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Estate and Gift Law Changes under the 2017 Tax Cuts and Jobs Act

The new legislation signed into law on December 22, 2017 has significant estate planning changes. The federal estate, gift and generation skipping tax exemption amount is now doubled to $11.2 million per person. This exemption is portable between spouses.

The new legislation also increased the annual gift exclusion amount from $14,000 to $15,000 as of January 1, 2018. This exclusion allows individuals to gift up to $15,000 annually to another individual without utilizing any gift tax exemption amounts.

Residents of New York must keep in mind the New York State estate tax laws have not changed. The New York estate tax exemption amount is $5,250,000. If a New York taxable estate is more than 5% over the exemption amount, the exemption is lost as the tax will be on the entire amount of the estate (the New York “cliff”). There is no portability of this exemption between spouses and the New York estate tax rate goes up to a rate of 16%.

It is important that estate planning documents be reviewed to confirm there are not provisions which are no longer wanted. For example, a person may not want to fund a credit shelter trust for the entire federal exemption amount ($11.2 million) and leave nothing for outright distribution to beneficiaries or to a marital trust.

As when there are changes in personal situations, changes in estate tax legislation present a good opportunity to review the appropriateness of estate planning documents.


For the last seventy-five years, a spouse paying alimony (also known as “maintenance” or “spousal support” in New York and many other jurisdictions) has been able to deduct the alimony award from his or her tax return each year.  Likewise, the spouse receiving the maintenance has the obligation to include the total amount of alimony received as income on his or her tax return.

This has now changed under H.R.1 – An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, otherwise known as the 2017 Tax Bill. Specifically, under Section 11051 of the 2017 Tax Bill, Repeal of Deduction for Alimony Payments, starting in 2019 alimony will no longer be deductible to the payor spouse.  The recipient spouse will no longer pay taxes on the income received as a result of the alimony award.  Importantly for matrimonial practitioners and their clients, this change only affects divorces commenced after December 31, 2018.

At first blush, this change might seem to benefit the recipient spouse, who no longer carries the obligation to pay taxes on the additional income.  Unfortunately, due to progressive marginal tax rates, this change actually reduces the overall “pot” of money available to the family.  For example, if the payor spouse is ordered to pay $60,000.00 per year in alimony, at the highest tax bracket (40%), the effective payment would be $36,000.00 out of pocket (considering the $24,000.00 tax deduction for the payor spouse.)  The recipient spouse, paying 15% in income taxes on the alimony award of $60,000.00, nets $51,000.00.  However, under the 2017 Tax Bill, the court can only order the payor spouse to pay $36,000.00 in alimony to the recipient spouse if the court desires to maintain the same level of out of pocket expenses for the payor.   An award of $60,000.00 could result in an inequitable result to the payor spouse, who now must pay a higher tax burden, in addition to the alimony award.  Continuing our example, if the Court seeks to award the recipient spouse $51,000 (the net result under prior law), the payor spouse’s total out of pocket is $51,000 of after tax income, a $15,000 loss to the family unit.

This change will only add an estimated $6.9 billion dollars in new tax revenue over ten years to the federal government, with some estimating that the tax bill will add up to $1.5 trillion dollars to the deficit in the same time period. The burden now shifts to families, who will lose those previously available funds to distribute between the spouses, as well as to states, which will now need to account for the change when determining maintenance awards.  New York follows a formula to derive the presumptively correct alimony amount. Presumably, this calculation previously took into consideration the tax implications to each spouse; whether this will now be modified depends on our state legislature.  While Governor Cuomo and legislative leaders have been outspoken on SALT deductions, it is unclear if a new alimony formula is currently being discussed or will be implemented by the end of the year.  This change will likely be one of many tax law changes to have an effect on settlement negotiations, where under the previous plan, the appeal of a tax deduction was often an incentive for the payor spouse to reach an agreement.

