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miller nash llp | Spring 2011 brought to you by the trusts & estates practice team Estate Planning Advisor Wealth Transfer Tax System the trust assets would be included in Unless revised by Congress, in his or her taxable estate to compute

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www.millernash.com

brought to you by the trusts & estates practice team

miller nash llp | Spring 2011

Estate Planning Advisor

Our federal wealth transfer tax system can be quite complex. The rules have evolved over a long period

f time. The federal wealth transfer

taxes consist of the estate tax, the gift tax, and the generation-skipping tax. In addition, many states have their own inheritance or estate tax. What follows is a summary about how each of the federal taxes operates. Federal Estate Tax. The federal estate tax is a tax imposed on all the assets

wned by a deceased person. The assets

are valued at their fair market value as if they were to be sold. The assets that are subject to the estate tax are all assets owned by a de-

cedent. In addition, all assets in which

someone had an interest are included in the estate. These rules can get com- plicated, so I don’t want to explain them in detail. But a few examples might help to illustrate what can be included in the estate. If someone created a trust and retained the right to determine who could benefi t from it, all the trust assets would be included in the estate. And if someone was the benefi ciary of a trust and the trust assets could be used at that person’s death to pay creditors, the trust assets would be included in his or her taxable estate to compute the federal estate tax. Some very important deductions and exclusions are available in comput- ing the taxable estate. Liabilities such as mortgages and expenses of admin- istering the estate can be deducted. State death taxes are also deductible. In addition, transfers to a spouse can be deducted. This deduction is called the marital deduction. But transfers to an irrevocable trust for the benefi t of the spouse are not deductible, unless the spouse will receive all the income from the trust for life and an election is made, called a QTIP election, to subject the trust assets to estate taxes at the surviving spouse’s death. Finally, assets passing to most charities can be deducted from the taxable estate. Currently, estates under $5 million are exempt from the federal estate tax. The tax rate on the excess over $5 million is 35 percent. Thus, if the taxable estate was $6 million, the federal estate tax would be $350,000 (35 percent of $6 million less $5 million exemption). If a married person dies and does not use up the entire $5 million exemption, the unused exemption amount can be transferred to the surviving spouse and used at his or her death. That means that for a married couple, a full $10 million in value can escape estate taxes. Unless revised by Congress, in 2013, the federal estate tax exemption is scheduled to go down to $1 million. The tax rate is scheduled to go up to as high as 55 percent. Federal Gift Tax. The federal gift tax is designed to prevent decedents from avoiding the estate tax by simply giving all their property away during their lifetimes. The tax is computed on all taxable gifts. As is the case with the estate tax, the marital and charitable exemptions are available. Further, like the estate tax, there is a $5 million lifetime exemption. Any gifts made during lifetime, however, reduce the $5 million exemption available on the death of a

Wealth Transfer Tax System

(continued on page 8)

inside this issue

2 How to Maximize Nontaxable Gifts to Family Members 3 Revocable Living Trusts— What’s the Big Deal? 4 Donor-Advised Funds: Philanthropy Made Easy 5 Transferring the Business to Children or Employees: A Recipe for Disaster?

by Ronald A. Shellan

ronald.shellan@millernash.com (503) 205-2541

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2 | miller nash llp | Estate Planning Advisor

How to Maximize Nontaxable Gifts to Family Members

In 2010, the gift tax lifetime exemption rose from $1 million to $5 million. For many of us, that exemption means that we will likely never have to pay gift tax. But there is no guarantee that the exemption will remain that high, and even if no gift tax is due, many transfers require the fi ling of a gift tax return. This article describes transfers that can be made without using your lifetime exemption and without having to fi le gift tax returns. The gift tax generally applies to transfers in which the donor transfers value without receiving full value in return. Some transfers, although classifi ed as taxable gifts and requiring a gift tax return, do not result in gift tax being due—for example, transfers that do not exceed the lifetime exclusion amount (currently $5 million) and most transfers to a spouse. Specifi c types of gifts are excluded from the defi nition of taxable gifts. These gifts, regardless of the recipient, do not use any of the donor’s exclusion, do not result in gift tax, and, if they are the only gifts made in any calendar year, do not require the fi ling of a gift tax return. These exclusions allow us not to worry about gift tax on routine small gifts and can be valuable estate planning tools. Imagine a couple with a potentially taxable estate who has three children and fi ve grandchildren. Without the imposition of any gift tax and without fi ling any gift tax returns, they can: (1) give away $208,000 each year by making annual exclusion gifts to their children and grandchildren (more if they make gifts to their children’s spouses); (2) pay the tuition for all fi ve grandchildren if they attend private elementary or high schools; (3) pay the grandchildren’s college tuition; (4) pay the medical expenses of all family members; and (5) purchase health insurance for all family members. These steps are simple and, when done consistently over time, can substantially reduce our imaginary couple’s taxable

