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February 2004

Estate planning

HOW ESTATE TAX LAWS CAN AFFECT YOU

Lauren E. Schaaf

              Although you have spent most of your life ensuring your family’s health and safety, how well have you prepared them for life when you are gone? This is a topic no one wants to think about, but did you know that failing to plan now may lead to big tax headaches for your family after you are gone?

              Estate tax laws are complicated and nearly impossible to understand, that is why it is essential seek the advice of attorneys experienced in the estate planning field.

              When a person dies, the property he or she leaves behind is subject to tax, specifically, estate tax. This tax is imposed on property including: real estate, life insurance, retirement plans, stocks, bonds, trusts, and personal property. The tax is imposed by both the federal and Illinois governments.

              This tax is imposed on the fair market value of the deceased’s estate as of the time of death, and is a progressive tax, meaning the larger the estate, the higher the rate of tax. There is good news however. As of January 1, 2004 you do not have to pay taxes on the first $1.5 million dollars of your estate. That exemption will increase annually until it hits $3.5 million in 2009.

              If a decedent’s estate exceeds the existing tax exemption, the tax is due on the estate, not the beneficiary. This means that the beneficiary will take his share of the estate tax free. The tax is paid before the shares are distributed, and the decedent’s will or trust can even determine from which part of the estate the taxes are paid.

              Depending on how you plan for your death distribution of your estate can either be easy or nightmarish for your loved ones. That is one reason why it is so important for you to contact an attorney specializing in estate planning. A good attorney will be able to help you plan the best strategy for how your estate will be distributed and how to best deal with the current estate tax laws, and those you leave behind will be more grateful than you can know.

              Before contacting an attorney ask yourself these questions. How much is my current estate worth? How much will my estate be worth in 10, 15 or 20 years? Of what does my current estate consist? Will my heirs have to worry about the government taking part of their share for taxes?

              For answers to these or any other estate planning questions contact the author at lschaaf@lavellelaw.com .

Finance & Tax Law

YEAR-ROUND TAX & FINANCIAL PLANNING CHECKLIST

Cameron R. Monti

              Savvy taxpayers or those who elect to retain the services of a tax advisor know and understand that a year-round effort of tax planning can avoid problems and, in some cases, lead to tax savings at year’s end. If you are like most taxpayers, you generally focus your time and energy towards your taxes and financial plans at the end of the year. This may not be wise. Below are a few tax-savings tips and financial planning strategies individuals should take into consideration during each quarter of the year to maximize their tax savings.

First Quarter

• Consider filing tax returns early in those states or jurisdictions where discounts are provided (e.g., Florida).
• Determine whether it is advantageous to pay any taxes with credit cards.
• Pay fourth-quarter estimated taxes for the preceding tax year.
• Give employees their copies of Form W-2, Wage and Tax Statement.

 

Second Quarter

• Comply with minimum distributions rules for qualified plans by April 1 if you attained age 70-1/2 in the previous year.

• File individual and gift tax returns (or an application for an extension).

• File Schedule H (Form 1040) with your tax return if you paid cash wages of $1,400 or more in 2003 to a household employee.

• Report federal unemployment tax (FUTA) on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2003 to household employees.

• Make first-quarter estimated tax payment.

• If you have transacted with a foreign trust (e.g., owner, transfer to or distribution from a foreign trust, hold a qualified obligation of a foreign trust, or receipt of certain gifts or bequests from a foreign person), file Form 3520. Pay second-quarter estimated taxes.

Third Quarter

• File Form 5500, Annual Report of Employee Benefit Plan, if applicable.

• If you extended your individual tax return, file the return or file for another extension.

• File Form 3520, if your individual tax return was extended, and filing of the form is necessary.

• Pay third-quarter estimated taxes.

Fourth Quarter

• Project your current year and next year tax liabilities.

• Evaluate the applicability of the AMT and other taxes.

• Adjust withholding, if necessary.

• Evaluate year-end capital transactions.

• Evaluate before-tax and voluntary after-tax contributions to retirement plans.

• File individual and gift tax returns extended at August 15.

• File Form 3520 (if necessary) if your individual income tax return was extended at August 15.

• Evaluate your tax and financial strategy for receiving discretionary and mandatory retirement plan distributions.

• Evaluate investments on an after-tax basis.

• Consider income shifting to maximize family wealth by making gifts up to the annual exclusion amount or up to your lifetime exclusion amount.  

