to proceed to a compromise or any other deal--but to full repeal. I oppose full repeal of the estate tax. Our Nation can no longer afford this tax break for the very well off. Permanently repealing the estate tax would add about $1 trillion to our national debt from 2011 to 2021.

Reference: Death Tax Repeal Permanency Act; Bill HR 8 ; vote number 2006-164 on Jun 8, 2006).

Source: On the Issues: Hillary Clinton on Tax Reform

The conservative Club for Growth, which favor repeal of the estate tax, rated Clinton's voting record 8 out of 100 for 2006 for pro-growth economic policies.

See also:

John McCain, Republican for President, on the Estate Tax
Barack Obama, Democrat for President, on the Estate Tax
Hillary Clinton Offical Site: Economic Blueprint

June 2008 update: Hillary Clinton ended her 2008 bid for the White House on June 7, 2008, leaving Barack Obama as the presumptive Democrat nominee.

Online Incorporation Services Review

Mark Stafford's review of online incorporation services, reprinted with permission:

Thinking about incorporating? DON'T waste your time with those online companies that claim to incorporate you. Unless of course you just have a bunch of money laying around. I am sharing this with you because of the lesson I learned the hard way.

I'll start by saying I know pretty much nothing about business when it comes down to all of the legal issues, tax, and accounting mubo jumbo and so forth. I like to just
concentrate on doing the work at hand. For example, if you mow lawns, then you should do just that. Why should you have to have a business degree, learn to be a tax whiz, and be a legal expert right? While all of these are great occupations, and their great to know about, if you mow lawns, then that would really put you out of a lot of time and energy, when you could concentrate on getting accounts and getting the work done.

I made the mistake of starting a business jumping in head first, and with the best intentions of course, but I ended up in a mess. I fell into the hype of all of those
"incorporate now" websites, and I'm not mentioning names (there are a ton of them), as they seem to all be very similar.

Most of them will ask you if you would like to incorporate, what type of corporation package would you like- as if you were ordering at a drive- thru. They are not
allowed to and won't give you any sort of legal advice, as they just sell the "package." It's really up to you to do ALL of the homework and research about the LLC's, S corps, C-corps, etc. They will in most cases be your "registered
agent," in which you will be represented in the event you are sued. And they will send you a VERY nice notebook with stock certificates and numerous other forms. In my case I got that and a nice library of five books (you would have to
be a lawyer to understand them), which if you were not already confused - you get the picture.

Ah, then the price. This can be from $600 and up. This is when I found a lawyer to be the best way in the first place, as they will know what type of corporation would best suit you. (No pun intended). In my case I had purchased the wrong type of corporation, and my lawyer had to fix it. In the end he charged me $400 to undo one corporation, and fix me up with the right corporation. AND he was also my registered agent. He also informed me that if you really wanted to put in the time, you could do the whole thing online in most cases for about $75. Wow.

Here in higher-cost California, the costs payable to state government of a properly done incorporation are a minimum of $150 - something to keep in mind when certain paralegal services on craigslist and elsewhere offer the entire package, including their 'service', for $125!

See also:

Online incorporation review article

Business Licenses and Online Incorporation Services

I recently received an email notification announcing a new service offered by a popular online incorporation and document filing service. For $75, they will email you the appropriate business license forms for you to complete and file. While this information may be helpful to some new business owners in locating the appropriate regulatory agencies and their respective forms, my flat fee full service incorporation and LLC formation packages have included this service for years (except that we complete the forms for you and when possible, file them for you on your behalf, and answer any questions you may have about the filings before and after they are made). Unforunately, it is hidden fees and add-ons like these that make online incorporation services much less of a bargain than they might initially appear to be.

Estate Planning Basics / Overview Top Ten

CNN & Money Magazine has a pretty good basic introduction to estate planning that may be valuable to review prior to speaking to an estate planning attorney and which explains why a will or trust is just one part of a comprehensive overall estate plan, and why estate planning is not just for the wealthy:

1. No matter your net worth, it's important to have a basic estate plan in place.

Such a plan ensures that your family and financial goals are met after you die.

2. An estate plan has several elements.

They include: a will; assignment of power of attorney; and a living will or healthcare proxy (medical power of attorney). For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws governing estates.

3. Taking inventory of your assets is a good place to start.

Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. Ask yourself three questions: Whom do you want to inherit your assets? Whom do you want handling your financial affairs if you're ever incapacitated? Whom do you want making medical decisions for you if you become unable to make them for yourself?

4. Everybody needs a will.

A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will - also known as dying "intestate" - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.

5. Trusts aren't just for the wealthy.

Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay, and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.

6. Discussing your estate plans with your heirs may prevent disputes or confusion.

Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you're gone.

7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has been rising gradually and will hit $3.5 million in 2009.

