More Developments Impacting Businesses, Employers and Private Investors
A Continuing Q&A with Sherman & Howard's Changing Markets Practice Group

Ongoing U.S. and worldwide economic developments are continuing to impact the playing field for all businesses, individuals and private investors. In an earlier Changing Markets Client Advisory Sherman & Howard's attorneys discussed some of the initial issues raised by these developments. In this Client Advisory, Sherman & Howard's attorneys continue their discussion of questions raised by these recent developments and ways in which we are assisting clients:

Are my company's bank accounts at risk from a bank failure?

Business accounts, like personal accounts, now are insured by the Federal Deposit Insurance Corporation up to $250,000. This increase from the prior FDIC cap of $100,000 per account was approved on October 3, 2008 when the President signed the Emergency Economic Stabilization Act of 2008. The increased insurance coverage means that many businesses that must retain large deposit balances for payroll and other purposes will have additional protection from a bank failure. Businesses should remember that, barring extension of the $250,000 cap under federal law, the additional coverage is set to expire on December 31, 2009, after which the $100,000 cap will apply again. In addition, businesses should note that their multiple accounts, if registered under the same company name with the same bank, are entitled to total coverage for all accounts of only $250,000.

Are my company's investments in money market mutual funds at risk?

The U.S. Treasury Department announced on September 19, 2008 the Temporary Guarantee Program for Money Market Funds. The purpose of the program is to protect investors in the event that a money market mutual fund "breaks the buck," meaning that the fund's value deteriorates such that its net asset value is less than $1.00 per share. The Program guarantees investors that they will receive $1 for each money market fund share held in any publicly offered eligible money market mutual fund that applies for and pays a fee to participate in the program. The federal guaranty, originally set to expire on December 18 of this year, has been extended to April 30, 2009 by the Treasury Department. To be eligible, a mutual fund must be registered under the Investment Company Act of 1940 and qualify under Rule 2a-7 adopted by the Securities and Exchange Commission. While the program protects the accounts of investors, each money market fund makes its own decision to sign up for the program. Investors should contact their money market fund directly to determine if it is participating in this program.

Does my bank's participation in TARP mean that it is at risk of failure?

Many banks have applied to participate in the federal government's bank capital stabilization program made available under the Troubled Asset Relief Program (TARP) enacted on October 3, 2008 as part of the Emergency Economic Stabilization Act of 2008. A bank's application to the TARP fund does not mean the bank is troubled or viewed by the federal government as undercapitalized. Many banks are taking advantage of the TARP program to enhance their balance sheets as a means of 1) making strategic acquisitions, 2) freeing up funds for lending activity, or 3) protecting against a deterioration of assets that has not occurred. Federal and state chartered banks continue to be subject to minimum regulatory capital requirements, whether or not they have applied for funding under the TARP program.

What must companies consider when planning for downsizing?

As employers downsize their workforces, they commonly offer separation packages in exchange for employee releases of claims. In their haste to accomplish a reduction-in-force, employers often overlook legal requirements. For instance, in order to obtain effective releases of age discrimination claims, employers must satisfy numerous requirements. One such requirement is that employees be given at least 45 days in which to consider and accept the offer made to them. Even after they sign the agreement, employees have a seven-day period in which to revoke the agreement. Another requirement often overlooked in a workforce reduction is that releases signed by employees do not waive age-discrimination claims if the employees do not receive certain disclosures showing the ages and job classifications of individuals who were released (and therefore offered a separation package), as well as the ages and job classifications of persons who were not released.

Are there special downsizing considerations for nonimmigrant foreign employees?

Employers contemplating a workforce reduction or employee layoff should consider giving special treatment to foreign employees with temporary nonimmigrant visas. This is because lawful status in the United States will conclude with a nonimmigrant's last day of employment. Affected non-immigrants include H-1B "professionals," TN "Free Trade Agreement professionals," L-1 "intracompany transferees," E-2 "treaty investors," H-2B "temporary or seasonal workers," and O-1 "persons of extraordinary ability." An unanticipated layoff will place a foreign employee with a temporary nonimmigrant visa in an unlawful and deportable position. Such employees need time to apply to change their authorized U.S. status or seek new authorized employment prior to their last day of employment.

Are my employees' pre-paid, stored-value cards protected by FDIC insurance?

Many businesses now make payroll deposits to pre-paid cards issued to an employee. Such programs benefit employees who may not have a bank account or require immediate access to payroll funds. On November 13, 2008, the FDIC General Counsel's Office issued an opinion clarifying that funds underlying an employee's bank-issued, stored-value card will be treated as deposits and insured up to the new FDIC insurance coverage cap of $250,000. To be eligible, funds underlying the card must be deposited by the employer or its agent with an FDIC-insured bank and they must comply with federal record-keeping and other "pass-through" insurance requirements. So long as the payroll program complies with these requirements, employee card balances will be insured on a per-employee basis.

