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Accounting and Tax Planning

Death and Taxes

By Jim Moran, CPA

 

On April 28, the Biden administration released its FY 2022 revenue proposals. Along with raising the corporate tax rate to 28% and the top individual rate to 39.6%, widespread changes have been proposed to the capital gains tax rate and estate tax.

Under current federal law, upon death, property passes to a beneficiary at fair market value, with a few exceptions. This means the beneficiary’s basis generally becomes the value of the property at the decedent’s date of death, also referred to as ‘step-up in basis.’ For gifts made during a donor’s lifetime, the donee receives the donor’s basis in the property. This means the donee’s basis remains the same as the donor’s basis, generally original cost plus any improvements. No taxable gain or loss occurs upon the transfer of the property. Gain or loss is realized only when the property is eventually sold.

Under the Biden administration’s proposal, transfers of appreciated property upon death, or by gift, may result in the realization of capital gain to the donor or decedent at the time of the transfer. This means tax may be triggered at the date of the transfer regardless of whether the property is subsequently sold. This would be accomplished by eliminating the step-up in basis upon death of a decedent and requiring a tax be paid on a portion of the value of a gift made.

Fortunately, the Biden proposal would allow a $1 million per-person exclusion from recognition of unrealized capital gains on property either transferred by gift or held at death. The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate- and gift-tax purposes (making the exclusion effectively $2 million per married couple). It is important to note, however, in the case of gifts, the donee’s basis in property received by gift during the donor’s life would be the donor’s basis in that property at the time of the gift to the extent that the unrealized gain on that property counted against the donor’s $1 million exclusion from recognition.

“Under the Biden administration’s proposal, transfers of appreciated property upon death, or by gift, may result in the realization of capital gain to the donor or decedent at the time of the transfer. This means tax may be triggered at the date of the transfer regardless of whether the property is subsequently sold.”

Tangible personal property (other than collectibles) would also be excluded from the triggering of gain. The exclusion under current law for certain small-business stock would remain, and the $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences currently allowed under IRC Section 121 and would be portable to the decedent’s surviving spouse, making the exclusion effectively $500,000 per couple.

The Biden proposal allows for some exempt transferees. Property transferred by a decedent to a charity would be exempt. Transfers by a decedent to a U.S. spouse would be at be the carryover basis of the decedent, and capital gain would not be recognized by the surviving spouse until the surviving spouse disposes of the asset or dies.

In addition to transfers upon death or gift to an individual, transfers of appreciated property into, or distributed in kind from, trusts (other than revocable grantor trusts) and partnerships may be treated as recognition events for the donor or donor’s estate. Valuation is another important concern in regard to a partial interest. The transfer of a partial interest would be at the ‘proportional share.’ Valuation discounts for minority interests will not apply.

Under Biden’s proposal, the donor would report any deemed recognition events on the donor’s gift-tax return. A decedent would report any capital gains on an estate-tax return or, potentially, a separate capital-gains return. A decedent would be able to offset capital gains against any unused capital-loss carry-forwards and up to $3,000 of ordinary income on their final individual income-tax returns. Any capital-gains taxes deemed realized at death would be deductible on the decedent’s federal estate-tax return if required.

The proposal would be effective for gains on property transferred by gift and on property owned at death by decedents dying after Dec. 31, 2021.

With a 50/50 partisan split in the U.S. Senate, it is currently unclear what the final proposal will end up being. Now is the time to start thinking about the how the proposed changes will affect you. Make an appointment with your tax or financial-planning professional to discuss what steps you should consider taking. You may need to be willing to act quickly should these proposals become reality.

 

Jim Moran, CPA, MST is a manager with Melanson CPAs, focusing on commercial services and tax planning, compliance, and preparation.

Law

LLCs in the Bay State

By Benjamin M. Coyle, Esq.

Benjamin M. Coyle

Benjamin M. Coyle

Many families have homes or other real estate that parents hope to pass along to the next generation. In the world of estate planning, there are a variety of ways to achieve the movement of a family home from parents to children — sometimes through a trust, sometimes through a will after death, or even sometimes by outright gift.

While all these methods have their place, another option that should be considered is the formation of a limited-liability company (LLC) to hold title to real estate.

