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Tax, Trusts & Estates Law Monitor

Updates and Commentary on Business and Individual Tax and Estate Planning

2015 Estate And Gift Tax Update

Posted in Estate Planning, Estate Tax

On October 30, 2014, the IRS released Revenue Procedure 2014-61, which announced inflation adjustments to the applicable exclusion amount beginning in 2015. For an estate of any decedent dying during calendar year 2015, the applicable exclusion is increased from $5.34 million to $5.43 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $10.86 million estate, gift and GST tax free to their children and grandchildren in 2015.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.

While the New Jersey state exclusion amount remains unchanged at $675,000, the New York exclusion amount was changed as of April 1, 2014.  Beginning April 1, 2014, the exclusion is as follows:

  • $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;
  • $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;
  • $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;
  • $5.25 million for decedents dying between April 1, 2017 through December 31, 2018.  Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

The gift tax annual exclusion to a non-citizen spouse has been increased from $145,000 to $147,000.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

Other items of note that also are subject to inflationary adjustment in 2015 include the social security wage base, which increases from $117,000 in 2014 to $118,500 in 2015, and the maximum amount that can be deferred into a 401(k) from $17,500 to $18,000.

Significant Revisions to the IRS Offshore Voluntary Disclosure Program

Posted in Income Tax, International Tax

On June 18, 2014, the IRS announced a revamped Offshore Voluntary Disclosure Program.

The existing OVDP has been in place since March 2009.  The program allows a taxpayer to voluntarily come into compliance with US tax reporting obligations and pay a reduced civil penalty rather than facing either greater civil penalty exposure or criminal exposure.  The updated program makes significant changes to the penalty structure, as well as changes to streamline the administration of the program.

Penalty Structure

The penalty structure has been changed significantly.  As part of the voluntary disclosure, the taxpayer must agree to pay a penalty in place of any FBAR penalties that would otherwise apply and in place of any penalties that would apply for the non-filing of various information returns that are also required for international tax compliance.  For the first time, the IRS has implemented a two-tier structure that prescribes a different penalty for those whose violations were willful and those whose violations were not willful.

The OVDP penalty percentage of 27.5% will continue.  The new program introduces a 50% penalty in place of the 27.5% penalty for those taxpayers who had banked with institutions or promoters that the US government has investigated for facilitating evasion activities for its clients, banks or promoters that are cooperating with the US, or banks or promoters who have been publicly identified as having been issued a summons for US taxpayer activity.  The IRS has published a list of such banks.  The higher penalty will be applicable only after August 4, 2014.  It serves as a further incentive for noncompliant taxpayers to come into compliance immediately through the use of the OVDP.

Streamlined Process

The second significant change is the expansion of the streamlined process, which had been in place since 2012, to U.S. residents and to all taxpayers who certify that their non-compliance was not due to willfulness.  The streamlined process allows for taxpayers to submit three years of tax returns and six years of FBARs.  There is no preclearance procedure for the streamlined process and no documentation other than the required returns and certification.  In addition, there is no longer any maximum tax threshold (previously $1,500) and no risk assessment, which in the 2012 program had limited the streamlined program to those considered low risk because of the nature of the offshore account and the amount in the account.  Once the streamlined process is used, the taxpayer can no longer avail himself of the OVDP.

The streamlined process differs slightly between US residents and non-US residents.

  • Non-residents may submit both delinquent original tax returns and amended tax returns.  Residents are only able to submit amended returns and are not eligible if they have not filed returns.
  • There is no FBAR penalty for a non-resident.  A resident must submit a 5% penalty for the FBAR violations.  The 5% penalty only applies to bank accounts that need to be reported on an FBAR and is narrower than the penalty base in the OVDP, which includes other assets that were vehicles for offshore tax evasion.

Transitional Guidance

Because of the reduced penalty available for non-willful taxpayers, the IRS has provided guidance for the transition of OVDP participants to the streamlined process.  Taxpayers who have opted out of the OVDP can also request to be transitioned to the streamlined program.  The important distinction between those who use the streamlined process initially from those who transition in from the OVDP is the requirement for OVDP participants to submit all required OVDP paperwork.  This element of the transition must be considered carefully in situations where the documentation shows possible willfulness.   The new guidance also notes that the streamlined process is available for those who filed amended returns and FBARs as a “quiet disclosure.”

