Roy Schneider to Discuss Ethics at CLU’s Fifty and Better Summer Lecture Series

Roy Schneider will lecture at CLU's Fifty and Better Lecture Series on the topic, "How Does Ethical Decisions We Make Impact our Businesses and Personal Lives?" The lecture will explore ethics; the definition, whether ethics and morality are the same, reasons people sometimes make clearly unethical choices, compliance with law and ethical considerations (i.e., can law mandate ethical behavior?), theories of ethical behavior and how ethics works in making ethical choices in business and personal decisions. In this lecture we will address the questions of whether ethics and morality change over time - is ethics universal or situational? Many are familiar with the McDonald’s hot coffee case and the debate it sparked. We will explore this and other new and interesting cases, helping to better understand business decisions affecting us as consumers, and how to make better ethical decisions in our daily lives and in our relationships with others.

Date & Time: June 21, 2022, 1:00-3pm PDT

Click here to register!

LLC Operating Agreements Will Save You

Business partners, seeking to make their fortunes, form their LLCs at a moment when they expect to work together indefinitely, with good will between them and nothing but cooperation as their modus operandi. At this time in a business partnership, the idea of distrusting their business partner and needing to dissolve the LLC is furthest from their minds. Commerce demand their attention, and they may forget to sign their operating agreement after they register their LLC with the California Secretary of State. What happens when dissension leads one partner to reject the terms of the unsigned OA, simply because they never signed it. Answer: they probably have to honor it anyway.

LLC Operating Agreements (“OA”) are governed by the law of contracts. The National Conference of Commissioners on Uniform State Laws, Uniform Limited Liability Company Act (2006)(Last Amended 2013) With Prefatory Note and Comments, 2014, at p. 15, states in the discussion of the definition of “Operating Agreement” the following:

An operating agreement is a contract, and therefore all statutory language pertaining to the operating agreement must be understood in the context of the law of contracts.

Every contract requires consenting parties. (See California Civil Code §§1550, 1565; 1 Witkin, Summary 11th Contracts § 116 [2021].) A party’s consent is gathered from the reasonable meaning of her words and acts, and not from any unexpressed intentions or understanding. (1 Witkin, Summary 11th Contracts § 116 [2021].) For instance, your partner’s consent is demonstrated when they comply with a term in the OA—like asking the co-member to consent to a transfer of their membership to their trust. Or perhaps your partner will cite the OA in a legal document, like, when the LLC applies for a bank loan.

Such consent can also be evidence of ratification of the unsigned OA. Ratification arises when your partner benefits from the bank loan based on their signed Certificate of Incumbency. If your LLC stands to receive income as a result of a loan-- perhaps enabling investment funds to be leveraged geometrically with borrowed funds—then ratification can arise.

California Civil Code section 2310 states:


A ratification can be made only in the manner that would have been necessary to confer an original authority for the act ratified, or where an oral authorization would suffice, by accepting or retaining the benefit of the act, with notice thereof.

In Rakestraw v. Rodrigues (1972) 8 Cal. 3d 67, ratification was found where signer Rakestraw, whose signature was forged on a deed of trust, did nothing to repudiate the challenged signature because she anticipated receiving monetary benefits from the mortgaged property. In Rakestraw, the court found that the forger was acting as agent for principal Rakestraw. On that basis, the court held that any requirement that the ratification be done in writing was inapplicable. (Rakestraw at 76.) Written ratification required under California Civil Code section 2310 was not intended to apply to a ratification as between a principal and agent. (Rakestraw at 77, citing Sunset-Sternau Food Co. v. Bonzi (1964) 60 Cal.2d 834.)

Consent and ratification are two classic contract principles that support validation of the unsigned OA. If your partner is repudiating your unsigned OA, look back over the years for indicia and evidence of consent and ratification. It’s probably there.

By: Kathleen J. Smith, Esq.

Kathleen J. Smith is an experienced civil litigator. Kathi advises clients on and handles all types of civil litigation, including employment matters, wage and hour, business, real estate, trademark disputes, class action defense, trust and probate, and homeowners association disputes. Kathi is experienced in all types of dispute resolution, from mediation to arbitration to civil trial.

To find out more about LLC operating agreements, please feel free to contact the knowledgeable attorneys at Schneiders & Associates, LLP. We will be pleased to answer any questions you may have, and make sure you are comfortable with our law firm. For more information please call or email our Oxnard office.