estates. These transfers are described

below. The fi rst of the excluded transfers is commonly referred to as the “annual exclusion gift.” Each individual is allowed to give to another individual gifts up to $13,000 a year completely tax-free. Thus, a married couple can give $26,000 annually. (This $13,000 fi gure is indexed for infl ation, so it may increase for future years.) There is no limit on the number of individuals to whom these gifts can be made. To qualify for the annual exclusion, a gift must be one of a “present interest.” In simple terms, this means that the person receiving the gift must be able to enjoy the gift immediately. A direct gift to an individual clearly meets this qualifi cation, but sometimes a direct gift is not appropriate, either because

f the donee’s age or because of other
circumstances. Most gifts to trusts do

not qualify as a present interest, but a trust will qualify if the benefi ciary has the right, even for a limited time, to take the gift out of the trust. Trusts with such provisions are referred to as “Crummey trusts”—named after the case that fi rst approved of this tech-

nique. A gift to a minor may be made

to a custodial account set up under state law with the child being entitled to outright distribution of the account

nce the child reaches a certain age

(usually 21 or 25). One should carefully consider whether it is wise to make annual gifts to a custodial account—if the gifts are made annually, with growth, the amount that the child is entitled to receive outright at the termination

f the custodial account may be

substantially more than is advis- able for a young adult to control. The second type of transfer that does not consist of taxable gifts (and is not part of the $13,000 annual exemption) is the payment of educational and health care expenses. To qualify, these payments must be made directly to the service providers. The educational expense exemption is limited to tuition and does not apply to payments for non- tuition items, such as books, supplies, and room and board. Medical expenses that can be paid without gift tax include medical care of the type that is deductible for income tax purposes, transpor- tation primarily to obtain medical care, and the purchase of health insurance. The transfer tax system is complex, and substantial effort is often required to transfer assets without paying transfer taxes, whether gift or estate. The gifts described above are simple, require little planning, require no returns, and, if done consistently over time, can transfer a large amount of wealth without paying gift or estate tax.

by Adrienne P. Jeffrey

adrienne.jeffrey@millernash.com (206) 777-7512

s a t g $ t

“The gift tax generally applies to transfers in which the donor transfers value without receiving full value in return.”

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Estate Planning Advisor | miller nash llp | 3

Revocable Living Trusts—What’s the Big Deal?

For generations, if not centuries, property of people who died would pass to their heirs through probate

f their wills or via some form of

joint ownership. Each method has its limitations: Probate proceedings, as Dickens memorably recorded, can be lengthy and relatively expensive; with joint ownership, property may end up in a tax-disadvantaged status, and a probate proceeding is often necessary when the surviving joint owner dies. In recent years, revocable living trusts have become a popular alternative to these long-standing methods of passing wealth on. What do they do and how do they work?

A revocable living trust is just

what the name implies—you can establish a trust for your assets, and amend or revoke the trust at any time. The trust becomes irrevocable only at your death.

Correctly implemented, a revocable

living trust avoids the expense

a court-supervised probate

proceeding. Although streamlined

procedures may be available for small estates ($200,000 in Oregon and $100,000 in Washington, both dependent on meeting personal and real property limitations), a full-scale probate often involves notices, accountings, and other court pleadings and requirements that can cause avoidable com- plications and expense. A trust provides an effi cient means of distributing property to your heirs

r, if you intend that your property

remain in trust for their benefi t,

by Jack B. Schwartz

jack.schwartz@millernash.com (503) 205-2560

an almost automatic transfer to your chosen successor trustee.

A revocable living trust provides
privacy. Probate records are open

to public inspection. Absent litigation, there is no reason to circulate a trust document, or lists of trust assets and trust accountings,

ther than to a deceased trust

grantor’s heirs and benefi ciaries.

If people own real property in

two or more states, a revocable living trust can be used to avoid additional probate proceedings

therwise necessary to transfer

the property in the other states.