Where no tax is due

In situations where there is no tax due and only FBARs or other information returns were not filed, the IRS has separately issued revised guidance for filing the information returns and FBAR forms without any penalty.

Open Issues

The question of whether an individual was willful is a legal determination that will depend on the facts and circumstances of each case.  The Supreme Court’s definition of willfulness is the “intentional violation of a known legal duty.”  How this standard is applied in the context of FBAR violations is the subject of controversy in several recent court cases and is by no means settled law.  This legal determination should be made by an attorney.

Immediate Action Items

  • For those who have accounts at banks under investigation, apply to the OVDP by August 4, 2014 to avoid the 50% penalty.

If you have any questions regarding the foregoing, please contact Jeffrey Schechter 201-525-6315, Geoffrey Weinstein 201-525-6282, Steven Saraisky 201-525-6259 or Reuben Muller 201-525-6238.

Important Changes to New York Estate and Gift Tax Laws

Posted in Estate Tax, Gift Tax

The New York State Legislature passed the Executive Budget for 2014-2015 on March 31, 2014, which brings about important changes to New York estate and gift tax laws.  These include:

Estate tax exemption increase.  Effective April 1, 2014, the New York State estate tax exemption increased to $2,062,500 for New York residents dying between April 1, 2014 and April 1, 2015 and will increase to $3,125,000 on April 1, 2015, $4,187,500 on April 1, 2016 and $5,250,000 for taxpayers dying between April 1, 2017 and January 1, 2019.  Beginning on January 1, 2019, the exclusion will be indexed for inflation taking into consideration cost-of-living adjustments.  In 2019, the New York exemption is scheduled to equal the federal estate tax exemption.

The top tax rate will remain at 16% rather than a reduction to 10% as proposed by Governor Cuomo.

New York has not adopted the concept of “portability,” which would permit a surviving spouse to utilize any estate tax exemption unused by the decedent spouse.  For this reason, estate planning tools such as qualified disclaimers should continue to be used to capture the decedent’s exemption absent portability.

Estate tax cliff.  The New York estate tax exclusion increase will benefit those estates equal to or below the estate tax applicable exclusion amount at the time of a decedent’s death while those estates that are between 100% and 105% of the exclusion amount will rapidly lose the benefit of the exclusion due to a phase-out computation.  However, no credit is allowed for New York taxable estates exceeding 105% of the basic exclusion amount.  Instead, these estates will be taxable in their entirety.

For example, assume an applicable estate tax exclusion amount of $2,062,500 at the time of a decedent’s death.  Under the new laws, if the decedent’s estate is valued at $2,062,500, the entire estate escapes New York estate tax.  However, if the estate is instead valued at $2.2 million, which represents more than 105% of the basic exclusion amount of $2,062,500, then the entire estate is subject to taxation, resulting in a tax of $114,800.

Pursuant to the new brackets, an estate exceeding 105% of the New York exclusion amount that is fully subject to New York estate tax will effectively owe the same amount that was owed under prior law.

Lifetime gifts added back to estate.  The new law also provides that all taxable gifts not otherwise included in the Federal gross estate and that were made during the three years ending on the decedent’s date of death will be included as part of the New York gross estate for purposes of calculating the New York estate tax.  This significant change in law does not apply to gifts made while the decedent was not a resident of New York State nor to gifts made prior to April 1, 2014 or on or after January 1, 2019.

Estate/Gift Tax and Residency Update – New York

Posted in Estate Tax, Gift Tax

There have been important new developments for New York taxpayers over the past two months, some of which may require your immediate attention. 

Increase in estate tax exemption.  Governor Cuomo’s January budget bill proposes significant changes to the New York estate tax.  The first change would increase the New York applicable exclusion amount from $1 million to $5.25 million over a four year period, and be indexed for inflation thereafter.  Beginning April 1, 2014, the exclusion would be:

  • $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015; 
  • $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;
  • $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;
  • $5.25 million for decedents dying between April 1, 2017 through December 31, 2019.  Beginning in 2020, the exclusion would be indexed for inflation.

The top tax rate also would be reduced from 16% to 10% beginning April 1, 2017.

