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Marriage – The Second Time Around

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Or … Third Time Around!


By Dan Timotic CFA
[Managing Principal]

Roughly four in 10 new marriages in 2013 included at least one partner who had been married before, and altogether about 42 million Americans have been married more than once [1].

A second marriage can create numerous estate planning challenges, especially when you wish to provide for both your current spouse and your children from a previous marriage. If you remarry later in life, your spouse and your adult children may not develop a close relationship, which could complicate matters when you die.

With a traditional family, estate assets are often inherited by the surviving spouse and eventually passed down to the couple’s children. Blended families, however, may require a more detailed strategy.

Start by having an honest conversation with your spouse (or fiancée) about your separate and shared finances and goals for the future.

Think Ahead

A prenuptial agreement is a written contract between prospective spouses that states how assets will be owned and distributed during the marriage, in the event of divorce, and at death. Each spouse’s financial rights and responsibilities are predetermined and clearly spelled out, and the contract can be altered or broken only with the consent of both parties.

Prenuptial agreements are not for everyone, but they could help reduce conflict between a surviving spouse, your adult children, and other family members.



[Broken Heart]


Useful Trusts

Placing assets in a properly structured living trust makes it more difficult for someone to contest your will and also avoids probate. The assets would be available to your heirs more quickly, and your private information would be kept out of the public domain.

A qualified terminable interest property (QTIP) trust is a marital trust typically used in conjunction with a bypass trust. When you die, your spouse receives a lifelong income from the assets in the trust. After your surviving spouse dies, the remaining trust assets are distributed to your children, or other designated heirs, according to your specific instructions.

A QTIP trust might be a viable option if you’re certain that a permanent financial relationship between your spouse and adult children will not be a constant source of tension and frustration. If you are uncomfortable making your children wait until your spouse’s death to receive an inheritance, it might make more sense to eliminate the financial connection between your surviving spouse and your children.


[Divorce Decree]


Pick Your Approach

One common arrangement is simply to designate a specific percentage of estate assets to be distributed outright for the spouse, each child, and any other heirs. This way, everyone shares in the appreciation or depreciation of the assets.

Another method involves allocating assets to various heirs based on specific financial needs or benefits. For example, a surviving spouse might inherit the home and retirement accounts, while the children might receive other financial assets such as shares of a business, family heirlooms, or the proceeds of a life insurance policy.

The beneficiary designations on all your retirement accounts, brokerage accounts, and insurance policies should also be updated and consistent with your overall estate plan. If your children are adults, you may want to keep them informed about your decisions so that everyone knows what to expect.


Remember – Trusts incur up-front costs, often have ongoing administrative fees, and involve complex tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing a trust strategy.

Citation: Pew Research Center, 2014


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A Review of LP / LLC Transfer Hazards for Physicians

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Can standard boilerplate and default corporate law provisions inadvertently disinherit your family from controlling the business or cost millions in additional estate/gift tax?

By Ed Morrow, JD, LL.M. (tax), MBA, CFP®

[Manager, Wealth Strategies Communications, Key Private Bank]

Many physicians use limited liability companies, limited liability partnerships or limited partnerships (“LLCs”, “LLPs” and “LPs”) to operate a trade or business, to hold real estate, or even to hold investment assets.  When only immediate family are owners, these are often referred to as family limited partnerships or limited liability companies (“FLPs” and “FLLCs”).  There are numerous business, asset protection and estate planning reasons for using these entities (hereinafter lumped together for simplicity as “LLCs”).  In many cases, these are preferable to old-fashioned corporations (see separate companion article on LP/LLC Advantages).

As a doctor – you must be very careful, however, when transferring LLC shares during lifetime or at death, to your spouse, children, trusts or others.  Especially when there are co-owners outside the immediate family.  This is due to a stark difference between LLC/partnership law and corporate law and the concept known as “assignee interests”.  Understanding this is even more crucial in 2012 because of the overwhelming demand and interest in transferring LLC interests to irrevocable trusts to exploit the $5.12million gift tax exclusion, which is slated to reduce to only $1 million in 2013.

An LLC owner (called a “member”, not a “stockholder”) has two bundles of rights:

  1. Economic rights – which are the rights to receive property from the LLC both during existence and upon liquidation, along with tax attributes and profit/losses; and
  2. Management rights – the right to vote, participate in management and receive reports and accountings.

It is the latter category that can cause problems when transferring LLC interests by gift or at death.

Members of an LLC usually establish an Operating Agreement to set the rules for transfer of interests.  State statutes (such as the Uniform Limited Liability Company Act) usually provide default rules where the document is silent.

The problem occurs when an LLC member transfers a portion of his or her ownership interest in the LLC to another person, either during lifetime or at death.  At that point, the transferee may become a “mere assignee” of the LLC interest, and not a full “substitute member.”  Under the laws of most states, unless the Operating Agreement provides or parties otherwise agree, an assignee only receives the transferor’s economic rights in the LLC, but not the management rights.

In fact, some court cases require member consent even if the operating agreement seems to otherwise permit such transfers (Ott v. Monroe, 719 S.E.2d 309, 282 Va. 403 (2011).  These state laws were enacted to protect business owners from unwillingly becoming partners with someone they never intended or contracted to be partners with.

This treatment is completely different from transferring C or S corporation stock – when you buy P&G stock, you get the same rights as the previous owner.  S Corporation stock is not even allowed to have differing classes of ownership interests (although voting/non-voting is permitted).  Usually, this quirk in the law has numerous asset protection benefits to LLC owners (discussed in the companion article), but it can cause havoc to one’s business planning in unforeseen circumstances.

