Essential Legal Concepts with Tax Analysis

ByDanny C. Santucci

The author is not engaged by this text, any accompanying electronic media, or lecture in the rendering of legal, tax, accounting, or similar professional services. While the legal, tax and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed. For that reason, the accuracy and completeness of this information and the author's opinions based thereon cannot be guaranteed. In addition, state or local tax laws and procedural rules may have a material impact on the general discussion. As a result, the strategies sug-gested may not be suitable for every individual. Before taking any action, all refer-ences and citations should be checked and updated accordingly.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert advice is required, the services of a com-petent professional person should be sought.

—-From a Declaration of Principles jointly adopted by a committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright February 2020 Danny Santucci

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TABLE OF CONTENTS CHAPTER 1 - ASSET PROTECTION .........................................................1-1

Why Asset Protection? ............................................................................................................................... 1-2Situations That Create Danger .............................................................................................................. 1-4Sources of Lawsuits .............................................................................................................................. 1-4Types of Liability ................................................................................................................................. 1-8Basic Protection Concepts .................................................................................................................... 1-8

Types of Creditors ...................................................................................................................................... 1-12Evading Creditors ................................................................................................................................. 1-16

Fraudulent Transfers .................................................................................................................................. 1-16Badges of Fraud .................................................................................................................................... 1-18Statute of Limitations ........................................................................................................................... 1-21Criminal Penalties ................................................................................................................................. 1-21Permissible Asset Transfers .................................................................................................................. 1-22Asset Protection Goals .......................................................................................................................... 1-22

Preparation ................................................................................................................................................. 1-26Insurance .................................................................................................................................................... 1-28

Homeowners Insurance ........................................................................................................................ 1-29Automobile Insurance ........................................................................................................................... 1-29Disability Insurance .............................................................................................................................. 1-30Life Insurance ....................................................................................................................................... 1-30Life Insurance Trust .............................................................................................................................. 1-31

Buy-Sell Agreements ................................................................................................................................. 1-31Definition .............................................................................................................................................. 1-31

Asset Protection Aspects of Common Entities ........................................................................................... 1-32Individual Ownership ........................................................................................................................... 1-32

Sole Proprietorship ........................................................................................................................ 1-33Corporate .............................................................................................................................................. 1-33

C Corporation ................................................................................................................................ 1-34No Pass-Through ..................................................................................................................... 1-35

The S Corporation - §1361 ............................................................................................................ 1-35Trusts .................................................................................................................................................... 1-38

Types of Trusts .............................................................................................................................. 1-38Revocable Trust ....................................................................................................................... 1-39

Land Trusts .......................................................................................................................... 1-39Irrevocable Trusts .................................................................................................................... 1-40Testamentary Trust .................................................................................................................. 1-40Business Trusts ........................................................................................................................ 1-41Foreign Trusts - §679 ............................................................................................................... 1-41

Asset Protection Trusts - APTs ........................................................................................... 1-42Foreign Jurisdictions ....................................................................................................... 1-42Alternatives ..................................................................................................................... 1-42Income Taxation.............................................................................................................. 1-43Estate & Gift Tax ............................................................................................................ 1-43Creditor Protection .......................................................................................................... 1-44

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Family Trusts ........................................................................................................................... 1-44Medicaid Trust ......................................................................................................................... 1-45Grantor Retained Income Trust ............................................................................................... 1-45

Co-Tenancy .......................................................................................................................................... 1-45Tenancy in Common ..................................................................................................................... 1-45

Varying Percentages ................................................................................................................ 1-46No Survivorship ....................................................................................................................... 1-46

Joint Tenancy with Right of Survivorship ..................................................................................... 1-47Equal Percentages .................................................................................................................... 1-47

Tenants by the Entirety .................................................................................................................. 1-47Right of Partition ........................................................................................................................... 1-48

Partnership ............................................................................................................................................ 1-48Family Partnerships ....................................................................................................................... 1-48

Charging Orders ....................................................................................................................... 1-48Phantom Income to Creditor .................................................................................................... 1-49Tax Issues ................................................................................................................................ 1-49

Estate Savings ...................................................................................................................... 1-50Income Tax Savings ............................................................................................................ 1-50

Limited Liability Company .................................................................................................................. 1-50Retirement Plan .................................................................................................................................... 1-50

Retirement Fund Protection in Bankruptcy ................................................................................... 1-51Custodianship ....................................................................................................................................... 1-51Estate .................................................................................................................................................... 1-52

Divorce ....................................................................................................................................................... 1-52Premarital Agreements ......................................................................................................................... 1-53

Uniform Premarital Act - The California Example ....................................................................... 1-53Permitted Items of Agreement ................................................................................................. 1-54Unenforceable Items ................................................................................................................ 1-54

Retirement Equity Act of 1984 ...................................................................................................... 1-54Benefits of a Premarital Agreement .............................................................................................. 1-55

Post-Nuptial Agreements ...................................................................................................................... 1-55

CHAPTER 2 - Alimony & Child Support .....................................................2-1Spousal Support - aka Alimony .................................................................................................................. 2-1

Divorce or Separation Instrument ......................................................................................................... 2-2Invalid Decree ............................................................................................................................... 2-3Amended Instrument ..................................................................................................................... 2-3Premarital Agreements .................................................................................................................. 2-3

Alimony Rules ...................................................................................................................................... 2-4Requirements ................................................................................................................................. 2-4

Payment Must Be In Cash ....................................................................................................... 2-6Payments to a Third Party ................................................................................................... 2-6

Written Requests, Consents, or Ratifications .................................................................. 2-7Payments for Family Residence .......................................................................................... 2-9

Taxpayer-Owned Home .................................................................................................. 2-9Spouse-Owned Home ...................................................................................................... 2-10Jointly-Owned Home ...................................................................................................... 2-10Rent On Property Owned by a Third Party ..................................................................... 2-11

Payments for Life Insurance ................................................................................................ 2-11Contingent Interest .......................................................................................................... 2-12

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Voluntary Payments ............................................................................................................ 2-12Payments to Remarried Spouse ........................................................................................... 2-13

Designating Payments as Not Alimony ................................................................................... 2-13Members of Different Households ........................................................................................... 2-15

Exception ............................................................................................................................. 2-15Termination at Death ............................................................................................................... 2-15

Substitute Payments............................................................................................................. 2-16Child Support ........................................................................................................................... 2-17

Past Due Child & Spousal Support Payments ..................................................................... 2-17Joint Return Prohibited ............................................................................................................ 2-18Minimum Term Rule for 1985 & 1986 Instruments ................................................................ 2-18

Exception ............................................................................................................................. 2-19Instruments Executed Before 1985 - A Historical Perspective ..................................................... 2-19

Old Requirements - Long, Long Ago in a Galaxy Far Away .................................................. 2-19Periodic Payments ............................................................................................................... 2-19

Exception for Installment Payments ................................................................................ 2-20Mixed Payments .............................................................................................................. 2-21

Marital or Family Relationship ............................................................................................ 2-22Property Settlement ......................................................................................................... 2-22

Child Support ...................................................................................................................... 2-22Tax Treatment of Alimony ................................................................................................................... 2-25

