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miller nash llp | Winter 2012 brought to you by the trusts & estates practice team Estate Planning Advisor Planning for Yourself: Health Care Representatives, Advance Directives, and the POLST disease or injury. In Washington, the patients

SLIDE 1

www.millernash.com

brought to you by the trusts & estates practice team

miller nash llp | Winter 2012

Estate Planning Advisor

inside this issue

2 Benefits of a Dynasty Trust 3 The Many Ways That Gifts Can Reduce Estate Taxes 4 Top Excuses That Owners Use to Avoid Exit Planning 6 Attention All Washington Trustees . . .

(continued on page 8) by Jack B. Schwartz

jack.schwartz@millernash.com 503.205.2560

An estate plan provides an opportunity to spell out in considerable detail who (including the government) will get what when a person dies, and when they will receive it. But what about the person himself or herself? How are family members and physicians to know someone’s care preferences when the person is in no condition to give instruction? Enter the health care representative designation, the advance directive, and the POLST (Physician Orders for Life-Sustaining Treatment). Designation of a Health Care Rep-

resentative. Oregon statute prescribes

a form that includes both the health care representative designation and an advance directive. The form must be signed before two witnesses. Your designated representative, and any alternate you may choose, must also sign the form. Once completed, the form authorizes your health care representative to communicate on your behalf and make your wishes regarding care known to physicians and hospitals when you are unable to do so because

f temporary incapacity or irreversible

disease or injury. In Washington, the designation is made by signing and notarizing a durable power of attorney for health care. Advance Directive. The Oregon advance directive form allows you to specify that you would refuse artificial life support and similar heroic mea- sures in the following circumstances: if such steps would not benefit you but would cause you permanent and severe pain; if you are terminally ill; if you are permanently unconscious;

r if you are in an advanced stage of a

progressive and fatal illness. You may also specify that you desire to have life support provided in any of these

circumstances. Completion of the form

will not prevent continuing care for cleanliness and comfort. Your health care representative is required to follow your wishes as expressed in the advance

directive. Washington statute provides

for a similar form, called the health care directive, which must be signed before two witnesses. Your designated health care representative should know how to access your advance directive, and you should provide a copy to your physician.

POLST. Both Oregon and Washing-

ton recognize the POLST form, which is an order signed by a physician. It is intended primarily for seriously ill patients with life-limiting advanced illness; patients with advanced frailty characterized by significant weak- ness and difficulty with personal-care activities; patients who may lose the capacity to make their own health care decisions in the next year; and persons with strong preferences about current end-of-life care. A POLST can duplicate portions of an advance directive. By turning a person’s advance directive decisions into a physician’s order, the POLST offers additional assurance that wishes as to end-of-life treatment will be recognized and followed. The POLST is particularly helpful in provid-

Planning for Yourself: Health Care Representatives, Advance Directives, and the POLST

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2 | miller nash llp | Estate Planning Advisor

(continued on page 8)

“Of course, a dynasty trust also provides all the advantages of having assets in trust—protection from creditors and fi nancial predators . . . .”

Benefits of a Dynasty Trust

A dynasty trust is a special type of trust that allows the client to provide for multiple generations while saving estate and state income taxes. A dynasty trust can be created during life or at death. As with any other type of trust, three parties are involved: the settlor who forms the trust, the trustee who manages the trust, and the beneficiaries who benefit from the trust. In a dynasty trust, the trustee is normally a trust company doing business in a state that allows trusts to exist indefinitely and that has favorable tax and trust laws. States have different rules regarding the maximum duration of a trust. In Washington, a trust must terminate 150 years from

formation. In Oregon, the period is 21

years after the death of the last to die

f the trust’s beneficiaries. A number
f states have enacted laws that allow

trusts to continue indefinitely. These states include South Dakota, Delaware, New Hampshire, and Alaska. The laws that apply to a trust are normally the laws of the state where the trust is administered, even if neither the settlor nor the beneficiaries live in that state. Therefore, by choosing a trustee doing business in a state such as South Da- kota, the trust will be considered to be located in South Dakota, and therefore can remain in existence until its funds are used up. The beneficiaries of a dynasty trust are often the settlor’s children, grandchildren, and future descendants. A charity is often included in case the settlor’s descendants do not use all the funds. A dynasty trust is usually drafted so that each generation has the rights to certain distributions of income and principal but does not have any rights that would cause the trust assets to be included in any member