A revocable living trust establishes

a method for handling your affairs if you become ill or incapacitated. Your chosen successor trustee can assume administration of the trust without the need for a court-supervised guardianship

proceeding. Also, the trust can

detail how you would like your assets expended on your behalf, even including such things as the care facility you have selected. In considering whether to accomplish your estate planning through a revocable living trust, keep in mind that life insurance proceeds usually pass without probate directly to benefi ciaries you have designated, as do IRAs and

ther retirement assets. With a revo-

cable living trust, your estate planning should also include a short-form will to ensure that any assets you may have

verlooked are transferred via the trust

and to nominate guardians for minor children, as well as an advance direc- tive for your health care and a durable power of attorney for fi nancial matters. Establishing a revocable living trust takes some work—assets must be transferred to the trust through such means as retitling brokerage accounts and recording new deeds to real property. But the eventual savings in expense and anxiety for your heirs and benefi ciaries may well prove worth the effort.

“. . . I regret that my arrangements in life, combined with circum- “. . . I regret that my arrangements in life, combined with circumstances over which I have no control, will put it out of my power . . .” stances over which I have no control, will put it out of my power . . .” Bleak House Bleak House, Charles Dickens , Charles Dickens

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4 | miller nash llp | Estate Planning Advisor

Looking to Go Green in 2011? Just trying to cut out the clutter? Lighten the load in your mail- box and help us reduce our impact on the environment by choosing to receive Estate Planning Advisor via e-mail. Please send us an e-mail at clientservices@millernash.com

r call us at 503.205.2608 to

Electronic Newsletter

Donor-Advised Funds: Philanthropy Made Easy

by Sarah MacLeod

sarah.macleod@millernash.com (206) 777-7425

Generally, when clients hear the word “philanthropy,” they associate it with names such as Carnegie, Rock- efeller, and Gates. They assume that in order to be a “philanthropist,” they must create a private foundation to carry out their charitable intentions. But many clients are intimidated by the administrative burdens and complex- ity of a private foundation. As a result, many clients opt, instead, for “checkbook charity,” by which they simply write checks throughout the year to various charities as both the need and the desire arise. While the checkbook-charity approach works much of the time, it has signifi cant limitations. For one thing, clients often overlook the advantages

f donating assets in kind, such as

appreciated stock or real property. In addition, clients often fi nd themselves making gifts to charities on an ad hoc basis—often writing checks in response to the most recent “pledge drive” or appeal—rather than creating a meaningful giving plan to ensure that their dollars are used to support those

rganizations or causes that they truly

want to support. Donor-advised funds are the answer for those clients who are not prepared to commit to a private foundation, but would like to move beyond checkbook

charity. Donor-advised funds operate as

follows: The client makes an initial contribution to a donor-advised fund of his

r her choosing (most funds require an

initial contribution of at least $10,000). The donor-advised fund is considered a 501(c)(3) organization by the IRS, so the client receives an up-front charitable deduction for the entire amount

transferred. (For cash contributions,

the charitable deduction can be up to 50 percent of the client’s adjusted gross income; for gifts of appreciated assets, the charitable deduction can be up to 30 percent of the client’s adjusted gross income, though any unused charitable deductions may be carried forward and used in subsequent years.) Once funded, the client may begin recommending to the fund administrator which charities should receive contributions from the fund. Throughout its duration, all income and growth

n assets in the fund are not subject

to income tax. The client may make additional contributions and receive additional charitable deductions. The client may also postpone making gifts from the fund if assets in the fund are not performing well and the client is concerned about depleting the fund too quickly. One of the primary advantages

f donor-advised funds is their ease
f administration. They can be estab-

lished almost immediately by simply registering with an organization that administers donor-advised funds. These organizations range from local community foundations to large commercial investment management fi

rms. Because the assets contributed to

the fund are considered to be “owned” by the host organization, all tax report- ing and administration responsibilities reside with the host organization. As a result, once the fund is created, the client’s only responsibility is to in- struct the fund administrator on what charitable contributions to make. (Note: Because the assets are “owned” by the host organization, the organization has the ultimate say over how the assets are distributed and could technically refuse to make a donor-advised distribution, especially if a donor wishes to make a contribution to a nonqualifi ed charity.) Donor-advised funds also have signifi cant tax advantages over both foundations and checkbook charity because the client can contribute in-kind assets such as stock and real property and receive an income tax deduction on the fair market value of the asset, rather than the client’s cost basis, so long as the client has held the asset for at least

ne year. This is particularly advanta-

geous for making gifts of assets with a low cost basis. Clients can also make anonymous gifts from donor-advised funds. Such anonymity is not possible when making a gift from a foundation, because

f foundations’ extensive disclosure re-

quirements, and certainly not possible with checkbook charity. Perhaps the greatest advantage of donor-advised funds is that they provide clients with a vehicle for carrying out long-term planned giving. Thus, rather than merely writing a check in response to every charitable request, clients who have created donor-advised funds can feel more like the philanthropists that they truly are.