Lifetime gifts added back to estate.  Another significant change proposed in the budget bill is that all taxable gifts made by a New York resident after March 31, 2014 will be included as part of the New York gross estate for purposes of calculating the New York estate tax.  Currently, New York taxpayers will pay less New York estate tax if they make lifetime gifts, and the Governor’s proposal is designed to close this perceived loophole.  New York taxpayers who have an estate in excess of the federal applicable exclusion amounts and who are inclined to gift should consider doing so prior to April 1.

QDOTs.  For New York residents who are not US citizens, there is a new, favorable law regarding “qualified domestic trusts” or “QDOTs.”  These trusts can be required under federal law in order for a decedent’s assets passing to or for the benefit of a non-citizen spouse to qualify for the estate tax marital deduction. 

The new law amends §951 of the New York Tax Law, and provides that, where a federal estate tax return is not required to be filed, it is not necessary to create a New York QDOT in order to obtain the New York State estate tax marital deduction, if the transfer would otherwise qualify for the federal estate tax marital deduction.  This is helpful in cases involving non-citizen spouses where the estate does not exceed the federal exemption amount (currently $5.34 million).  Thus, a New York individual who has less than $5.34 million in 2014 would now be able to leave assets to his or her non-citizen spouse outright and not trigger any New York estate tax.

Residency audits.  Finally, the New York Court of Appeals (New York’s highest court) issued a favorable decision regarding New York residency. 

In Gaied v New York State, the taxpayer lived in New Jersey but maintained a home for his elderly parents in Staten Island and sometimes stayed there.  New York law provides that a statutory resident is someone who is not domiciled in New York but maintains a permanent place of abode in New York and spends more than 183 days of the taxable year in New York.  The issue therefore was whether the taxpayer’s home for his parents constituted a “permanent place of abode” as to him. 

The Court of Appeals reversed the Appellate Division (and lower tribunals) and held that the taxpayer did not satisfy the permanent place of abode test and thus was not a statutory resident.  The court found that the taxpayer himself must have a residential interest in the property in order for it to be his place of abode. 

This ruling provides more clarity for non-New York domiciliaries who maintain property in New York but do not reside in said property. 

 

2014 Estate And Gift Tax Update

Posted in Uncategorized

The fiscal cliff drama heading into the start of 2013 fortunately was not repeated as the calendar turned to 2014.  Having said that, as we now start 2014, it is important to highlight the following major estate and gift tax laws and changes made in 2014:

  1. The estate, gift and generation skipping transfer (“GST”) tax applicable exclusion amount has increased from $5.25 million in 2013 to $5.34 million in 2014.  This means a husband and wife with proper planning could transfer $10.68 million estate, gift and GST tax free to their grandchildren.
  2. The estate, gift and GST tax rate remains the same at 40%. 
  3. New York and New Jersey state exclusion amounts remain unchanged.  The New York estate tax exclusion amount is $1 million and the New Jersey exclusion amount is $675,000.  As the disparity between the federal exclusion amount and the state exclusion amount increases, the need to carefully plan to not trigger unnecessary state estate taxes, grows as well. 
  4. The gift tax annual exclusion remains at $14,000.
  5. Portability of the federal exclusion amount is permanent, meaning, the unused exclusion of the first deceased spouse may be used by the surviving spouse at his or her death.  For many reasons, including the fact that GST exclusions and state exclusions are not portable, it is critical to properly plan your estate to ensure maximum tax savings are achieved.
  6. The gift tax annual exclusion to a non-citizen spouse has been increased from $143,000 to $145,000.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

Estate Planning and Former Spouses: Updating your Will, Life Insurance and Other Beneficiary Designations following a Divorce

Posted in Estate Planning

Following a divorce, you should carefully review your estate plan to ensure that your former spouse will not receive any unintended distributions from your estate.  Unless otherwise required by the terms of the divorce, you should revise your Will to remove your ex-spouse as a beneficiary.  You also should update beneficiary designations for any non-probate assets in which you hold an interest, such as life insurance policies, retirement plans and joint bank accounts.

Even if you neglect to revise your estate plan, New Jersey law provides some protection by presuming that a divorce generally revokes a former spouse’s designation as a beneficiary under any “governing instrument.” N.J.S.A. 3B:3-14.  The term “governing instrument” is defined broadly to include a variety of items, such as deeds, Wills, trusts, insurance policies, retirement and bank accounts and powers of attorney. N.J.S.A. 3B:1-1. 

