Estate Planning Tip: Be Aware of a Recent Tax Court Ruling that “Loan” Is Actually a Gift


In a recent tax court case, Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, 119 T.C.M. (CCH) 1502 (June 1, 2020), the court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan. Many people use trusts and gifts as estate planning tools. Be aware of the requirements of “loans” v. “gifts” when using lending as an estate planning tool.

Background
Mary Bolles made numerous transfers of money to each of her children from the Bolles Trust, keeping a personal record of her advances and repayments from each child, treating the advances as loans, but forgiving up to the annual gift tax exclusion each year. Mary made numerous advances amounting to $1.06 million to her son Peter, an architect, between 1985 and 2007. Peter’s architecture career initially seemed promising, and during his early career, it seemed that Peter would be able to repay the amounts advanced to him by Mary. However, his architecture firm, which had begun to have financial difficulties by the early 1980s, eventually closed. Although Peter continued to be gainfully employed, he did not repay Mary after 1988. By 1989, it was clear that Peter would not be able to repay the advancements.

Although Mary was aware of Peter’s financial troubles, she continued to advance him money, recording the sums as loans and keeping track of the interest. However, she did not require Peter to repay the money and continued to provide financial help to him despite her awareness of his difficulties. Although Mary created a revocable trust in 1989 excluding Peter from any distribution of her estate upon her death, she later amended the trust, including a formula to account for the loans made to him rather than excluding him. Peter signed an acknowledgment in 1995 that he was unable to repay any of the amounts Mary had previously loaned to him. He further agreed that the loans and the interest thereon would be taken into account when distributions were made from the trust.

Upon Mary’s death in 2010, the IRS assessed the estate with a deficiency of $1.15 million on the basis that Mary’s advances to Peter were gifts. Mary’s estate asserted that the advances were loans. Both parties relied upon Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997).

Requirement for Advances to be Considered a Loan
The case of Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997) spells out the traditional factors that should be considered in determining whether an advance of money is a loan or gift. To establish that an advance is a loan, the court should consider whether:
(1) there was a promissory note or other evidence of indebtedness,
(2) interest was charged,
(3) there was security or collateral,
(4) there was a fixed maturity date,
(5) a demand for repayment was made,
(6) actual repayment was made,
(7) the transferee had the ability to repay,
(8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and
(9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.

Court Ruling
In the Estate of Bolles case, the tax court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan.

The court found that the evidence showed that although Mary recorded the advances to Peter as loans and kept records of the interest, there were no loan agreements, no attempts to force repayment, and no security. Because it was clear that Mary realized by 1989 that Peter would not be able to repay the advances, the court held that although the advances to Peter could be characterized as loans through 1989, beginning in 1990, the advances must be considered gifts. In addition, the court found that Mary did not forgive any of the loans in 1989, but merely accepted that they could not be repaid. Thus, whether an advance is a loan or a gift depends not only upon the documentation maintained by the parties, but also upon their intent or expectations.

Lending as an Estate Planning Tool
As the Estate of Bolles case demonstrates, intra-family loans can be a smart estate planning tool for many families IF properly structured and well-documented. Lenders (usually grandparents or parents) can essentially give access to an inheritance without any immediate gift or estate tax problems, generate a better return on their cash than they could with bank deposits, and borrowers (usually children or grandchildren) can take out loans at interest rates lower than commercial rates and with better terms. In fact, the Internal Revenue Service allows borrowers who are related to one another to pay very low rates on intra-family loans. Furthermore, the total interest paid on these types of transactions over the life of the loan stays within the family. These loans may effectively transfer money within the family, for the purchase of a home, the financing of a business, or any other purpose.

There are several points to keep in mind regarding these types of loans: the loan must be well-documented, lenders should usually ask for collateral, the lender should make sure the borrower can repay the loan, and the income and estate tax implications should be examined thoroughly.

Express Intent in Estate Documents
While you were kind enough to help a member of your family by lending him or her money, do not let this become a legal dilemma in the event of your incapacity or after your death. Instead, use your estate plan to specifically express what you want to have happen regarding these assets. Before lending money, it is important to carefully consider how the loan should be structured, documented, and repaid.

We are Here to Help
If you or someone you know has lent money and has questions about how this affects your estate plan, contact MM&C estate planning attorney Dave Lucas today to discuss the options.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  

 





The Daily Record Announces Annual VIP List Winners; Names MM&C Attorney Diane Feuerherd to List


Miller, Miller & Canby is pleased to announce attorney Diane Feuerherd has been named to the Daily Record VIP list for 2020. The VIP list recognizes leaders in the State of Maryland based on their professional accomplishments, community service and a commitment to inspiring change. Honorees are 40 years old or younger. They are selected by an outside panel of judges, which includes previous winners and business leaders.

“We are extremely proud to announce this well-deserved honor for Diane, who has been an instrumental part of our firm since she joined us in 2013,” said Managing Principal Robert Gough.

