While negotiating the purchase of another business, you need to consider how such purchase might impact your company’s unemployment insurance premiums. A company’s insurance premium is based upon an experience rating, which is impacted, in part, by a company’s payment and employment history. The lower the experience rating, the lower the insurance premium.

When you purchase the assets of an existing business, you will most likely be required to accept the transfer of the prior business’s experience rating. This may or may not be beneficial. If it is beneficial, you need to make an election to have such transfer made within a certain time frame. If it is not beneficial, the Department of Labor could allocate to your company the prior business’s experience rating from the date of transfer. A transfer of experience from one employer’s account to another is governed by the provisions of the Unemployment Insurance Law. If there is a “transfer of a business,” in whole or in part, from one employer to another, the statute allows the NYS Department of Labor, Unemployment Insurance Division, to also transfer the experience rating of the business. A transfer of the business is deemed to have occurred whenever any one of the following four conditions are present in the transaction between two parties:

1. The transferee has acquired some of the transferring employer’s good will; or
2. The transferee has assumed some of the transferring employer’s obligations; or
3. The transferee has either continued or resumed the business of the transferring employer, in the same establishment or elsewhere; or
4. The transferee has employed substantially the same employees as were employed by the transferring employer.

What constitutes these conditions has been interpreted very broadly, so as to include situations where the transferee has continued the name of the business, operated out of the same location as the prior employer, resumed the business of the transferring employer, assumed any debts or obligations, or even just operated the same type of business. Attributing nominal value toward the assets in a purchase contract will not be sufficient to avoid these transfer rules.

Accordingly, a purchaser should request specific documentation during the due diligence period in order to verify the transferor’s unemployment insurance experience ratings and premiums. A proper analysis should be made as to how the transfer of such experience rating may impact the insurance premiums for the transferee’s current or new business. While a business deal can potentially be structured in order to avoid such transfer rules, case law is extremely broad and most cases reflect that the transfer of business assets from a transferor that is either discontinuing its business operations or allowing the transferee to take over, will constitute a transfer for experience rating purposes. Depending upon the size of the payroll upon which unemployment insurance premiums are based, even a small increase in experience rating could significantly impact the cost of a deal and should be carefully considered.

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Not only is it important to review your estate plan for probate purposes on a regular basis and to consider any new additions to your family, the acquisition or disposition of property, or the loss of a loved one, it is equally important to consider the current fiscal climate when evaluating new and re-evaluating existing estate planning opportunities.

Those of our readers who have recently secured a mortgage or refinanced their homes may have noticed that interest rates are rising. Although this obviously makes borrowing more expensive, it also brings about new estate planning opportunities.

Rising interest rates, in particular, make two estate planning strategies very attractive: the qualified personal residence trust (“QPRT”) and the charitable remainder trust (“CRT”). This article will focus on QPRTs and we will highlight the benefits of rising interest rates on CRTs in a future newsletter issue. By way of background, the IRS utilizes interest rates to determine the present value of assets placed in a trust. The benchmark is the applicable federal rate (“AFR”) which is tied to the prevailing Federal Reserve interest rate which generally changes each month.

A personal residence or second home/vacation home is often the most valuable and highly appreciated asset in your estate. A QPRT allows the property owner to move that home into a trust but still retain a proprietary use of the residence for a preset number of years. When the trust period finally ends, the home is passed on to the trust beneficiary. When the property owner creates the QPRT, he or she has made a present taxable gift to the beneficiary. But the taxable value of the gift is reduced by the owner’s right to continue using the residence through the life of the trust. The present value of the gift is determined by the prevailing AFR at the time when the trust is established and by the length of the trust. The higher the interest rate and the longer the term of the trust, the lower the present value of the gift.

For example, suppose a 65-year-old grandmother has a $1,000,000 vacation home. If she were to put that home into a QPRT for a 10 year term at a time when the AFR was 4.6 percent, the IRS would determine the value of the final gift to her heirs to be worth $483,000. If the prevailing AFR was 6.5 percent, then the present value of the final gift to her heirs is reduced to approximately $400,000. In that case, Grandma has an additional $83,000 to use toward her $1,000,000 lifetime gift tax credit. In addition, the value of the house is locked for gift tax purposes. Therefore, any appreciation in the value of the house after it is transferred to the QPRT is not subject to gift tax.

The problem is that, for the QPRT to be worthwhile, Grandma must outlive the QPRT. If she dies before the QPRT terminates, the full value of the house is included in her estate. Effectively, it is as if no gift had been made. On the other hand, in the event she outlives the QPRT and wants to continue using the house after the trust concludes, she can simply rent it from the heirs.

If you own your residence or a vacation home, a properly drafted and executed qualified personal residence trust may eliminate federal estate tax and minimize federal gift tax on that asset as described above. We welcome the opportunity to discuss how this estate planning technique might apply to your situation, and assist with any probate issues you may have.

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