However, N.J.S.A. 3B:3-14 does not apply in all situations. Courts have concluded that the statute cannot trump beneficiary designations governed by the Employee Retirement Insurance and Security Act (“ERISA”).  See Juno v. Verizon Communications, Inc., 2011 WL 1321683 (D.N.J. Mar. 31, 2011) (holding N.J.S.A. 3B:3-14 did not apply to 401(k) ERISA plan); In re Kensinger, 2010 U.S. Dist. Lexis 116078 (D.N.J. Nov. 1, 2010) (same).  Nor can it disturb beneficiary designations made pursuant to the Servicemembers’ Group Life Insurance Act. See Calmon-Hess v. Harmer, 904 F. Supp. 2d 388 (D.N.J. 2012).  Moreover, the Supreme Court of the United States recently held that a similar Virginia statute could not alter a beneficiary designation controlled by the Federal Employees’ Group Life Insurance Act.  See Hillman v. Maretta, 133 S. Ct. 1943 (2013).

Accordingly, the best method to prevent confusion, unnecessary disputes and the unwanted disposition of your assets to a former spouse is to update your estate plan promptly after a divorce.

Estate Administration In A Paperless World

Posted in Estate Planning

While our current digital, paperless world has made life more efficient for most, when someone dies, it can be difficult for the survivors to obtain the keys to unlock all of the digital information that is left behind. As a result, it is important to plan during life to make the process of administering one’s estate easier to navigate.

Estate administration is the process in which executors and/or personal representatives (the “Executor”) appointed under a Decedent’s Will are charged with the responsibility of handling the Decedent’s estate. What this means is that the Executor must probate the Decedent’s Will, gather, or marshal, all of the Decedent’s assets, inventory them, file any necessary estate and/or income tax returns that are due and then distribute the assets pursuant to the terms of the Decedent’s Will. Typically, Executors hire professionals (attorneys and accountants) to assist them in completing these necessary tasks.

Often times, the Executor may not have first-hand knowledge of the composition of the Decedent’s estate. In such case, the Executor must rely on a review of the Decedent’s important records and files to compile an accurate inventory of the Decedent’s assets. Typically, this involves a review of all bank statements, brokerage accounts, tax returns, deeds, property records, insurance policies, etc. to compile a comprehensive and accurate list of the Decedent’s assets and liabilities.

Prior to our present internet world, this review by the Executor typically involved reviewing safety deposit boxes, file cabinets, and regular mail to review all financial statements that were delivered each month. This is no longer the norm for most taxpayers as many if not all accounts are online and paperless. Without actual knowledge of online accounts, Executors have no way of knowing what accounts are owned by a Decedent. For those Executors who do have knowledge, they face obstacles in the form of confidential user IDs and passwords to obtain the appropriate information.

These issues are not limited to the financial assets of a Decedent. Social networking sites, email accounts, photos, and online music and video libraries all have sentimental value which are part of the Decedent’s estate and are meant to be passed on. Without knowledge of passwords, this could become very troublesome to access.

We are in the relative infancy of our online world, and as such, few states have passed laws regarding the disposition and access to such assets. But rules governing online accounts are not limited to the passage of laws. Popular websites have developed policies on these issues, which you should be familiar with if you use them.

For example, for those people who have a Gmail email account, Gmail is one of the only websites that has an established and published procedure for accessing a Decedent’s electronic property. However, it is a long and arduous task. The website refers to it as a “lengthy process.” The website’s privacy policy sets out a two step process that “may” in “rare cases” allow an Executor to obtain access to his or her emails.

For Hotmail users, although, Microsoft does not have a written policy regarding this scenario, the company does have an internal policy in dealing with this matter. In the event a user passes away, Microsoft will allow the next of kin to either close the account or request the contents of the account. If the latter request is granted, Microsoft will ship a DVD to the next of kin that contains all emails and their attachments, address books, and Messenger contact lists.

Facebook does not allow access to a person’s account without the username and password. However, in the event that a user passes away, Facebook gives the family two options. The family can either formally request that the profile be closed or request that the profile be “memorialized.” If a Facebook profile is memorialized, only the deceased user’s family and confirmed friends can view pictures and write on the wall in remembrance. Alternatively, the account can be deactivated and the page erased.