Added senior Principal Donna McBride, “Diane makes a tremendous positive impact here for our clients, and also in the broader legal community through her many volunteer and leadership roles.  She has accomplished a great deal in a short period of time, and we look forward to continuing to celebrate her achievements as she advances in her career.”

Diane Feuerherd
is an attorney in Miller, Miller & Canby's Litigation practice with focuses in appellate, business and real estate litigation. She joined the firm after serving for two years as an appellate law clerk to the Honorable Lynne A. Battaglia of the Court of Appeals of Maryland, the State's highest court. She has successfully represented individuals, property owners, and businesses in a wide variety of matters, ranging from administrative hearings before the Board of Appeals, to jury and bench trials in state and federal courts, and to appeals before the Court of Special Appeals and Court of Appeals.

In addition to her work, she is active in state and local bar associations. She serves as co-chair of the Maryland State Bar Association’s Judicial Appointments Committee, Blog Manager of the Maryland Appellate Blog, Board Member of the Maryland Bar Foundation and a past Fellow of the MSBA’s prestigious Leadership Academy.

"This year's VIP List honorees are an impressive group of young professionals with a strong work ethic and a drive to succeed," said Suzanne Fischer-Huettner, group publisher of The Daily Record. "They are making significant contributions to their professions and to improving their communities. The Daily Record is pleased to honor them."

Click here for more information about the Daily Record VIP list for 2020 and celebratory event on September 17, 2020. Click the Download Attachment link below to view the entire list of VIPs.

ABOUT MILLER, MILLER & CANBY
In 2021, Miller, Miller & Canby will celebrate 75 years of serving the legal needs of metropolitan Washington, DC. As the oldest law firm in Montgomery County, MD, the firm recognizes that this milestone reflects the relationships built and maintained with our clients, friends and the business community, many spanning multiple generations. The firm maintains its focus on its core areas of practice: Land Use and Zoning, Real Estate, Litigation, Eminent Domain, Business and Tax, and Trusts and Estates Law. The firm's size allows its attorneys to maintain close contact with clients and have the opportunity to develop and foster trusted, lasting relationships. In all of our practice areas, an overarching concern for quality of product and efficiency of accomplishment assures clients that we strive for true value in legal representation. Miller, Miller & Canby is proud to have maintained this standard of service since the firm’s founding in 1946.





Widening Washington D.C.’s Beltway & I-270 for Toll Lanes in Maryland: June 2020 Project Update


If you live in Montgomery or Prince George’s Counties, or you regularly commute into Washington D.C. or Northern Virginia, you are likely already aware of plans to widen the I-495 Beltway and I-270 to make way for new toll lanes.  Miller, Miller & Canby’s eminent domain and condemnation attorneys are closely monitoring this major infrastructure project.

The Landscape
This project is a priority of Governor Hogan, which is emerging out of the I-495 & I-270 Managed Lanes Study launched in March 2018 by Maryland Department of Transportation’s State Highway Administration (MDOT SHA).  A Public-Private Partnership (P3) has been established to manage and indeed fund the project’s development, design and construction.  The P3 releases periodic newsletters and maintains this project website.

On January 8, 2020, Maryland’s Board of Public Works (BPW), comprised of the Governor, Treasurer and Comptroller, voted 2-1 to approve Phase-1 of the project.  On February 7th the P3 posted an announcement on its website (click here to view) clarifying that the BPW’s vote “only allows the solicitation process to move forward for a Phase Developer to assist the MDOT SHA with preliminary development and design activities, which is allowable under federal regulations.”   Once the project’s new toll lanes are constructed, the P3’s development contractor will retain some level of ownership interest in those lanes while operating and maintaining them for a given time period – purportedly 50 years.

Prior to January’s BPW vote, the National Environmental Policy Act (NEPA) process was already well underway for the I-495 & I-270 Managed Lanes Study.  In fact, the Draft Environmental Impact Statement (DEIS) was scheduled to be released earlier this year for public review and comment until the COVID-19 situation introduced delay.  The P3 is working to release the DEIS in the mid-July timeframe, and it will be followed by an announcement scheduling public hearings, which will most likely be held virtually, but in-person hearings have not yet been ruled out.  P3 also announced that the minimum-required 45-day review period will be extended.


The Plan for Phase 1
The P3’s February 7th website post included a map of Phase-1 as planned, a copy of which is provided below.  Phase-1 will widen I-495 and I-270 for toll lanes, beginning by replacing and widening the American Legion Bridge that crosses the Potomac River from Virginia, and extending northward to I-70 in Frederick County.  Current plans are to divide Phase-1’s delivery, first widening I-270 up to its intersection with I-370 in Montgomery County.  However, since the project’s details remain undefined, the extent of privately owned real estate that will be required to support the widening remains unresolved.  At present, there is an interactive map posted online by MDOT SHA for preliminary planning purposes, which remains subject to change.


