Growth
May 2024
Growth is a common goal. Most want their estate to increase in size over multiple generations. Fortunately, favorable income tax rules for the transfer of property at death do not impede growth.
Reporting requirements for entities have also increased. Certain entities are now required to report information regarding beneficial owners.
Growth like an oak
Middleton Oak is a live oak near Charleston, South Carolina. The tree has grown for a thousand years. Unimpeded by drought, it lives on the banks of the Ashley River and has reached a massive size. The trunk is over ten feet in diameter.
Estates similarly grow unimpeded by income tax at death because the Code contains an exclusion for gifts and inheritances. This may come as a surprise because most agree that the only certainties in life are death and taxes.
I.R.C. § 102(a) provides that gross income does not include property received by gift, bequest, devise, or inheritance. In other words, property received under a will or under statutes of descent and distribution is not includible in gross income. Treas. Reg. § 1.102-1(a).
Middleton Oak.
This favorable exclusion is beneficial for both small and large estates alike because it is not subject to any dollar limitation.
EXAMPLE: A owns various property interests with an aggregate value of $1 million. A dies and A’s will bequeaths all property to B. B’s gross income does not include the property interests of $1 million bequeathed to B. I.R.C. § 102(a).
EXAMPLE: A owns various property interests with an aggregate value of $100 million. A dies and A’s will bequeaths all property to B. B’s gross income does not include the property interests of $100 million bequeathed to B. I.R.C. § 102(a).
This exclusion, however, is subject to certain exceptions, notably with respect to income. I.R.C. § 102(b).
For more information, please consider the treatise for income tax issues in estate planning, “Income Taxation of Property Acquired from a Decedent.”
New reporting requirements for entities
Beginning January 1, 2024, many entities are now required to report information about their owners pursuant to the Corporate Transparency Act.
Each reporting company is required to file a report that identifies each beneficial owner.
“Reporting company” includes a corporation, limited liability company, or other entity (such as a limited partnership) that is created by filing a document with a secretary of state under state law.
Twenty three types of entities, however, are exempt from reporting. This includes publicly traded companies, nonprofits, and certain large operating companies.
“Beneficial owner” includes an individual who owns or controls twenty five percent (25%) or more of ownership interests, and exercises substantial control over the entity.
BOI report.
Reporting is made to the Financial Crimes Enforcement Network, which is a bureau of Treasury and known as “FinCEN,” on a Beneficiary Ownership Information Report filed electronically through the FinCEN website: www.fincen.gov/boi.
Three different due dates may apply. If the company is created before January 1, 2024, then the due date to report is January 1, 2025. If the company is created in 2024, then the due date to report is 90 days after confirmation of formation. If the company is created after 2024, then the due date to report is 30 days after confirmation of formation.
EXAMPLE: In 2015, A and B create a new limited partnership by filing a certificate of formation with the secretary of state. A and B are equal members, each owning fifty percent (50%) partnership interests. The partnership is a reporting company. Both A and B are beneficial owners. The due date to first report beneficial owners is January 1, 2025. In 2024, the company electronically files a BOI report with FinCEN that reports beneficial ownership of A and B.
After filing an initial report, an updated report is required within 30 days to report (1) any change to the information reported for the reporting company, such as registering a new business name; (2) a change in beneficial owners or a sale that changes who meets the ownership interest threshold of twenty five percent; or (3) any change to a beneficial owner’s name, address, or unique identifying number previously provided to FinCEN.
Further guidance is provided on the FinCEN website.