Instruments Executed Before 2019 ................................................................................................ 2-25Alimony Paid - Deductible ...................................................................................................... 2-25Reporting Alimony Received - Income ................................................................................... 2-25

Alimony as Compensation .................................................................................................. 2-26Recapture of Alimony for Type A & B Agreements ............................................................... 2-26

Exceptions to Recapture ...................................................................................................... 2-26Including the Recapture in Income ...................................................................................... 2-27Deducting the Recapture ..................................................................................................... 2-27TRA ‘84 Recapture - 1985 & 1986 Instruments .................................................................. 2-27TRA ‘86 Recapture - After 1986 Instruments ..................................................................... 2-28Exceptions ........................................................................................................................... 2-30Computation ........................................................................................................................ 2-30

Alimony Substitution Trusts & Annuities ............................................................................... 2-33Advantages of Alimony Trust ............................................................................................. 2-34Disadvantages of Alimony Trust ......................................................................................... 2-35

Annuities .................................................................................................................................. 2-35Alimony Paid by an Estate ....................................................................................................... 2-35

Instruments Executed After 2018 ................................................................................................. 2-35Child Support ............................................................................................................................................. 2-36

Contingency Relating To the Child ...................................................................................................... 2-36Clearly Associated With a Contingency ............................................................................................... 2-37

Heller Case .................................................................................................................................... 2-37Rebuttable Presumptions ...................................................................................................................... 2-38

COBRA Coverage ...................................................................................................................................... 2-38Coverage Termination .......................................................................................................................... 2-39Notice ................................................................................................................................................... 2-39

Election .......................................................................................................................................... 2-39Choice of Coverage ....................................................................................................................... 2-40Cost................................................................................................................................................ 2-40Deductibles .................................................................................................................................... 2-40

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Qualified Medical Child Support Orders.................................................................................................... 2-41Definition .............................................................................................................................................. 2-41Procedures & Duties ............................................................................................................................. 2-41Jurisdiction ........................................................................................................................................... 2-42

CHAPTER 3 - Bankruptcy .............................................................................3-1Federal Bankruptcy .................................................................................................................................... 3-1

Means Testing ...................................................................................................................................... 3-2Median State Income Test ............................................................................................................. 3-2Means Test .................................................................................................................................... 3-2

Credit Counseling ................................................................................................................................. 3-2Tax Law Changes ................................................................................................................................. 3-2

Chapter 13 "Superdischarge" ......................................................................................................... 3-3Subordination Of Ad Valorem Tax Liens ..................................................................................... 3-3Interest on Tax Claims ................................................................................................................... 3-3Tax Returns ................................................................................................................................... 3-3

Bankruptcy Types ................................................................................................................................. 3-3Chapter 7 - Liquidation ................................................................................................................. 3-5

Exempt Assets ......................................................................................................................... 3-5Availability .............................................................................................................................. 3-6Trustee Appointment ............................................................................................................... 3-6

Chapter 11- Reorganization ........................................................................................................... 3-6Availability .............................................................................................................................. 3-7Creditors’ Committee .............................................................................................................. 3-7Reorganization Plan ................................................................................................................. 3-7

Chapter 13 - Wage-Earner Plan ..................................................................................................... 3-8Availability .............................................................................................................................. 3-8Repayment Plan ....................................................................................................................... 3-8Trustee Appointment ............................................................................................................... 3-9

Automatic Stay ..................................................................................................................................... 3-11Tax Assessment ............................................................................................................................. 3-13

Suspension of Statute of Limitation ......................................................................................... 3-13Immediate Assessment ............................................................................................................ 3-14

Levy ............................................................................................................................................... 3-14Tax Court ....................................................................................................................................... 3-15

Tax Court Petition .................................................................................................................... 3-15Preferences ........................................................................................................................................... 3-16

Trust Fund Taxes ........................................................................................................................... 3-16Allocation of Tax Payments .......................................................................................................... 3-16

Priorities ............................................................................................................................................... 3-17Super Priority Claims .................................................................................................................... 3-17Secured Claims .............................................................................................................................. 3-17

Federal Tax Liens .................................................................................................................... 3-17Priority Claims .............................................................................................................................. 3-18Tax Claim Determination .............................................................................................................. 3-19

Refunds .................................................................................................................................... 3-21Priority of Tax Claims ................................................................................................................... 3-23

Second Priority Tax Claims ..................................................................................................... 3-24Third Priority Tax Claims ........................................................................................................ 3-24Four Generates Priority Eight Tax Claims ............................................................................... 3-24

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Eighth Priority Tax Claims ...................................................................................................... 3-24Debt Discharge ..................................................................................................................................... 3-25

Chapter 7 Discharge ...................................................................................................................... 3-25Chapter 11 Discharge .................................................................................................................... 3-28Chapter 13 Discharge .................................................................................................................... 3-28Discharge of Taxes ........................................................................................................................ 3-29

Tax Liens ................................................................................................................................. 3-29Individual Bankruptcy Estate ............................................................................................................... 3-29

Separate Entity .............................................................................................................................. 3-29Tax Attribute Carryovers ............................................................................................................... 3-30

Termination of the Estate ......................................................................................................... 3-31Filing Requirements ...................................................................................................................... 3-31

Disclosure of Return Information ............................................................................................ 3-32Taxable Income ............................................................................................................................. 3-33

Taxable Year ............................................................................................................................ 3-33Gross Income ........................................................................................................................... 3-33Deductions & Credits .............................................................................................................. 3-34Administrative Expenses ......................................................................................................... 3-34Net Operating Loss Carryback................................................................................................. 3-35Transfers to Debtor .................................................................................................................. 3-35Partnership & S Corporation Interests ..................................................................................... 3-35Request for Prompt Determination of Liability ....................................................................... 3-35Tax Liability ............................................................................................................................ 3-36

Individual Debtor .................................................................................................................................. 3-36Tax Year Election .......................................................................................................................... 3-36

Annualizing Taxable Income ................................................................................................... 3-37Making the Election ................................................................................................................. 3-37Later Bankruptcy of Spouse .................................................................................................... 3-38Election Considerations ........................................................................................................... 3-39

Transfers between Debtor & Estate ............................................................................................... 3-39Net Operating Loss Carryback Limitation .................................................................................... 3-39

Partnership Bankruptcy ........................................................................................................................ 3-39No Separate Estate ......................................................................................................................... 3-40Discharge of Debts ........................................................................................................................ 3-40

Corporate Bankruptcy ........................................................................................................................... 3-40Exemption Return Filing ............................................................................................................... 3-40Personal Holding Company Tax .................................................................................................... 3-41Tax-Free Reorganizations ............................................................................................................. 3-41

§354, §355, & §356 ................................................................................................................. 3-41Corporate Liquidations under Chapter 7 ....................................................................................... 3-42Carryover of Tax Items - §381 & 382 ........................................................................................... 3-42

Bankruptcy Exception ............................................................................................................. 3-43Reduction of Carryforwards ................................................................................................ 3-43Section 269 Presumption ..................................................................................................... 3-44