In Massachusetts, a limited-liability company is a business entity, formed with the secretary of the Commonwealth, and offering great flexibility in its management. This flexibility is very appealing, particularly when a home or other real estate is to be owned, used, and managed by a group.

For example, parents may want their four children to inherit a property equally. By using an LLC, rather than deeding each child a 25% interest in the property outright, parents would be able to transfer shares in the LLC to their children. Doing things this way is beneficial for several reasons.

One of the most important advantages of an LLC is the ability to work under an operating agreement — a formal, written document that clearly states the owners/members of the LLC, their respective interests, and the manner in which the LLC is operated and governed. The operating agreement can also allocate profits and losses to various members (which can be different than their ownership interest). Most importantly, the operating agreement also clearly states rules for use of the property by the members, and allocation of expenses.

“One of the most important advantages of an LLC is the ability to work under an operating agreement — a formal, written document that clearly states the owners/members of the LLC, their respective interests, and the manner in which the LLC is operated and governed.”

This gives everyone involved a crystal-clear understanding of their privileges and responsibilities relative to the property.

Once an LLC is formed and an operating agreement established, the real estate in question would be transferred into the LLC by deed, and the LLC would then be the owner of the property. By transferring the property to the LLC, the grantor has essentially converted real estate into tangible personal property, thereby avoiding many of the probate complexities of real estate.

Additionally, an LLC offers continuity in the property’s title, while still providing for the flexibility of changing ownership interests and membership shares (in contrast to multiple deeds divvying up the property, which could cause significant title confusion).

In the event the property is rented, the LLC provides limited-liability protection for its members, either short term or long term. Further, LLCs often offer tax advantages (over outright ownership) with respect to rental income, repair costs, renovations, and other expenses associated with the property. Additionally, since the LLC is a recognized business entity, it may often be easier for the LLC to obtain insurance or borrow money from a bank, in contrast with the banking difficulties that can be experienced by individuals with a shared interest via deed, or if the property were held in a trust.

Although there are significant advantages to the LLC, there are also startup costs and recurring annual expenses associated with the formation and continued maintenance of the LLC. Initial formation costs include a filing fee of $500 with the secretary of the Commonwealth, and any legal fees associated with the completion of articles of organization and the operating agreement.

Massachusetts requires that LLCs file an annual report with the secretary of the Commonwealth. For LLCs formed outside of Massachusetts, the Commonwealth requires a foreign LLC to register in Massachusetts and comply with the state’s annual filing requirements.

It is good practice (and may even be required by the operating agreement) for the members of an LLC to hold regular meetings, at least annually, where they discuss the business of the prior year and the upcoming year as it pertains to the LLC and the operation of the property. The LLC should maintain a corporate book that includes the minutes of each membership meeting, as well as minutes for any special meetings that may occur throughout the year. Since the LLC is a business entity, it will require its own tax-identification number and annual tax return. Depending upon the tax election chosen by the LLC, if there is any associated tax liability, those costs can potentially be passed on to each member to be addressed on their individual tax returns, and the expenses associated with annual fees and costs can be deducted from any LLC income.

An LLC is an excellent option to consider when determining the best way to address transferring real estate from one generation to the next. The transfer can occur during the lifetime of the current owners with relative ease and can be added to many existing estate plans, thereby providing families with effective ownership transitions and limited liability for the members of the LLC.

Benjamin M. Coyle is a shareholder with Bacon Wilson, P.C. He specializes in matters of estate planning and administration, and also has extensive experience with real estate, business, corporate, and municipal law; (413) 781-0560; [email protected]

Commercial Real Estate

Making a Big Splash

This rendering shows the many components of the planned $650 million resort and water park in Palmer.

This rendering shows the many components of the planned $650 million resort and water park in Palmer.

More than five years after Palmer residents rejected a casino proposal for a huge tract of land just off Turnpike exit 8, the property is back in the news, this time as the planned site of a $650 million water park, resort spa, and sports complex.

It’s the most basic tenet in commercial real estate.

Location, location, location.

Since the Massachusetts Turnpike opened in 1957, the large tract of land sitting atop the hill overlooking the exit 8 ramp in Palmer has always possessed that coveted quality. But over the ensuing 60-plus years, little has been done to capitalize on it.

