As the New Year is upon us, unveiling the dawn of a new tax season, the time is ripe to discuss the “disregarded entity.” Although a variety of different entities can be considered “disregarded entities,” such as grantor trusts and qualified Subchapter S corporations, this discussion will refer mainly to the entity that our office most frequently incorporates into estate plans and that is the limited liability company (“LLC”).
A “disregarded entity” is one that is disregarded for income tax purposes. As a result, in the case of an LLC, the activity of the LLC will be reported on the federal income tax return of the LLC’s owner. In contrast, if the LLC is determined to be a partnership or corporation for income tax purposes, then such LLC would be required to file a separate income tax return in order to report its activity. The fact that an LLC is considered separate from its owner and not “disregarded,” can result in an unfavorable outcome from an administrative and tax planning point-of-view in some instances. Thus, in certain situations (not discussed herein) it will be important to ensure that an LLC is a “disregarded” one.
The Internal Revenue Service (“IRS”) will treat an LLC as either a corporation, partnership, or a “disregarded entity” depending on the elections that the LLC makes. According to the Treasury regulations, also known as the “check-the-box” regulations, an LLC with two (2) or more members can elect to be treated as either a corporation or a partnership. And an LLC with a single owner can elect to be a corporation or to be a “disregarded entity.” By default, however, these regulations provide that if an LLC has two (2) or more owners, it will be considered a partnership, and if it has a single owner, then it will be considered “disregarded.” To change this default classification, the LLC would have to elect otherwise.
This may seem straight forwarded. For if the LLC has two (2) or more members it is a partnership, and if it only has one (1) member, then it is a “disregarded entity.” Of course, tax law could never be that simple. In fact, there are situations where an LLC has two (2) or more members and is still “disregarded.” For instance, according to a Revenue Procedure issued by the IRS, an LLC owned by husband and wife as community property may be treated as a “disregarded entity” notwithstanding the fact that there are actually two owners: the husband and the wife. Importantly, the LLC owned by the husband and wife must be owned as community property.
Further, according to a Revenue Ruling issued by the IRS, it is possible for an LLC (“A”) to have two members or owners, which include another LLC (“B”) and a corporation (“C”), yet still be “disregarded.” In this situation, as long as B is considered “disregarded” by having its sole member be C, then A will also be “disregarded.” In other words, even though A has two (2) members, it will be considered a “disregarded entity” because according to the IRS there is only one owner for income tax purposes and that owner is C.
- Attorney Michael D. Lum
An attorney cannot reveal information relating to the representation of a client unless the client gives informed consent or the disclosure is impliedly authorized in order to carry out the representation of the client. This duty of non-disclosure is often referred to as the attorney-client privilege. But what happens to this privilege when the client dies? For example, an attorney assists a client in his or her estate planning, specifically the preparation and execution of the client’s revocable trust agreement, last will and testament and related estate planning documents. During the course of the representation, disclosures are made by the client to the attorney regarding the assets and liabilities of the client, the family dynamics, and the intent of the client. Does the confidentiality of this information survive the death of the client and continue on? The short answer is yes, with certain exceptions.
The general rule in Nevada is that the attorney-client privilege survives the death of a client. However, the personal representative of the estate of the deceased client is entitled to any information from the attorney as a matter of necessity since the personal representative is charged with duties that include the carrying out the terms of the last will and testament, preserving and safeguarding the assets of the estate, and filing a written inventory of the estate assets. Essentially, the personal representative steps into the shoes of the deceased client. The attorney-client privilege passes to the personal representative of the estate of the deceased client and can be asserted by the personal representative.
The attorney-client privilege also passes to the successor trustee of the revocable trust of the deceased client and can be asserted by the successor trustee. The successor trustee is again entitled to any information from the attorney as a matter of necessity. Also under Nevada law, a beneficiary of a trust is entitled to a copy of the relevant portions of a trust agreement regarding his or her bequest in most cases.
One very common exception is when the validity of the terms of the last will and testament or of a revocable trust is challenged. For example, a party brings an action alleging that the last will and testament or the revocable trust is invalid because the decedent was unduly influenced in the making of the will or trust. There is no privilege as to a communication relevant to an issue between parties who claim through the same deceased client. A related exception is that there is no privilege as to a communication relevant to an issue concerning an attested document such as a last will and testament to which the attorney is an attesting witness. These exceptions are practical necessities to enable a party to establish the validity or invalidity of a will or trust of a decedent.
In summary, an estate planning client can rest assured that information furnished to an attorney remains confidential after his or her death with certain, practical exceptions.