Accountants and attorneys are still figuring out the ways in which the new tax bill affects our clients.  It will be an interesting year to come.

Purchasing Property with a Lease

Often when purchasing a company, certain assets pose issues not easy to discern. For example, a Purchaser can buy real estate through a purchase contract and perhaps even personal property such as furniture and furnishings, fairly easily. When purchasing real estate, title insurance can be ordered, surveys re-dated, and abstracts renewed. Information on mortgages can be obtained from a County Clerk’s office and assurances can be given of non-default status.

One major asset exists, however that is not so easy to determine currently–the status of Leases. But there are tools that can help, as follows; and requiring them in a Purchase Offer can be essential. These are some, but by no means all of such tools.

1.  Past Breach of Lease. If a purchaser is taking a Lease amongst other assets it is critical to know that the Lease is not in breach, and that there will be no future Landlord or Tenant action. But how to find this out? There would be no public filing regarding a breach particularly if no law suit has as yet been brought by or against either party.

The tool here, is an Estoppel Letter where the Seller, Tenant, and the Landlord each state, under oath or not, that there has not now nor ever been a breach. Having given such assurance, the assuring party is then estopped from asserting a current breach into the future. Of course, it would have been astute for the Purchase Contract to require an Estoppel Letter if and when demanded during the Lease Term. Careful drafting of Leases may even attach a sample Estoppel Letter in acceptable form, as an exhibit.

2.  Assignment of Subletting Clause. A purchaser must also study a Lease to determine what rights the Landlord has with respect to assignment or subletting. There are many variations of this so the Assignment and Subletting consents need to be carefully examined. For example, it is possible that if this is a store in a chain of branch stores, that there may be a lease clause simply stating that if all or a significant number of related locations are to be sold, the Landlord need only be given notice and its consent is unnecessary. Other typical such clauses may or may not require that Landlord consent, be reasonable or not and prompt or not. The number of days when Landlord consent is required to an assignment or sublet might also be stated.

3.  Use Clause. A purchaser must study the Use Clause in every lease. I was once confronted with a purchaser who wanted to open a car dealership. The lease prohibited car dealerships because the Landlord had also been a car dealer. Often, Leases require only that any Use be permitted by zoning. Sometimes a non-compete clause will determine prohibited competitive users even in an extended geographic radius.

4.  Attornment Clause. For a person purchasing a Landlord position, it’s important to determine if the Lease contains an Attornment Clause requiring the current Tenant to be governed by the new Landlord (Purchaser) as the original Landlord had been.

5.  Internal and External. Every provision in each lease must be examined including, for example, whether or not the Landlord’s approval of a new Tenant as an Assignee rather than as a sub-tenant excuses the current Tenant from further liability.

If so, or if not, a Purchaser of the Landlord’s position should request updated financials of all successor tenants. Hopefully, when the Lease was first drafted or in the purchase contract provision was made for requiring financial statements on demand. Otherwise, the current Tenant (or Landlord) may not be compelled to provide one. Knowing what items of equipment and personality go with the departing tenant or remain after the sale are often referenced in the Lease.

6.  Physical Examination. Purchasers are benefited by a physical examination not only by the Purchaser itself, but also by a building engineer or inspector. It may be that costly repairs need to be made for safety or government compliance, which might be used to offset the purchase price. It would be helpful to check with the applicable zoning or building department to determine if the building qualifies or perhaps has ever been cited under environmental, federal, state, and local legal and administrative guidelines.

All told, there are a number of important leasehold analyses which need to be examined when purchasing property that includes a lease. The tools to discover problems prior to purchase may not be obvious but they exist in your attorney’s lexicon.

The Federal and New York State Tax Advantages of Long Term Care Insurance

If you have looked into purchasing long term care insurance, you know that it is an expensive proposition. However, there are some tax advantages related to the premium payments for long term care insurance.

If you are an employee and itemize your deductions, you can deduct a portion of your long term care insurance premium as a medical expense on the itemized deductions of Schedule A of your 1040 tax return.