f that generation’s taxable estate for

estate tax purposes. The result of this is that although gift or estate tax may be imposed on the settlor when the trust is created, no estate or gift tax is imposed again as long as the assets remain in

trust. This can result in substantial

estate tax savings—not in the estate of the settlor, but in the estates of the settlor’s descendants. These estate tax savings are realized only if the family has enough wealth that future generations are anticipated to have taxable estates. The dynasty trust may also result in state income tax savings. Assuming that the beneficiaries live in a state with an income tax, state taxes may be imposed to the extent that income is distributed to beneficiaries. In many cases, however, income that is not distributed will be subject only to the income tax of the state where the trustee is located. If a trustee doing business in a state with-

ut an income tax is chosen, the trust

assets not distributed may avoid state income taxes. The settlor has great discretion in drafting the terms of a dynasty trust, and the trust can be used to spread the benefits of the funds over the generations rather than giving all assets to one or two generations and nothing to future descendants. For instance, the trust can provide incentives to en- courage each generation to work or to contribute to society by tying distributions to certain behaviors. These trusts can also be used to provide a source of funding for the education of the settlor’s descendants or to create a fund that can be used as a “family bank” to make loans to the generations, enabling them to fulfill their dreams of creating a business or purchasing a home. Of course, a dynasty trust also provides all the advantages of having assets in trust—protection from creditors and financial predators; profes- sional management; and keeping assets away from beneficiaries with personal problems such as addiction. If you have a large estate, you may wonder whether your entire estate can be transferred into a dynasty trust. Unfor- tunately, the amount you can transfer to a dynasty trust is limited to the amount

f your generation-skipping transfer

(“GST”) tax exemption. The GST tax is imposed on transfers that are struc- tured so that estate tax is not paid at each generation or to direct transfers to persons more than one generation below the transferor, usually grandchil-

dren. The GST tax is imposed at the

same rate as the estate tax, often in addition to estate tax. But each person has a GST exemption amount that allows him or her to transfer that amount to any person without imposition of GST

tax. If the funding of a dynasty trust is

limited to the settlor’s GST exemption amount, no GST is imposed on the trust, regardless of how large it grows. Under current law, the GST exemption

by Adrienne P. Jeffrey

adrienne.jeffrey@millernash.com 206.777.7512

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Estate Planning Advisor | miller nash llp | 3

The Many Ways That Gifts Can Reduce Estate Taxes

Gifting property to children and grandchildren is one of the easiest and most rewarding ways to save estate tax-

es. A gift can help introduce a child into

the family business. It can also help the child to purchase a home or business. And besides the thanks received, it is nice to know that each dollar removed from a taxable estate can save Oregon residents 45.4 cents! In other words, removing $100,000 from a taxable estate can save up to $45,400 in estate taxes. Removing Growth. A taxable gift does not remove the gift itself from a person’s federal estate. When someone dies, his or her taxable estate includes everything that person owns plus prior taxable gifts. The post-gift growth on assets, however, is removed from the estate. Today, we are in the middle of a worldwide economic meltdown. Many types of asset values are at historic lows. An office building worth $2 million a few years ago might be worth only $1 million today. It is a great time to make gifts because it is likely that asset values will rebound as the economy im-

proves. Even if the value increases only

3 percent a year, a $100,000 property will increase in value to over $180,000 after 20 years, thus removing $80,000 from the gift-maker’s taxable estate. Special Oregon and Washington Bo-

nus. There is a special bonus for Oregon

and Washington residents. For those filing Washington or Oregon estate tax returns, the entire gift of $180,000 is excluded from their estates. There is no add-back of the value of the gifted asset. Oregon’s estate tax starts at estates of $1 million (with rates starting at 10 percent

f the excess over $1 million).

Discount Exclusion. One of the most popular ways to save estate taxes is to make a gift of a partial interest in prop-

erty. For example, a gift of a 49 percent

minority interest in a limited liability company that owns property valued at $1 million would without doubt be worth less than $490,000, or 49 percent of $1

million. Appraisers provide a discount

for a minority interest in an entity such as a limited liability company, because someone owning a 49 percent interest in the company would not be able to control it. Appraisers will also give an additional discount for lack of market- ability because an interest in a privately

wned limited liability company is not

as valuable as outright ownership of the asset. The discount amounts can easily hit 25 percent and are sometimes as much as 60 percent off the value of the underlying assets. A 25 percent discount on property with an underlying value of $490,000 is equal to $122,500. Earnings Exclusion on Gifted As-

sets. Another benefit of making a gift is

that the earnings on the gifted asset are also excluded from the taxable estate. Thus, the post-gift interest, dividends,

r business profits are not included in

the taxable estate of the gift-giver. Annual Exclusion. Finally, a gift of a present or current interest in property has an additional exclusion of $13,000 per year / per donee / per donor. A pres-