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2 | miller nash llp | Estate Planning Advisor

(continued on page 7)

» On June 2, Miller Nash partner Bill Manne will be speaking on “The Established Exempt Organization Toolkit” at the 11th

Annual Oregon Tax Institute.

» Sarah MacLeod, an attorney with Miller Nash’s trusts & estates practice team, will be speaking at the Washington State

Bar Association’s Real Property, Probate and Trust Section Midyear Meeting on June 12.

» On April 19, Miller Nash partner Phil Grillo was recognized by the Portland Business Alliance for his superior service to

the local business community.

» Welcome, Kimball H. Ferris, who recently joined Miller Nash as a partner in the firm’s business practice team in Portland.

Kimball’s experience encompasses corporate, international, and real property and finance transactions.

» Miller Nash has announced the addition of two new industry blogs. One focuses specifically on Native American law

(www.nativeamericanlawfocus.com), while one focuses on real estate development (www.fromthegrounduplaw.com). For details, visit our new Web site at www.millernash.com or e-mail clientservices@millernash.com

Announcements & Events

How do you successfully transfer your business to a child, key employee,

r co-owner? The most successful

method is to follow a recipe that mixes, in equal measure, three key ingredients:

Prospective new owners with abil-

ity, experience, and dedication;

A company with strong, consistent

cash fl

w and little debt; and
A transaction designed to prevent

income taxes from eroding the cash fl

w available to you, the seller.

It should be obvious that a business cannot be successfully transferred unless the new ownership is capable. Fur- thermore, we cannot expect the transfer to be successful if the business itself lacks the ability to provide an ongoing stream of income with which to pay for the business acquisition. What may not be so obvious, however, is the corrosive effect of income taxation on the transfer

f a business to “insiders”—children,

key employees, or co-owners. Let’s look at two key facts associated with transferring your business to an insider. First, your children or key employees may not have cash to buy you out. Therefore, any sale may take many years to complete—a potentially risky

prospect. Further, all the cash used to

purchase your ownership may come from one source: the future cash fl

w of

the business after you have left it. Second, without planning, the cash fl

w can be taxed twice. It is this double

tax (sometimes totaling more than 50 percent) that can spell disaster for many internal transfers. Through effective tax planning, however, much of this tax burden can be legally avoided. Witness what Karl Clark did. Karl Clark agreed to sell his company to a key employee, Sharon Smith, for $1 million. This value was based on the company’s annual $250,000 cash fl

w, which Karl historically took in the

form of salary. While Karl understood that Sharon could not pay $1 million (nor could she secure fi nancing), he did think that she could buy out the company over a fi ve- or six-year period, using the available cash fl

w of the company.

Karl’s calculations were way off the

mark. The time needed for a buyout was

at least ten years. But why were his calculations so off base? In a word, taxes— actually in two words, double taxation. Without proper planning, this is what happens if Sharon buys the company (and what can happen to you when you attempt to sell your business to your children or employees): 1. Sharon receives the cash fl

($250,000 per year) and is taxed

n it at an estimated 35 percent

federal and 5 percent state income tax rate (these rates may vary depending on total income and your state’s tax rate). 2. Sharon pays $100,000 in taxes (40 percent of $250,000). This is the fi rst tax on the business’s cash fl

3. Sharon pays the remaining $150,000 (net after tax) to Karl. 4. Karl pays an estimated 15 percent federal and 5 percent capital gains tax on the $150,000 he has received for the sale of his

wnership interest, or $30,000

in taxes. This is the second tax

n the original stream of income

from the business. The result? 5. The company distributes $250,000 of its cash fl

w, but

Karl is able to put only $120,000 in his pocket.