Homesteading ............................................................................................................................................. 3-44Types of Homesteads ............................................................................................................................ 3-44Property & Equity Covered .................................................................................................................. 3-45Who Can Homestead? .......................................................................................................................... 3-45Excluded Debts ..................................................................................................................................... 3-46

Garnishment ............................................................................................................................................... 3-46

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CHAPTER 4 - Divorce Settlements & Divisions ..........................................4-1Premarital Agreements ............................................................................................................................... 4-3

Uniform Premarital Act - The California Example .............................................................................. 4-3Permitted Items of Agreement ....................................................................................................... 4-3Unenforceable Items ...................................................................................................................... 4-5

Retirement Equity Act of 1984 ................................................................................................ 4-5Benefits of a Premarital Agreement ...................................................................................................... 4-6

Post-Nuptial Agreements ........................................................................................................................... 4-6Divorce Settlements - The Tax Trap .......................................................................................................... 4-7

Section 1041 ......................................................................................................................................... 4-7Application of §1041 ............................................................................................................................ 4-7

Mandatory Scope ........................................................................................................................... 4-8Property vs. Income ....................................................................................................................... 4-11

Savings Bonds ......................................................................................................................... 4-11Receivables .............................................................................................................................. 4-12Interest ..................................................................................................................................... 4-12

Imputed Interest ................................................................................................................... 4-13Incident to Divorce ............................................................................................................................... 4-15

Related To Termination ................................................................................................................. 4-16Rebuttable Presumption ........................................................................................................... 4-16

Divorce or Separation Instrument .................................................................................................. 4-17Transfers in Trust.................................................................................................................................. 4-17Third Party Transfers ............................................................................................................................ 4-18Property Basis ....................................................................................................................................... 4-19

Gift Variation ................................................................................................................................ 4-20Passive Activity Loss Property ...................................................................................................... 4-20Property Transferred In Trust ........................................................................................................ 4-21Basis in U.S. Savings Bonds ......................................................................................................... 4-21Negotiated Property Divisions ....................................................................................................... 4-21Adjudicated Property Divisions ..................................................................................................... 4-21

Caselaw .................................................................................................................................... 4-22General Rule - Immediate & Specific ........................................................................................... 4-22

Liabilities .............................................................................................................................................. 4-23Holding Period ...................................................................................................................................... 4-23Notice & Record Keeping .................................................................................................................... 4-23

Purchases Between Spouses ....................................................................................................................... 4-26Residence .............................................................................................................................................. 4-26

Home Mortgage Interest ................................................................................................................ 4-26Deferral & Exclusion of Gain ........................................................................................................ 4-27

Business & Investment Property .......................................................................................................... 4-27Recapture ....................................................................................................................................... 4-27Section 1031 Exchange ................................................................................................................. 4-28Installment Sale of Assets ............................................................................................................. 4-29

Selected Asset Divisions ............................................................................................................................ 4-29Installment Obligations ......................................................................................................................... 4-29Business Interests ................................................................................................................................. 4-29

Corporations .................................................................................................................................. 4-30Section 302 Redemption .......................................................................................................... 4-30Recapitalization ....................................................................................................................... 4-30

Partnerships ................................................................................................................................... 4-31Section 736(a) Payments ......................................................................................................... 4-31

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Effect on Recipient .............................................................................................................. 4-32Section 736(b) Payments ......................................................................................................... 4-32

Effect ................................................................................................................................... 4-32Exclusions From §736(b) Treatment ................................................................................... 4-32Liabilities ............................................................................................................................. 4-33Series of Payments .............................................................................................................. 4-33

Section 754 Election ................................................................................................................ 4-34Insurance Policies ................................................................................................................................. 4-34Pension Benefits ................................................................................................................................... 4-34

Qualified Domestic Relations Order ............................................................................................. 4-35Taxation of Distributions ............................................................................................................... 4-37Deferred v. Present Division of Benefits ....................................................................................... 4-37

Deferred Division Arguments .................................................................................................. 4-37Present Division or Alternate Property Arguments ................................................................. 4-38

Individual Retirement Arrangements ............................................................................................ 4-38IRA Deduction Limit ............................................................................................................... 4-39Rollovers .................................................................................................................................. 4-39

Divorce Distributions .......................................................................................................... 4-39Amounts Not Rolled Over ................................................................................................... 4-39

Military & Civil Service Pensions ................................................................................................. 4-40

CHAPTER 5 - Employment ...........................................................................5-1The Employment Relationship ................................................................................................................... 5-1Employee v. Independent Contractor ......................................................................................................... 5-2

Common Law Rules Used by IRS ........................................................................................................ 5-3Factors ........................................................................................................................................... 5-3Statutory Employees ...................................................................................................................... 5-5Real Estate Agents ......................................................................................................................... 5-5Reporting Requirements ................................................................................................................ 5-5Penalties ........................................................................................................................................ 5-5

Section 530 Relief .................................................................................................................... 5-6Unemployment Compensation ................................................................................................................... 5-6

Federal Unemployment (FUTA) Tax - §3302 ...................................................................................... 5-7Depositing FUTA Tax ................................................................................................................... 5-7

Unemployment Compensation ............................................................................................................. 5-8Withholding ................................................................................................................................... 5-82009 Partial Suspension of Unemployment Taxation ................................................................... 5-9

Workers’ Compensation ............................................................................................................................. 5-9Tax Exemption ..................................................................................................................................... 5-9

Unreasonable Compensation ...................................................................................................................... 5-10Overall Limitation ................................................................................................................................ 5-10

Allowance of Deduction................................................................................................................ 5-10Limitation on Accrual Deduction .................................................................................................. 5-10Employment Contracts .................................................................................................................. 5-13

Scope of Examination ........................................................................................................................... 5-13Factors .................................................................................................................................................. 5-13

Employee’s Qualifications ............................................................................................................ 5-13Size of the Business ....................................................................................................................... 5-13Employee’s Compensation History ............................................................................................... 5-13

Unreasonably Low Salaries ..................................................................................................... 5-13

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Services Performed by the Employee ............................................................................................ 5-14Past Service ................................................................................................................................... 5-14Reasonable Dividends ................................................................................................................... 5-14

Bonuses as Constituting Dividends ......................................................................................... 5-14Payback Agreements ..................................................................................................................... 5-14Miscellaneous Factors ................................................................................................................... 5-15

Social Security............................................................................................................................................ 5-15How Social Security Works.................................................................................................................. 5-15Social Security Participants .................................................................................................................. 5-16Social Security Benefits ........................................................................................................................ 5-16Retirement Benefits .............................................................................................................................. 5-17

Qualification .................................................................................................................................. 5-17Calculation..................................................................................................................................... 5-20

Average Indexed Monthly Earnings (AIME) .......................................................................... 5-21Primary Insurance Amount (PIA) ............................................................................................ 5-23

Cost of Living Adjustment Using Dollar Bend Points ........................................................ 5-23Adjustment for Retirement Date .......................................................................................... 5-24

Early Retirement ............................................................................................................. 5-24Effect of Late Retirement ................................................................................................ 5-25

Earnings Reduction Formula ............................................................................................... 5-26Annual Report of Earnings .............................................................................................. 5-26Special Monthly Rule ...................................................................................................... 5-27