It’s time for another update on the current COVID-19 legislation and what impact the 2022 Supplemental Paid Sick Leave (“SPSL”) will have on California employers. California’s new SPSL officially took effect on February 19, 2022; however, it is retroactive to January 1, 2022. The SPSL provides for two separate 40-hour banks of leave: one for testing and isolating, and a second bank for employees or family members who test positive for COVID-19.

Below we have highlighted some of the more relevant sections that employers need to familiarize themselves with in order to avoid the potential for liability stemming from its handling of COVID-19 leaves of absence.

  1. How long will the SPSL govern employers’ obligations to its employees and their family members who are affected by COVID-19?

The SPSL is in effect from January 1, 2022 through September 30, 2022.

  • To which Employers does the SPSL apply?

All employers with 26 or more employees.

  • What are the scenarios in which an employee can request leave under the SPSL?

The 2022 SPSL provides for two separate banks of leave, both of which may total 40 hours.

First, SPSL is available to employees who cannot work (including working remotely) due to the any of the three following reasons: (a) Caring for themselves. This includes the employee who is subject to an isolation period or quarantine related to COVID-19, has been advised by a medical professional to isolate or quarantine, or who is experiencing COVID-19 symptoms. (b) Caring for a family member. An employee who is caring for a family member who is subject to an isolation period or quarantine related to COVID-19, has been advised by a medical professional to isolate or quarantine, or who is experiencing COVID-19 symptoms. (c) Vaccine or booster. An employee or a family member of an employee who has an appointment for a COVID-19 vaccine or booster, or experiences vaccine-related side effects.

Second, an employee or family member of an employee who tests positive for COVID-19.

  • When does an employer have to make the leave available to employees who request time off due to COVID-19?

Immediately upon written or oral request by the employee.

  • What notice must an employer provide to its employees?

Employers are required to display the 2022 COVID-19 SPSL poster at the workplace where employees can easily locate and read it. For example, employers should post the SPSL poster in the breakroom or other common areas where similar health and safety information is located.

If an employee works off-site or works remotely, then the employer must send the required information via email (or other electronic means such as an employee portal or dashboard).

  • Can the employee ask for retroactive pay SPSL if they took a leave prior to February 19, 2022?

Yes. If employees used sick leave prior to February 19, 2022, and did not receive compensation, they are entitled to pay, at their regular, straight-time wage. In order to qualify for the entire 80 hours of leave (40 hours in each of the two banks of leave), an employee must have worked an average of at least 40 hours per week in the two weeks prior to taking the leave.

If the employee receives retroactive pay for leave taken for a qualifying reason prior to February 19, 2022, then the employer can reduce the number of hours from that employee’s corresponding bank of hours.

  • What information must be contained in the employee’s paystub if they take leave pursuant to the 2022 COVID-19 SPSL?

If an employee takes leave under the SPSL, those hours must be itemized on the employee’s wage statement (paystub) for the pay period during which the leave was taken. This itemized line must be separate and distinct from other forms of leave available to the employee, including the 24 hours of “regular sick leave” and any accrued vacation. 

  • What type of COVID-19 test is required for an employee to qualify for leave under the SPSL?

Any COVID-19 test is acceptable, including an over-the-counter “at-home” (rapid test) or a test from a testing facility.

  • Can the employer require documentation from a medical professional when an employee requests to take leave for a qualifying reason?

Yes, in three situations.

First, if the employee is requesting retroactive pay from the period of January 1, 2022 through February 19, 2022.

Second, when an employee uses more than three days (or 24 hours) of leave for a single vaccination or booster appointment. A note from a medical professional stating that the side effects lasted longer than three days will suffice.

Third, when the employee seeks leave from the 40-hour bank designated for employees (or their family member(s)) who tested positive for COVID-19. If the employee fails to provide a positive test within a reasonable time, the employer can deny pay for the leave taken by the employee.

  1. Are there limits to how much SPSL an employee can use for receiving the vaccine or booster?

Yes, as described above, the maximum leave an employee can use for a vaccination or vaccine appointment is 24 hours. The employee does not have to use his or her 24 hours consecutively. For example, an employee could use four hours to receive a vaccine and then return to work if they are not suffering any died effects from the vaccination. The same employee could use the remaining 36 hours for subsequent vaccination or booster appointments, or if they suffer side effects from either of the latter appointments.

By: Christopher Correa, Esq.