Transferring the Business to Children or Employees: A Recipe for Disaster?

by William S. Manne

bill.manne@millernash.com (503) 205-2584

5 Estate Planning Advisor | miller nash llp | 5

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Estate Planning Advisor | miller nash llp | 3 6 | miller nash llp | Estate Planning Advisor

www.millernash.com brought to you by the tax law practice team miller nash llp | Fall 2010

Tax-Free Exchange Advisor

IRS Provides Some Relief to Exchanges Destroyed by Bankrupt Accommodators

The IRS has provided some relief for taxpayers who had completed the fi rst leg of an exchange, only to have the accommodator fi le for bankruptcy or be involved in a receivership. In Rev Proc 2010-14, the IRS ruled that in such situations the exchange will be treated as an installment sale. In order to complete a tax-free exchange under Section 1031, the taxpayer must sell his or her property using the services of a qualifi ed intermediary (also known as an accommodator). If qualifi ed replacement property is properly identifi ed within the 45-day identifi cation period and it is actually acquired within 180 days, or the earlier due date of the taxpayer’s tax return, the exchange qualifi es for tax-free treatment under Section 1031. But what if the accommodator fi les for bankruptcy in the interim? In that situation, many taxpayers have found themselves in the unhappy situation of losing some or all of their funds. But even if the funds were completely lost, they could not get access to the funds within the 180-day replacement period in order to complete their exchange. The new revenue procedure allows the gain to be recognized similar to an installment sale. It requires the following: (1) that the accommodator be a qualifi ed intermediary, (2) that the replacement property be properly identifi ed unless the accommodator was in default before the end of the 45-day identifi cation period, (3) that the like- kind exchange not be completed solely because of the bankruptcy of the accommodator, and (4) that the taxpayer not be in constructive receipt of the fund held by the accommodator before the bankruptcy fi ling. The new procedure determines gain similarly to an installment sale under Section 453. The gain is recognized if, as, and when the accommodator ulti- mately distributes cash to the taxpayer: Joe sold his $5 million building through an accommodator. His basis was $1 million. Joe was un- able to acquire replacement property because Joe’s accommodator had fi led for bankruptcy. Joe’s gain for a normal sale is $4 mil-

lion. Joe is advised that he will

receive $3 million in full satisfac- tion of his claim three years after the bankruptcy was fi led and in that year receives $1 million in

cash. Joe’s gain for purposes of

the calculation is $2 million ($3 million cash recovery less $1 million basis). His gain ratio is 67% ($2 million gain / $3 million sale price). Joe will have taxable income in the year he receives the fi rst $1 million of cash of $670,000 ($1 million × 67% gain ratio). If the taxpayer does not even receive enough cash from the bankruptcy to equal his basis, he will be able to claim a loss. Additional guidance is provided for many additional situations, such as for taxpayers who sold encumbered property. The best approach for taxpayers is to use caution in negotiating the exchange by Ronald A. Shellan ronald.shellan@millernash.com (503) 205-2541 (continued on page 6) inside this issue 2 Involuntary Conversion Exchanges . . . 3 The IRS Eases Up on Related-Party Exchanges 4 IRS Reverses Long-Standing Position on Exchanging Cer- tain Business Intangibles W W W . M I L L E R N A S H . C O M to learn more about our new From the Ground Up blog, visit

Welcome to Our Real Estate Development Blog

This is the Northwest’s first comprehensive blog tackling issues related to the real estate industry. Home Search RSS Return to Main Website Blog Contact James (Jamie) Howsley James.Howsley@MillerNash.com 360.699.4771 Our focus is to educate our clients, consultants, and the general public of developments not

nly in the law, but also in the market related to real estate development. One of our primary

goals is to identify trends to assist others in making development projects successful. Attorneys from Miller Nash practicing in the areas of Land Use, Real Estate, Environmental, Construction, and Real Estate Tax will contribute frequently to this blog. We also expect guest posts from time to time from outside consultants and from other practice areas within Miller Nash dealing with real estate development. And while we will not show comments on this site, please feel free to e-mail us directly with any questions, comments, or suggestions. We hope that you find this blog enjoyable to read and that the information is pertinent to the industry. W W W . M I L L E R N A S H . C O M to learn more about our Native American Law Focus blog, visit

Welcome to The Native American Law Focus, A Miller Nash Blog

Welcome to Miller Nash’s Native American Law Focus—a blog dedicated to providing legal updates and news for tribal governments and their enterprises. Home Search RSS Return to Main Website Blog Contact Chris Masse Christine.Masse@MillerNash.com 206.622.8484 Native American Law Focus will feature postings from a number of practicing attorneys at Miller Nash who work with our tribal group in various areas, including gaming, government relations, labor and employment, finance, litigation, and real estate. We invite you to come and check us out—and come back often—to stay up to date on local, state, and national issues important to Indian country. www.millernash.com real estate, land use, construction, and environmental law miller nash llp | Spring 2010