Personalized Benefit Estimate ....................................................................................................... 5-27Impact of Private Pension .............................................................................................................. 5-27

Direct Deposit ....................................................................................................................................... 5-27Social Security’s Payroll Tax or FICA - §3111 & §3121 ..................................................................... 5-29

Rates .............................................................................................................................................. 5-30Covered Earnings .......................................................................................................................... 5-30Multiple Employers ....................................................................................................................... 5-30Covered Employment .................................................................................................................... 5-31Self-Employment ........................................................................................................................... 5-31Tax after Retirement ...................................................................................................................... 5-31

Survivors Benefits ................................................................................................................................ 5-32Divorce ................................................................................................................................................. 5-33

Medicare ..................................................................................................................................................... 5-35Who Is Eligible For Hospital Insurance (Part A)? ................................................................................ 5-35Who Can Get Medical Insurance (Part B)? .......................................................................................... 5-36Prescription Drug Coverage (Part D) .................................................................................................... 5-36How Do You Get Medicare? ................................................................................................................ 5-37What Does Medicare Pay For? ............................................................................................................. 5-37What Medicare Does Not Pay For? ...................................................................................................... 5-37Medigap Insurance ............................................................................................................................... 5-37

Disability .................................................................................................................................................... 5-38Social Security Disability Benefits ....................................................................................................... 5-38Family Members ................................................................................................................................... 5-38HIV & AIDS ......................................................................................................................................... 5-39Children ................................................................................................................................................ 5-39Qualification ......................................................................................................................................... 5-39General Disability Benefits ................................................................................................................... 5-40

Americans with Disabilities Act of 1990 ................................................................................................... 5-41Disabled Access Credit - §44 ............................................................................................................... 5-42

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Eligible Small Business ................................................................................................................. 5-42Eligible Access Expenditures ........................................................................................................ 5-42Credit Amount ............................................................................................................................... 5-43

Architectural & Transportation Barrier Removal - §190 ...................................................................... 5-43

CHAPTER 6 - Entities & Title .......................................................................6-1Basic Entity Formats .................................................................................................................................. 6-1

Individual & Sole Proprietorship .......................................................................................................... 6-2Marital Property ............................................................................................................................ 6-3

Timing & Domicile .................................................................................................................. 6-3Corporate .............................................................................................................................................. 6-3

Categories of C Corporations ........................................................................................................ 6-4Personal Holding Company - §541 .......................................................................................... 6-4

Attribution Rules ................................................................................................................. 6-4Penalty Tax .......................................................................................................................... 6-4

Regular C Corporation............................................................................................................. 6-5No Pass-Through ................................................................................................................. 6-5Getting Money Out of the C Corporation ............................................................................ 6-6Passive Loss Restrictions .................................................................................................... 6-8Partnership vs. Corporation ................................................................................................. 6-10

Personal Service Corporation - §269A .................................................................................... 6-11S Corporation - §1361 ................................................................................................................... 6-11

Minors as Shareholders ............................................................................................................ 6-12Passthrough Entities - 20% Deduction .................................................................................... 6-12Bequests & Estate Ownership .................................................................................................. 6-13Trusts as Shareholders ............................................................................................................. 6-13S Corporation Assets ............................................................................................................... 6-16

Built-In Gains Tax - §1374 .................................................................................................. 6-16Incorporation of a Farm ................................................................................................................. 6-18

Land Partnership Advantage .................................................................................................... 6-19Leasebacks..................................................................................................................................... 6-19

Trusts .................................................................................................................................................... 6-20Title Holding ................................................................................................................................. 6-20Business Trusts .............................................................................................................................. 6-20

Co-Tenancy .......................................................................................................................................... 6-22Taxation ......................................................................................................................................... 6-23Percentage Interests ....................................................................................................................... 6-23Partition ......................................................................................................................................... 6-24

Partnership ............................................................................................................................................ 6-24Partnership Taxation ...................................................................................................................... 6-24

Allocation of Income & Deduction .......................................................................................... 6-25Partnership Recapitalization .......................................................................................................... 6-25

Two Class Format .................................................................................................................... 6-25Valuation ............................................................................................................................. 6-25

Guaranteed Payment ....................................................................................................... 6-26Control & Management ....................................................................................................... 6-26Estate Issues ........................................................................................................................ 6-27

Family Partnerships ....................................................................................................................... 6-27Estate Savings .......................................................................................................................... 6-27Income Tax Savings ................................................................................................................ 6-28

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Family Partnership Requirements ............................................................................................ 6-28Recognizing a Partner .......................................................................................................... 6-29

Control ............................................................................................................................ 6-29Transferability ................................................................................................................. 6-29

Donee as a Partner ............................................................................................................... 6-30Trusts as Partners ................................................................................................................. 6-30Minor as a Partner ............................................................................................................... 6-31Purchased Interests .............................................................................................................. 6-31Capital Interest in the Partnership ....................................................................................... 6-32Capital as a Material Income-Producing Item ..................................................................... 6-32

Source of Capital ............................................................................................................. 6-32Family Partnerships Not Within §704(e) ............................................................................. 6-32Real Estate Family Partnerships .......................................................................................... 6-33Business Family Partnerships .............................................................................................. 6-33Structuring the Family Partnership ...................................................................................... 6-33

Limited Liability Company .................................................................................................................. 6-34Outside Basis & Debt Share Advantage ........................................................................................ 6-35

Substantial Economic Effect Rules .......................................................................................... 6-36Discharge of Indebtedness Income .......................................................................................... 6-36

Suggested Uses .............................................................................................................................. 6-36Professional Firms ................................................................................................................... 6-36Joint Ventures .......................................................................................................................... 6-37Substitute for Family Limited Partnership ............................................................................... 6-37

Retirement Plan .................................................................................................................................... 6-37Employer Costs ............................................................................................................................. 6-38Profit-Sharing Plan ........................................................................................................................ 6-40Money Purchase Pension Plan ....................................................................................................... 6-40Defined Benefit Pension Plan ........................................................................................................ 6-40

Custodianship ....................................................................................................................................... 6-41Estate .................................................................................................................................................... 6-41

CHAPTER 7 - Insurance ................................................................................7-1Homeowners Insurance .............................................................................................................................. 7-2Automobile Insurance ................................................................................................................................ 7-2Disability Insurance .................................................................................................................................... 7-3Life Insurance ............................................................................................................................................. 7-3

Purpose ................................................................................................................................................. 7-4Tax Overview ....................................................................................................................................... 7-4

Income Tax .................................................................................................................................... 7-4Transfer for Value Rule ........................................................................................................... 7-5Employee Death Benefit - §101(b) Repealed .......................................................................... 7-5Premiums ................................................................................................................................. 7-5Lifetime Benefits ..................................................................................................................... 7-5

Section 72 ............................................................................................................................ 7-6Estate Taxes - §2042 & §2035(a) .................................................................................................. 7-7

Ownership ................................................................................................................................ 7-7Gift Taxes ...................................................................................................................................... 7-8

Community Property Gift Danger ........................................................................................... 7-8Life Insurance Trust .............................................................................................................................. 7-8