California Approves COVID-19 Sick Pay for Employees

AB 84/SB 114 - COVID-19 Supplemental Paid Sick Leave (SPSL)

California lawmakers passed legislation to reinstate COVID-19 Supplemental Paid Sick Leave, providing most California employees with up to two weeks of sick pay if an employee or family member tests positive for COVID-19.

“As the Omicron surge intensified, workers screamed from the rooftops about the desperate need to reinstate COVID paid sick leave,” California Labor Federation Executive Secretary-Treasurer Art Pulaski said in a statement. “The governor and Legislature heard frontline workers loud and clear, and we appreciate them acting with urgency to get this done. Once again, California shows it’s a national leader on worker protections and COVID mitigation.”

Here is what employers need to know:

  • Applies to employers with 26 or more employees.
  • Retroactive to January 1, 2022 and will and will expire on September 30, 2022.
  • Requires employers to provide up to two weeks of SPSL to recover from COVID-19 or care for a family member.
  • Employees are entitled to 40 hours of SPSL for the following reasons:
  1. The covered employee is subject to a quarantine or isolation period related to COVID-19 as defined by an order or guidance of the State Department of Public Health, the federal Centers for Disease Control and Prevention (CDC), or a local public health officer who has jurisdiction over the workplace.
  2. The covered employee has been advised by a health care provider to isolate or quarantine due to COVID-19.
  3. The covered employee is attending an appointment for themselves or a family member to receive a vaccine or a vaccine booster for protection against COVID-19, limited to three days or 24 hours.
  4. The covered employee is experiencing symptoms or caring for a family member experiencing symptoms, related to a COVID-19 vaccine or vaccine booster that prevents the employee from being able to work or telework.
  5. The covered employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
  6. The covered employee is caring for a family member who is subject to an order or guidance or who has been advised to isolate or quarantine.
  7. The covered employee is caring for a child, whose school or place of care is closed or otherwise unavailable for reasons related to COVID-19 on the premises.
  8. An additional 40 hours for an employee or family member tests positive.
  9. Maximum of 80 hours of leave. Part time employees receive a pro-rated amount of time.

Governor Gavin Newsome is expected to sign legislation this week, enacting the new law. If you have questions about COVID-19 Supplemental Paid Sick Leave or other new laws affecting your business, contact our employment law experts at Schneiders and Associates, L.L.P. at (805) 764-6370 or visit our website at

The text of the bills can be found at:

By: Theodore Schneider, Esq.

Theodore Schneider assists his clients in Ventura County and surrounding areas, with respect to all aspects of personnel matters, including employee discipline, wrongful termination, retaliation, discrimination, hostile work environment, sexual harassment, leaves of absence, Americans with Disabilities Act, Fair Employment and Housing Act, Fair Labor Standards Act, and the California Labor Code. Ted also drafts and reviews employee handbooks and employment policies for his clients. Email Ted at

“22 for 2022” – Twenty-Two New Employment Laws to be Aware of as We Head into 2022!

Ring in the new year by preparing your business for new California workplace laws! The past year has had human resource professionals scrambling to keep up. The California Legislature passed several laws that will affect California employers. Our employment law attorneys have listed “22 for 2022” new employment laws that you need to know about as we head into the new year. Hold on to your seats!

SB 93: Rehiring and Retention Law

SB 93 requires that employers in certain industries, particularly the hospitality industry, make written job offers to employees whom they laid off because of COVID-19. Employees have five business days to respond, and employers must keep records for three years.

AB 1003: Wage theft

AB 1003 makes intentional theft of wages in an amount greater than $950 from any one employee or $2350 in from 2 or more employees in any consecutive 12-month period punishable as grand theft, which is punishable either as a misdemeanor or felony. Examples of wage theft include being paid less than minimum wage per hour, not being allowed to take meal and rest breaks, owners or mangers taking tips, bounced checks, to name a few.

AB 1033: Expansion for CFRA Leave to Include Parents-in-Law

Employers must grant eligible employees up to 12 weeks of job-protected time off from work annually for the purposes of providing care to a parent-in-law with a serious medical condition under the California Family Rights Act (CFRA).

AB 685: Noticing Requirements

AB 685 establishes employer reporting and noticing requirements upon notice of a potential exposure to COVID-19 at the workplace. If an employer receives a notice of a potential exposure to COVID-19, the employer must, within one business day, provide written notice to all employees and the employers of subcontracted employees that were on the premises at the same worksite, provide information regarding benefits, and notify all employees of the disinfection and safety plan.

