The new Michigan Business Tax has little impact on estate planning, right?
There is an ongoing concern that the MBT can be applied to trusts, Family Limited Partnerships and Family Limited Liability Companies, because there is no exclusion from the definition of "business activity" for investment activities. Likewise, under the new MBT there is no exclusion for casual sales, which are generally sales other than those in the ordinary course of a taxpayer's trade or business, and were exempt from the MBT's predecessor, the Single Business Tax.
An Imperfect Solution
In December, state lawmakers recognized that the MBT could be applied to estate planning techniques so they passed an amendment to rectify the situation — sort of.
Their first attempt at correction, Public Act 145, left too much to interpretation in regard to trusts, FLPs and FLLCs.
The act provides an exemption from "gross receipts" as follows: "For an individual, estate, partnership organized exclusively for estate or gift planning purposes, or trust organized exclusively for estate or gift planning purposes, amounts received other than those from transactions, activities and sources in the regular course of the taxpayer's trade or business, including the following . . . "
I emphasized the key word in the above paragraph. A significant concern for families with FLPs and FLLCs is that these entities are arguably never set up exclusively for estate or gift planning purposes. While these entities are often recommended as a means of transferring real estate or other assets to family members at a reduced estate and gift tax cost, they also promote centralized management, continuity and other business purposes, and are therefore not organized exclusively for estate or gift planning purposes. In fact, many experts believe that business purpose is necessary to support the minority and marketability discounts that produce the estate and gift tax savings.
A NEW PROPOSAL
So the Legislature is going back to the drawing board.
Under significant pressure from estate planners and others, the Michigan Senate has introduced new legislation intended to clarify the exemption for gross receipts received by trusts, FLPs and FLLCs. Senate Bill 1038 would basically remove "exclusively" from the statement "organized exclusively for estate or gift planning purposes."
Removing that single word would generally exempt gross receipts of entities in which one of the purposes of organization is estate or gift planning. The Senate passed the measure in February and it is awaiting action in the House.
Families with trusts, FLPs and FLLCs should consider the following in determining the appropriate steps to minimize the impact of the MBT:
Entities with less than $350,000 of gross receipts are generally exempt from the MBT. However, the MBT utilizes a "unitary" approach, which generally means that entities under common control will be treated as a single entity for purposes of determining qualification for exemption under the $350,000 rule.
While SB 1038, if passed by the House, should offer some comfort to "traditional" trusts, FLPs and FLLCs established for estate planning purposes, the current law's language of "exclusively for estate or gift planning purposes" is troublesome.
More active FLPs and FLLCs may not be exempted under SB 1038 if gross receipts of these entities are received in the "regular course of the taxpayer's trade or business." A significant factor in determining whether an entity is engaged in a trade or business is the level of the entity's trading and other activities.
Some experts have advised entities with MBT exposure to move out of Michigan to avoid these problems. A decision to move out of Michigan should consider MBT "nexus" rules for determining non-Michigan status.
Contact your Warner Norcross & Judd advisor if you have questions regarding the impact of the Michigan Business Tax on your family's estate planning.