What will the Applicable Estate Tax Exclusion Amount be for 2009?

Effective January 1, 2009, the Applicable Exclusion Amount for Federal Estate Tax purposes will increase to $3.5 million. The Applicable Exclusion Amount reflects the amount that an individual may leave free of Federal Estate Tax at his or her death to any individual or individuals other than the surviving spouse. Any value in an individual's estate that is in excess of this $3.5 million amount and is left to an individual other than a surviving spouse is subject to Federal Estate Tax at a 45 percent rate.

Will the Estate Tax Exclusion Amount change under the Obama administration?

Several clients have asked whether we anticipate the Obama administration will reduce the Estate Tax Applicable Exclusion Amount or increase the Estate Tax rate. President-elect Obama has indicated that he intends to make permanent the 2009 Applicable Exclusion Amount of $3.5 million and the 2009 Estate Tax rate of 45 percent. This would eliminate the one-year repeal of the Federal Estate Tax that is scheduled to occur in 2010. It also would eliminate the rollback of the Applicable Exclusion Amount to $1 million that is scheduled to occur in 2011. Based on President-Elect Obama's representations, we do expect the 2009 Applicable Exclusion Amount to be made permanent and we do not expect a reduction in the Estate Tax rate.

In what other ways might the Obama administration impact estate planning?

There are some suggestions that the Obama administration will attempt to eliminate opportunities for estate planning techniques designed to shift future appreciation, free of Federal Gift Tax, to the second and third generations. In particular, there have been suggestions that the Obama administration may attempt to eliminate Grantor Retained Annuity Trusts (GRATs). There are also suggestions that an Obama administration may attempt to eliminate valuation discounting. Both of these estate planning techniques are fundamental for individuals with net worth in excess of the Applicable Exclusion Amount.

As discussed in a prior Changing Markets Client Advisory, with a GRAT, the Grantor transfers assets to a Grantor Retained Annuity Trust. Each year, the Grantor receives back from the GRAT an annuity (including fair market value interest). At the end of the GRAT term, if there is an asset of value left in the GRAT, that asset passes to the Grantor's children free of Federal Gift Tax. For example, Grantor transfers $6M of appreciating stock to a three-year GRAT. The Grantor receives an annuity each year of $2 million plus fair market value interest. If, during the three-year term, the GRAT assets grow to $10 million, there will be a transfer of approximately $4 million, free of Federal Gift Tax, to the second generation. Because the GRAT is a "grantor trust" for income tax purposes, no income tax is triggered by any of these transfers.

As an example of valuation discounting, consider a partnership with two partners - a general partner owning 10 percent of all partnership interests and a limited partner owning 90 percent of all partnership interests. The partnership holds assets with a value of $1 million. Arguably, the general partner's interest is worth $100,000, or 10 percent of the $1 million in assets. Using the same logic, the limited partner's interest should be worth $900,000. However, because the general partner retains all control over decisions regarding the partnership and distributions from the partnership, the limited partner is unlikely to be able to sell her interest for $900,000. Instead, the limited partner must discount this interest. At times, this discount may be in the range of one-third. Therefore, when the limited partner gifts or sells her interest to descendants or trusts for their benefit, it is appropriate to use a discounted value of $600,000.

While we believe that it is unlikely that the Obama administration will be successful in any attempt to eliminate GRATs or valuation discounts, we feel that it is appropriate for clients who have a net worth in excess of the Applicable Exclusion Amount to consider how they wish to proceed with GRATs and other planning opportunities sooner, rather than later.

For more information please contact your Sherman & Howard relationship attorney or one of the attorneys in our Changing Markets Practice Group.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.

Circular 230 Notice

This advisory contains provisions concerning a federal tax issue or issues. This advisory is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on any taxpayer by the Internal Revenue Service. For information about this statement, contact Sherman & Howard L.L.C. or visit our website at www.shermanhoward.com/PrivacyPolicy/Circular230/.