AB 654: Employer Reporting Requirements Revised

AB 654 expands the types of employers who are exempt from COVID-19 outbreak reporting requirements. Employers such as community clinics, adult day health centers, community care facilities, and child daycare facilities are exempt from COVID-19 outbreak reporting required under AB 685.

AB 2537 and SB 275: PPE Requirement

AB 2537 and SB 275 requires that employers provide certain employees (those working in hospitals) with Personal Protective Equipment (PPE) and maintain a three-month stockpile and provide inventory information to Cal/OSHA upon request.

SB 331: Limits NDAs and Settlement Agreement Terms in Employment Cases

SB 331 further limits the use of non-disclosure agreements (NDAs) and settlement agreement terms when settling employment legal claims involving harassment, discrimination, or retaliation.

SB 1159: COVID-19 Workers’ Compensation

SB 1159 expands access to workers’ compensation so that first responders, health care workers and people who test positive due to an outbreak at work get support, including necessary medical care and wage replacement benefits. Employers are required to notify their insurance carriers and/or third-party administrators, in writing, of all known employee COVID-19 positive cases, whether the case is work-related or not, within 3 business days.

SB 807: Personnel Records Retention

SB 807 extends the current personnel records retention requirement to 4 years.

SB 1383: California Family Rights Act (CFRA) Expanded to Cover Businesses with Five or More Employees

SB 1383 expands CFRA to employers with five or more employees and expands the scope of “family members” for whom employees take leave to include many additional categories. The new law replaces the new Parent Leave Act. The new law allows for the ability to care for a “family member” with a serious health condition: Family members expanded to include siblings, grandparents, grandchildren, and domestic partners. The definition of “child” is expanded to include adult children.

AB 2399: Paid Family Leave for Active Military Duty

AB 2399 extends the definition of Paid Family Leave under the state’s Unemployment Insurance Code to include coverage for active military members and their families. It provides wage replacement benefits for employees to take time off to care for a seriously ill family member.

AB 2043: Occupational Safety and Health, Agricultural Employers and Employees

AB 2043 requires employers to disseminate information of best practices for COVID-19 infection prevention to agricultural employees, in both English and Spanish. It also requires that Cal/OSHA work with employers and employees on outreach campaigns targeting agricultural employees. The law only applies during the state of emergency.

AB 1867: Supplemental Paid Sick Leave

AB 1867 expands supplemental paid sick leave for COVID-19- related reasons for employers not covered by the federal Families First Coronavirus Response Act (FFCRA) – employers with 500 or more employees, as well as health care providers and first responders.

Vaquez v. Jan-Pro Franchising International, Inc. (Cal. Sup. Court, Jan. 14, 2021)

In the case of Vaquez v. Jan-Pro Franchising International, Inc., the California Supreme Court ruled that the independent contractor ABC test in Dynamex Operations West, Inc. v. Superior Court (Dynamex) applies retroactively to all cases “not yet final” as of the date of the Dynamex decision. A business that relied in good faith on Borello can now be liable for not following the ABC test before the Dynamex decision was ever issued.

AB 1512: Security Guard Rest Breaks

AB 1512 changes the law to provide that security guards may be required to remain on the premises during rest periods and to remain on call during the rest period.

AB 3075: Expansion of Successor Liability for Labor Code Judgements

AB 3075 provides that "[a] successor to a judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor's former workforce pursuant to a final judgement, after the time to appeal therefrom has expired and for which no appeal therefrom is pending." AB 3075 also adds new obligations for a company when submitting its statement of information with the California Secretary of State, to state whether "any member or any manager has an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for which no appeal therefrom is pending, for the violation of any wage order or provision of the Labor Code."

Brown v. TGS Management Co., LLC (2020)

Brown v. TGS Management, LLC (2020) the California Court of Appeal decision holds that an employee confidentiality agreement may be voided as a de facto unlawful non-compete agreement if it has the effect of preventing the employee from working in the industry.

AB 1947: Complaints with DLSE

Effective date: January 1, 2021. This legislation extends the statute of limitations to file a complaint with the State of California's Division of Labor Standards Enforcement from six months after the occurrence of the alleged violation(s) to within one year after the occurrence of the alleged violation(s).

