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
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.
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.
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.