	Contact Us Services Attorneys News and Events Publications About the Firm Inclusiveness Careers In the Media Events and Registration Press Releases Speaking Engagements Articles Client Advisories Subscriptions History Offices Pro Bono Interlaw Contact Us Culture Legal Opportunities Summer Associates Support Staff Publications Client Advisories Home > Publications > Client Advisories > View More Developments Impacting Businesses, Employers and Private Investors A Continuing Q&A with Sherman & Howard's Changing Markets Practice Group Ongoing U.S. and worldwide economic developments are continuing to impact the playing field for all businesses, individuals and private investors. In an earlier Changing Markets Client Advisory Sherman & Howard's attorneys discussed some of the initial issues raised by these developments. In this Client Advisory, Sherman & Howard's attorneys continue their discussion of questions raised by these recent developments and ways in which we are assisting clients: Are my company's bank accounts at risk from a bank failure? Business accounts, like personal accounts, now are insured by the Federal Deposit Insurance Corporation up to $250,000. This increase from the prior FDIC cap of $100,000 per account was approved on October 3, 2008 when the President signed the Emergency Economic Stabilization Act of 2008. The increased insurance coverage means that many businesses that must retain large deposit balances for payroll and other purposes will have additional protection from a bank failure. Businesses should remember that, barring extension of the $250,000 cap under federal law, the additional coverage is set to expire on December 31, 2009, after which the $100,000 cap will apply again. In addition, businesses should note that their multiple accounts, if registered under the same company name with the same bank, are entitled to total coverage for all accounts of only $250,000. Are my company's investments in money market mutual funds at risk? The U.S. Treasury Department announced on September 19, 2008 the Temporary Guarantee Program for Money Market Funds. The purpose of the program is to protect investors in the event that a money market mutual fund "breaks the buck," meaning that the fund's value deteriorates such that its net asset value is less than $1.00 per share. The Program guarantees investors that they will receive $1 for each money market fund share held in any publicly offered eligible money market mutual fund that applies for and pays a fee to participate in the program. The federal guaranty, originally set to expire on December 18 of this year, has been extended to April 30, 2009 by the Treasury Department. To be eligible, a mutual fund must be registered under the Investment Company Act of 1940 and qualify under Rule 2a-7 adopted by the Securities and Exchange Commission. While the program protects the accounts of investors, each money market fund makes its own decision to sign up for the program. Investors should contact their money market fund directly to determine if it is participating in this program. Does my bank's participation in TARP mean that it is at risk of failure? Many banks have applied to participate in the federal government's bank capital stabilization program made available under the Troubled Asset Relief Program (TARP) enacted on October 3, 2008 as part of the Emergency Economic Stabilization Act of 2008. A bank's application to the TARP fund does not mean the bank is troubled or viewed by the federal government as undercapitalized. Many banks are taking advantage of the TARP program to enhance their balance sheets as a means of 1) making strategic acquisitions, 2) freeing up funds for lending activity, or 3) protecting against a deterioration of assets that has not occurred. Federal and state chartered banks continue to be subject to minimum regulatory capital requirements, whether or not they have applied for funding under the TARP program. What must companies consider when planning for downsizing? As employers downsize their workforces, they commonly offer separation packages in exchange for employee releases of claims. In their haste to accomplish a reduction-in-force, employers often overlook legal requirements. For instance, in order to obtain effective releases of age discrimination claims, employers must satisfy numerous requirements. One such requirement is that employees be given at least 45 days in which to consider and accept the offer made to them. Even after they sign the agreement, employees have a seven-day period in which to revoke the agreement. Another requirement often overlooked in a workforce reduction is that releases signed by employees do not waive age-discrimination claims if the employees do not receive certain disclosures showing the ages and job classifications of individuals who were released (and therefore offered a separation package), as well as the ages and job classifications of persons who were not released. Are there special downsizing considerations for nonimmigrant foreign employees? Employers contemplating a workforce reduction or employee layoff should consider giving special treatment to foreign employees with temporary nonimmigrant visas. This is because lawful status in the United States will conclude with a nonimmigrant's last day of employment. Affected non-immigrants include H-1B "professionals," TN "Free Trade Agreement professionals," L-1 "intracompany transferees," E-2 "treaty investors," H-2B "temporary or seasonal workers," and O-1 "persons of extraordinary ability." An unanticipated layoff will place a foreign employee with a temporary nonimmigrant visa in an unlawful and deportable position. Such employees need time to apply to change their authorized U.S. status or seek new authorized employment prior to their last day of employment. Are my employees' pre-paid, stored-value cards protected by FDIC insurance? Many businesses now make payroll deposits