Indeed, among the more than 20 exits on the Pike, exit 8 is arguably the least developed. There’s a small gas station and attached convenience store just off the exit ramp, but one has to go a half mile left or right to find much commercial development, and even then there isn’t much.

Still, Northeast Development saw the enormous potential in the property more than 20 years ago, and first obtained an option on more than 200 acres owned by the late John Lizak — who owned several properties within the town — and later acquired it outright soon after casino-gambling legislation was passed in the Commonwealth.

An opportunity to place a casino, proposed by the owners of Mohegan Sun, at the site went by the boards in 2013, when Palmer residents rejected a casino referendum, but now the property is the focus of another high-profile initiative — one on almost the same scale as the MGM casino eventually placed in the South End of Springfield.

“I remember being at a meeting with them and hearing them say, ‘this is a hot idea — irrespective of the casino, water parks are hot commodities if they’re done right.’”

And, ironically, it’s a concept that actually became part of the rejected casino proposal — a water park.

Or a water park on a much, much larger scale, to be more specific. This would be a $650 million water park resort and spa, featuring everything from a man-made tubing river (if constructed as planned, it would be the longest in the country) to batting cages to athletic fields.

“As the casino competition started heating up, everyone was putting something new into what they were doing,” said Paul Robbins, president of Paul Robbins Assoc., a Wilbraham-based marketing and public-relations firm and spokesperson for the Palmer Sports Group. His firm has also represented Northeast Development for many years. “Doug Flutie was going to be part of Ameristar [one of the casinos proposed for Springfield], and MGM was touting its entertainment. That’s also when Mohegan introduced the concept of a water park.

“And I remember being at a meeting with them, and hearing them say, ‘this is a hot idea — irrespective of the casino, water parks are hot commodities if they’re done right.’”

Those at Palmer Sports Group obviously feel the same way.

Led by Winthop ‘Trip’ Knox, who has been involved with the design and construction of more than 3,000 water-related facilities for water parks, resorts, and deluxe hotels, and Michael D’Amato, who managed the construction of the later stages of the Foxwoods Resort Casino, including the Grand Pequot Tower, the group is thinking big.

As in very big.

Indeed, the complex will feature indoor and outdoor sports facilities, a resort hotel, and two indoor water parks, as well as an indoor hockey and basketball facility, an indoor sports bubble, a baseball complex, soccer and mixed-use fields, beach-volleyball courts, restaurants, and on-site townhomes.

There is demand for all of the above, said Robbins, adding that there isn’t anything like this in the Northeast, and the developers expect to draw visitors from a 300-mile radius and do so for at least 10 months out of the year; yes, the water in the tubing river will be heated.

“The developers believe there are 25 million people in the catchment area for this facility,” said Robbins, who used the phrases ‘Disney-esque’ and ‘think Orlando’ a number of times as he talked about just what is being proposed for the Palmer site.

Elaborating, he said there will be a large water park attached to the resort complex (again, like the Disney parks) that become part of the package of staying at that facility. There will also be second water park for day trippers, as well as a host of other facilities.

Robbins said the Palmer site, while somewhat remote (which explains the lack of development at and around the exit 8 interchange), lies roughly halfway between Springfield and Worcester and is easily accessible to several major population centers. And that has made it a hot property, as they say in this business, for some time.

“When Mohegan signed on, I had a number of meetings with them, and they absolutely loved that site,” said Robbins. “They loved it because [then-Gov.] Deval Patrick said he wasn’t thrilled about casinos going to urban areas; his vision was for a bucolic, ‘drive to the destination, stay a few nights’ type of resort, and that’s what Mohegan is. But the location is also ideal.”

So much so that Northeast pursued a number of different development opportunities for the site, but eventually returned to the concept that grew out of the casino proposal and may eventually replace it as Palmer biggest hope to replace the many manufacturing jobs that were lost there over the past few decades and bring new vibrancy to the community.

Preliminary estimates call for 2,000 jobs, said Robbins, adding that the project might well become a synergistic complement to the recently opened MGM Springfield, offering people from outside the region more reason to come to the Bay State, and specifically Western Mass., for an extended stay.

At present, there is no timetable for the development, said Robbins, adding that the Palmer Sports Group is working with town officials to secure the necessary approvals and make the project a reality.

— George O’Brien

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