Failure of Legislation Proposed to Stop the Project
This project remains highly controversial.  In fact, Bills S.B. 229 & H.B. 292, cross-filed in both chambers of the General Assembly in the 2020 regular session, proposed to prohibit the State from constructing toll roads or bridges without the consent of the majority of the affected Counties.  The Bills proposed to rewrite an existing law (Maryland Transportation Code Section 4-407), which already requires majority County consent for toll projects, but only amongst nine named Counties all located east of the Chesapeake Bay Bridge.  If successfully enacted, the new law would have extended that majority consent requirement to ALL Maryland Counties and Baltimore City.  

However, on March 16, 2020, the House Environment and Transportation Committee voted 16-5 against HB292 and issued an unfavorable report.  The Senate’s version of the Bill, S.B. 229 technically died in the Finance Committee by March 18th, when the regular session prematurely adjourned due to the COVID-19 situation.

While the General Assembly’s debate over the 495/270 widening project may carry on due to its passionate opponents, they find themselves in the minority – so it seems highly unlikely the General Assembly will enact legislation that even potentially threatens to curb the project.


About Miller, Miller & Canby
Miller, Miller & Canby has extensive experience in protecting property owners’ rights throughout the eminent domain process. Jamie Roth is an Associate in the firm’s Litigation Practice Group, concentrating his practice in real estate litigation with a focus in eminent domain. Prior to becoming an attorney, Jamie enjoyed a distinguished career spanning over twenty years in the private and public sector with experience in project management, strategic planning, asset management and risk mitigation, including eleven years as a successful real estate consultant in federal eminent domain matters.

If you have any eminent domain-related questions or questions about the project or its potential impact to your property, please contact Jamie at 301.762.5212 or via email.

Visit our firm’s website for general information on the eminent domain process and our firm’s services by clicking here.

 





New Guidance on PPP Flexibility Act and New 3508EZ Forgiveness Application


On June 5, 2020, the Payroll Protection Program Flexibility Act (Flexibility Act) was signed into law, amending the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  Central to the Flexibility Act was expanding the 8-week forgiveness period under the CARES Act for which businesses must spend their PPP loan proceeds to qualify for loan forgiveness.  Now, under the Flexibility Act, businesses may opt to spread their forgiven period over twenty-four (24) weeks, beginning on the date the PPP loan proceeds was disbursed.

Payroll Compensation Thresholds
Upon enactment of PPP loan program, it was unclear how to spread payroll costs out over the new 24-month period for individuals earning more than $100,000 per year.  Under the CARES Act, businesses are capped at $100,000 of annualized pay per employee, with a maximum amount paid to such employee capped at $15,385.  The SBA had arrived at that maximum amount by dividing the $100,000 amount by 52 weeks and multiplying by 8 weeks (100,000/52 x 8).  Last week, the Small Business Administration (SBA) released an Interim Final Rule (IRF) to address the confusion for whether the maximum amount under the 24-month forgiveness period would be the same as the 8-week forgiveness period.  Per the IFR, payroll costs are still capped at $100,000, but the maximum amount jumps to $46,154 per employee. In doing so, the SBA swapped the 8 weeks with 24 weeks (100,000/52 x 24).  Accordingly, businesses that opt for the 24-week forgiveness period are permitted to allocate almost 3 times as much PPP loan proceeds to employees making over $100,000 than they would under the 8-week forgiveness period.

The IFR also clarified owner compensation.  Now, under the Flexibility Act, owners may pay themselves either 1) 8 weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an 8-week forgiveness period; or 2) 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week forgiveness period.  The IFR stated that, for self-employment income earners opting for the 24 week forgiveness period, the SBA limited the forgiveness of owner compensation to 2.5 months’ worth of 2019 net profit (up to $20,833) since the maximum loan amount is generally based on 2.5 months of the borrower’s total monthly payroll costs during the one-year period preceding the loan.

PPP Loan Forgiveness EZ Application
On June 17, the SBA released an EZ version of the forgiveness application, Form 3508EZ, that applies to borrowers that:

•    Are self-employee with no employees; or
•    Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
•    Experienced reductions in business activity as a result of health directives relating to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

The EZ application requires fewer calculations and less documentation, and can accessed here.

SBA Guidance on Loan Forgiveness
On June 22, 2020, the SBA issued a clarification to its IFR whereby it detailed, among other things, when a borrower may apply for loan forgiveness.  Per this new guidance, borrowers may submit their forgiveness application any time on or before the maturity date of the loan, including before the end of the covered period, if the borrower has used all the PPP loan proceeds for which the borrower is requesting forgiveness. However, if the borrower applies for forgiveness before the end of the covered period, and the borrower has reduced any employee’s salaries/wages in excess of twenty five percent (25%), the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.  In addition, in the event the borrower does not apply for loan forgiveness within ten (10) months after the last day of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (whether in whole or in part), the PPP loan will no longer be deferred, and the borrower must begin paying principal and interest.

For businesses interested in learning more about the loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.
 