Meanwhile, the top estate tax rate is coming down. The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.

8. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic.

By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death.

9. There are two easy ways to give gifts tax-free and reduce your estate.

You may give up to $12,000 a year to an individual (or $24,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.

10. There are ways to give charitable gifts that keep on giving.

If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.

CNNMoney.com, "Money 101 - Lesson 21: Estate Planning, Top Things To Know", not dated (but apparently up to date as of this posting).

FAQ: How much to form a corporation? Review a contract? Draft a living trust?

As an attorney, I am frequently asked by potential clients some variation of the following question:

How much to form a corporation, to review this contract, or to draft a living trust?

Usually, the honest answer is, it depends (although this tends not to be what the questioner wanted to hear). Legal services are professional services more akin to those offered by doctors or even automobile mechanics than to purchasing a fungible item like a television. With a TV, you know what you're getting before you buy, and you can price shop amongst competitors, because you know the product is going to be the same regardless of where it is purchased. Conversely, when you visit the doctor, you know you need a check-up or aren't feeling well, but until you get in there and the physician runs some tests, you aren't going to know how much it will cost. Asking an attorney, 'How much to fix X problem?' is often times akin to asking a doctor, 'How much to make me better?' or your mechanic, 'How much to fix my car?' You could ask what a doctor's visit costs, but one doctor's visit may not cure you. Likewise, you can ask me about my flat rate incorporations, but you may also need contract, employment, trademark, or other legal work, and in fact, a corporation may not be the best entity for you, so the number quoted must be put into context.

For contract negotiation, drafting, review, and counsel, my rates are hourly, and the final fee will depend on a host of factors. The fact that an agreement to be reviewed is five pages long is only one of these factors; the others will remain unknown until you sign on with me and I actually dig into the issues. (Just as your mechanic won't be able to determine what labor and parts are needed to repair your vehicle until you have paid him to look under the hood.)

Further, clients may not realize what they need. The question, 'How much for a living trust?' ignores that a living trust may not be needed at all, one living trust alone may not be sufficient, and that proper estate planning involves more than just drafting a revocable living trust (and even that is customized for each client's needs).

In summary, just as with the doctor and mechanic, some small leap of faith is required of the potential client. You must hire an attorney to analyze your circumstances and advise you; the component parts of the solution may have flat fees knowable in advance, but some legal work may additionally be recommended or even required to get where you want to go. After all, part of what you are hiring the lawyer to do is identify legal issues of which you might not be aware. Seen in this light, calling around to attorneys to compare prices for an LLC or a trust may give you an idea of the fee level, but the answers will rarely be precise, and others questions may be at least as useful. As a last resort, of course, you can always take your legal business elsewhere if your first choice for an attorney proves unsatisfactory, or you feel you are being overbilled.

California LLC Quotes in Today's Los Angeles Times:

LLCs provide key financial benefits:
The owners receive tax and liability advantages. Such registrations have risen, but the format is not for everyone.
Cyndia Zwahlen: Small Business Report
July 25, 2007

To be an LLC or not to be an LLC? That is the question for a growing number of small businesses.

Whether to adopt the relatively new limited liability company format or to set up under the more traditional form of a corporation, partnership or sole proprietorship is a key decision for a small-business owner.

"An LLC is an important option for small businesses," said Jonas M. Grant, a business attorney based in Burbank. Interest in the format is high, he said.

The benefits of an LLC seem almost too good to be true.

The owners, or members, have the personal liability protection that shareholders of a corporation do, with far less paperwork and fewer regulations.

That means — barring illegal, unethical or irresponsible activity — their personal assets are not on the line when it comes to covering the company's business debts or legal claims against it.

At the same time, the owners avoid the double taxation on profit to which shareholders in a regular corporation face.

Limited liability companies pass profits to the members, who pay taxes at their individual income rates, as in a legal partnership. In California, where this type of company has been legal since 1994, there are 409,619 limited liability companies, according to the secretary of state's office.

The number of companies registered under this format has jumped each year since 2000, when the state finally allowed limited liability companies to be set up by single-person businesses. More than 73,000 LLCs registered with the state last year, compared with about 31,000 in 2000, the secretary of state's office said.

That growth doesn't surprise LLC expert Anthony "Tony" Mancuso, a Berkeley attorney who wrote the new edition of "Nolo's Quick LLC: All You Need to Know About Limited Liability Companies" (Nolo, 2007). "It was obvious to me that LLCs would become the next big thing in business entities because of the combination of benefits," said Mancuso, who has written several books on limited liability companies and other corporate structures for Nolo, a self-help legal publishing house based in Berkeley.

The newest version of his "Quick LLC" book lays out the basic features of limited liability companies, explains important exceptions to owners' limited liability and compares the LLC with other business formats.