(continued on page 7) by Ronald A. Shellan

ronald.shellan@millernash.com 503.205.2541 For those in the Portland area, Miller Nash invites you to a complimentary one-hour program on estate planning. The program will answer the following questions:

What is a probate?
Who gets my assets if I don’t have a Will?
How are trusts set up and what are their uses?
Will my estate be subject to estate taxes?
What are some approaches we can use if we have children from prior marriages?
Can a Will avoid probate?
How do I plan for jointly owned property, 401(k) accounts, and life insurance benefits?
What must I consider when passing property to children and grandchildren?
What are the basic strategies used to minimize estate taxes?
What should business owners consider when planning their estates?

In addition to these topics, we invite other estate planning questions that you may have. The program is appropriate for business owners, retirees, and executives. Spouses and adult children are welcome to join. You can register by sending an e-mail to marika.giers@millernash.com or by calling 503.205.2367. When: March 6 (9:00-10:00 a.m.) Where: Miller Nash LLP (111 S.W. Fifth Avenue, Suite 3400, Portland, Oregon 97204)

Continental breakfast provided. Parking will be validated. Find more information online at www.millernash.com.

Estate Planning Seminar

Engaged Guidance, Exceptional Counsel.

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4 | miller nash llp | Estate Planning Advisor

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r call us at 503.205.2608 to

Electronic Newsletter

(continued on next page)

Like every other business owner, you will one day exit your business— voluntarily or involuntarily. On that day you will want to attain certain business and personal objectives: the first (and usually prerequisite to all others) is financial security. Believe it or not, most owners do absolutely nothing to consciously plan and systematically move toward that all- important goal. Anecdotally, the four most common excuses that owners use to justify delaying and eventually ignor- ing exit planning are: 1. It makes no sense to start planning when my business isn’t worth enough to meet my financial needs. When it is, that’s when I’ll think about leaving.

2. I will be required to work years

for a new owner. 3. I don’t need to plan. When the business is ready, a buyer will find me.

4. This business is my life: I can’t

imagine my life without it! Let’s look at each of these hurdles that prevent most owners from systematically planning the steps needed to cash out of their businesses and move

n to the next stage of their lives.

Excuse #1: It makes no sense to start planning when my business isn’t worth enough to meet my financial

needs. When it is, that’s when I’ll think

about leaving. This is a common and not unrea- sonable assumption: Why spend time, effort, and money to plan to leave your business when, today, you can’t? Why not wait until it is at least theoretically possible to leave to begin the exiting process? At age 45, Jerome Rowling was dreaming of the day he could leave his company. The past fi ve years that Jerry had spent trimming fat, watching every dime, and developing new marketing strategies on a shoestring had taken their toll. Like the trouper he was, Jerry kept his nose to the grindstone, fully confi dent that if he worked hard enough, the exit he dreamed

f would take care of itself.

Fast-forward fi ve more years, and we fi nd Jerry pretty much where we left him—dreaming more frequently, but doing nothing about the day he will walk

ut the door. What had changed was that

Jerry had reached his 50th birthday—a benchmark he had set years earlier for the day he’d leave the business behind. During the five years Jerry spent working in (rather than on) his business, he missed the opportunity to:

Clearly establish his personal

exit goals and objectives;

Create an exit plan (based on

his goals) that would identify the most productive actions he could take to create and protect value, in the most tax-efficient way possible; and

Drive up business value to the

point where he could sell, pay taxes, and exit with the amount

f cash necessary to achieve his

financial security. What owners know to be true, but

ften fail to act upon, is that growing

value does not usually occur unless

wners focus their efforts on deliberate

actions that move their companies mea- surably toward their goals. In failing to act on what they know, owners don’t create or implement exit plans and so postpone their ability to exit on their terms, sometimes indefinitely. Do you have a plan? To avoid planning not only puts your future financial security at risk, but also overlooks your company’s need to grow in value—efficiently and quickly—in carefully targeted

areas. Growing and protecting value

is at the core of strategic exit planning. Identifying where and how to spend precious company resources (your time and money) to make the greatest impact is a key exit-planning task. It is just as important as identifying and implementing strategies to minimize current taxes and the tax bill when you eventually transfer your company. It makes sense to start planning for your eventual exit because you have to plan (and consistently take purposeful actions to implement your plan) if you ever want to exit in today’s (and likely tomorrow’s) economy. The simple real- ity is that most owners don’t plan, and therefore most owners are never able to leave their businesses in style.