• Evaluate passive loss exposure and potential investment shifts.

• If you have excess cash flow, consider how to invest those funds.

• Optimize mix of interest expense items.

• Consider making charitable contributions of property.

• Consider ways to fund your child's education.

• Evaluate your mix of portfolio and passive income.

• Be mindful of expiring credits, tax reductions, and exemptions.

• Review resident and non-resident filing requirements for federal and state income, estate, gift, and generation-skipping tax purposes.

              Are you saving the most money through proper financial and tax planning that is available? Wouldn’t it be nice to know that you may avoid the year-end stress that the tax season brings by proper planning? Like the children’s tale of the Grasshopper and the Ant, by making plans and carrying out those plans year-round, you may find the end of the tax year a bit less stressful. Please direct any questions concerning this article or any other questions to cmonti@lavellelaw.com.

Litigation

REQUEST TO ADMIT- FRIEND OR FOE?

Matthew J. Sheahin

     There is a discovery device in Illinois called a Request to Admit Facts or Genuineness of a Document. Illinois Supreme Court Rule 216 addresses this particular pleading. This device allows one party to serve upon its opponent specific statements or documents to which the opposing party must file a written response with the Court admitting or denying the truth of the statement or the genuineness of the document.

                                                           Frequently, in contract cases, a party may serve a request to admit that ascertain contract was signed by the opposing party, thereby obtaining proof that the contract controls the relationship between the parties. In other cases you may request that a party admit that it has not made any payments towards a certain debt since a specific date. The intent behind Supreme Court Rule 216 is to make it easier to obtain proof regarding certain facts that may eliminate the need for extended discovery with drawn out written requests and time-consuming depositions. Such request can be a very useful tool in litigation.

                                                           However, the timing of a party’s filing its Response to a Request to Admit is crucial. Once you have been properly served with a Request to Admit, you must file and serve a response to the Request to Admit within 28 days. If you fail to file and serve a written response within 28 days, all facts contained in the Request to Admit are deemed admitted and all documents are deemed to be genuine. This is true even if the facts are not necessarily correct or accurate or the document is not genuine. The penalty for failing to file a written and timely response is obviously harsh.

              There are cases in Illinois where a party missed the 28-day deadline by as little as 4 days and the Court would not allow the late filing party to file its responses. Given that all the Requests to Admit were then deemed admitted, the late party found itself in a position where it could not introduce vital evidence and promptly lost the case. Furthermore, all responses must be signed and verified by the party and not its attorney. Filing a response signed only by the attorney will result in full admissions under Rule 216. Additionally, if a party is serving its response by mail it must allow 4

days under Supre Court Rule 12 for it to be received by the opposing party. Therefore, if you are going to serve your response by regular mail, you must file it on the 24th day and mail it on the 24th day for it to count as being served on the 28th day. The moral of the story is to make sure that responses are timely because the penalty might cause you to lose your case even though the true facts favor your side. If you have any questions about this article or any other litigation matters, please contact me at msheahin@lavellelaw.com .

Corporate Law

THE IMPORTANCE OF CORPORATE FORMALITIES

Theodore M. McGinn

            A common way to operate a business is the create a corporation. Every year, individuals using corporations ignore the corporate minutes prepared by their attorneys or worse, do not even receive them. Many of you may ask what is the point when often there is one shareholder and one director and one individual who is the President, Secretary and Treasurer of the company. These steps are crucial in order to preserve the limited liability aspect of the corporate entity.

              The primary reason for creating a corporate entity is to insulate your personal assets from the business creditors of the company. If for whatever reason the business proves to be unsuccessful and the company files for bankruptcy or is dissolved, some of the creditors of the business may not be paid in full. A creditor may decide to pursue its claim against you individually. To support their claim, such creditor will argue that you operated your business not as a corporation but as a mere sole proprietorship. At this point you will want to be able to produce for the Court a thorough set of corporate minutes and resolutions which demonstrate that you have operated as a corporate entity. If you are unable to produce such minutes, a Court may pierce the corporate veil and find you personally liable.

              In addition to preparing and executing corporate minutes, there are other formalities that you must observe. One of the most common failures is the commingling of business and personal assets. It is a breach of fiduciary duty for a shareholder or officer to use corporate assets for personal uses. Withdrawing cash from the corporate bank account for personal purchases of Christmas gifts is not proper.

