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Buchanan Law Group March 3, 2009

Greetings! 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
Transfers 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 and contracts. Director's 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 ยง1602 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 always mean 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. Estate 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. Sincerely,
Robert Buchanan Buchanan Law Group Disclaimer This Law Note has been prepared by Buchanan Law Group for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Transmission of the materials and information contained herein is not intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. Readers should not rely upon this information for any purpose without seeking legal advice from a licensed attorney in the reader's state. The information contained in this Law Note is provided only as general information that may or may not reflect the most current legal developments; accordingly, information is not promised or guaranteed to be correct or complete. Buchanan Law Group expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this Law Note.
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