Good News for PPP Borrowers: The New Paycheck Protection Program Flexibility Act of 2020


The landmark COVID-19 stimulus package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has been a significant tool for assisting struggling small businesses during the current international pandemic. Indeed, it has provided much-needed financial relief and saved countless from closure or bankruptcy. However, the centerpiece of this legislation, the Paycheck Protection Plan (PPP), has been a source of confusion and frustration for many business owners seeking this aid. In an attempt to alleviate frustrations and stay true to the original intent of the bill—providing cash flow to keep people employed and businesses afloat—a new bipartisan bill was passed by the Senate and signed by President Trump on June 5, 2020. The Paycheck Protection Program Flexibility Act of 2020  modifies and provides additional flexibility to portions of the PPP to address those needs. These are the key changes in the new act:
 
●    An extension of time to use funds. A major source of concern for PPP loan borrowers has been the limitation of the eight-week covered period. Only expenses incurred during this time frame were eligible for loan forgiveness. Unfortunately, many businesses were anticipating that they would not be able to utilize all of the loan proceeds during this period because of challenges like restricted operations due to mandatory stay-home orders and lockdowns, and unconventional payroll structures. The new act addresses that issue by expanding the covered period from eight weeks to the earlier of twenty-four weeks or until December 31, 2020. By extending the covered period, businesses have the flexibility to use the loan funds in a way that is more consistent with their standard practices without forfeiting their ability to take advantage of loan forgiveness.

●    A reduction in the amount required to be directed to payroll. Under guidance provided by the Small Business Administration (SBA) and the Department of the Treasury regarding PPP loans, in order to qualify for loan forgiveness of the total amount borrowed, small businesses had to spend at least 75 percent of their loan amount on payroll expenses. The new law reduces that requirement to 60 percent. This change affords business owners the opportunity to allocate the funds toward other eligible expenses such as utilities or rent without fearing the loss of loan forgiveness. However, there is a caveat: Under the language of the new law, which may be clarified by future SBA guidance, businesses must be careful to meet the lower 60 percent threshold because failure to do so will apparently result in the total loss of loan forgiveness. Previously, the forgiveness amount would have merely been reduced.

●    A change in the loan period from two to five years. The new law also changed how repayment of loans ineligible for loan forgiveness is handled. Rather than requiring the funds to be paid back within two years, the new act requires them to be paid back within five years. This amendment was effective immediately upon the law’s enactment. For businesses that have already obtained funds from lenders, the act leaves room for the lenders to make adjustments to the maturity terms for existing loans in order to comply with these improvements. Additionally, the timeline for deferring repayment has been extended. Lenders can defer all payments—principal, interest, and fees—until the loan forgiveness amount is determined.

●    Greater flexibility for rehiring employees or returning to typical workforce size. As was the case under the original PPP Act, businesses are still required to attempt to maintain or return to their prepandemic average number of full-time equivalent (FTE) employees in order to avoid a reduction in their loan forgiveness amount. However, the new law has provided more flexibility to businesses that seek to restore their workforce to previous levels. First, businesses have been given additional time—until December 31, 2020—to restore their workforces before incurring a reduction in their loan forgiveness amount. Next, small businesses that are still unable to meet the requirement due to challenges in rehiring for post-COVID-19-related reasons may be eligible for additional exemptions under the new legislation. To benefit from the exemptions, businesses must show that because of COVID-19-related orders from the federal government, they have been unable to restore their average number of FTE employees despite having made good-faith efforts to (1) restore the workforce and (2) restore the business to normal business functions. Documentation showing these good-faith attempts is required in order to avoid a reduction in the loan forgiveness amount.

●    Deferment of payroll taxes. The new act expands the number of businesses allowed to defer payroll taxes. Previously, small businesses were given the opportunity to defer payroll taxes, but businesses that had obtained PPP loans were not allowed to take advantage of this option if they also planned to seek forgiveness of their loans. Now, even borrowers who seek and receive PPP loan forgiveness can defer the Social Security tax and 50 percent of the tax on self-employment income from March 27 until December 31, 2020.

Ultimately, the PPP Flexibility Act alleviates many of the pressures small business owners were facing in an attempt to comply with the original PPP requirements under the CARES Act. In light of the changes in the new PPP Flexibility Act, an updated loan forgiveness application is anticipated. Nevertheless, one thing that has not changed is that documentation will still be a critical component of applying for loan forgiveness.

June 17 Update:  SBA and Tresury issued a press release announcing a new EZ PPP Loan Forgiveness Application and a Revised Full PPP Loan Forgiveness Application

For businesses interested in learning more about the loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.
 





How the CARES Act Affects Your Retirement Plan


The Internal Revenue Service (IRS) recently published questions and answers (click here) regarding retirement provisions in Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to providing the well-known stimulus aid for individuals and the Payroll Protection Program and Economic Injury Disaster Loan programs for businesses, the CARES Act increases accessibility to funds and loans from certain retirement plans and accounts. The information the IRS published clarifies which individuals may benefit from the legislation and which plans and accounts are covered.