Considerations ............................................................................................................................... 7-9

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Annuities .................................................................................................................................................... 7-13Deferred Annuity .................................................................................................................................. 7-13Private Annuity ..................................................................................................................................... 7-14

Unsecured Promise ........................................................................................................................ 7-14Regulations Restrict Private Annuities .......................................................................................... 7-15

Buy-Sell Agreements ................................................................................................................................. 7-15Definition .............................................................................................................................................. 7-15

Contractual Format ........................................................................................................................ 7-16Funding .......................................................................................................................................... 7-16

Life Insurance Funding ............................................................................................................ 7-16Term vs. Whole Life ............................................................................................................ 7-17Policy Ownership & Premium Payment .............................................................................. 7-17

Entity & Cross-Purchase Agreements .................................................................................................. 7-17Tax Consequences - Cross-Purchase Agreements ......................................................................... 7-17

Non-Deductible Premiums ...................................................................................................... 7-18No Dividend Danger ................................................................................................................ 7-18

Tax Consequences - Entity Purchase Agreements ........................................................................ 7-18Non-Deductible Premiums ...................................................................................................... 7-20Dividend Danger - §302 .......................................................................................................... 7-20Exception to Dividend Treatment ............................................................................................ 7-21

Constructive Ownership (Attribution) Rules ....................................................................... 7-21“Estate/Beneficiary” Rule ............................................................................................... 7-21“Family/Trust/Corporation” Rule ................................................................................... 7-21

No Gain on Sale ............................................................................................................................ 7-23Estate Tax Valuation ..................................................................................................................... 7-23

Using the Buy-Sell Agreement to Set Value ........................................................................... 7-24Buy-Sell Agreements - §2703..................................................................................................7-24

Exceptions to §2703 ............................................................................................................ 7-24Arms-Length Bargain .......................................................................................................... 7-25Substantial Modifications .................................................................................................... 7-25

Exceptions ....................................................................................................................... 7-26Purchase Price & Terms ....................................................................................................................... 7-26

Valuation ....................................................................................................................................... 7-26Community Property ............................................................................................................................ 7-26Professional Corporations ..................................................................................................................... 7-27

Marketability Problems ................................................................................................................. 7-27Controlled Disposition ................................................................................................................... 7-27

S Corporations ...................................................................................................................................... 7-27Sole Shareholder Planning .................................................................................................................... 7-28

Complete Liquidations .................................................................................................................. 7-28Alternative Dispositions .......................................................................................................... 7-28Use of Life Insurance ............................................................................................................... 7-28Estate Valuation ....................................................................................................................... 7-28

One-Way Buy-Outs ....................................................................................................................... 7-29

CHAPTER 8 - Property Dispositions ............................................................8-1Capital Gains .............................................................................................................................................. 8-2

Rates - §1 .............................................................................................................................................. 8-228% Rate Group ................................................................................................................................... 8-325% Rate Group - Unrecaptured §1250 Gain ....................................................................................... 8-3

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15% (or sometimes 20%) Rate Group - Adjusted Net Capital Gain ..................................................... 8-5Tax on Net Investment Income - §1411 ............................................................................................... 8-6Former 18% & 8% Rate Group (Repealed) .......................................................................................... 8-6

Deemed Sale Election (Repealed) ................................................................................................. 8-6AMT ..................................................................................................................................................... 8-7

Small Business Stock .................................................................................................................... 8-7Netting of Capital Gains & Losses ....................................................................................................... 8-7Analysis ................................................................................................................................................ 8-8

Home Sales - §121 ..................................................................................................................................... 8-10Two-Year Ownership & Use Requirements ......................................................................................... 8-10

Tacking of Prior Holding Period ................................................................................................... 8-11Prorata Exception .......................................................................................................................... 8-11Limitations on Exclusion ............................................................................................................... 8-13

Installment Method .................................................................................................................................... 8-15Requirements ........................................................................................................................................ 8-15Formula ................................................................................................................................................ 8-15Definitions ............................................................................................................................................ 8-16Mortgage in Excess of Basis ................................................................................................................. 8-17

Wrap-around Indebtedness ............................................................................................................ 8-17Professional Equities Decision ................................................................................................ 8-17

Recapture .............................................................................................................................................. 8-18Related Party Resale Rule .................................................................................................................... 8-19

Related Persons ............................................................................................................................. 8-19Exceptions ..................................................................................................................................... 8-19Depreciable Property ..................................................................................................................... 8-19

Contingent Payments or Price .............................................................................................................. 8-19Installment Sales Revision Act of 1980 ......................................................................................... 8-20

Contingent Payment Sale ......................................................................................................... 8-20Maximum Selling Price Transactions ............................................................................................ 8-20

Recomputation ......................................................................................................................... 8-20Fixed Payment Term Transactions ................................................................................................ 8-21

Losses ...................................................................................................................................... 8-21Transactions with Neither Maximum Selling nor Fixed Payment Term ....................................... 8-22

Losses ...................................................................................................................................... 8-22Income Forecast Method ............................................................................................................... 8-22

Election .................................................................................................................................... 8-22Calculation ............................................................................................................................... 8-23

Special Rules ................................................................................................................................. 8-23Qualification ............................................................................................................................ 8-23

Repeal of Installment Treatment for Dealer Dispositions ............................................................. 8-26Definition ................................................................................................................................. 8-26Residential Lot & Timeshare Exception .................................................................................. 8-26Interest Computation ............................................................................................................... 8-26Qualification ............................................................................................................................ 8-26

Installment Obligations in Excess of $5 Million ........................................................................... 8-26Computation of Interest ........................................................................................................... 8-27Definitions ............................................................................................................................... 8-27

Pledging ......................................................................................................................................... 8-27Disposition of Installment Obligations ................................................................................................. 8-27

Gain or Loss .................................................................................................................................. 8-27Exceptions ............................................................................................................................... 8-28

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Substitution .......................................................................................................................... 8-28Tax-Free Transfers ................................................................................................................... 8-28

Imputed Interest & OID ........................................................................................................................ 8-28Complexity .................................................................................................................................... 8-28

Sale at a Loss ........................................................................................................................... 8-28Section 483 - Imputed Interest ....................................................................................................... 8-29

Exemptions .............................................................................................................................. 8-29Imputed Interest Rates ............................................................................................................. 8-29

Small Transaction Exception ............................................................................................... 8-30Intra-family Land Exception ............................................................................................... 8-30Timing ................................................................................................................................. 8-30

Sections 1271-1274 & OID ........................................................................................................... 8-30OID Rates ................................................................................................................................ 8-30

Timing ................................................................................................................................. 8-30Cash Method Debt Instrument Exception............................................................................ 8-30

Computation of OID ................................................................................................................ 8-30Personal Use Property - Buyer’s Deduction of Imputed Interest................................................... 8-31

Section 1031 “Like Kind” Exchanges ........................................................................................................ 8-33Exchange Advantage ............................................................................................................................ 8-33Importance of Deferral ......................................................................................................................... 8-33Three Elements ..................................................................................................................................... 8-33

