Estate Planning and Gift Tax Analysis on Transfers of Property

Gift Tax Analysis on Transfers of Property

 Denver Estate Planning Attorneys

             Maybe you are considering gifting property or money to a child or other family member, or maybe you have already gifted property and are wondering about the gift tax consequences.  If you have not transferred the property and made the gift, it is always advisable to speak with you’re your estate planning attorney or a tax attorney prior to the disposition.  However, if the gift has been made, this article may be able to assist you in analyzing the tax consequences of such gift.

 

First and foremost you must ask, was there a completed gift?  Did you actually gift the property to a third party?  For a complete gift, you as the donor must completely give up dominion and control of the property to have a completed gift.  Thus, the donee must have the immediate right to use, possess or transfer the property, as well as right to enjoy any income from the property.  For example, property transferred to a revocable trust is not a gift because the trust can be revoked.  If creditors have the right to income from the property transferred, this also would not appear to be a completed gift.

 

If it is determined that the gift is a completed gift, then you must consider whether the gift constitutes a present interest.  For the annual gift exclusion to apply, the gift must be a completed gift of a present interest.  For example, if Joe gifts property into trust and his son Mike holds a remainder interest in the trust, Mike does not hold a present interest as a remainderman and thus the annual gift exclusion would not apply.

 

If it is determined that the gift is a completed gift of a present interest then you must look at the value of the gift.  The fair market value of the gift is the fair market value as of the date of transfer.  The amount of the gift exceeding the current year annual gift tax exclusion would reduce the donor’s lifetime exclusion or be taxable if the donor has already “used” their lifetime exclusion or credit.

 

After the gift is made, what is the donee’s (recipient’s) basis in the gift?  This is important so that the donee’s gain can be calculated upon their transfer of the property.  The recipient takes a carryover basis in the gifted property under Internal Revenue Code Section 1015.  Thus, the recipient takes the donor’s basis.  Further, if the donor pays gift tax on the transfer, the gift tax paid by the donor increases the donee’s basis, and this is known as the Gift Tax Paid Adjustment (GTPA).

 

One issue to consider is that property received via inheritance receives a stepped up basis to the fair market value of the property at the death of decedent under Internal Revenue Code Section 1014.  Thus, it may not always be wise to gift property (depending upon the circumstances) in order to take advantage of the stepped up basis rules when property is received through an inheritance.

 

Individuals considering gifting property should consult their estate attorney or tax attorney to discuss the current and long term tax implications of the transfer and to ensure the transfer will achieve the intended results.

Contact The McGuire Law Firm to speak with and schedule a free consultation with a estate planning attorney.

 

The Corporate Capital Structure

The Corporate Capital StructureDenver Business Attorneys

At The McGuire Law Firm, a Denver business attorney or tax attorney can assist you with the capital structure of your corporation and other business entities.  The article below is a general outline of some issues to consider when looking at your corporate capital structure.  Please feel free to contact a Denver tax attorney and business attorney at The McGuire Law Firm.

When forming a corporation, the capital structure should be designed in a manner that effectively allocates the various interests in the corporation amongst the owners and investors.  The pertinent interests will be: interests in current income, interests in control and, interests in accumulated income and capital.  When organizing the corporation, there is significant flexibility to design the capital structure and thus accomplish the preferred allocation.

The capital structure of a corporation will consist of securities issued by the corporation in exchange for cash, property or services contributed to the corporation.  Stock issued by the corporation represents ownership in the corporation or an equity interest in the corporation.  Debt of the corporation is a creditor interest.  Although the difference between an equity interest and a debt interest would appear clear, the difference between an equity interest and debt can often be very unclear.

Stock, Debt, Options & Hybrid Securities

Common Stock: Every corporation has at least one class of common stock outstanding.  The common stock holders are entitled to the corporation’s profit, increase in value and the right to vote on corporate matters.  Common stock however, would be considered more of a “junior” security due to because common stock holders are entitled to their rights only when required allocations have been made to other “senior” security holders.

Preferred Stock: A corporation can issue one or more classes of stock, and often a corporation will issue “senior” securities known as preferred stock.  A preferred stock holder’s right to current income and/or accumulated capital is limited.  Each share of preferred stock usually holds a stated liquidation preference, which is the amount to be paid on the retirement of the preferred stock and the amount paid to the corporation to acquire the preferred stock.  The limitation on current income of a preferred stock holder is usually limited to a percentage rate of the liquidation preference.  Thus, preferred stock can appear to be quite similar to a loan.  Generally, for tax purposes, preferred stock has been treated as “stock” and similar to common stock.

Debt: The debt of a corporation may come in many forms.  Extensions of credit (debt) could be a short term loan needed to purchase goods and inventory, or could be a long term investment in the corporation.  Further, a bank may loan money to the corporation.  Each form or type of debt is likely to have different terms and maybe secured by different means, or even unsecured.  In most circumstances and absent an agreement to the contrary, debt is senior to all stock.  Thus, interest on the debt is paid before dividends are paid to shareholders, and upon dissolution of the corporation, the debt is priority and will be satisfied first and foremost.

Options: An option is the right to purchase stock of the corporation, at a fixed price in the future.  Thus, the investor may be able to benefit in the later appreciation of the stock for a smaller current investment.

Hybrid Securities:  A single security may hold the attributes of multiple types of securities.  For example, a convertible security is a hybrid.  The terms of a debt instrument may allow the holder (creditor) to exchange the note or instrument for a specific number of shares of stock.  These forms of securities create difficulties in defining and labeling the security as either equity or debt.