Retirement Account Rules Established by the CARES Act
Under Section 2202 of the CARES Act, individuals may withdraw up to $100,000 in “Coronavirus-related” distributions from certain retirement accounts. Distributions are deemed “Coronavirus-related” if they are withdrawn from approved plans between January 1, 2020, and December 30, 2020, by individuals who have been adversely affected by COVID-19 in a number of specified ways (discussed below). Individuals may take distributions from 401(k), 403(b), and individual retirement accounts (IRAs). Under normal circumstances, a 10 percent penalty is imposed on distributions made from these accounts by account owners under the age of 59.5 - the CARES Act now waives this penalty.

In addition to expanding access to retirement distributions, eligible individuals may also take loans of up to $100,000 from their employer-sponsored retirement plans. Prior to the CARES Act, the limit was $50,000 or 50 percent of the vested account balance. Loans taken under this CARES Act provision must be entered into by September 22, 2020. For existing loans, payment due dates have been extended, and repayment is not required through December 31, 2020.

Qualified Participants
Like much of the legislation pertaining to COVID-19, the retirement relief sections were specifically designed to provide broad coverage. According to the IRS information, a qualified participant is eligible for the expanded access set forth in Section 2202 if the participant, the participant’s spouse, or the participant’s dependent was either diagnosed with COVID-19 using a test approved by the Centers for Disease Control and Prevention (CDC) or has experienced “adverse financial consequences” caused by COVID-19. The “financial adverse consequences” experienced by the participant must be the result of one of the following:

  • The participant has been quarantined, furloughed, laid off, or has experienced a reduction of work hours due to COVID-19;

  • The participant has been unable to work due to the lack of child care caused by COVID-19; or

  • The participant has had to reduce business hours or close a business the participant owns or operates due to COVID-19.

An individual who falls within any of these categories is eligible for the expanded distribution and loan options available under the CARES Act.


Additional Benefits for Individuals of Retirement Age
The CARES Act also temporarily suspends required minimum distributions (RMDs) from IRAs, and 401(k) and 403(b) retirement accounts. In general, once an individual reaches a certain age (currently 72 years old per the SECURE Act – click here to learn more about SECURE), the government mandates that the individual begin taking out a minimum distribution to ensure that these retirement funds are not left untouched indefinitely. This temporary suspension of RMDs is unique because it is not limited to retirees impacted by COVID-19. The suspension also applies to:

  • individuals who turned 70.5 years old in 2019 and did not take their RMDs in 2019,

  • individuals who are 72 years old or older, and

  • beneficiaries of inherited IRAs for Decedents who died before 2020.

These law changes allow retirees to keep their money invested for a longer time. If you have already taken an RMD that you were not required to due to the CARES Act, please note that you may be able to redeposit these distributions via rollover provisions, but you must act quickly. In the past, the IRS allowed the rollover of funds within sixty days of withdrawal. Under the CARES Act, however, the sixty-day rollover period has been extended to July 15, 2020.

A Word of Caution
Despite the various new options available under the CARES Act, it is critical to carefully consider whether distributions should be taken from any accounts. The tax implications of these options vary, and action should be taken only after careful consideration of an individual’s personal goals and capacity.

Schedule a Meeting
We know that these are trying times. Let us help you choose the best course of action.  We are more than happy to meet with you by phone or video conference.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  


 





PPP Loan Forgiveness Clarified: Borrowers May Begin Calculating How Much, If Any, Must be Repaid


The CARES Act was enacted in late March with the goal of saving the economy from collapse or depression.  Central to the CARES Act’s goal is the Payroll Protection Program (PPP) with its design of saving small businesses from bankruptcy or closure.  As enacted, Congress offered complete loan forgiveness so long as borrowers met certain requirements relating to employee retention and spending limitations.  However, even for unforgiven PPP loan amounts, borrower-friendly terms such as a one percent (1%) interest rate and a six (6) month repayment deferral are offered.  Accordingly, the PPP was immediately and overwhelmingly popular.  Indeed, the pool of PPP money ran out in a few weeks, requiring Congress to replenish the funds.  

The Small Business Administration (SBA) recently published its long-awaited loan forgiveness application and offered some clarity on unanswered questions and outstanding concerns.  Specifically, borrowers now have the benefit of designating their loan proceeds and imputing those figures into a worksheet to determine which amounts would likely be forgiven, and which amounts would revert to the original PPP loan terms and be required to be repaid.

As you likely recall, loan forgiveness will focus on a borrower’s expenditures during an eight (8) week, or 56 day, period, commencing on either:

  1. the day on which the borrower received the PPP loan, or

  2. for borrowers with a biweekly (or more frequent) payroll schedule, the first day of the borrower’s first pay period following the PPP loan disbursement date.  


