On June 12, 2021, New York’s new Power of Attorney law (A.5630-A/S.3923-A) went into effect.  As a reminder, the law simplifies New York’s Power of Attorney form and implements penalties for improper rejection of a New York Power of Attorney by third parties.  A Power of Attorney that was executed under a prior version of the law remains effective and does not need to be re-executed at this time.  Here is a link to our previous article with a substantive outline of the specific changes to the law.

This short article outlines the requirements for starting an active business in a qualified opportunity zone (“QOZ”).

The US tax legislation that created QOZs was enacted in early 2018, and is intended to encourage long-term investment in economically distressed communities.  The IRS issued two substantive sets of proposed regulations outlining rules for QOZ investments (in October, 2018, and April, 2019), and finalized the regulations in December, 2019.  Investors and entrepreneurs are still absorbing these rules.  Nevertheless, the tax benefits from a successful QOZ investment in an active business can be substantial.  These primarily include (1) a deferral of tax on the amount of gain that is reinvested into a QOZ investment until 2026, and (2) the ability to sell a QOZ investment held for 10 years on a tax-free basis.

Real estate has been the main focus for QOZ investors, and a cottage industry in QOZ real estate investments has emerged.  In addition, an entrepreneur who is starting a new business would do well to consider whether he or she can locate the new business in a QOZ and comply with complex rules to qualify as a QOZ business.

The main definitions and applicable rules are summarized below:

  1. A “QOZ Fund” is an investment vehicle formed as a partnership or corporation for the purposes of investing in an eligible QOZ Property. The QOZ Fund is required to hold at least 90% of its assets in QOZ Property.
  2. “QOZ Property” means: (a) QOZ stock, which is original issue stock in a domestic corporation acquired for cash where the corporation is a QOZ Business, (b) QOZ partnership interest, which is any capital or profits interest in a domestic partnership acquired for cash where the partnership is a QOZ Business, or (c) “QOZ Business Property,” which is tangible property used in a trade or business of the QOZ fund, where the original use of the property in the QOZ begins with the QOZ Fund, or the QOZ Fund “substantially improves” the property (generally, a 30 month test to double the value of the property).
  3. A “QOZ Business” is generally an active trade or business where substantially all (ie, more than 70%) of the tangible property owned or leased by the taxpayer (through the QOZ Fund) is QOZ Business Property. In addition, a QOZ Business is a business where:
    1. at least 50% of the total gross income of such trade or business is derived from the active conduct of such trade business within a QOZ (the “50% gross income test”),
    2. a substantial portion of the intangible property of such trade or business is used in the active conduct of such trade or business in the QOZ, and
    3. less than 5% of the average of the aggregate unadjusted tax bases of the property of such trade or business is attributable to nonqualified financial property.

While there was initially significant uncertainty around the 50% gross income test, the Regulations provide more clarity by providing three safe harbor tests.  Based on the Regulations, a QOZ business will satisfy the 50% gross income test if any of the following apply:

  1. More than 50% of the service hours performed for the business by its employees and independent contractors are performed within the QOZ,
  2. More than 50% of the compensation and/or independent contractor expenses for the business are incurred by its employees and independent contractors within the QOZ, or
  3. The QOZ Business locates both tangible property and its management or operations within a QOZ that are necessary to generate 50% of the gross income of the business.

A business that does not meet the safe harbor tests also may meet the 50% gross income requirement based on a facts and circumstances test if, based on all the facts and circumstances, it can demonstrate that at least 50% of the business’ gross income is derived from the active conduct of the business in the QOZ.

The Regulations contain an example of a tech company.  The business is a startup business that develops software applications for global sale and is located in a QOZ.  A majority of the total hours of the startup’s employees and contractors developing software applications are performed in the QOZ.  The example provides that the business would satisfy the 50% gross income test, even though the business makes the vast majority of its sales to consumers located outside of the QOZ.

There are many additional issues for entrepreneurs to consider in starting a QOZ Business, including timing issues to invest capital, valuation issues to satisfy the IRS’ tests, leasing issues if property is leased, related party issues if property is purchased or leased from a related party, and tax reporting issues.  It also may be possible to move an existing business into a QOZ, though this requires careful planning and additional investment.