GroundBreaking News

™ (continued on page 6)

Commercial Real Estate Without Banks

Enough already with so much fear and doom talking about the future of commercial real estate. Yes, prices and volume of transactions are down. But those wading out into this swampy market are finding some firmer ground to

work. Many professionals who worked

in the wave of 2003-2007 feel like those left on the beach after a tsunami swept in and back out. Disoriented and stunned by the silence, we don’t know where to begin. I recently made a few calls to brokers, finance people, and title underwriters and then looked at recent commercial property recording data for Clark County. From that input, I offer a few points to ponder. First, it appears that banks are not interested in construction, development,

r property acquisition lending, despite

the protests of my banker friends to the

contrary. The fallen valuations underly-

ing most real estate loans already on the books for local lenders are so painful, their priority is to deal with what they have, not increase exposure. We are seeing some alternative seller-contract financing or sellers agreeing to extend a second-position carry-back loan for part of a sale price, but that works only rarely: if a seller has enough equity to work with. Second, life insurance companies are lending, but owners might have to be ready for bigger equity requirements to buy and even a “Cash-In” refinance as opposed to the “Cash-Outs” of the

past. It was common to get loan-to-value

ratios of 75 or 80 percent, but the refi- nancing life-lenders today will lend only to 60 or 65 percent of appraised value. So if you can borrow only a smaller por- tion of a smaller appraised value, cash from the owner or from a nonsecured party is required. According to Blake Hering Jr., a partner at NBS Financial Services, the life-lenders are active and lending on finished and lease-stable property producing income at a “sus- tainable” capitalization rate (8%+), and the numbers will be closely scrutinized. Third, there is a nagging ques- tion of what will happen with all the CMBS or “conduit” loans that financed 25-30 percent of the commercial market coming due. The answer might be, as with Y2K, nothing. Congressional action has reduced tax traps, so recently those CMBS borrowers who can show a viable plan, an ability to keep paying the expiring loan, and a willingness to hand over any excess rents to the lender are getting extensions. These lenders would rather just accept some payments and wait than foreclose. Many publicly traded REIT funds are up this year, and the “short funds” that ballooned in anticipation of a further collapse of commercial real estate are way down, indicating that Wall Street is now ready to absorb the refinance problem and that the predicted wave of distressed selling of commercial property may never arrive. Finally, what is going to happen with all the reported “vulture” funds and cash war chests that have been gathered to buy in the predicted panic? These guys will see vacant or unfinished distressed projects for sale by lenders, but as long as government-backed interest rates are low, and stable lenders are willing to extend terms, they may not have much Paid Advertising inside this issue 2 State Legislation Requires New Strategies for Greenhouse Gas Reduction 3 River Plan Marches On 3 Don’t Lien on My Forms by Dustin R. Klinger dustin.klinger@millernash.com www.millernash.com (continued on page 6) uch fear uture of ices and

wn. But

mpy mar-

und to

worked feel like tsunami nted and n’t know de a few and title at recent data for I offer a are not

pment,

despite ds to the underly- y on the painful, hat they We are contract

extend
an for

rks only Second, life insurance companies are lending, but owners might have to be ready for bigger equity requirements to buy and even a “Cash-In” refinance as opposed to the “Cash-Outs” of the

past. It was common to get loan-to-value

ratios of 75 or 80 percent, but the refi- nancing life-lenders today will lend only to 60 or 65 percent of appraised value. So if you can borrow only a smaller por- tion of a smaller appraised value, cash from the owner or from a nonsecured party is required. According to Blake Hering Jr., a partner at NBS Financial Services, the life-lenders are active and lending on finished and lease-stable property producing income at a “sus- tainable” capitalization rate (8%+), and the numbers will be closely scrutinized. Third, there is a nagging ques- tion of what will happen with all the CMBS or “conduit” loans that financed 25-30 percent of the commercial market coming due. The answer might be, as with Y2K, nothing. Congressional action has reduced tax traps, so recently those CMBS borrowers who can show a viable plan, an ability to keep paying the expiring loan, and a willingness to hand over any excess rents to the lender are getting extensions. These lenders would rather just accept some payments and wait than foreclose. Many publicly anticipation of a further collapse of commercial real estate are way down, indicating that Wall Street is now ready to absorb the refinance problem and that the predicted wave of distressed selling of commercial property may never arrive. Finally, what is going to happen with all the reported “vulture” funds and cash war chests that have been gathered to buy in the predicted panic? These guys will see vacant or unfinished distressed projects for sale by lenders, but as long as government-backed interest rates are low, and stable lenders are willing to extend terms, they may not have much Paid Advertising inside this issue 2 State Legislation Requires New Strategies for Greenhouse Gas Reduction 3 River Plan Marches On 3 Don’t Lien on My Forms ge er r er rn nash h.c com m www.millernash.com brought to you by the tax law practice team miller nash llp | Fall 2010

