Buchanan Law Group
March 3, 2009
In this Law Note, we discuss two appellate court decisions - one affecting
the inspection rights of corporate directors and another raising a note of
caution when transferring property out of an LLC. We also give you a brief
synopsis of the pending bill addressing changes in the estate and gift
tax laws. If you have any questions, please give us a call at (415) 395-4700 or
learn more about us at www.buchananlaw.com.
of LLC Units to Revocable Trusts. In Kwok
v. Transnation Title Insurance Company(C.A. 2nd; February 10,
2009; B207421), Mr. and Mrs. Kwok formed a limited liability company ("LLC")
and were its only members. The LLC purchased real property which was its sole
asset. The named title company issued a title insurance policy insuring title
to the property and an easement over a neighboring parcel. The LLC was the only
named "insured", which was defined as the named insured and those who succeeded
to its interest by operation of law. The Kwoks transferred the real property
out of the LLC, to themselves, as trustees of their revocable trust, and then
later dissolved the LLC. When the dispute surrounding the easement heated up,
the Kwoks brought suit against the neighbor and submitted a claim against the
title insurance policy. The title insurance company successfully denied
coverage, as the Kwoks had taken title by grant deed and not "by operation of
law." Had they transferred their units to the trust first and then simply dissolved,
they would have won. This demonstrates how careful one must be to determine how
transfers into and out of an LLC (or other entity) affect related agreements
Inspection Rights. In Tritek Telecom, Inc. v. Superior Court(C.A. 4th;
January 7, 2009; D053073), the court was called upon to interpret Corporations
Code §1602 which gives members of a corporation's board of directors an
absolute right to examine the company's books and records. However, "absolute" doesn't
absolute. In this case, the plaintiff was both a shareholder and director.
Prior to bringing the action to enforce his director inspection rights, he had
brought suit against the corporation and the other shareholder in the
plaintiff's individual capacity as a shareholder. At that point he became an
adversary of the corporation, and much of what he sought to obtain was covered
by the attorney-client privilege as having been produced in the context of his
action as a shareholder against the corporation. The court held that a
corporate director does not have the right to access documents covered by the
attorney-client privilege and were generated in defense of a suit for damages
that the director filed against the corporation in his capacity as a
shareholder. This case demonstrates how carefully a director and shareholder of
a corporation must navigate those roles when disputes arise as to how the
company is being managed.
Tax. H.R. 436 is a bill
introduced early this year, and is now in the Ways and Means Committee. The
estate tax exemption is $3.5 million in 2009. Current law provides that the
estate tax will not apply in 2010, and that the old (pre-2001) exemption of $1
million will return in 2011, and the maximum estate and gift tax rate
(presently 45%) would increase to 55% in that year.
H.R. 436 would amend
the tax code to eliminate the one year estate tax repeal next year, keep the
current estate tax exemption at $3.5 million, keep the maximum tax rate at 45%,
and maintain the current "step-up in basis" rule currently in effect
(as to its currently scheduled change, in 2010, to a "modified carryover
basis" rule which would limit the permitted step-up in the basis of assets
transferred at death to $1.5 million per decedent, plus $3 million for assets
transferred to a surviving spouse).
Finally, H.R. 436 would
substantially change the landscape for family estate tax planning using limited
partnerships and LLCs. Under H.R. 436, appraisers valuing assets transferred
after its enactment would not be allowed to apply any discounts to
"nonbusiness" assets held by partnerships or other entities. Also, if
a family controls a business entity that is not "actively traded," no
discounts will be allowed for the transferee's lack of control of the entity.
Current law permits a discount to reflect a minority interest. The bill is
currently slated to become effective as of the date of its enactment. Though it
is uncertain how H.R. 436 will fare, because the benefits of using family
limited partnerships as a family wealth transfer could be curtailed, it may be
wise to accelerate current plans.
Thank you for taking the time to view this Law Note. We hope you find this information
useful. If you have any questions, please do not hesitate to contact us.
Buchanan Law Group
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