              Another common mishap that individuals often commit is their failure to prepare stock certificates. Very often when the corporate minute book is purchased, it is simply put aside and forgotten. It is important that the stock certificates are prepared and delivered to the shareholders for their receipt.

              Another corporate formality often ignored is the failure to memorialize agreements between shareholders and the company. For instance, if the company is operating out of commercial property owned by the shareholder individually, the shareholder and the company should execute a formal lease. Or another example would be where a shareholder who has more than one corporation will use the same operating assets in both entities.

              Simply put, if you wish to have the benefits of limited liability, you need to act like a corporation. That includes following all of the corporate formalities and not co-mingling the business assets with your personal uses. If you fail to comply with these simple rules, one day you may find yourself personally responsible for a business debt.

              Are you following the proper corporate formalities? Are you commingling assets? If you are not sure, please feel free to me for a free evaluation at tmcginn@lavellelaw.com

.

Commercial Real Estate Law

RETAIL LEASES - THE DEVIL IS IN THE DETAILS!

Kerry M. Lavelle

          Frequently, the prospective tenant shops for a location via a real estate broker and a lawyer is called in only after the tenant has been presented with the term sheet, or the first draft of the lease. We believe that the best tenant is a well informed tenant. The following is a list of concerns and items we like our tenants/clients to be aware of the first time they meet the landlord:

              1.           Does the landlord control the site? Make sure that other landlords do not own adjacent properties that appears to be “connected” to the strip center or the shopping center. Know exactly what your landlord controls and own.

              2.           Future Tenant Mix. Do you have an exclusive to sell your items? Or could a competitor move next door?

              3.           Parking Rights. Do you have any concerns for adequacy of customer parking? How about employee parking?

              4.           Panel Identification on Pylon Sign. Do you need or want a panel on the shopping center pylon sign? How about the cost, and what will be the on going electric charge for the pylon sign?

              5.           Documents to Review. Obtain reciprocal easement agreements affecting the site, covenants, conditions, and restrictions of records, lists of exclusive and prohibited uses for the shopping center; language from the anchor tenant’s lease concerning any rights of the anchor tenant to terminate its lease or to close its door; all rights of other tenants to reduce parking or to use the parking field for display purposes.

              6.           Commencement Date. Note that there is a difference between the date the lease is signed, the date the landlord delivers possession (“Commencement Date”), and the date the rent begins. Iron out those differences.

              7.           Landlord’s Work. Whether you are entering into a newly constructed shopping center, or having the inside of your space in an old strip center remodeled, clearly articulate what work needs to be done by the landlord, when it will be completed, and what penalties will be imposed on the landlord if it is not completed within a timely fashion. Be specific. Identify telephone lines between T-1 lines, Potts lines, etc. Amperage in electric service, the finish on demising walls, and other ADA compliance requirements, etc.

              8.           Insurance. Who will carry the general fire insurance? What is the coverage under the fire coverage? Certainly tenants need to insure their own build out (“leasehold improvements”), and personal property. Does this tenant need business interruption insurance? Do your lease payments continue to be due even if you have fire damage inside your unit? Do not assume anything.

              9.           Assignment and Subletting. Can you assign your lease and eliminate your tenant liability?

              10.         Percentage Rent. A retail lease will often provide for a sharing of the tenants success by way of a payment to the landlord of percentage rent. The retail lease will often provide if the landlord receives a percentage of the tenant’s gross sales once a milestone or a “breakpoint” in tenant sales is reached. 

              11.         Property Taxes. Are you paying “billed” taxes, or “accrued” taxes?

When reviewing your lease, or negotiating a new lease

• Are you personally guaranteeing the lease?

• Do you have the right to sublet?

• Does the landlord have any hidden ways to terminate your lease?

• Can you negotiate free rent in exchange for your investment in the property i.e., your build out?

Email your questions to Kerry Lavelle at klavelle@lavellelaw.com on this subject.

Taxation Law

TAXPAYER RECORD-KEEPING

Timothy M. Hughes

You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which may help you out on your taxes.

Records help you document the deductions you have claimed in your return. You will need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents records relating to a home purchase or sale, stock transactions, IRA and business or rental property should be kept longer.

              In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return. Such items would include bills, receipts, invoices, mileage logs, canceled checks, or any other proof of payment, and any other records to support any deductions or credits you claim on your return.

              Good record-keeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.

              Do you have all the proper documents needed to prepare your tax return this year ? Please contact Tim Hughes at thughes@lavellelaw.com with any questions.

This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.