Note that the state income tax treatment of a QOZ interest may be different than the federal income tax treatment.  For example, New York recently decoupled its tax law from the federal QOZ law with respect to the deferral of gains that are reinvested in QOZ Businesses (although New York appears to have retained the exclusion of gain from taxation on the sale of QOZ Businesses held for more than 10 years).

Despite the complexity of the law, the overall benefits to distressed communities, and the tax benefits, for QOZ Businesses can be substantial.

If you are interested in starting an active business in a QOZ, you should speak with a tax attorney to guide you through the requirements of the QOZ rules.

In a contested estate situation, family members are mad, often fighting mad.  A common client question is, “When are we going to court?”  Perhaps surprisingly, our usual answer to this is, “Only when everything else has failed and you do not have other options.”

Contested estates generally involve a limited number of claims.  These include:

  • A Will or trust is invalid due to lack of capacity, undue influence or coercion.
  • An action for removal of a trustee or executor, usually due to alleged mismanagement of a trust or estate, and/or failure to make distributions.
  • An action for an accounting for a trust or estate.
  • Guardianship for an incapacitated adult (often to try to stop abuse of a power of attorney).

There are some instances where going to court is required or necessary.  For example, there is a specific time period to contest a Will and a court filing is required.  Or, if there is an imminent action that will harm the beneficiaries of an estate (such as selling an important estate asset), the beneficiaries may go to court to seek immediate restraints.  In a recent public example of this, the beneficiaries of the Prince estate (his siblings) went to court to try to remove the corporate executor, Comerica Bank.

However, in many cases, a client is best served by not running straight into court.  Lawsuits are expensive, emotionally draining, and follow very defined rules (regarding discovery and motions, for example).  It is frequently preferable to try to negotiate a resolution with another family member or party in advance of filing a lawsuit.  The threat of the lawsuit often is sufficient to bring parties to the negotiating table.  Negotiation frequently will be effective for the parties to explain their respective positions, and explore whether the dispute can be resolved through an agreement.  Mediation, usually with a retired judge as a mediator, is also an option to consider and much less expensive than a lawsuit.

Here are some examples of recent matters in our office that were resolved without resorting to litigation:

  • A trustee agreeing to resign and a new trustee being appointed.
  • A trustee agreeing to make annual distributions of an agreed-upon amount from a trust.
  • A trustee agreeing to change investment advisors and the investments of a trust to produce more income for a beneficiary.
  • An executor agreeing to sell family real estate and distribute the proceeds to the beneficiaries after years of refusal to do so.
  • A full accounting of a trust for several years, and resolution of alleged improper actions with monetary payments to the estate beneficiaries.

Often, it is inadvisable to rush into court as a first step in a contested estate.  An attorney can be a zealous, even aggressive, advocate for his or her client without commencing a lawsuit.  Attorneys with experience in the area of contested estates can provide guidance as to the best strategy and approach to achieve the client’s goals.

Marta J. Paczkowska, Law Clerk at Cole Schotz, co-authored this blog.

On December 15, 2020, Governor Andrew Cuomo signed a bill into law that simplifies New York’s Power of Attorney form and implements penalties for improper rejection of a New York Power of Attorney by third parties.

The new law (A.5630-A/S.3923-A), which goes into effect in June 2021, amends New York General Obligations Law, Article 5, Title 15, as follows:

  • In defining “Power of Attorney,” the law now explicitly includes both a statutory short form Power of Attorney and non-statutory Power of Attorney.
  • A Power of Attorney no longer needs to exactly match the wording of the statutory short form, but now can substantially conform to the statutory short form. “Substantially conform” is defined as “us[ing] language that is essentially the same as, but is not identical to, the statutory form.”
  • A Power of Attorney can be executed by either the principal or someone signing in the name of the principal, as long as that individual is someone other than the principal’s named agent or successor agent. The individual signing in the name of the principal must sign in the principal’s presence and at the principal’s direction.
  • The Statutory Gifts Rider is eliminated and powers that were previously included in the Statutory Gifts Rider will now be stated in the “Modifications” section of a Power of Attorney.
  • A third party is now permitted to accept and rely on a Power of Attorney that was allegedly acknowledged (i.e. notarized) even if (1) the signature on the Power of Attorney is not genuine, (2) the Power of Attorney is void, invalid, or terminated, (3) the purported agent’s authority is void, invalid, or terminated, or (4) the agent is improperly exercising his or her authority – as long as the third party does not have actual knowledge of these facts and relies on the Power of Attorney in good faith. A third party who is being asked to accept an acknowledged Power of Attorney may, however, request an agent’s certification of any factual matter, and an opinion of counsel as to any matter of law, concerning the Power of Attorney.
  • Third parties are required, within ten (10) business days after being presented with an original or attorney certified copy of a Power of Attorney, to either (1) honor the Power of Attorney, (2) reject it in a writing that lays out the reasons for rejection, or (3) request the agent to execute an acknowledged affidavit stating that the Power of Attorney is in full force and effect. If the third party initially rejects the Power of Attorney and subsequently receives a written response, the third party must, within seven (7) business days after receiving the written response, either honor the Power of Attorney or reject it in a writing setting forth the reasons for the final rejection.  Likewise, if the third party requests the agent to execute an acknowledged affidavit, the third party must honor the statutory short form Power of Attorney within seven (7) business days after receiving the acknowledged affidavit.
  • A court may award damages, including reasonable attorney’s fees and costs, if a special proceeding is brought to compel a third party to honor a Power of Attorney and the court finds that the third party acted unreasonably in refusing to honor a properly executed Power of Attorney.