Given the PPP’s namesake, its focus is on preserving payroll and retaining employees.  As such, expenses that fit within the definition of “payroll costs” will eligible for loan forgiveness – such as compensation, employer contributions to group health care coverage and retirement plans, and certain state and local taxes assessed on employee compensation, among other costs.  Eligible compensation is capped at $15,385 per employee during the 8-week period (which is the 8-week equivalent of $100,000 per year).  In addition to such payroll costs, there are non-payroll costs that are likewise eligible for forgiveness.  These non-payroll costs include:

  1. mortgage interest payments on both real and personal property obligations incurred prior to February 15, 2020;

  2. lease payments on real and personal property leases executed prior to February 15, 2020; and

  3. utility payments for electricity, gas, water, transportation, telephone or internet access that was in service prior to February 15, 2020.  

In addition, with regard to eligible payroll costs, such costs that are incurred during the 8-week period, but not paid during the last pay period of such 8-week period, are eligible for forgiveness so long as they are paid on or before the next regular payroll date.

Once all eligible payroll and non-payroll costs have been identified and added together, borrowers must then determine the portion of their maximum loan forgiveness amount that will be reduced, if any.  Specifically, borrowers must reduce their maximum loan forgiveness amount by the following:
    

  1. Salary/hourly wage reduction.  For employees that were employed by the borrower in 2019, and had an annual salary of $100,000 or less, the borrower must have maintained that employee’s average pay during the 8-week period at a rate of at least 75% of the employee’s average pay from January 1, to March 31, 2020.  A borrower’s loan forgiveness will be reduced by the amount of any reduction in pay.  However, there is a safe harbor whereby borrowers can avoid such reduction if, by June 30, 2020, the borrower restores the employee’s salary to an amount equal to or greater than the employee’s annual salary as of February 15, 2020.

  2. Full-time equivalency (FTE) reduction.  Borrowers are required to maintain the number of employees and the average paid hours of employees during the 8-week period.  If there is a reduction in the average number of weekly full-time FTEs during the 8-week period compared to the period covering either (i) February 15 to June 30, 2020; (ii) January 1 to February 29, 2020; or (iii) for seasonal employers, a consecutive 12-week period between May 1 and September 15, 2019, the loan forgiveness will be reduced unless the borrower qualifies for the safe harbor or one of the exceptions.  Specifically, borrowers will not be penalized for an FTE reduction if (i) the borrower made a good-faith written offer to rehire the employee during the 8-week period, or (ii) the employee was terminated for cause, voluntarily resigned or voluntarily requested a reduction of hours.  For the FTE safe harbor, for borrowers that reduced their FTEs between February 15 and April 26, 2020, there will be no FTE reduction if the FTEs are restored by June 30, 2020.

Additionally, borrowers are subject to the 75% requirement whereby a borrower’s non-payroll costs cannot exceed 25% of all forgivable costs.    The application has a mechanism for determining whether at least 75% of the potential forgiveness amount was used for payroll costs.

The SBA application also requires borrowers whose PPP loans exceed $2 million to disclose that fact by checking a specific box.  It had been previously been announced that all such loans would be automatically subject to audit, and this feature allows the SBA to easily identify such borrowers.

While the application is complicated in places and confusing in others, organized borrowers should be able to navigate it.  In addition, there are already rumors relating to changes to the structure of PPP loans as well as what will be eligible for forgiveness.  Currently, the loan forgiveness application must be filed by October 31, 2020.

A copy of the SBA loan forgiveness application may be found here.

For businesses interested in learning more about the loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.




 





Don’t Procrastinate: Answer these 4 Questions to Get a Quick Jump-Start on Your Estate Plan


As the coronavirus pandemic continues to disrupt daily life and leave Americans uncertain of the future, you do not have to feel helpless. In fact, now is a great time to be proactive and organize your affairs in the event you or a loved one should fall ill. One of the most important things you can do (and should do) is get your estate plan in place. If you can answer the following questions or at least begin to think them through, you can get a jump-start on the estate planning process today.

1.    Who Do You Want to Handle Your Financial Affairs?
One major issue that must be addressed during the estate planning process is the control of your money and property. This includes what will happen while you are alive and what will happen at your death. The person(s) you choose to put in charge of your money and property should be trustworthy, detail-oriented, financially savvy, and organized. To assist you with your financial affairs, you may decide to appoint someone to serve as your Agent (aka attorney-in-fact) under a financial power of attorney and/or a successor Trustee of your revocable living trust.

The agent is responsible for carrying out the financial transactions listed in the financial power of attorney document on your behalf while you are alive. The document can be tailored to meet your needs, granting your agent as much or as little authority as necessary or desired. You could grant your agent the authority to do everything you could do (known as a general durable power of attorney), or the agent could be instructed to only open a bank account for the purposes of depositing a specific check (known as a limited power of attorney). You also have the ability to specify when your agent’s authority to act on your behalf becomes effective. With a “springing” power of attorney, the agent can act only if you become incapacitated. The method used to determine whether you are incapacitated is stated in the power of attorney (note: in general, “springing” powers of attorney are not recommended). Alternatively, an immediately effective power of attorney allows your agent to act the moment you sign the document, even though you are still able to conduct your own financial affairs. This feature, however, does not limit your ability to carry out your own transactions - it merely provides that another person can carry them out in addition to you.