Premiums for qualifying long term care insurance policies for individuals under 65 may be deducted to the extent that they, along with other non-reimbursable medical expenses, exceed 10 percent of the individual’s adjusted gross income.

The maximum deductions for 2017 for long term care insurance premiums paid (these amounts increase annually) are as follows:

If you are self-employed, you may be able to deduct premiums that you pay for medical, dental and qualifying long term care insurance premiums for yourself, your spouse and your dependents. This is a deduction on page 1 of Form 1040 and is not an itemized deduction subject to the percentage of adjusted gross income limitations as a medical expense under itemized deductions.

Partners and LLC members who are treated as partners for tax purposes may also be able to deduct health and long term care insurance premiums as a straight deduction and not limited as an itemized deduction as a medical expense under certain circumstances.

Additionally, if you are a New York State resident you are entitled to a credit on your New York State tax return if you or your business pay premiums for qualifying long term care insurance policies. The credit is 20 percent of the premiums.

Therefore, while long term care insurance appears to be quite expensive, if you are unlucky enough to get sick and be in need of long term care, long term care insurance definitely softens the blow on protecting your assets and income, and there are deductions and credits available to reduce the actual cost of the long term care insurance.

Nine legal concepts that affect your investment if you make a non-controlling (minority) investment in a business.

Investors who make a non-controlling (minority) investment in a business must contend with a variety of legal issues as they negotiate the structure and terms of their investment.  Below is a brief overview of nine legal concepts with which every minority investor should be familiar.