Similar to Facebook, LinkedIn allows for a deceased member’s profile to be memorialized. When a profile is memorialized, LinkeIn may restrict profile access, remove messaging functionality, and close the account if they receive a formal request from the user’s next of kin or other proper legal request. Alternatively, once death is verified, the profile will be removed.

Upon the death of a user, Twitter will de-activate the account and/or send out an archive of all the user’s public tweets. In order to request one of these courses of action, either a person authorized to act on behalf of the estate or a verified immediate family member of the deceased must contact Twitter.

Interestingly, in its privacy policy, Yahoo! explicitly prohibits any right of survivorship or transferability of content. The policy states, “[y]ou agree that your Yahoo! account is non-transferable and any rights to your Yahoo! ID or contents within your account terminate upon your death. Upon receipt of a copy of a death certificate, your account may be terminated and all contents therein permanently deleted.”

Apple has no policy in place regarding this scenario. Thus, for a Decedent’s ITunes Account, you would need to know the Decedent’s username and password.

Clearly, many problems and delays related to online accounts are preempted if the Executor knows the Decedent’s usernames and passwords for his or her accounts or the place where this information is stored. The question for people during life is where to store this information while keeping it protected. Safes, safety deposit boxes, and/or providing this confidential information to trusted family members, friends or professionals all are options to consider in this regard.

There are also online companies that provide this service as well. The New York Times recently published an article discussing a few of these services. Of course, these services are only useful to your heirs if you update them anytime your user names or passwords change.

What is important to know is that when you are planning your estate, you need more than a properly drafted Will. You need to have a comprehensive asset and liability list, and if they are online and paperless, a secure place to store your usernames and passwords so they are accessible. Furthermore, you should compile a list of all of your other online accounts (email, social networking, professional, etc.) and their user names and passwords as well so that your Executor is able to easily access them in the event you are unable to disclose this information prior to your passing.

2013 Estate Planning – Still Not The Time To Be Complacent

Posted in Estate Planning, Estate Tax, Gift Tax, Legislation

The end of 2012 saw an unprecedented surge of activity for estate planning attorneys and advisors counseling clients to implement estate plans before the 2013 changes in the law, which would have reduced gift and estate tax exemptions to $1 million.  As it turned out, the American Taxpayer Relief Act enacted on January 2, 2013, did not reduce exemption amounts – they were set at $5 million and indexed for inflation (the 2013 gift and estate tax exemption amount is $5.25 million per person). 

While the law is technically permanent, it does not mean that it cannot be changed.  If President Obama’s 2013 budget (the Green Book) is passed as proposed, the estate tax exemption amount will be reduced to $3.5 million (with no indexing for inflation), estate tax rates will increase to 45% (from the current 40% rate) and the gift tax exemption amount would be reduced to $1 million.  In addition, the President seeks to restrict the use of powerful estate planning techniques, including GRATs and Sales to Grantor Trusts. 

While there may be a sense that you do not have to consider your estate planning now that exemption amounts are $10.5 million per couple, there are many reasons why this is an incorrect assumption, including (1) lower state estate tax thresholds, including New York ($1 million) and New Jersey ($675,000), (2) non-tax considerations such as proper designation of beneficiaries, the benefits of creating testamentary and inter-vivos trusts, appointment of executors, trustees and guardians, and appropriate asset ownership, (3) changes in your life situation, such as a new child, divorce, remarriage or beneficiary substance abuse, (4) the benefits of gifting assets during lifetime and (5) potential changes in the estate tax law in the future.  

We have linked to this recent article in the New York Times, which highlights the need to continue to pay attention to your estate plan.

Who is a Large Employer Under Obamacare?

Posted in Legislation

Among other things, the Patient Protection and Affordable Care Act (the “Act”), commonly referred to as Obamacare, requires “large employers” to provide qualified health coverage for all of their full-time employees, or pay an annual penalty.  A large employer is generally an employer with 50 or more full-time employees. 

In order to prevent employers from dividing businesses into several smaller businesses to avoid the “50 full-time employees” rule, the Act also contains rules that require businesses with common ownership to be treated as a single employer. 