Examples of Inadvertent Loss of Control

#1- Doctors Able and Baker, unrelated parties, form and operate an LLC.  Able owns 49% and Baker owns 51%.  Baker has a controlling interest in the LLC.  Baker dies and his 51% interest in the LLC is transferred to his revocable living trust.  Now, the trust is a “mere assignee” and while the trust receives 100% of Baker’s economic rights in the LLC (51% of the total LLC economic rights), it has none of the management rights.  After Baker’s death, Able will have 100% of the LLC’s management rights.  The trustee may have serious difficulty even getting books and records of the LLC, much less have any say on reviewing Able’s business decisions (including new hire and new salary expectations).

#2 – Same ownership structure as above, but Baker leaves assets via Transfer on Death designation or via Will to his spouse, children or others directly.  Same result.

#3 – Same ownership scenario as above, but Baker gifts his membership interests during life to his spouse, children, UTMA account or an irrevocable grantor trust.  Same result.

#3a – Same scenario as above, but Baker simply transfers his shares to his revocable living trust (called “funding”) via Schedule A attached to trust or other assignment.  Same result.

#4 – Same scenario, but Dr. Baker got express permission of Able to transfer his LLC interest to his revocable living trust and have it remain a full substitute member.  No issue – until Baker dies and the LLC interests pass to a new subtrust, such as a bypass, marital, QTIP, or other irrevocable trust, or to beneficiaries outright.  Able must have agreed to this subsequent transfer as well, otherwise the transfer to the new subtrust will be a mere assignee interest and the Baker family loses control.

Creditor Issues

Again, Able and Baker own 49%/51%.  Baker has some creditor issues from a tort claim and co-signed loans unrelated to the LLC.  He files bankruptcy to reorganize or get a clean start (or perhaps the creditor forces a bankruptcy).  This is probably another trigger that causes Baker to lose all of his management rights in the LLC.

Incapacity Issues

Again, Able and Baker own 49% and 51% economic and management rights respectively.  This time, Baker has a stroke or an accident and his wife or one of his family takes over as guardian or conservator.  Similar result.  Able now has 100% controlling management rights, even though Baker still keeps the same economic rights.  He can fire Baker and raise his own salary.

Estate/Gift Tax Issues 

Able and Baker’s company is worth $10Million.  Baker’s 51% interest gets marketability discount, but a controlling premium, so valuation experts and the IRS agree it is worth $4Million.  Able’s 49% interest gets a marketability and lack of control discount, so his interest is only worth $3 million.  Yet when Baker dies, he leaves this 51% interest to his spouse (or marital trust) as a mere assignee, and because the interest has no voting control or management rights, it may be worth only about $3 million in the hands of the spouse/trust (because there is no “control” or management rights, the 51% is worth considerably less).  Thus, Baker’s 51% interest is taxed at $4 million, but only gets a $3 million marital deduction (this same discrepancy is true for charitable gifts, which is why physicians should also be careful gifting LLC interests to charities or charitable trusts).  Did $1 million in value inadvertently pass to Able?  At best, this wastes Baker’s estate tax exemption.  At worst, it may lead to an additional 55% tax (and probably penalties, since it would unlikely be reported and caught on audit) on $1million, or $550,000 additional tax that could easily be avoided.

This same issue arises in gifting shares to a spouse or to a trust for a spouse that is intended to qualify for the marital deduction (or to charities or charitable trusts).

In addition, gifting a mere “assignee” interest risks disqualifying any LLC/LP gifts for the “present interest” annual exclusion under IRC 2503(e) ($13,000 per donor per donee) pursuant to the recent IRS wins in the Hackl, Fisher and Price cases.

Furthermore, it adds grist to a favorite line of attack that the IRS uses to add to taxpayers’ estate tax bill.  If a taxpayer has a “retained interest” in a gift, the IRS has been successful in pulling such gifts back into a taxpayer’s estate (therefore causing additional 35-55% estate tax).

What Can Physicians Who Own LP/LLCs Do?

If you want to transfer both economic rights and management rights in your LLCs, similar to shares of stock of a corporation, then the LLC’s written Operating Agreement should be reviewed and/or revised to admit certain transferees or assignees (like a guardian/conservator, spouse, children, trust, subtrusts, etc) as full “substitute members”, while other transferees (like creditors, ex-spouses) can remain “mere assignees”, with no management rights.

LLC owners may decide on other variations on the above solution if desired.  For instance, some owners might prefer to exclude a surviving spouse or children from management rights, but be perfectly comfortable with having an independent or agreed upon trustee of a marital trust accede to those rights.  The key to good planning is to know the consequences of gifts/bequests beforehand to adequately plan.

Make sure your entire wealth management team is on the same page when orchestrating your wealth planning.  Ask whether they use a checklist of any sorts in their planning, or even if they do, whether they communicate the checklist with other advisors on your team – many do not.


As noted in Atul Gawande’s The Checklist Manifesto, simple checklists can often prevent mistakes and miscommunications among even the most educated of professionals – this is certainly true for asset protection and tax planning for LLC interests, and at no time more than in 2012 with all of the anticipated tax changes and proposals threatening to snare any missteps in planning.


© 2012 Edwin P. Morrow III and KeyBank, NA.  The author holds the following designations:  J.D., LL.M. (masters in tax law), MBA, CFP® and RFC®.  He is a Board Certified Specialist in Estate Planning, Probate and Trust Law through the Ohio State Bar Association.  He is an approved arbitrator for the Financial Industry Regulatory Association (FINRA).  He currently provides educational and consultative services nationwide for the financial advisors and clients of Key Private Bank.  Contact:  (937) 285-5343 or:  Edwin_P_Morrow@KeyBank.com Ed is also a friend of the ME-P and designated “thought-leader”. 


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