  1. Priority Returns.  Companies are often structured to provide preferred or priority returns that favor certain investors over other investors with respect to the distribution of cash. You should not assume that a purchase of a certain percentage of a business entitles you to the same percentage of the profits of the business or of the proceeds of a sale of the business.  If you invest in a corporation, you should inquire into the rights of any preferred stock.  If you invest in a limited partnership or limited liability company, you should inquire into the provisions of the limited partnership agreement or operating agreement that govern allocations and distributions of cash to investors.
  2. Transfer Restrictions. Minority investors need to be mindful of legal and, if applicable, contractual restrictions on transferring their securities.  Federal and state securities laws place significant restrictions on the ability of an investor to transfer the securities of a privately-held company in which he or she has invested.  In addition, minority investors are frequently bound by contractual restrictions on transfer.  A company’s governing documents may contain an outright prohibition on transfers to certain third parties (such as competitors of the company) or may require investors to obtain the consent of the company’s board of directors (or equivalent governing body) prior to any transfer.   A company’s governing documents may also contain a right of first refusal, which requires a minority investor that has received a bona fide offer to purchase his or her securities from a third party to offer the company and/or other investors the right to purchase such securities prior to consummating a transfer of the securities to such third party.
  3. Preemptive rights. A preemptive right provides an investor with the right, but not the obligation, to purchase securities in any future equity-capital raising transaction by the company on a pro rata basis. A preemptive right enables existing investors to maintain their percentage ownership in the company following an equity-capital raising transaction.  Minority investors often seek preemptive rights as a means to protect against dilution of their investment.
  4. Tag-along rights. Like preemptive rights, tag-along rights are often sought by minority investors.  Tag-along rights provide an investor with the right, but not the obligation, to sell his or her pro rata share of securities in connection with a sale of securities by other investors. Minority investors are often concerned about the possibility that the majority investors will sell their securities in a transaction in which the minority investors are not afforded the opportunity to participate.  In this scenario, the majority investors would receive cash or something else of value for their securities while the minority investors would continue to hold their securities, perhaps indefinitely.  Tag-along rights address this concern by ensuring that the minority investors will have the right to participate on a pro rata basis in any sale of securities by the majority investors.
  5. Drag-along rights. A drag-along right requires a minority investor to participate in any extraordinary transaction (e.g., a merger or asset sale) in which the majority investors sell their securities. The purpose of a drag-along right is to ensure that a purchaser can acquire 100% of the equity interests of a company.  Drag-along rights are frequently included in the governing documents of a company for the benefit of the majority investors.    If you become a minority investor in a company, you should understand any applicable drag-along right and the obligations of minority investors pursuant thereto.
  6. Fiduciary Duties. Minority investors sometimes serve as officers or directors of the company in which they have made an investment.  If you become an officer or director of a company, you may owe fiduciary duties to the other investors.  There may also be other situations where you owe fiduciary duties to other investors, depending upon the particular facts and circumstances of your investment and role in the company.  Fiduciary duties are determined by the law of the state in which the company was formed.  They typically include a duty of good faith, a duty of care and a duty of loyalty.  You should understand your applicable fiduciary duties prior to making an investment in a company.
  7. Protective Provisions. Minority investors frequently seek governance rights in the form of “protective provisions”.  These provisions prohibit the company from taking certain significant actions without the consent of the minority investor.  Examples of actions that cannot be taken without the consent of the minority investor might include extraordinary transactions (e.g., mergers and asset sales), the issuance of new securities or indebtedness, or the entry by the company into transactions with its officers, directors or other investors.  Protective provisions can be particularly useful for a minority investor that does not have a representative serving on the company’s board of directors (or equivalent governing body) but that nonetheless seeks a meaningful role in the governance of the company.
  8. Amendments. Minority investors should carefully consider the extent to which the company’s governing documents can be amended.  The rights that a minority investor negotiates for himself or herself are of no benefit if the majority investors can amend the company’s governing documents to modify or eliminate those rights without the consent of such minority investor.  Care must be taken in drafting the provisions that govern the extent to which a company’s governing documents may be amended.  Disputes concerning amendments to the rights of minority investors are a frequent source of litigation.
  9. Registration rights. Registration rights provide minority investors with the right, but not the obligation, to register their securities under the Securities Act of 1933 following an initial public offering of a company.  Registration rights are useful to minority investors in companies that may go public because they facilitate sales of securities once the company is a public company.  Registration rights come in the following two basic types, although minority investors may receive both types.  The first type is “demand” registration rights, which provide minority investors with the right to force the company to register their securities.  The second type is “piggyback” registration rights, which give minority investors the right to include their securities in any registration of securities initiated by the company.

If you are considering making a minority investment, you should understand each of these concepts and discuss them with experienced transaction counsel.

I received an unexpected offer to purchase my business. What do I do now?

Many business owners have been caught off guard by the receipt of an unexpected offer from a third party to purchase their business. Here are six immediate steps that you should consider taking if this happens to you.

1) Request a letter of intent. If you haven’t received a signed letter of intent (LOI) from the prospective purchaser, you should request one. The LOI should indicate the purchase price and the other material terms of the transaction. The LOI should also indicate the structure of the transaction (i.e., stock sale or asset sale), the expected timing of the transaction and whether the prospective purchaser will need to raise funds from a third party to pay the purchase price. LOIs are also helpful in fleshing out whether there will be an “exclusivity period” during which you will be prohibited from shopping your business to third parties. LOIs are typically non-binding (except with respect to exclusivity as described above), but they are useful in establishing the parameters of the transaction and in identifying the key issues that will need to be resolved.

2) Request the execution of a confidentiality agreement. You should not discuss the possibility of selling your business to any party that has not executed a confidentiality agreement for your benefit. In addition to covering business and financial information about your company, the confidentiality agreement should restrict the prospective purchaser from disclosing the fact that discussions are taking place concerning the sale of the business or the status of any such discussions.