SB 973: New Pay Data Reporting Obligations for Employers with 100 or More Employees

SB 973 requires employers with 100 or more employees and who are required under federal law to file an annual federal Employer Information Report (EEO-1) to submit an annual pay data report to the California Department of Fair Employment and Housing (DFEH). The report must include the number of employees and the hours they worked by race, ethnicity and gender in 10 federally identified job categories and whose annual earnings fall within the pay bands used by the U.S. Bureau of Labor Statistics in the Occupational Employment Statistics survey. Since SB 973 was enacted on September 30, 2020, private emloyers with 100 or more employees must submit their pay data reports to the DFEH by March 31, 2021, and annually thereafter.

AB 2143 – Loosened Restrictions on “No Re-Hire” Provisions in Employment Settlement Agreements

AB 2143 requires that the aggrieved former employee must have filed the claim in good faith in order for the prohibition against “no-rehire” provisions apply. AB 2143 Expands this "no-rehire" exception to allow no-rehire provisions when the former employee engaged in any criminal conduct, rather than limiting the exception to sexual harassment or sexual assault. To qualify for the "good faith determination" exception, an employer's determination must have been made and documented before the aggrieved person filed the claim or complaint.

California Proposition 22 (Prop 22): Exempts App-Based Drivers from AB 5

Prop 22 allows app-based ride share and food delivery companies to treat workers as independent contractors, even though they do not qualify as such under the AB 5’s “ABC” Test. Workers are only independent contractors if the workers have freedom to determine dates and times of work, and the company does not restrict the driver from performing rideshare or delivery services for other companies.

Employee Handbooks

There are several new laws that require employers of all sizes to update their employee handbooks. Employee handbook revisions should address remote work rules, COVID-19 specific workplace safety plans, expanded leave rights (CFRA), and changes to crime victims leave and organ and bone marrow donation. Contact our employment law attorneys at Schneiders & Associates for a review of your current handbook.

By: Christopher Correa, Esq.

This summary of new laws will be discussed on January 25, 2022 by Schneiders & Associates Partners Roy and Ted Schneider. Roy and Ted will present the 2022 Annual Employment Law Update – an in-depth discussion and further explanation of new laws, via Zoom. Please register for this free webinar at We hope to see you there to answer all your new employment law related questions!

Please note, this webinar is approved for one hour of MCLE credit.

Schneiders & Associates Offers Free Employment Law Update Webinar!

The new year will be full of changes. Prepare for 2022 with our help! Join us for a FREE virtual employment law update seminar to learn about new employment law changes in 2022, including COVID-19 employment law updates. Partners Roy and Ted Schneider will discuss in detail, the changes the new year will bring and help you prepare for the road ahead! Tuesday, January 25, 2022 11:00 a.m. - 12:00 p.m. Via Zoom. Register today! Please note: MCLE credit is available for this seminar. Attorneys that wish to receive MCLE credit may contact Angela Mumme via email at to register.

Can I Implement a Mandatory Vaccine Policy for My Employees – And What is a Mandatory Vaccine Policy?

It is likely that President Biden’s administration will implement a mandatory vaccine policy for all private-sector employers with 100 or more employees. Failure to comply with the policy will result in significant fines (up to $13,600 per violation). This sounds simple on its face, but what if you do not have 100 employees; or, what if one of your employees refuses to get vaccinated?

                If you employ less than 100 employees, you can still implement a mandatory vaccine policy, as long as it complies with state and federal laws prohibiting discrimination based on a medical condition or disability or a sincerely held religious belief. This requires the employer to engage in an interactive dialogue with the employee in an effort to find a reasonable accommodation for the employee’s disability or sincerely held religious belief.

                A mandatory vaccine policy does not mean that every employee must be vaccinated. An employee can refuse to get vaccinated and may still be entitled to keep his or her job. The new policy requires that all employees receive the COVID-19 vaccine and any FDA-approved boosters, or that the employee must produce a negative test at least once a week. Unvaccinated employees will also be required to wear a mask indoors, as well as any other locations that the local, state, or federal rules require masks. (For example, LA and Ventura Counties are currently requiring all people to wear a mask indoors, regardless of their vaccination status.)

                At this point, it is unclear who bears the cost of the testing kits, but early opinions appear to put the burden on the employer to provide testing kits or pay for unvaccinated employees to get tested by a healthcare provider or pharmacy. Furthermore, the employer must exercise some control over the testing procedure and accuracy of the results. You cannot permit the unvaccinated employee to test himself or herself at home and self-report the results upon arriving at work.

                While this may not present a burden on larger employers, the cost of test kits could tip the balance in favor of smaller employers telling the unvaccinated employee (or applicant) to seek employment elsewhere. The cost factor is not enough by itself to end the interactive dialogue, but it will be helpful to the small business owners’ analysis.