Exchange Requirement .................................................................................................................. 8-34Two-Party Exchanges .............................................................................................................. 8-35Multi-party Exchanges ............................................................................................................. 8-35

Alderson .............................................................................................................................. 8-36Baird .................................................................................................................................... 8-36

Delayed Exchanges .................................................................................................................. 8-36Qualified Property Requirement .................................................................................................... 8-37Like-Kind Requirement ................................................................................................................. 8-38

Rules of Boot ........................................................................................................................... 8-38Related Party Exchanges ...................................................................................................................... 8-40

Definition of Related Party ............................................................................................................ 8-40Exceptions to the Two Year Rule .................................................................................................. 8-41Contractual Protection ................................................................................................................... 8-41Transactions Between a Partner & Partnership ............................................................................. 8-42

Foreign Real Property Exchanges ........................................................................................................ 8-42Qualified §1031 Exchange of Personal Property Repealed .................................................................. 8-44

Requirements for Personal Property - Prior to 2018 ...................................................................... 8-44Like-Kind or Like-Class .......................................................................................................... 8-45

Like-Kind Personal Property - Identical .............................................................................. 8-45Like Class Personal Property - General Asset or Product Class .......................................... 8-45

Five, Four, Then Six Digit Product Classes .................................................................... 8-46Other Personal Property ...................................................................................................... 8-49

Multiple Asset Exchanges ....................................................................................................... 8-49Exchange Groups ................................................................................................................ 8-49Aggregation & Allocation ................................................................................................... 8-49

Delayed (Deferred) Exchange Regulations .......................................................................................... 8-50Deferred (Delayed) Exchange Definition ...................................................................................... 8-50Identification Requirements .......................................................................................................... 8-50

Identification & Exchange Periods .......................................................................................... 8-50Application of §7503 ........................................................................................................... 8-50

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Method of Identification .......................................................................................................... 8-51Property Description ............................................................................................................ 8-51

Incidental Property - 15% Rule ....................................................................................... 8-53Revocation ............................................................................................................................... 8-53Substantial Receipt .................................................................................................................. 8-53Multiple Replacement Properties ............................................................................................. 8-53

Actual & Constructive Receipt Rule ............................................................................................. 8-55Four Safe Harbors .................................................................................................................... 8-55

Safe Harbor #1 - Security .................................................................................................... 8-55Safe Harbor #2 - Escrow Accounts & Trusts ...................................................................... 8-56

Disqualified Person ......................................................................................................... 8-56Who Is An Agent? ........................................................................................................... 8-56

Safe Harbor #3 - Qualified Intermediary ............................................................................. 8-57Who Is A Qualified Intermediary? .................................................................................. 8-57Direct Deeding ................................................................................................................ 8-58Assignment ...................................................................................................................... 8-58Simultaneous Exchanges ................................................................................................. 8-58

Safe Harbor #4 - Interest ..................................................................................................... 8-58Interest Reporting - Section 468B(g) .............................................................................. 8-59

Restrictions On Rights to Money & Other Property - “g(6)” Limitations ........................... 8-59Outside Transfers of Money or Other Property ............................................................... 8-60

Exchanges of Partnership Interests ................................................................................................ 8-62Effective Date of Partnership Provisions ................................................................................. 8-62

Foreclosure ................................................................................................................................................. 8-64Discharged Debt ................................................................................................................................... 8-64

Nonrecourse Indebtedness ............................................................................................................. 8-66Recourse Indebtedness .................................................................................................................. 8-67Reporting ....................................................................................................................................... 8-68Form 1099A .................................................................................................................................. 8-69Timing & Character of Gain or Loss ............................................................................................. 8-70

Gain ......................................................................................................................................... 8-71Loss .......................................................................................................................................... 8-71

Lender’s Tax Impact ...................................................................................................................... 8-72Foreclosure Sale ....................................................................................................................... 8-72

Mortgage Debt Relief Act of 2007 ....................................................................................................... 8-73Qualified Principal Residence Indebtedness ................................................................................. 8-73

Mixed Indebtedness ................................................................................................................. 8-73Repossession .............................................................................................................................................. 8-75

Personal Property .................................................................................................................................. 8-75Non-Installment Method Sales ...................................................................................................... 8-75

Basis of Installment Obligation ............................................................................................... 8-75Gain or Loss on Repossession ................................................................................................. 8-78

Installment Method Sales .............................................................................................................. 8-78Basis of Installment Obligation ............................................................................................... 8-78Gain or Loss on Repossession ................................................................................................. 8-78

Basis of Repossessed Personal Property ........................................................................................ 8-79Bad Debt ........................................................................................................................................ 8-80

Real Property ........................................................................................................................................ 8-80Conditions ..................................................................................................................................... 8-80Figuring Gain on Repossession ..................................................................................................... 8-82

Limit on Taxable Gain ............................................................................................................. 8-82

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Repossession Costs .............................................................................................................. 8-82Indefinite Selling Price .................................................................................................... 8-84

Character of Gain ................................................................................................................ 8-84Basis of Repossessed Real Property ........................................................................................ 8-84Holding Period for Resales ...................................................................................................... 8-85

Buyer Improvements ........................................................................................................... 8-85Bad Debt .................................................................................................................................. 8-87

Seller’s Former Home Exception .................................................................................................. 8-87Involuntary Conversions ............................................................................................................................ 8-93

Condemnations ..................................................................................................................................... 8-93Threat of Condemnation ................................................................................................................ 8-93

Reports of Condemnation ........................................................................................................ 8-94Property Voluntarily Sold .............................................................................................................. 8-94Easements ...................................................................................................................................... 8-94Condemnation Award .................................................................................................................... 8-95

Amounts Withheld From Award ............................................................................................. 8-95Net Condemnation Award ....................................................................................................... 8-95Interest on Award .................................................................................................................... 8-95Payments to Relocate ............................................................................................................... 8-96

Severance Damages ....................................................................................................................... 8-96Treatment of Severance Damages ........................................................................................... 8-96

Expenses of Obtaining an Award .................................................................................................. 8-97Special Assessment Withheld from Award ................................................................................... 8-97Severance Damages Included in Award ........................................................................................ 8-98

Gain or Loss from Condemnations ....................................................................................................... 8-98How to Figure Gain or Loss .......................................................................................................... 8-98

Part Business or Part Rental ..................................................................................................... 8-98Postponement of Gain .......................................................................................................................... 8-99

Choosing to Postpone Gain ........................................................................................................... 8-99Cost Test ........................................................................................................................................ 8-100Replacement Period ....................................................................................................................... 8-100

Condemnation .......................................................................................................................... 8-100Replacement Property Acquired Before The Condemnation ................................................... 8-101Extension ................................................................................................................................. 8-101Time For Assessing a Deficiency ............................................................................................ 8-101

Related Party Rule ................................................................................................................................ 8-102

CHAPTER 9 - Retirement & Employee Benefits .........................................9-1Retirement Plans ........................................................................................................................................ 9-1

Designing Your Retirement .................................................................................................................. 9-2Sources of Retirement Income .............................................................................................................. 9-3

Qualified Corporate Programs ....................................................................................................... 9-3Defined Contribution Plans ..................................................................................................... 9-3