3) Commence seller due diligence. You should begin to identify, with the help of legal counsel, the “diligence issues” that may complicate the transaction. In broad terms, diligence issues are those transaction issues that can be identified by reviewing the seller’s business records and contracts. Examples include (i) the need to obtain the consent of third parties to consummate the transaction and (ii) the existence of actual or potential liabilities that may be significant in amount. The prospective purchaser will engage in extensive due diligence prior to signing a definitive agreement to purchase your company, and will seek to resolve any diligence issues that it may identify either through a reduction of the purchase price or through contractual mechanisms. It is advisable for a seller to identify and attempt to address any such diligence issues before they are identified by the prospective purchaser.

4) Discuss the offer with your tax advisor. It is impossible to determine whether an offer to purchase your business is attractive without an understanding of the tax liability that you will incur as a result of such transaction. Keep in mind that the structure of a sale transaction can be important in determining the tax consequences of the transaction. Accordingly, it may be desirable to make a counteroffer with a more tax-efficient structure after discussing the offer with your tax advisor.

5) Consider whether to conduct a formal auction for the business. Sellers often seek a “market check” to determine if the offer that is on the table is truly the best offer. As a seller, you may be able to conduct a formal auction process where additional prospective purchasers are identified and competing bids are solicited from such parties. You should be mindful that conducting a formal auction process is time-consuming, and the ensuing delay may cause the party that made the unexpected offer to withdraw such offer. If you plan to conduct a formal auction process, it may be desirable to engage an investment banker to assist you with that process.

6) Be mindful of fiduciary duties. If you don’t own 100% of the business, you will need to be mindful of fiduciary duties you may owe to the other owners of the business. In general terms, fiduciary duties require persons to act in good faith, exercise due care, and refrain from pursuing self-interest at the expense of other shareholders. If a sale of the business is imminent, your fiduciary duties may require you to obtain the highest possible price for the business. You should navigate any fiduciary duty issues with the assistance of legal counsel.

Industrial Development Agencies Located In The Central New York Regional Transportation District No Longer Exempt From The Additional Mortgage Recording Tax

In 1969, New York State enacted the New York State Industrial Development Agency Act which created industrial development agencies (“IDAs”). New York State created IDAs to promote the economic welfare, recreation opportunities and prosperity of the inhabitants of New York State. IDAs have traditionally provided financial assistance by offering exemptions from sales and use taxes, mortgage recording tax, and real property taxes. Mortgages executed by IDAs have been exempt from the payment of all mortgage recording taxes, including (1) the Basic Tax of 0.50% of the amount of the mortgage, (2) the Special Additional Tax of 0.25% of the amount of the mortgage, (3) the Additional Tax of 0.25% of the amount of the mortgage for mortgages recorded in counties located within the Central New York Regional Transportation District and certain other transportation districts and 0.30% of the amount of the mortgage for counties located within the downstate Metropolitan Commuter Transportation District, and (4) any local mortgage recording tax imposed by some cities and counties.

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Federal Court Blocks Implementation of New Overtime Rules

Late on Tuesday, November 22, 2016, the United States District Court for the Eastern District of Texas issued a nationwide preliminary injunction enjoining the U.S. Department of Labor (“USDOL”) from implementing and enforcing its new overtime rules. These overtime rules would have raised the minimum salary level for the white collar exemptions (executive, administrative, professional) to $47,476 per year. These rules would have gone into effect on December 1, 2016 had the court not issued the injunction.

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Tips & New Initiatives for Health Care Plans from the Federal Department of Labor

Mary Rosen, the Associate Regional Director of the United States Department of Labor for New England including Upstate New York gave a presentation Wednesday on common issues with health care plans. She also described six tips for common plan errors and three new initiatives the DOL is working on.

This seminar hosted by Anthony Stevens was a very good opportunity to hear what issues the Federal DOL is focused upon.

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Disclaimer: This blog is for educational purposes; to provide readers general information and a general understanding of the law, not to provide specific legal advice. By using this blog all readers understand that there is no attorney client relationship between the reader and Mackenzie Hughes LLP, the publisher of this blog.

Prior results do not guarantee future success.

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