He also discusses converting an existing business to an LLC, as well as tax and management issues. And he devotes a chapter to the paperwork involved in setting up a limited liability company. There is also a sample operating agreement and a checklist to help you determine whether forming an LLC makes sense for your business.

Considerations include whether your type of business is one in which business debts and claims could threaten your personal assets. Another consideration is whether you have assets, such as equity in a house, that could be at risk without the protection of an LLC.

"Anyone a little bit nervous about the adequacy of their insurance coverage" could be a good candidate, Mancuso said.

Existing sole proprietorships or general partnerships and anyone thinking of forming an S corporation, an entity that generally pays no taxes, he writes, could benefit.

Those who aren't good candidates include existing regular corporations, also known as C corporations. And in California, some professionals such as lawyers and architects may not form an LLC.

If you want to raise money from venture capitalists or by selling stock, an LLC probably is not the business form you need.

Mancuso makes it clear that despite the potential benefits of an LLC, they have to be weighed against the cost, especially in California. Although it costs just $70 and takes a one-page form to set up a limited liability company in California, ongoing annual fees and taxes could cost more than 10 times that amount. There is a minimum annual tax of $800, payable to the state Franchise Tax Board.

And once gross receipts hit $250,000, additional annual fees kick in, which range from $900 to $11,790.

There have been several challenges to the constitutionality of the state's LLC fees, but the issue is still working its way through the courts.

Although Wyoming, in 1977, was the first state to authorize limited liability companies, it wasn't until 1997 when helpful new Internal Revenue Service rules kicked in that the format began to gather steam among business owners

Limited personal liability protection does not apply if you personally guarantee a business debt or bank loan for the company. Then your personal assets are on the line. That will probably happen more often when a company is young and has not yet established its credit history.

And as is the case with all other business entities, an owner can be held personally responsible for financial losses caused by their negligent or careless actions, Mancuso said.

Mancuso recommends three steps to safeguard the protection against personal liability offered by an LLC.

Act fairly and legally, including disclosing important facts or financial information to members or outsiders such as vendors.

Put enough money into the LLC to properly fund it. Otherwise, a court may not consider it a legitimate business and yank the personal liability protection.

Separate personal expenses from LLC expenses. Aside from making good business sense, that is another way to show that the company is legitimate, especially if you will be a single-member LLC.

The limited liability format isn't available or appropriate for some business entities. In addition to a number of professions, banks, insurance companies and other financial service firms are not usually candidates for a limited liability company.

Even if you qualify for an LLC, you may not need the protection. In his book, Mancuso gives an example of a freelance proofreader working from home as a business that may not need the extra protection from lawsuit claims and business debt.

And if you decide to end your California limited liability company, it must be formally dissolved. For more details, go to the California secretary of state website at http://www.sos.ca.gov/business/llc/llc_faq.htm or call its business programs division at (916) 657-5448.

Important tax information for California limited liability companies can be found in the Franchise Tax Board's Form 3556, available online at http://www.ftb.ca.gov . Just type "Form 3556" in the search box.

Armed with the facts, you can decide whether LLCs have real benefits or not.

"Sometimes I get a new client who tends to believe an LLC is manna from heaven," Grant said. Of course that's not always the case, although, he said, "it certainly has its place and should always be considered."

(C) 2007 Los Angeles Times

Online Incorporation Services Review Article

I recently published an article that reviews the pros and cons of online incorporation services and other non-attorney corporation and llc formation options:

http://ezinearticles.com/?Online-Incorporation-and-LLC-Formation-Services-Advantages-and-Disadvantages,-Pros-and-Cons&id=628630

I don't expect this to be too popular with either the online incorporation services, or with the general public, because the article doesn't say what people want to hear ('quick', 'easy', 'do it yourself', 'save money', 'no lawyers', etc.), but I see the results of not using an attorney to protect one's self and do things properly the first time on an almost daily basis.

Just today, for example, a potential client called me to discuss representation and after a short initial consultation, agreed that a legal mess she was currently in that was likely to cost her $100,000 in losses could have been greatly reduced or, more likely, avoided entirely, with $2,000 - 5,000 worth of legal planning.

Many of my comments and opinions on online incorporation services also apply to storefront legal assistance clinics, paralegal and document preparation services, and accountants. Clients who have used these services to incorporate a corporation or form an LLC before they began working with me often show me corporate books with missing or inappropriate documentation, odd organization, wrong entity used, and the like. An accountant using a form is not giving you state of the art, custom documents; an accountant attempting to modify or draft legal documents is engaged in the unauthorized practice of law (UAL), a misdemeanor in California.

See also:

Is Legal Zoom a Good Idea? Do the Documents Work? by fellow WealthCounsel estate planning attorney Alexis Martin Neely;

LegalZoom.com reviews; and

Online incorporation service review.

[This post updated August 2008.]