Another way a trusted individual can assist you is by serving as a successor trustee of your revocable living trust. When the trust is first created and you transfer money and property to the trust, you will likely serve as the initial trustee and will be in full control of the money and property, just as you were before your transferred it to the trust. In addition to being the trustee, you will also be the current beneficiary, allowing you to continue to enjoy the money and property even though they are technically owned by the trust. For the foreseeable future, this situation will work well. However, the true benefit of the trust arises when you are no longer able to fulfill the role of trustee. At that point, the trusted individual you have appointed as your successor trustee will step in and manage the money and property for you, without court involvement. Your successor trustee can also step up at your death without court involvement. But no matter when the successor trustee takes over, i.e., when you are unable to manage your affairs or upon your death, he or she is required to follow the instructions that have been detailed in the trust document. This means that the money and property will continue to be used for your benefit during your lifetime and for the benefit of those you have chosen at your death.

2.    Who Will Communicate Your Medical Decisions to the Appropriate Medical Personnel?
In the event you are unable to communicate your medical wishes, your agent under an advance medical directive or medical power of attorney is the person who can make the life or death decisions on your behalf. Your health care agent should be level headed, able to act under pressure, and most importantly, able communicate your wishes, even if their own wishes or beliefs differ from yours. If you have family members that disagree with your choices, you may want to rethink before giving them the authority to make medical decisions on your behalf. It is also essential that you consider the individual’s availability to act for you. Medical emergencies can happen without warning. It is necessary that the person you choose as your agent is available in the required capacity to make those decisions for you. If the person you would like to choose is across the country, do they have the time and finances to travel? If your first choice has a demanding job or home life, can he or she be reached in a reasonable amount of time in the event a decision can be made over the phone?

Medical decisions are very personal. Even if you have the most capable person appointed as your health care agent, it is helpful if you can provide him or her with your wishes in writing. This can be a valuable tool for your agent. An advance medical directive or ‘living will” allows you to state your wishes regarding your end-of-life care: Do you want medication to help manage any pain? Do you want to be put on a ventilator if needed, etc.? While these decisions may take some soul searching, this information may be crucial in allowing your agent to make the best decisions on your behalf.
 
3.    Who Will Look After Your Minor Children, Even if it is Just Temporary?
If you have a minor child, you know that they require some level of supervision. In case you are not able to take care of your minor child, and the other custodial parent is not available, you must make sure to appoint someone to step in and take care of your child, even if it is just for a short period of time. This person should have the ability to take on the mental, emotional, and possibly financial day-to-day responsibilities of raising your child. Because it is impossible to know in advance the amount of time your child would need to spend with them, you will also need to consider whether the person is geographically desirable or if your child would be required to move, even temporarily.

4.    How Do You Want Your Money and Property Divided at Your Death?
When considering how to divide your money and property, think about what is in the best interests of each person. You do not have to give the money and property to your loved ones outright: You have options.

If you are concerned about giving a chosen beneficiary access to 100% of the money and property they will inherit, you could choose to stagger distributions over a period of time. For example, the beneficiary could receive 25% at age 25, 50% at age 40, and the remaining 25% at age 60. By staggering the distributions in this fashion, your younger beneficiary may be able to use the last portion as a nest egg for retirement.

In the event you would like to incentivize certain behaviors, you can set aside money or property to be distributed when a beneficiary accomplishes certain milestones (i.e., graduates college, stays sober for 180 days, gets their first full-time job). This can be helpful if you are concerned that the inheritance might derail a beneficiary from a productive path. By making the distributions contingent on certain behaviors, you can help ensure that they are staying on the right track even after you are gone.

For some beneficiaries, it may be more appropriate for any distribution to be solely within the complete discretion of the named successor trustee. Although this may sound harsh, there are many types of beneficiaries that can be safely provided for using this strategy. If your beneficiary has creditor issues, their creditors can only take the money or property that has been given to the beneficiary. So long as the money and property remain in the trust, and the trustee is not required to make distributions to the beneficiary, the money can stay out of the hands of the creditors. Additionally, a properly structured trust can prevent the beneficiary’s former spouse from taking the inheritance due to the limited control your beneficiary has over the money. This does not mean that your beneficiary will never receive any benefit from the trust - it just means that the trustee has the ability to ensure that distributions are truly in the best interest of the beneficiary, at the best time, and in the right amount.

We Are Here to Help
We are here to help you navigate through the estate planning process during these unprecedented times. Let us help you be proactive and get your affairs in order.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.