Top Excuses That Owners Use to Avoid Exit Planning

by William S. Manne

bill.manne@millernash.com 503.205.2584

SLIDE 5

Estate Planning Advisor | miller nash llp | 5 Top Excuses . . . | Continued from page 4 Excuse #2: I will be required to work years for a new owner If one of your exit objectives is to leave your business as soon as possible, tell your exit-planning advisor to make that a prerequisite of any sale. Some buyers require sellers to stay on after closing, but if the management team is strong, most require the former owner to remain for only short transition period—usually no more than a few months. If your management team consists

nly of you, and you want to leave as

soon as possible, plan on working for the new owner for a couple of years. If your exit is still several years away, you’ve got work to do. (If you would like more information about how to create and motivate a management team that will stay beyond your departure, please contact us.) The best way to be sure that you don’t become an employee of a new

wner is to make yourself an unneces-

sary expense. You do that by creating a management team that has proved its ability to make the company profitable and is motivated to do so. Excuse #3: I don’t need to plan. When the business is ready, a buyer will find me. According to a 2010 study, 18 percent of owners share this “exit plan.” One of the hard lessons of the Great Recession of 2008-2011, however, is that the timing of an exit depends on a vibrant economy with an active mergers and acquisitions market, as well as a company with strong cash flow and an owner ready to sell. These factors seldom exist in equal measure at the same time. We suspect that some owners believe that waiting for a future economic high tide to bring back well-financed buyers involves little to no risk. But this type of passivity is fraught with danger:

What if a qualified buyer doesn’t

show up?

What happens if, when you are

ready to sell:

» the mergers and acquisitions

market is dormant;

» your industry niche has

fallen out of favor;

» a national competitor moves

into your territory;

» your business and/or the

economy is in decline or worse; or

» your health (or personal cir-

cumstances) unexpectedly deteriorates?

What happens if the economic

tide doesn’t return at all, or at least not for many years? Excuse #4: This business is my life: I can’t imagine life without it! We all know business owners whose belly fires are long cold and whose ani- mating goals have grown stale. Yet they hang on in their businesses because they can’t imagine their post-exit lives. We also know owners who remain energized and involved with their

companies. Both types will leave their

businesses. If you are still passionately engaged with your business and happily making a difference in your life and the lives of

thers, don’t exit just to exit. But if the

passion that once burned brightly has turned to cold ash, it’s time to act while you have time. To start exit planning only when the end is near fails to exploit the majority of its benefits. Exit planning involves building business value, its cash flow, and its resiliency so that it prospers regardless of who owns it or what that owner’s exit objectives are. Exit planning involves protecting value and minimizing taxes—both valuable endeavors regardless of an owner’s specific exit objectives. When departure day dawns, owners who have planned their exits are better positioned to achieve all their business and financial

bjectives.

Final thoughts Certainly, the decision to sell the business you created and nurtured is an intensely personal one. No one can tell you when to exit your business or what to do with the rest of your life. Having worked with other owners, we can help guide you through the process

f preparing for the biggest financial

event of your life. We can help you to consider all the factors associated with exiting your business and help you to reach your exit objectives. 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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6 | miller nash llp | Estate Planning Advisor

by Sarah MacLeod

sarah.macleod@millernash.com 206.777.7425

In 2011, the Washington State legislature adopted an act reforming the way in which trusts are to be administered. The bill, which modifies several of the statutes relating to trusts and estates, is seen as the most significant probate and trust legislation since 1999. The new law contains several provisions relating to a trustee’s duty to provide notice. Under the new law, a trustee of an irrevocable trust must provide notice of the trustee’s appointment and the existence of a trust within 60 days of his or her appointment or within 60 days of the trust’s becoming

irrevocable. This mandatory notice

provision applies only to irrevocable trusts created after January 1, 2012, or to trusts that became irrevocable after January 1, 2012. The act also clarifies a trustee’s

ngoing duty to keep trust beneficiaries

informed by stating that trustees must keep “all persons interested in [a] trust . . . reasonably informed about the ad- ministration of the trust and of the ma- terial facts necessary for them to protect their interests.” RCW 11.97.010(3). The act then specifies that a trustee can satisfy this requirement by providing all interested parties with an annual trust report detailing all receipts and disbursements from the trust, the value