to pre-paid cards issued to an employee. Such programs benefit employees who may not have a bank account or require immediate access to payroll funds. On November 13, 2008, the FDIC General Counsel's Office issued an opinion clarifying that funds underlying an employee's bank-issued, stored-value card will be treated as deposits and insured up to the new FDIC insurance coverage cap of $250,000. To be eligible, funds underlying the card must be deposited by the employer or its agent with an FDIC-insured bank and they must comply with federal record-keeping and other "pass-through" insurance requirements. So long as the payroll program complies with these requirements, employee card balances will be insured on a per-employee basis. What will the Applicable Estate Tax Exclusion Amount be for 2009? Effective January 1, 2009, the Applicable Exclusion Amount for Federal Estate Tax purposes will increase to $3.5 million. The Applicable Exclusion Amount reflects the amount that an individual may leave free of Federal Estate Tax at his or her death to any individual or individuals other than the surviving spouse. Any value in an individual's estate that is in excess of this $3.5 million amount and is left to an individual other than a surviving spouse is subject to Federal Estate Tax at a 45 percent rate. Will the Estate Tax Exclusion Amount change under the Obama administration? Several clients have asked whether we anticipate the Obama administration will reduce the Estate Tax Applicable Exclusion Amount or increase the Estate Tax rate. President-elect Obama has indicated that he intends to make permanent the 2009 Applicable Exclusion Amount of $3.5 million and the 2009 Estate Tax rate of 45 percent. This would eliminate the one-year repeal of the Federal Estate Tax that is scheduled to occur in 2010. It also would eliminate the rollback of the Applicable Exclusion Amount to $1 million that is scheduled to occur in 2011. Based on President-Elect Obama's representations, we do expect the 2009 Applicable Exclusion Amount to be made permanent and we do not expect a reduction in the Estate Tax rate. In what other ways might the Obama administration impact estate planning? There are some suggestions that the Obama administration will attempt to eliminate opportunities for estate planning techniques designed to shift future appreciation, free of Federal Gift Tax, to the second and third generations. In particular, there have been suggestions that the Obama administration may attempt to eliminate Grantor Retained Annuity Trusts (GRATs). There are also suggestions that an Obama administration may attempt to eliminate valuation discounting. Both of these estate planning techniques are fundamental for individuals with net worth in excess of the Applicable Exclusion Amount. As discussed in a prior Changing Markets Client Advisory, with a GRAT, the Grantor transfers assets to a Grantor Retained Annuity Trust. Each year, the Grantor receives back from the GRAT an annuity (including fair market value interest). At the end of the GRAT term, if there is an asset of value left in the GRAT, that asset passes to the Grantor's children free of Federal Gift Tax. For example, Grantor transfers $6M of appreciating stock to a three-year GRAT. The Grantor receives an annuity each year of $2 million plus fair market value interest. If, during the three-year term, the GRAT assets grow to $10 million, there will be a transfer of approximately $4 million, free of Federal Gift Tax, to the second generation. Because the GRAT is a "grantor trust" for income tax purposes, no income tax is triggered by any of these transfers. As an example of valuation discounting, consider a partnership with two partners - a general partner owning 10 percent of all partnership interests and a limited partner owning 90 percent of all partnership interests. The partnership holds assets with a value of $1 million. Arguably, the general partner's interest is worth $100,000, or 10 percent of the $1 million in assets. Using the same logic, the limited partner's interest should be worth $900,000. However, because the general partner retains all control over decisions regarding the partnership and distributions from the partnership, the limited partner is unlikely to be able to sell her interest for $900,000. Instead, the limited partner must discount this interest. At times, this discount may be in the range of one-third. Therefore, when the limited partner gifts or sells her interest to descendants or trusts for their benefit, it is appropriate to use a discounted value of $600,000. While we believe that it is unlikely that the Obama administration will be successful in any attempt to eliminate GRATs or valuation discounts, we feel that it is appropriate for clients who have a net worth in excess of the Applicable Exclusion Amount to consider how they wish to proceed with GRATs and other planning opportunities sooner, rather than later. For more information please contact your Sherman & Howard relationship attorney or one of the attorneys in our Changing Markets Practice Group. Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation. Circular 230 Notice This advisory contains provisions concerning a federal tax issue or issues. This advisory is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on any taxpayer by the Internal Revenue Service. For information about this statement, contact Sherman & Howard L.L.C. or visit our website at www.shermanhoward.com/PrivacyPolicy/Circular230/. © 2008 Sherman & Howard L.L.C. December 18, 2008 Copyright 2000-2010 Sherman & Howard L.L.C. All rights reserved. Privacy Policy \| Terms of Use

More Developments Impacting Businesses, Employers and Private InvestorsA Continuing Q&A with Sherman & Howard's Changing Markets Practice Group

More Developments Impacting Businesses, Employers and Private Investors
A Continuing Q&A with Sherman & Howard's Changing Markets Practice Group