NW Tax Wire

™ The “three-legged-stool” model of state-tax systems holds that an ideal state-tax system will have a property tax, a net income tax, and a consumption (or sales) tax. The theory behind the model is that it allows a state to distribute the tax burden among as many different groups as possible. The Pacifi c North- west provides an interesting venue to study state-tax issues. Washington has property, gross receipts, and sales taxes but no income tax. Oregon has property and net income taxes, but no sales tax. Idaho has property, net income, and sales taxes. This means that a business

perating in the tri-state area needs to

be relatively sophisticated with respect to the differences between these tax systems and plan its affairs accordingly. In the current era of state-tax law, the difference between a property tax and a net income tax is well accepted. Property taxes are generally ad valorem taxes based on the value of property in a

location. Net income taxes are based on

a taxpayer’s income, minus expenses. Both property and net income taxes are occasioned by a status. A taxpayer incurs property taxes because the taxpayer owns property in a jurisdiction

n the lien date. Similarly, a taxpayer

incurs a net income tax because the taxpayer is a resident of or has a taxable presence in a jurisdiction. Some states

utside this region have franchise taxes.

These are also “status” taxes, since they are often based on a taxpayer’s capital

attributes. Louisiana, for example, bases

its franchise tax on a taxpayer’s appor- tioned capital. Sales taxes, however, fall into the murky area of excise taxes. Excise taxes are broadly understood as taxes that are occasioned by specifi c events. They take a number of forms; the best- known excise taxes are sales taxes. For example, a taxpayer buys a television in Washington or Idaho. The vendor charges a sales tax on the event of the television purchase measured by the value of the television. Professor Hell- erstein notes that economists identify fi ve major types of general sales taxes: “(1) retail sales tax[es]; (2) single-stage excise [taxes] on sales by manufacturers

r wholesalers; (3) multiple-stage ‘gross

sales’ or ‘turnover’ tax[es], applying to all sales by manufacturers, wholesalers, and retailers; (4) ‘gross income’ tax[es], applying not only to sales of tangible commodities but also to gross income from services; fi nally (5) the tax[es] on ‘value added’[, which] may be considered * * * general consumption, as well as * * * general business, tax[es].”1 When we discuss Washington’s tax regime, we typically compare the state’s business and occupation (“B&O”) tax regime to other states’ income taxes because it is the primary state-level tax that most businesses pay and the incidence

f taxation is on the business (meaning

that it cannot be passed directly through to the businesses’ customers).2 In fact, the B&O tax is an excise tax and is therefore more analogous to the state’s retail sales tax than to an income tax.3 Professor Hellerstein identifi es the B&O tax as a form of sales tax. It is a multistage tax that is imposed

n a taxpayer’s revenues at each step
f the supply chain. Because a single

taxpayer may perform multiple activities giving rise to B&O tax in different categories, the legislature implemented the multiple-activities tax credit. This allows a taxpayer to take a credit and avoid paying B&O tax on different activities performed with respect to the same product. (continued on page 5) inside this issue 2 Who Watches the Watchmen? 4 Welcome to Washington . . .

What Is the Washington Business and Occupation Tax?

by Valerie Sasaki valerie.sasaki@millernash.com 1 2 Jerome R. Hellerstein & Walter Hellerstein, State Taxation ¶ 12.01 (2010). 2 Nelson v. Appleway Chevrolet, Inc., 157 P3d 847 (Wash 2007). 3 2 Hellerstein, supra, ¶ 12.02, Table 12.1.

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f who we are. That’s why we regularly

publish articles, distribute fl ash reports, and post blog updates that are designed to help you stay current on important legal changes that can affect your business. Visit www.millernash.com to view current and past articles or sign up to receive free important updates. You can also send us an e-mail at clientservices@millernash.com.