Investing in a Corporation

An investor is free to make multiple types of investments in a corporation, and some investors prefer this balance and strategy.  The pertinent question for the investor is how to balance the additional security of debt against the stock’s potential for appreciation.

Debt or Equity Financing, or both?

Structuring the correct balance between debt and equity financing is not easy, and often, only time allows the investor or corporation to reflect upon the decisions made- hindsight is always 20/20!  However, the structuring can be vital to the success of the corporation and thus an investor’s rate of return on their investment.  There are tax and non-tax issues to consider, and often the answers to these issues create more questions and are in conflict with one another.  Some favor debt due to the fact that a C Corporations profits distributed on stock are subject to double taxation and the payment of interest on debt is deductible.  Investors may prefer debt due to the greater security and generally steady and consistent annual return on investment that is not always found with dividend payments.  Some favor stock because stock, unlike debt can be received in a tax free transaction.  Further, too much debt can impact the corporation’s credit, and the payment of debt interest can create cash flow issues for businesses, especially newer businesses.

We recommend that the business owners contact their business attorney or tax attorney when considering the formation and structure of their business.

Contact The McGuire Law Firm to schedule a free consultation with a Denver business attorney.

5 Reasons to Hire a Tax Attorney

5 Reasons or Situations of Which You Should Hire a Denver Tax AttorneyDenver Tax Attorney

 1) If you are being audited by the IRS or owe taxes to the IRS, you should contact a tax attorney.  An experienced tax attorney can represent you before the IRS and often prevent enforcement action such as bank levies, asset seizures and wage garnishments.  Further, your tax attorney can help you resolve the tax issue, as well as help educate you to hopefully prevent the issues from occurring in the future.  John McGuire is an experienced Denver tax attorney at The McGuire Law Firm and has successfully represented hundreds to thousands of businesses and individuals before the IRS.

2) If you are starting a business, a tax attorney can educate you on the tax issues and implications regarding the taxation of different business entities, and tax affects to the business owners.  Further, if your business will have employees, a tax attorney can help you understand your requirements regarding withholding taxes, 941 returns and federal tax deposits. A Denver tax attorney can assist you with the formation of your businesses and in understanding your tax responsibilities.

3) If you are considering gifting or transferring property to loved ones or other parties, a tax attorney can help draft the necessary documents and advise you regarding the federal tax implications.  A tax attorney will often work with clients regarding the advantages of gifting within their estate plan and execute these gifting strategies within the estate planning documents.

4) Your considering buying a rental property, but do not understand depreciation and how the rental property will impact your individual income tax return.  A tax attorney can help you understand these issues and thus allow you to take full benefit of the federal tax code and likely reduce your personal income tax.  A Denver tax attorney at The McGuire Law Firm can outline the tax implications and issues to consider when purchasing rental properties, in addition to other issues such as liability.

5) You have not filed tax returns in a while and are scared of the IRS.  Call a tax attorney immediately.  The longer you wait, the worse the situation will become.  A Denver tax attorney at The McGuire Law Firm can contact the IRS on your behalf, obtain information & transcripts and help you prepare and file returns with the IRS.  If the tax returns once filed result in a tax debt, we can help you resolve your IRS debt with an offer in compromise, installment agreement or other resolution option.

 

Call us at 720-833-7705 to speak with a Denver tax attorney and schedule your free consultation.

 

 

5 Reasons to Hire a Denver Business Attorney

Denver Business Attorney Denver Small Business AttorneyAt The McGuire Law Firm,  a Denver business attorney can assist you on a number of issues and on an ongoing basis as your business grows.  Below are situations in which you may wish to consult with a Denver business attorney at The McGuire Law Firm.

  1. A business attorney can help you form the proper entity or entity structure based upon the needs of your business. Further, through this process, your business attorney can explain to you the different liability protections afforded different entities and the different tax implications to the business and business owners based upon the choice of the business entity.  For example a C Corporation, S Corporation and Limited Liability Company (LLC) are all treated differently for tax purposes, and a fundamental understanding of the taxation of your business entity is a must to properly run and operate your business.  Further, your business attorney can explain the individual income tax issues that you as the business owner will need to consider.
  2. How should your business be financed?  Do you want more debt or equity interests in your business?  A Denver business attorney at our office can help you understand what constitutes debt and equity, and the good & bad behind both debt and equity financing.
  3. Did you read and understand your lease agreement?  A business should always hire a business attorney to review and negotiate their lease agreement.  The vast majority of lease agreements are very “one-sided” in favor of the landlord and a business attorney may be able to help you negotiate more reasonable terms, as well as explain the terms of the lease agreement and your personal exposure to the lease agreement as an owner and likely guarantor of the lease agreement.
  4. You’ve heard the saying that death and taxes are the only 2 certainties in life.  While this may be true, if you own a business, there is also the certainty that as at some point during your life or at your death, you will need to sell, dispose of or otherwise transfer your business interests.  A business attorney can help you establish a plan regarding the transfer or sale of your business or business interests in a manner that is most beneficial to you regarding your exposure to liability and in regards to the taxation of the transfer or disposition.  Your business attorney can also help in regards to the drafting of the purchase agreements and the necessary negotiations with the parties involved.
  5. As a business owner, you may want to establish retirement accounts for yourself and your employees.  A business attorney can assist you regarding the different options and tax benefits, as well as the reporting requirements for such compensation plans.

Contact The McGuire Law Firm to schedule your free consultation with a Denver business attorney.