Profit-Sharing Plan .............................................................................................................. 9-3Money Purchase Pension Plan ............................................................................................. 9-3Stock Bonus Plan ................................................................................................................. 9-4Employee Stock Ownership Plan ........................................................................................ 9-4401(k) Plan .......................................................................................................................... 9-4

Defined Benefit ........................................................................................................................ 9-4Defined Benefit Pension ...................................................................................................... 9-4

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Annuity Plan ........................................................................................................................ 9-4SIMPLE Plans ............................................................................................................................... 9-4Self-Employed Plans ..................................................................................................................... 9-5Individual Retirement Accounts .................................................................................................... 9-8

Roth IRA - §408A ................................................................................................................... 9-8Contributions to Roth IRAs ..................................................................................................... 9-9

Phase-out ............................................................................................................................. 9-11Excess Contributions ........................................................................................................... 9-11

Taxation of Distributions ......................................................................................................... 9-11Qualified Distribution.......................................................................................................... 9-12

5-Year Exception ............................................................................................................ 9-12Nonqualified Distributions .................................................................................................. 9-12Reporting ............................................................................................................................. 9-13

Rollovers & Conversions ......................................................................................................... 9-13Rollover from Traditional IRA ............................................................................................ 9-13

Allowable Rollovers ........................................................................................................ 9-13Income Taxation.............................................................................................................. 9-14Rollover Considerations .................................................................................................. 9-14

Conversions ......................................................................................................................... 9-15Transfer of Contributions .................................................................................................... 9-15

Waiting Period ................................................................................................................ 9-16Penalty-Free Withdrawals ............................................................................................................. 9-16Tax-Deferred Annuities................................................................................................................. 9-16

Mechanics ................................................................................................................................ 9-16Types of Deferred Annuity ...................................................................................................... 9-16

Fixed Annuity ...................................................................................................................... 9-17Variable Annuity ................................................................................................................. 9-17Minimum Investment & Charges ........................................................................................ 9-17

Simplified Employee Pension (SEP) Plan ..................................................................................... 9-17Investment Assets .......................................................................................................................... 9-17Ultimate Question .......................................................................................................................... 9-18Participant Loan Regulations......................................................................................................... 9-18

Additional Loan Requirements ................................................................................................ 9-19DOL Regulations ..................................................................................................................... 9-19

Fringe Benefits ........................................................................................................................................... 9-21Old Dichotomy - Statutory v. Nonstatutory .......................................................................................... 9-21

Fringe Benefit Provisions .............................................................................................................. 9-21TRA ‘84 - §132 ........................................................................................................................ 9-21Discrimination ......................................................................................................................... 9-21Only Statutory Benefits ........................................................................................................... 9-21

No-Additional-Cost Services - §132(b) ................................................................................................ 9-22Covered Employees ....................................................................................................................... 9-22Line of Business Requirement ....................................................................................................... 9-22

Definition ................................................................................................................................. 9-22Qualified Employee Discounts - §132(c) ............................................................................................. 9-23

Manner of Discount ....................................................................................................................... 9-23Real Estate & Investment Property Exclusion ......................................................................... 9-23

Amount of Discount ...................................................................................................................... 9-23Working Condition Fringes - §132(d) .................................................................................................. 9-23

Covered Employees ....................................................................................................................... 9-24Exceptions ..................................................................................................................................... 9-24

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Substantiation ................................................................................................................................ 9-24De Minimis Fringes - §132(e) .............................................................................................................. 9-24

Subsidized Eating Facilities .......................................................................................................... 9-24Employee Achievement Awards - §74(c) & §274(j) ............................................................................ 9-25

Exclusion ....................................................................................................................................... 9-25Definition of Employee Achievement Awards .............................................................................. 9-25Qualified Plan Award .................................................................................................................... 9-26Employer Deduction Limits .......................................................................................................... 9-26

Aggregation Limit ................................................................................................................... 9-26Special Partnership Rule .......................................................................................................... 9-26Employee Impact ..................................................................................................................... 9-26

Group Term Life Insurance - §79 ......................................................................................................... 9-27Dependent Care Assistance - §129 ....................................................................................................... 9-27

Amount of Assistance.................................................................................................................... 9-27Requirements ................................................................................................................................. 9-27Conflict with Dependent Care ....................................................................................................... 9-28

Cafeteria Plans - §125........................................................................................................................... 9-30Definition ...................................................................................................................................... 9-30Qualified Benefits .......................................................................................................................... 9-30

Non-Qualified Benefits ............................................................................................................ 9-30Controlled Group Rules ................................................................................................................. 9-31Salary Reduction Plans .................................................................................................................. 9-31Nondiscrimination ......................................................................................................................... 9-31

Meals & Lodging - §119 ...................................................................................................................... 9-31Income Exclusion .......................................................................................................................... 9-31

Convenience of Employer ....................................................................................................... 9-32Self-Insured Medical Reimbursement Plans - §105 ............................................................................. 9-32

Allowable Expenses ...................................................................................................................... 9-32Requirements ................................................................................................................................. 9-32Benefits .......................................................................................................................................... 9-32Exposure ........................................................................................................................................ 9-33

Employee Educational Assistance Programs - §127 ............................................................................ 9-33Employer-Provided Automobile - §61 & §132 .................................................................................... 9-33

General Valuation Method ............................................................................................................ 9-33Annual Lease Value Method ......................................................................................................... 9-33

Computation ............................................................................................................................ 9-35Cents Per Mile Method .................................................................................................................. 9-35Commuting Value Method ............................................................................................................ 9-35

Interest-Free & Below-Market Loans - §7872 ...................................................................................... 9-35Permissible Discrimination ...................................................................................................... 9-35Employee Needs ...................................................................................................................... 9-36

Imputed Interest ............................................................................................................................. 9-36Types of Loans .............................................................................................................................. 9-36

Demand Loans ......................................................................................................................... 9-36Term Loans .............................................................................................................................. 9-36

Application of §7872 and Rate Determinations ............................................................................ 9-37Summary ....................................................................................................................................... 9-37

Moving Expenses & Reimbursement Suspended - §217 ...................................................................... 9-37Financial Planning - §67 & §212 .......................................................................................................... 9-37

Popularity ...................................................................................................................................... 9-38Taxation ......................................................................................................................................... 9-38

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Tax Planning - §67 & §212 .................................................................................................................. 9-38Taxation ......................................................................................................................................... 9-38

Estate Planning - §67 & §212 ............................................................................................................... 9-39Death Benefit Payment - §101(b) Repealed ......................................................................................... 9-39On-premises Athletic Facility - §132(j)(4)(B) ...................................................................................... 9-39Employer-Provided Retirement Advice & Planning - §132 ................................................................. 9-39Home Office - §280A ........................................................................................................................... 9-40

Carryforward ................................................................................................................................. 9-40Renting Space to Employer ........................................................................................................... 9-40

Fringe Benefit Plans for S Corporations ............................................................................................... 9-40Insurance............................................................................................................................................... 9-41

Basis .............................................................................................................................................. 9-41Permanent Policies ........................................................................................................................ 9-41