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SLIDE 7

5 | miller nash llp | Estate Planning Advisor Transferring the Business to Children . . . | Continued from page 5 7 Without proper tax planning, you, too, may experience an effective tax rate that could be in excess of 50 percent on the company’s available cash fl

w used

to fund your buyout. This is likely to prevent, as it did for Karl and Sharon, a consummation of the sale of the business. How might you design your sale to lower taxes and maximize the opportu- nity for success? 1.

Plan. Like Karl, you should

have a plan that yields you a greater after-tax amount for the sale of your company. Since the cash fl

w of the company may

increase, the key is to provide Uncle Sam with a smaller slice

f the available cash fl
w.

2. Use an experienced advisory team, usually consisting of a business attorney, CPA, and insurance or fi nancial profes-

sional. They should understand

the importance of tax sensitiv- ity to both seller and buyer in

rder to make more money

available to you. 3. In addition, you and your advisors should use a modest, but defensible, valuation for the company. Because a lower value is used for the purchase price, the size of the tax bite is correspondingly reduced. The difference between what you will receive from the sale of your business, at a lower price, and what you want to be paid to you after you leave the business is “made good” through a number of different techniques to extract cash from the company after you leave it. Tax planning for the transfer of your company to an insider takes time, planning, and knowledge. But it can possibly save a tremendous amount

f money. Take time now to begin the

planning process. Learn as much as you can about how to best accomplish the transfer of your business. Seek the advice of your advisory team. Taking action sooner rather than later may help your business-transfer recipe provide a tastier result. Bon ap- petit! Bill Manne chairs the fi rm’s tax and business-owner exit practice teams and is also a certifi ed public accountant. This article was previously published by Business Enterprise Institute in The Exit Planning Review™.

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Trusts & Estates

Trusts & Estates Trusts & Estates

The Miller Nash Trusts & Estates Practice Team assists our clients in achieving their goals for the disposition of their estates. In this process we consider first a client’s goals and then exam- ine a variety of strategies to achieve those goals, including the relative tax efficiencies of the various strategies. Our team has assisted clients with appropriate and efficient estate plans for estates ranging in size from $100,000 to $100,000,000. We are well acquainted with bank trust departments and trust companies throughout our region. Estate planning may include consideration of transitioning a family business to the next generation, the preservation of ownership of significant family property, and the achievement of philanthropic objectives.

W W W . M I L L E R N A S H . C O M learn more about our trusts & estates team at

Practice Leader:

R. Thomas Olson

tom.olson@millernash.com

SLIDE 8

3400 U.S. Bancorp Tower 111 S.W. Fifth Avenue Portland, Oregon 97204

Estate Planning Advisor™ is published by Miller Nash LLP. This newsletter should not be construed as legal opinion on any specifi c facts or circumstances. The articles are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and any specifi c legal questions you may have. To be added to any of our newsletter or event mailing lists or to submit feedback, questions, address changes, and article ideas, contact Client Services at 503.205.2608 or at clientservices@millernash.com.

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Wealth Transfer Tax System | Continued from page 1

decedent. The federal gift tax rate, like

the estate tax rate, is 35 percent. There is an additional exemption for smaller gifts. The exemption amount is $13,000 per year for each person receiving a gift. So if a married couple had 10 grandchildren, they could give away $260,000 per year (2 donors times 10 donees times $13,000) and not use any

f their lifetime exemption. To qualify

for the annual exclusion exemption, gifts must be of a present interest in

property. Thus, gifts to most children’s
r grandchildren’s trusts, unless they

have special provisions, will not qualify. As is the case for the federal estate tax, unless revised by Congress, the federal gift tax exemption is scheduled to go down to $1 million in 2013. The tax rate is scheduled to go up to as high as 55 percent. Federal Generation-Skipping Tax (“GST”). As was the case with the federal gift tax, the GST was also designed by Congress to prevent more remote decedents from avoiding the estate tax. In this case, wealthy individuals were giving assets to their children in trust for life, with the balance over to grandchildren at the death of their children. When their children died, since they had no “incidents of ownership” in the assets, the assets could pass from the children to the grandchildren free of estate taxes. Congress plugged this loophole by creating the GST. The GST basi- cally taxes gifts from a grandparent to a grandchild. If someone gave a grandchild money at death, the transfer might be subject to both the federal estate tax and the GST. Like both the federal estate tax and gift tax, the GST has a $5 million exemption and a tax rate of 35 percent. And as with the estate tax and gift tax, in 2013 the exemption is scheduled to be reduced to $1 million and the tax rate is scheduled to go up to as high as 55 percent.