Tax season has started with a bang and with it the annual ritual of meeting with clients to close the year and prepare their tax returns. Rather than simply reacting to the avalanche of last minute information, I’m confident you will also leverage these interactions to encourage clients to consider proactive legal measures to protect their wealth and add value to their business.
Henry Aldana is the principal of Aldana & Associates, PSC, LTD , a boutique public accounting firm in the Washington metropolitan area catering to the small business community, Arista Law is a Law firm, Ed Arista is the managing attorney of Arista Law.
Here are 10 legal issues you might want to raise with your clients during this brief window when they are motivated to gather information and get things done. Chances are that at some point they will be eternally grateful they followed your advice, but at least they won’t be able to say you never warned them …
1. Structuring tax-free, legal conversions of corporations to LLCs (S or C corp treatment) to better protect their ownership interest against a personal judgment.
2. Drafting and funding anIrrevocable Life Insurance Trust (ILIT) to remove the value of the policy from their taxable estate. Starting in 2013, the estate tax will reach estates over $1 million, including the value of life insurance. Transferring policies to an I.L.I.T. can shield the proceeds from estate tax. Clients with existing policies should act now because the proceeds will remain taxable for 3 years after the transfer.
3. Drafting and executing enforceable non-disclosure and non-competition agreements to protect business opportunities and trade secrets. The recession has brought with it an increase of key employees and minority shareholders usurping confidential information and trade secrets to start their own competing businesses or land employment with a competitor.
4. Carefully analyzing your foreign clients’ facts and circumstances to determine whether the IRS could use current international tax law to argue that in 2010 (or if before see #5) they became «U.S. Persons» for purposes of the income tax and therefore taxed on their worldwide income and check any applicable treaties. Conduct the same analysis under the different rules that determine tax residency for purposes of the estate and gift taxes. If tax residency for either tax may occur in 2011, then also coach them as to how they might defer tax residency and identify maneuvers they can make in the meantime to minimize their tax burden and legal exposure.
5. Submitting voluntary disclosures of unreported foreign income and bank accounts to reduce criminal exposure in advance of increased enforcement activity. Before you check «no» on Schedule B regarding foreign bank accounts and trusts, help them get it right to avoid Schedule B becoming «Exhibit A» and yourself a witness in the their criminal tax fraud trial. If prior years are unreported, have them lawyer up before they provide information so you can then be retained by the lawyer and subsequent communications between you and the client are protected by the attorney-client privilege.
6. Update or design and implement estate planning documents that reflect the current reality of desired business succession and actual family dynamics, and that eliminate risks associated with jointly held property to avoid costly probates and guardianships just waiting to happen.
7. Consider taking advantage of the unified credit being an unprecedented $5 million for gift tax purposes in 2011 and 2012, five times higher than it has ever been! This is a fantastic opportunity for those who own stable or appreciating assets (e.g. a real estate portfolio or a family business) worth up to $5 million at today’s valuations ($10 million for a married couple) to transfer the value of those assets to the next generation tax fee without losing control of the asset/business and without complex estate tax planning using discounted gifting and family partnerships. This window of opportunity ends in 2013 when the unified credit goes back down to only $1 million.
8. Legal asset protection strategies that protect valuable property and businesses from exposure to possible judgments relating to personal guarantees, distressed real estate and struggling business ventures without increasing legal exposure to fraudulent conveyances. For example, any client with single member LLCs should see an asset protection attorney regarding the effect of an important new Supreme Court case.
9. Design legal exit strategies for amicable separation from business partners on favorable terms instead of letting things simmer until protracted litigation becomes inescapable, or take proactive legal measures to document/update their co-ownership arrangement before problems arise. Now more than ever I am seeing business owners regret not hiring a competent lawyer to prepare a good shareholder/partnership/operating agreement during their «honeymoon» period including, among other things, properly funded, legally enforceable and tax-efficient buy-sell agreements triggered by death or incapacity to prevent a forced sale of the business.
10. Help your overleveraged client make business, not emotional decisions regarding whether to make a strategic default or continue depleting their resources. While they should hope for the best by trying to workout their debt, they should also plan for the worst by preparing to shield their business and other remaining assets from the increasing possibility of a judgment against them.
Although I am a CPA, Arista Law does not perform any accounting or tax compliance services. Instead, I utilize my accounting background to work more effectively with my clients’ CPAs when implementing any of these legal maneuvers, as well as to proactively identify opportunities where a CPA can add value. Similarly, you can always call on me when you have legal questions and whenever you feel your client needs to «lawyer up».
In the Washington DC Metropolitan area you can contact Henry Aldana of Aldana & Associates, PSC, LTd a public accounting firm www.aldanas.com 301-770-4901
Happy Tax Season!!!