COMMENTS SUPPORTING THE PASSAGE OF

SENATE BILL 775

AMENDING THE MICHIGAN PROFESSIONAL SERVICE CORPORATION ACT OF 1962 (MPSCA of 1962)

PERMITTING THE QUALIFICATION OF CERTAIN

LIVING TRUSTS AND CHARITABLE TRUSTS TO

OWN PROFESSIONAL CORPORATION STOCK

By John E. Mayer, CFP

President, BFA Family Wealth Planners

7108 Pebble Park

W. Bloomfield, MI 48322

800-452-4983

Fax: 248-855-5886

THE NATURE AND PURPOSES OF S.B.775

Why We Support This Legislation: Today, the current state of the art in estate planning embraces the use of various types of trusts (Living Trust & CRTs) to protect one’s assets for family members and accomplish a myriad of objectives such as minimizing transfer costs (probate) and estate tax shrinkage. In addition Charitable Remainder Trusts (CRTs) another form of trust are generally used to meet one’s philanthropic objectives especially when selling a highly appreciated asset such as a business (perhaps a professional corporation at retirement).

The Professional Service Corporation Act of 1962 (MPSCA of 1962) does not permit an individual with a professional corporation to place their stock into a trust (either Living Trust or CRT) in order to achieve the benefits of these sound estate-planning techniques for their family. Senate Bill 775 would permit these professionals to enjoy the same benefits that other non-professionals have always enjoyed.

There are two main reasons for S.B.. 775. The first is the use of a Living Trust by those owning professional service corporations. The use of a Living Trust is a method that many individuals use today to accomplish many important objectives such as:

· Avoid the costs, delays and publicity of probate

· Avoid unintentional disinheritance of family members

· Protect assets for the surviving spouse

· Provide for economic needs of surviving spouse

· Minimize estate tax shrinkage

These benefits are not currently available for the portion of one’s estate represented by ownership in a professional corporation.

The second reason is to permit those owning professional service corporations to dispose of their stock by contributing it to a Charitable Remainder Trust (“CRT”). These have become very popular over the last ten years. The CRT, in its present forms, came into existence under Section 664 of the Internal Revenue Code of 1969. It permits an individual to make a deferred gift to charity and receive certain current economic benefits during their lifetime in order to help foster philanthropy. The benefits of a CRT to the donor may include the following:

· Enhanced income from repositioning of assets (PC stock)

· Increased donor control over deferred charitable gifts

· Current income tax and future estate tax deduction

· Retention of charitable capital for State of Michigan

These benefits, both personal and charitable, are not currently available for professionals who wish to dispose of their PC stock. Senate Bill 775 would allow professional corporation stock to be treated in this respect as regular corporations are and have been since 1969. Unless the existing law is changed as proposed it unfairly precludes the availability of this popular charitable and financial planning concept for shareholders of Michigan PC stock and the charities that would like to promote deferred gifts of such stock. The only apparent reason for so discriminating against PC shareholders over shareholders of regular corporations is the fact that CRTs were not considered when the Professional Service Corporations Act was enacted. Since then, such interest has increased dramatically as professionals are becoming more aware of the benefits of CRTs in the disposition of a highly-appreciated business interest and organizations (such as hospital and national medical corporations) are purchasing professional practices and consolidating them for greater efficiencies in delivering health care services, etc.

Who Falls Under the Professional Service Act of 1962 Professional service includes, but is not limited to services rendered by certified or other public accountants, chiropractors, dentists, optometrists, veterinarians, osteopaths, physicians & surgeons, doctors of medicine, doctors of dentistry, podiatrists, chiropodists, architects, professional engineers, land surveyors & attorneys at law.

How Senate Bill 775 Solves the Problem. The proposed amendments to the Michigan Professional Service Corporation Act of 1962 would expressly permit living trusts as well as CRTs of all varieties described in Internal Revenue Code (“IRC”) Sec 664 to qualify conditionally as “qualified trusts” that would be authorized to hold Michigan PC stock. In keeping with the spirit of the Michigan Professional Service Act of 1962, conditions imposed by the proposed amendments will assure that qualifying CRTs are designed such that all current income beneficiaries and the trustee who is responsible for the PC stock while the trust owns it are all qualified persons (as defined presently in the Michigan Professional Service Act of 1962). If at any time the current income recipient(s) and/or the trustee who is responsible for the PC stock no longer meet the criteria of a qualified person, the Living Trust or the CRT would become a disqualified person within the meaning of the Michigan Professional Service Act of 1962. This means that if the trustee responsible for dealing with the PC stock while the trust owns it is (or becomes) a disqualified person, he or she will be required to divest the Living Trust or CRT’s interest in the PC stock according to the procedures set forth in the Michigan Professional Service Act of 1962. Likewise, upon the death or other event terminating the current income interests of all qualified persons, the appropriate trustee will then be obliged to sell the PC stock according to the statutory procedures as if the qualified person(s) died. Finally, before the Living Trust or Charitable Remainder (CRT) interest can be distributed to disqualified persons, any PC stock owned by the Living Trust or CRT will first have to be sold to other qualified persons according to statutory procedures.

Given these conditions, for a Living Trust or CRT to qualify as a qualified trust it must be designated such that only current income recipient(s) are qualified persons. For example, if the settlor is a married physician who wishes to share the CRT income interest with a spouse who is a non-physician: (1) the trustee responsible for the PC stock will have to be another qualified person, i.e. another physician; and (2) the trust will have to be designed such that the settlor-physician’s income interest must precede the spouse's income interest. If the spouse dies first, the Living Trust or CRT will continue for the physician’s life and the PC stock will have to be sold at his death, if not sold before. However, if the spouse survives, the spouse will succeed to the physician’s income interest but the trustee will have to sell any trust-owned PC stock at the physician’s death according to the procedures set forth in the Michigan Professional Service Act of 1962.

Where Do Other States Stand The state of Indiana enacted similar legislation on July 1, 1996 (Senate Enrolled Act 93). This has allowed the state of Indiana to capture more assets for charities, that would have otherwise left the state in the form of federal tax dollars.

Explain the Living Trust Mechanics For example, a dentist would re-title his or her stock into his or her Living Trust while alive in order to achieve the benefits mentioned earlier. It should not matter whether this dentist owns the PC stock in individual name or as trustee of that individual’s trust, as long as its restricted to a trust for a qualified person and the current income beneficiary is a qualified person.

I would like to thank Jon Bassett in the Legislative Service Bureau-Legal Division for his wonderful help in preparing Senate Bill 775. I would also like to thank Steven R. Bone, Esq. Director, Legal Support Services at Renaissance Inc. in Carmel, IN for paving the way in Indiana and taking the time to explain and educate me.