It is important to note that third parties must honor, and may not unreasonably reject, a Power of Attorney that was executed in accordance with the laws in effect at the time of its execution.  As such, existing Powers of Attorney do not need to be re-executed at this time.

Closely-held businesses come in all shapes and sizes.  Some owners own 100% of their businesses.  Some have partners. Some have children in the business.  Some do not.  A common question that a client asks the business and tax planning professional is, “Should I own my business in a trust?”  There are, of course, many nuances to this question, and every situation is different.  Nonetheless, below are some important considerations in evaluating the benefits of having a trust own a portion of the equity in a business.

Control.  Business succession planning involves both management succession – that is, who runs the business and ownership succession – that is, who owns the business.  Sometimes, transferring a portion of the equity of the business to a trust ensures that the family continues to own the business (even if non-family members run the business).  We often will recapitalize a company so that there is a voting interest which controls all business decisions, and a non-voting interest which represents the economic interest in the business.  An owner may transfer the non-voting interest to a trust and maintain control by keeping the voting interest in his or her name.

Cash flow to surviving spouse.  A common concern with business succession planning is providing cash flow to a surviving spouse.  Having a trust own a portion of the business can help address this.  The trustee could be the surviving spouse, either alone or with one or more co-trustees.  The trustees can use their discretion to receive cash flow from the business and make trust distributions for the surviving spouse’s support.

Equalization among children, or reward to child in the business.  A trust can provide for the benefit of one or more children.  If cash flow from the business flows into the trust, the trustees then can use their discretion to make distributions to (1) a child who is in the business, or (2) a group of children who are not in the business.  A trust can provide the client with great flexibility to address the family goals in this context.

Estate tax.  The business owner may make a gift of a non-voting interest in the business to a trust for the benefit of the family.  The gift removes the value of the asset from the business owner’s taxable estate, and may save estate taxes in the future upon the business owner’s death.  All future appreciation in the value of the business may be removed from the business owner’s estate.  In addition, the value of the gift may be discounted due to lack of control and lack of marketability.

Because of a concern that the federal estate tax exemption – currently $11.7 million per person – will be reduced in 2026 or earlier, many business owners with potential estate tax issues should consider this type of gift prior to a change in the law.

Asset protection.  Assets gifted to a trust are no longer owned by the business owner, and may be protected from his or her potential creditors.  Assets left to children in trust rather than outright may be protected from the child’s potential creditors.  In this way, trust ownership can provide a substantial benefit to the family.

Income tax.  A trust can be used as an income tax planning tool.  If, for example, trust income is distributed among three children, the income may be taxed at lower income tax rates.  Trusts also may be structured in a way that produces state income tax savings.

People fail to plan all the time.  One of the latest examples is Tony Hsieh, the longtime CEO of Zappos, who died unexpectedly in November, 2020, at age 46.  Mr. Hsieh had a large estate, including a number of business interests and over 100 properties in Las Vegas.  He had no estate planning documents in place at his death, nor any business succession planning.  It is likely that the estate will owe substantial estate taxes and there will be litigation for years to come.

Business owners should be sure that their business planning, including business structure, succession and tax planning, is up-to-date and reflects their wishes.  Every family business is unique, but having a portion of a business owned in a trust for the family’s benefit often has a number of advantages.