Jody Kline Joins University of Maryland School of Architecture as Guest Lecturer


On the evening of Thursday, April 30, Jody Kline of the Land Use and Zoning Department at Miller, Miller & Canby was a guest speaker / lecturer at a class offered at the University of Maryland’s School of Architecture, Planning & Preservation.  The class, titled “Planning Policy, Practice and Politics for Developers” is offered within the University’s Master of Real Estate Development program.  Through videoconferencing, Jody spoke to graduate students along with their instructor, Jamey Pratt, a Senior Planner of the Area 3 Team of the Maryland-National Capital Park and Planning Commission in Silver Spring. 

Jody began his presentation by explaining how developers of real estate use the services of attorneys during the land development process to secure entitlements throughout a project, from acquisition to implementation.  Relying on his more than 45 years of experience in the land use field, Jody discussed how real estate development is highly influenced by area master plans, governing regulations and even the personalities of plan reviewers.  He encouraged the students to recognize that the success of their potential future projects would be more determined by how they responded to the challenges of the development review process, rather than what pro forma told them.  Each project is unique with its own issues and attention needed to walk through the process. Finally, based on his experience from years in the field, he provided a cautionary tale of realistic time constraints that can either make or break a real estate development project.
   
Jody Kline
has been a principal at Miller, Miller & Canby since 1981 and co-chairs the Land Development practice group with attorney Soo Lee-Cho. The practice group has been honored with a national “Tier 1” ranking in US News & World Report Best Law Firms.

Jody Kline concentrates his practice on land use, zoning and subdivision law in Montgomery County and he has represented clients in many of the County’s planning and economic development initiatives. His areas of expertise include zoning, special exception, subdivision, master planning, building permit issuance, and administrative and real estate matters related to land development. He represents private clients, non-profit entities and municipal corporations and agencies. He is a recognized “Super Lawyer,” and U.S. News & World Report “Best Lawyer” in the state of Maryland, as well as a recognized Top Real Estate Lawyer in publications that include Washingtonian and Bethesda Magazine.

To learn more about his practice, contact Jody Kline here; learn more about Miller, Miller & Canby’s Land Development practice by clicking here
 





Main Street Lending Program: How to Save Your Business Without Relying on Congress or the CARES Act


As most small businesses have likely heard, the CARES Act’s Payroll Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program both ran out of money last week. While there is pending federal legislation to replenish both with several billions of dollars, given how the first round of funding went, it is all but certain that any second-round funding will be depleted in a matter of days. As such, there are going to be businesses that lose out on CARES Act funding altogether, especially considering how much money has already been injected into it and the uncertainty surrounding the duration of the pandemic. For those unlucky businesses, there are other CARES Act programs and mechanisms as well as state and local relief programs that they can take advantage of; or they can look to a less-publicized Federal Reserve program. Indeed, the Main Street Lending Program (the “Program”) is Federal Reserve creation and is an alternative to the PPP and EIDL and other CARES Act programs (it is unaffiliated with the Small Business Administration (SBA)).

Main Street Lending Program
The Program is designed to assist banks with loaning money more freely by requiring the Federal Reserve to purchase ninety five percent (95%) of the loans, while the lender assumes the remaining five percent (5%). As such and similar to the PPP, local banks serve as the lender for economically stressed businesses. In addition, businesses that have already received PPP loans may also take advantage of the Program.  

The Program operates in two (2) facilities:

  1. Main Street New Loan Facility (MSNLF)

  2. Main Street Expanded Loan Facility (MSELF).

For both facilities, repayment on these loans are four (4) years, amortization of principal and interest is deferred for one (1) year, and the interest rate is an adjustable rate of secured overnight financing rate (SOFR) plus 250-400 basis points. The minimum loan under both is $1 million, but the maximum under the MSNLF is generally $25 million, and for the MSELF it is generally $150 million. However, a key distinction between the two facilities is that, under the MSNLF, the loans are unsecured.

The Program is aimed to help small and medium-sized businesses. Accordingly, eligible borrowers must have either:

  • 10,000 or less employees; or

  • 2019 revenues of $2.5 billion or less.  

In addition, eligible borrowers must be created or incorporated in the United States, with a significant portion of their operations and employees based here. Borrowers must also make several attestations when submitting a loan application and depending on which particular facility it applies to, including, among other things, that the borrower will not use loan proceeds to pay preexisting loans or lines of credit; it will not cancel or reduce existing lines of credit; that it requires this financing due to COVID-19 pandemic and it will make reasonable efforts to use the loan proceeds to maintain its payroll during the term of the loan; and that it will follow stock repurchase, compensation and capital distribution restrictions set forth in the CARES Act.

For businesses looking for liquidity to carry them through the health emergency the Program offers a possible alternative on borrower-friendly terms, even though it does not provide for loan forgiveness like the PPP.  Likewise, the automatic $10,000 grant of the EIDL program, or the non-repayable aspect of the Employee Retention Credit, are additional options for businesses looking to obtain much needed-cash while they are under economic distress.

The Federal Reserve is currently working to create and implement the Program’s infrastructure. Final terms and conditions have not yet been released. For businesses interested in learning more about the Program, please contact Chris Young at 301-738-2033.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.





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