Re: Attorney And Law Firm Guide To The Business Of Law: Planning And Operating For Survival And Growth D

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Jul 10, 2024, 8:40:33 AM7/10/24

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Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth d

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While nothing is guaranteed in life or law, attorneys and firm management consultants say taking a step back and looking at the big picture, whether you're a solo practitioner or at a large firm, is essential to knowing where you've been, where you're going - and how you will keep growing. And such a strategic planning process is the best way to achieve success in the long run, even if it seems like you've been doing just fine dealing with the day to day.

Managing change. "The world is complicated. It doesn't stay the same forever," says Craig Caldwell, department chair in marketing and management at Butler University and a speaker on strategic planning for law firms at the April 16 Solo & Small Firm Institute program in Peoria (see sidebar). "Firms can get blindsided by getting too down into the weeds of their business. It's necessary at times, for the livelihood and success of the firm, to pop your head up, see what's going on in the marketplace, and see whether your firm needs to make some changes."

Lack of strategic planning might not negatively impact a law firm as quickly as another type of business - say, a technology firm - because of the highly regulated legal environment, which provides a buffer of sorts from economic and other changes, Caldwell says. "But if there are aspirations for growth, or skill sets within the law firm that simply aren't as in demand as they used to be, you're going to find yourself in a scenario where strategic planning is going to be critical," he says.

Olmstead figures that probably three quarters of large firms have strategic plans, while mid-sized firms in the 50-attorney range are closer to 50-50, with the likelihood shrinking to 15 percent or less of firms with 10 attorneys and fewer. "Different approaches to strategic planning [for different-sized firms] would be appropriate," he says. "The challenges and issues are different."

That goes for the planning document, too, Olmstead adds. "Most of the [plans] I've done for 15 and 25 attorney firms and under, particularly even smaller ones, will typically be 10 pages or less," he says. "To me, if you can keep them briefer and to the point, as opposed to carrying on and making these things too elaborate, they've got a much better chance of implementation."

Wilson considers his plans living documents that he revisits continuously to see how well the firm's efforts are matching the vision laid out. "If my plan is to increase estate administration and asset planning, and I see we're putting too much time into real estate, I'm not adhering to my plan," he says. "The reason it's important is because it's a guide for a firm to keep on topic and on goals, so we can always look back and bring it up at a monthly meeting."

Duane Morris LLP, a law firm with more than 750 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today's legal and business challenges. Evolving from a partnership of prominent lawyers in Philadelphia a century ago, Duane Morris' modern organization stretches from the U.S. to Europe and the Middle East, and now across Asia. Throughout this global expansion, Duane Morris has remained committed to preserving its collegial, collaborative culture that has attracted many talented attorneys. The firm's leadership, and outside observers like the Harvard Business School, believe this culture is truly unique among large law firms, and helps account for the firm continuing to prosper throughout changing economic and industry conditions.

This guide provides tax planning strategies for corporate executives, businesses, individuals, nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, or reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2020 and 2021 as tax changes materialize under new leadership in America.

The chart below summarizes the most common 2020 tax rates together with corresponding taxable income levels. Effective management of your tax bracket can provide meaningful tax savings, as often a change of $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the code, and discussed in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral and harvesting of capital gains and losses.

Alternatives to the Estate Tax

Three professors presented alternative systems for taxing wealth at the 3/12/08 hearing. Some clarification of terminology is required for this discussion. Typically, the difference between an estate tax and an inheritance tax is that an estate tax applies one rate schedule, often with a series of progressive rates, to the value of the taxable estate and imposes that tax on the estate itself. By contrast, an inheritance tax generally is imposed on the heirs, with a tax computed on the property received by each heir. The rate schedule may vary depending on the relationship between the decedent and the heir. Usually, the rate applicable to any particular heir is flat. Most European countries impose an inheritance tax rather than an estate tax at death.

Those are not the only options, however. Some have suggested that the taxation of wealth transfers be married with the income tax. If Section 102 of the Code were repealed, the receipt of a gift or bequest would be taxable income to the recipient. Professor Joseph Dodge referred to this system as an "income inclusion approach."2 The income inclusion approach looks at each tax year on a freestanding basis, without regard to whether the taxpayer has received gifts or bequests in any prior year.

A modified version of an income inclusion approach is an accessions tax. Under an accessions tax, the tax would be imposed on the recipient of a gift or bequest, but there would be a cumulative exemption for each recipient (as opposed to each donor), effectively allowing every person to receive a certain amount of gifts or bequests without tax. As proposed by Professor Lily Batchelder, receipts ofwealth transfers in excess of the exempt amount would be taxed at income tax rates, with a surtax on cumulative receipts over a certain amount.3

Thus, an accessions tax is similar to an inheritance tax in that it taxes the recipient, and it is similar to an estate tax in its ability to provide an exemption and a somewhat graduated rate schedule. Like an income inclusion approach, the tax could be self-assessed on the income tax return. Depending on the amount of the cumulative exemption and the level at which the surtax applies, an accessions tax could be designed to generate as much revenue as the present estate tax, but its burden would fall on a slightly different set of taxpayers. According to Professor Batchelder, under the present estate tax, 30% of heirs inheriting between $2.5 million and $5 million are not burdened by the estate tax at all, while 4% of those inheriting between $500,000 and $1 million are burdened by the estate tax.4 An accessions tax would level the playing field for heirs.