Effect of Premium Payment ..................................................................................................... 9-41Key Employee Insurance ............................................................................................................... 9-41Medical Insurance ......................................................................................................................... 9-41Retirement Plans ............................................................................................................................ 9-41Summary ....................................................................................................................................... 9-42

ERISA Compliance .............................................................................................................................. 9-42Welfare Plans ................................................................................................................................ 9-42Additional Requirements ............................................................................................................... 9-42

CHAPTER 10 - Torts & Personal Injuries ...................................................10-1Types of Torts ............................................................................................................................................ 10-1

Intentional Torts ................................................................................................................................... 10-1Unintentional Torts ............................................................................................................................... 10-2Business Torts ...................................................................................................................................... 10-2

Damages ..................................................................................................................................................... 10-2Personal Injury Awards - §104 ................................................................................................................... 10-2

Personal Injury ...................................................................................................................................... 10-3Back Pay ........................................................................................................................................ 10-4Installment Payments ..................................................................................................................... 10-5

Nonphysical Personal Injury ................................................................................................................. 10-5Punitive Damages .......................................................................................................................... 10-5Wrongful Death ............................................................................................................................. 10-5

Interest & Legal Fees ............................................................................................................................ 10-5

CHAPTER 11 - Wills & Probate ....................................................................11-1What Is A Will? .......................................................................................................................................... 11-1

Provisions & Requirements .................................................................................................................. 11-1Specific & General Bequests ......................................................................................................... 11-2Residual Bequests .......................................................................................................................... 11-2Conditional Bequests ..................................................................................................................... 11-2Executor ........................................................................................................................................ 11-3Guardian ........................................................................................................................................ 11-3

Types of Wills ...................................................................................................................................... 11-3Title Implications .................................................................................................................................. 11-4

Individual ...................................................................................................................................... 11-5Joint Tenancy ................................................................................................................................ 11-5Tenants in Common ...................................................................................................................... 11-7

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Tenants by the Entirety .................................................................................................................. 11-8Community Property ..................................................................................................................... 11-8

Tax Basis Advantage ............................................................................................................... 11-8Untitled Assets .............................................................................................................................. 11-9

Changes to a Will ................................................................................................................................. 11-9Advantages of a Will .................................................................................................................................. 11-9

Intestate Succession .............................................................................................................................. 11-10Periodic Review .................................................................................................................................... 11-11Continuing Business Operations ........................................................................................................... 11-12

Simple Will ................................................................................................................................................ 11-12Probate ........................................................................................................................................................ 11-13

Advantages ........................................................................................................................................... 11-14Disadvantages ....................................................................................................................................... 11-14Probate Avoidance ................................................................................................................................ 11-15

Joint Tenancy ................................................................................................................................ 11-15Community Property ..................................................................................................................... 11-15Totten Trust Accounts ................................................................................................................... 11-17Life Insurance & Employee Benefits ............................................................................................ 11-17Living Trusts ................................................................................................................................. 11-17

CHAPTER 12 - Trusts ....................................................................................12-1What is a Trust? .......................................................................................................................................... 12-1Why a Trust? .............................................................................................................................................. 12-1Types of Trusts ........................................................................................................................................... 12-3

Common Elements ............................................................................................................................... 12-3Revocable Trust .................................................................................................................................... 12-3Irrevocable Trusts ................................................................................................................................. 12-4Testamentary Trust ............................................................................................................................... 12-4Foreign Trusts - §679 ........................................................................................................................... 12-4Family Trusts ........................................................................................................................................ 12-5Medicaid Trust ...................................................................................................................................... 12-5Living Trust .......................................................................................................................................... 12-5

Reversion ....................................................................................................................................... 12-6Advantages of a Living Trust ........................................................................................................ 12-6Disadvantages ................................................................................................................................ 12-6Priority ........................................................................................................................................... 12-6

Pour-Over Will ........................................................................................................................ 12-7Trust Taxation ............................................................................................................................................ 12-7

Income Tax ........................................................................................................................................... 12-7Grantor Trusts - §671 to §678 ....................................................................................................... 12-7

Grantor Retained Income Trust ............................................................................................... 12-9Revocable Trusts Included in Estate - §646 & §2652(b)(1) .......................................................... 12-10

Election for Income Tax Purposes ........................................................................................... 12-10Irrevocable Trust Taxation ............................................................................................................ 12-11

Throwback Rules ..................................................................................................................... 12-12Capital Gains ................................................................................................................................. 12-12Deduction of Estate Planning Expenses ........................................................................................ 12-12Deductibility of Death Expenses ................................................................................................... 12-13

Gift Tax ................................................................................................................................................ 12-13Estate Tax ............................................................................................................................................. 12-13

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Unlimited Marital Deduction......................................................................................................... 12-14Outright to Spouse ................................................................................................................... 12-14Marital Deduction Trust ........................................................................................................... 12-14Qualified Terminable Interest Property (QTIP) Trust ............................................................. 12-14

“A-B” Format ................................................................................................................................ 12-18“A-B-C” (QTIP) Format ................................................................................................................ 12-21Valuation & Tax Basis .................................................................................................................. 12-21Alternate Valuation ....................................................................................................................... 12-23

Fundamental Provisions - Revocable Living Trust .................................................................................... 12-23Identification Clause ............................................................................................................................. 12-23Recital Clause ....................................................................................................................................... 12-23Property Transfer Clause ...................................................................................................................... 12-23Income & Principal Clause ................................................................................................................... 12-24Revocation & Amendment Clause ....................................................................................................... 12-24Trustee Clause ...................................................................................................................................... 12-24

Trustee’s Acceptance ..................................................................................................................... 12-24Choice of a Trustee ........................................................................................................................ 12-24Factors for Corporate Trustees ...................................................................................................... 12-25Factors for Individual Trustees ...................................................................................................... 12-25

Trust Termination Clause ..................................................................................................................... 12-26

Learning Objectives

After reading Chapter 1, participants will be able to: 1. Identify the goals and purposes of asset protection recognizing the objec-tions some people have about shielding assets from creditors by:

a. Citing reasons for asset protection and situations that can unexpected-ly put assets and financial security at stake;b. Specifying sources of lawsuits and the author's concept of exploding and imploding liability; and c. Determining asset protection using the primary concepts of insurance, asset placement, and statutory protections.

2. Recognize the importance of creditor types associated with asset protec-tion and fraudulent transfers. 3. Specify the fraudulent transfer laws and badges of fraud, define statutes of limitation, criminal penalties, and permissible asset transfers. 4. Identify the degree and necessity of asset protection using net worth and asset values under a balance sheet and the various ways that insurance and buy-sell agreements can offer asset protection. 5. Recognize the asset protection advantages and disadvantages of owner-ship formats and entities by:

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a. Determining the use of individual ownership and corporate ownership in an asset protection plan including the importance of S corporations and their estate tax planning advantages;b. Identifying testamentary trusts, living trusts, and subcategories of trusts recognizing their asset protection elements; c. Specifying the various types of co-tenancy, identifying their asset pro-tection dangers, and several types of partnerships citing their variation from limited liability companies; and d. Recognizing the unique asset protection qualities of retirement plans, custodianship, and estates as asset protection tools.