These rules refer to two Code sections – Code §1563 which deals with groups of corporations that qualify to file consolidated tax returns, and Code §414 which deals with commonly controlled businesses under ERISA.  These rules are quite complicated though also somewhat mechanical.  For groups of family-owned businesses with 50 or more employees in total, the ownership structure must be evaluated against the tests detailed in the statute and regulations to determine if the businesses are aggregated.  Below is a brief summary of the rules and a discussion of potential planning opportunities.

Under the statutory tests, a controlled group can be either (1) a parent-subsidiary controlled group, (2) a brother-sister controlled group, or (3) a combination of parent-subsidiary and brother-sister controlled groups.  There are also rules for attribution of ownership between related individuals, trusts and non-corporate entities. 

A “parent-subsidiary controlled group” exists when a common parent corporation owns 80% or more of the stock of subsidiary corporations.  This does not apply to most family businesses because they typically are not owned in parent-subsidiary ownership structures.

A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust or an estate) own directly or indirectly a “controlling interest” of each group and have “effective control.”  “Controlling interest” is defined in Regs §1.414(c)-2(b)(2) and generally means 80% or more of the stock of each corporation (but only if such common owners own stock in each corporation).  “Effective control” is defined in Regs §1.414(c)-2(c)(2) and generally means more than 50% of the stock of each corporation, but only to the extent that such stock ownership is identical with respect to such corporation.

Under Code §414(m), there also can be aggregation for entities that are considered to be part of an “affiliated service group,” which applies to companies whose principal business is the performance of services. 

For most closely held businesses, the key analysis will be whether the entities constitute brother-sister corporations.  Also, in most cases, the first prong of the brother-sister test – the “controlling interest test” – will be satisfied because five or fewer shareholders together frequently own 80% or more of the ownership interest in each company.  (On the other hand, it is worth noting that if two family members whose interests are not attributed to each other, such as father and son-in-law, each own a separate business, the businesses may fail this prong of the test.) 

The second prong of the brother-sister test – the “effective control” test – looks at the common ownership in both entities and deems them to be effectively controlled by  an owner group that owns more than 50%.  One must first calculate the ownership interest that each owner has in both entities, and then determine if they exceed 50%.

For example, if A, B, C and D are each 25% owners of two companies, they each own 25% of both companies and together they effectively control 100%, so the companies would be brother-sister companies.

But, for example, assume that the ownership of the two companies is as follows: 

Owner

Company 1

Company 2

A

80%

20%

B

10%

50%

C

5%

15%

D

5%

15%

Total

100%

100%

In this example, A, B, C and D together own 100% of the stock of both companies, but they do not have “effective control” because the sum of each stockholder’s common ownership in both companies does not exceed 50% (A = 20%, B = 10%, C = 5% and D = 5%, and the sum is 40%).  See Larry Lawson and Jeff Nelson, Controlled and Affiliated Service Groups, IRS Tax-Exempt and Government Entities, pp. 7-7 – 7-8 (available here). 

The effective control test raises some interesting possibilities, as stock ownership can be arranged to flunk the test and therefore avoid aggregation as a large employer.  The following charts show ownership percentages for corporations with two and three shareholders that will not pass the effective control test. 

            Example for two owners (no attribution):

Owner

Company 1

Company 2

A

76%

24%

B

24%

76%

Total

100%

100%

 In this case, A has 24% common ownership in both companies, and B has 24% common ownership in both companies.  The total is 48%, which is below 50%, and the companies should not be a brother-sister controlled group.

            Example for three owners (no attribution):

Owner

Company 1

Company 2

Company 3

A

68%

16%

16%

B

16%

68%

16%

C

16%

16%

68%

Total

100%

100%

100%

 In this case, A, B and C together will not have more than 48% common ownership in any two companies.  The total is 48%, which is below 50%, and none of the companies should be considered a brother-sister controlled group.

While the controlled group rules will effectively cause many family-owned businesses to be aggregated for purposes of Obamacare’s large employer test, for some businesses there may be planning opportunities to avoid these rules.

In addition, for more information on the Act, see Michael Morea and Lauren Manduke’s recent article, “Preparing for the Employer Mandate,” New Jersey Law Journal, April 29, 2013. 

Tags:  Applicable large employer, single employer, controlled group, parent-subsidiary controlled group, brother-sister controlled group, Code §1563, Code §414, Obamacare, Patient Protection Act.