The accessions tax is favored by the academics in large part because it aligns the imposition of the tax with the actual burden of the tax. Philosophically, it is easier to refute the double taxation argument with an accessions tax. Opponents of the estate tax argue that imposition of an estate tax amounts to double taxation of income on which the taxpayer has already paid income tax. By imposing the tax directly on the heirs, it becomes clear that a tax at death is not a second tax on the decedent's money, but a tax on the recipient's windfall.

Furthermore, one of the primary justifications for having an estate tax is to prevent the accumulation of vast amounts of wealth in the hands of a few. By focusing on the taxable estate in the hands of the decedent, however, the estate tax fails to take into account the decedent's own plan for redistributing his or her wealth. The accessions tax offers an incentive to "spread the wealth" among a greater number of heirs, and provides a financial disincentive for leaving one's wealth to a small number of heirs.

Professor David Duff articulated the public relations problem very clearly: "The gift and estate tax sends exactly the wrong message about a wealth transfer tax by taxing successful, hardworking and generous donors who have accumulated wealth out of income on which they have often paid tax already. In contrast, an accessions tax sends a very different and justifiable message by taxing the beneficiaries of substantial gifts and inheritances on amounts that they have not themselves earned and on which they have not themselves paid any tax."5

In addition to the philosophical support, an accessions tax offers neat solutions to some problems under the estate tax, eliminating the need for some complex estate planning. For example, the proceeds of life insurance would be taxed to the person who receives the proceeds, eliminating the need to know who holds the "incidents of ownership."6 Such a change would also eliminate the need for dividing assets between husband and wife, since the exemption amount would relate to the heir and not the decedent. Lastly, because the accessions tax would mostly likely be reported on a schedule to the income tax return, the whole infrastructure of the estate and gift tax filings could be eliminated.

Assuming that states followed the shift to an accessions tax, there could be a dramatic shift in which states collect taxes at death. Unlike aging retirees, who disproportionally relocate to warmer climates, heirs are not as free to relocate to avoid taxes on the deaths of their parents and others. Consequently, accessions tax payers are more likely to be disbursed among the 50 states. The change to an accessions tax at the state level would be a revenue enhancer for some states and a revenue loser for others.

A change to an accessions tax could have an adverse impact on charity. A decedent could have the same impact on the overall tax bill at death by leaving a bequest to a person who has not used his cumulative exemption amount as would be the case if the same bequest were left to charity. Given this option, an individual may choose to leave funds to more remote relatives instead of to charity.

Professor Batchelder estimates that an accessions tax would be revenue neutral compared to present law for the year 2009 if each heir had a cumulative lifetime exemption of $1. 9 million and inheritances (or gifts) in excess of that amount were subject to income tax at the heir's rates plus a 15% surtax. Alternatively, the lifetime cumulative exemption could be $1.6 million, with the excess taxed at the applicable income tax rate plus a 10% surtax.

In the final analysis, a switch to an accessions tax has considerable philosophical appeal, but the practical burdens of the change would be great. Were we starting from scratch, there are clear advantages to the accessions tax. The professors seem to favor an accessions tax primarily because it accords more easily with the actual burden of the estate tax (on the heirs). However, the accessions tax does not shift the actual burden of the tax. Ifthe issue is one of public perception, perhaps education about the true impact of the estate tax would work just as well without having to revamp the entire wealth transfer tax system.

Options for Reform

Dennis Belcher, an attorney in private practice, focused his testimony on ways to modernize Section 6166.7 Section 6166 should apply regardless of the choice of business entity; thus, the law needs to be clarified to specifically include modern business entities such as limited liability companies, limited partnerships, and business trusts. Mr. Belcher also identified the holding company provisions as provisions in need of modernization, as they are so complex that a highly specialized (and expensive) attorney is needed to guide a client through them.

Another burdensome requirement ofSection 6166 is the lien procedure. The lien provisions should be enforced in a standardized fashion and in a manner that doesn't interfere with the business's ability to continue to operate. Mr. Belcher and the other panelists confirmed under questioning that the five-year deferral is a critical aspect of 6166, and that the ten annual payments provide adequate time to raise funds for the estate tax payments.

The second topic discussed at the hearing was portability of the unified credit and GST exemption. Shirley Kovar's portability proposals8 was warmly received by the Finance Committee members. Portability, the idea that any unused portion of a deceased person's unified credit would be made available to his or her surviving spouse, was presented as a simple proposal that avoids unnecessary complicated estate planning and accords with what spouses would really want to do with their assets, absent tax considerations.

Accordingly, if a married couple has assets of $2 million each, the standard estate planning recommendation under present law would be to establish a bypass or credit shelter trust upon the death of the first spouse in order not to waste his or her unified credit. While the tax savings makes it relatively easy to convince clients to provide for bypass trusts, left to their own devices, most of these clients (at least those in first marriages) would bequeath the property outright to the surviving spouse. Portability would allow them to satisfy both goals, leaving the property outright to the surviving spouse without sacrificing the first spouse's unified credit. It would also eliminate the need for complex estate planning.