f the trust, and the compensation of

the trustee and the trustee’s agents for the year. While Washington common law has long required a trustee to keep beneficiaries reasonably informed, some commentators believe that the new statute expands common law by requiring trustees to keep “all persons interested in [a] trust” informed on an ongoing

basis. The act defines all “interested”

parties as the trustor (a.k.a. the person who created the trust), all parties who have a beneficial interest in the trust, including remainder beneficiaries, and the attorney general in cases of a charitable trust. While the statute does not require that an annual trust report be provided to all interested parties, it does provide trustees with a strong incentive to do so. The act states that if a trustee provides a trust report to all parties, not only will the trustee be viewed as having satis- fied the requirement of keeping parties informed, but the report also begins tolling a three-year statute of limitations

n all acts disclosed on the trust report.

This means that the interested persons would have only three years from the date of receiving the report to sue the trustee for acts disclosed. If a trustee does not provide an annual report, the trustee can be sued for his or her acts as trustee at the earliest of three years after the trustee stops acting as trustee, the termination of a beneficiary’s interest in a trust, or the termination of the trust itself. Washington had long had an annual accounting requirement that required trustees to provide annual accountings to all income beneficiaries. Former RCW 11.106.020. But this duty could be and was often waived. Under the new act, the duty to keep beneficiaries reasonably informed cannot be waived either by the trustor in the trust agreement or by the beneficiaries of the trust. While it is difficult to predict the impact that the new legislation will have

n trust administration in Washing-

ton, trustees would be well advised to become familiar with the new act, and those wishing to create trusts should be aware of the act’s requirements when contemplating their choice for trustee.

Attention All Washington Trustees: Washington Enacts New Law Governing Notice by Trustees

Engaged Guidance, Exceptional Counsel. EXPERIENCE • PRACTICE TEAMS

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

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Estate Planning Advisor | miller nash llp | 7

. . . Reduce Estate Taxes | Continued from page 3

ent interest means that the gift donee has an immediate right to use the property, which would not be the case if it were gifted to most irrevocable trusts. For gift-givers with lots of children and grandchildren (and their spouses), this can be a bonanza. For example, a hus- band and wife who have ten children and grandchildren can make $260,000 ($13,000 × 10 donees × 2 donors) in annual gifts without even filing a tax return. Almost all gifts can be made with-

ut paying a current gift tax. In addi-

tion to the annual exclusion, there is a lifetime exemption of $5 million. The $5 million exemption is scheduled to be reduced to only $1 million in 2013 unless Congress makes further changes to the estate and gift tax laws. So besides the low asset values today, completing gifts before 2013 may be a once-in-a-lifetime

pportunity to make larger gifts to fam-

ily members without incurring a gift

tax. Making a large estate-planning gift

is often a terrific estate-planning strat-

egy. You should consult with a Miller

Nash LLP lawyer before making a large gift, however, because many additional technical issues that are not covered in this article should be considered in making a major gift.

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 unable 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 L E R N to learn more about our new From the Ground Up blog, visit Return Return to Main to Main Websit Website Blog Contact James (Jamie) Howsley James.Howsley@MillerNash.com 360.699.4771 Attorneys from Miller Nash practicing in the areas of Land Use Construction, and Real Estate Tax will contribute frequently to t posts from time to time from outside consultants and from oth Nash dealing with real estate development. And while we will please feel free to e-mail us directly with any questions, comm that you find this blog enjoyable to read and that the informat 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 ac- tion 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 ces and

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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 ac- tion 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 er rna ash sh.c h.co 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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Benefits of a Dynasty Trust | Continued from page 2 is $5 million per person but will revert to $1 million at the beginning of 2013. The client with a large estate who is considering making substantial taxable gifts this year may want to consider making those gifts to a dynasty trust and in that way provide not only for his or her children, but also for future generations. ing instruction to emergency medical technicians and other first responders who may not have access to, or be aware

f, an advance directive—as a physi-

cian’s order, the POLST may direct them to forgo what would otherwise be standard procedures. The POLST form is brightly colored (pink in Oregon, green in Washington) in order to be immediately visible to first responders (the form sponsors suggest placing the POLST on a person’s refrigerator). Oregon also maintains an electronic database of POLST forms. Your designated health care representative may speak with your physician about signing a POLST if you are unable to do so. Planning for Yourself . . . | Continued from page 1