                For now, the Equal Employment Opportunity Commission (EEOC) and Department of Fair Employment and Housing (DFEH) are using a number of factors to determine whether a potential accommodation is reasonable or puts an undue burden on the employer. These include: the nature and cost of the accommodation; the employer’s financial resources, the number of employees at a facility, and the effect on expenses at that facility; the employer’s operation type, the geographic separateness, and effect on administrative or fiscal relationship of the facility making the accommodation; and the impact of the accommodation on the worksite.

                Some employees may be able to perform their jobs remotely. Others may work alone or outdoors and geographically away from other employees or clients and customers.

If you are an employer and have questions regarding vaccine mandates in the workplace and wish to speak with an Employment Law expert, contact our Ventura County office, at 805-764-6370.

By: Christopher Correa, Esq.

Christopher Correa, Attorney

About Christopher Correa

Chris is an expert in COVID-19 employment related issues, such as paid time off, and getting employees back to work safely. Chris advises employers about their rights and obligations as businesses begin to reopen.

Email Christopher at

Ventura County Mask Mandate – Update

Updated October 19, 2021

The Ventura County Public Health Officer has extended its indoor mandatory mask mandate, for both the vaccinated and unvaccinated. County officials are concerned about the increased transmission of COVID-19, specifically among the unvaccinated. The mandate requires all persons to wear a face covering indoors, including the workplace. Masks must also be worn inside all government buildings, restaurants and bars, retail outlets, venues, and gatherings.

The extension requires that all business owners and employers continue to require its employees, customers, clients, delivery persons, and vendors wear mask inside the building, regardless of vaccination status.

If you have questions about your Company’s COVID-19 policies, please contact Chris Correa at or Ted Schneider at

Estate Planning Tax Law Changes – Be Prepared!

None of us can predict what will happen in D.C., but we can take steps now to prepare for changes coming in the near future.

As we write this commentary, Congress and the White House are negotiating over proposed legislation which, if enacted in its current form, would significantly change tax laws that impact estate planning.

The latest proposals, incorporated into the budget reconciliation bill commonly known as the "Build Back Better Act."  Most of the relevant proposals in the reconciliation bill would be effective as of the date of enactment, or as of January 1, 2022, whichever is later.

Understandably, estate planners are anxious about advising their clients to take action now in order to preserve certain advantages that could be curtailed by any new legislation. However, given the potential magnitude of the proposed changes and the uncertainty as to which of them will pass, it can be a challenge to know exactly what we should advise our clients to do.

The bottom line is that we don’t know what the final legislation will look like, or when specific new rules will be effective. All we can do is consider what has been proposed and how to advise clients in the event those proposals do become law.

The best advice for clients now is to be prepared – have documents ready to sign (perhaps more than one version, each designed to address a different legislative result) and have assets ready to transfer because time is – and will continue to be – of the essence.

Estate and Gift Tax Exemption Reduction – Using the Excess Exemption Before It's Lost.

The unified estate and gift tax exemption is currently $11.7 million and is already scheduled to drop in 2026 to around $6 million. Pending legislation would accelerate this reduction, likely effective on January 1, 2022.

Most commentators feel this is the most likely change that will impact estate planning, and that it won’t be retroactive (but there are no guarantees). What we do know is that taking full advantage of the higher exemption before it’s gone requires using the full amount – $11.7 million – rather than making a smaller gift of say $6 million.

This is because a taxpayer’s use of the exemption is cumulative, so using the increased exemption before it is lost requires exhausting the amount of the potentially reduced exemption and making gifts in excess of that amount.

Making Gifts in Trust – Contending with the Grantor Trust Proposals.

For clients who wish to fully use the current high exemption by making gifts, it is usually best to give property away in trust – perhaps to children, a spouse and children, or other beneficiaries – to take advantage of the benefits provided by trusts, including creditor protection, asset management, and the reduction in transfer tax for future generations. In addition, gifts in trust allow for the use of certain safety nets to address the possibility of retroactive changes, as well as the concerns of clients who may be nervous about completely losing the benefit of transferred property.

Authorizing a qualified disclaimer of a gift in trust by the trustee or a particular beneficiary may provide a mechanism for unwinding a gift in the event retroactive changes make the gift undesirable.

One wrinkle the proposed legislation has thrown into trust planning is the potential for changes to the treatment of irrevocable grantor trusts. These proposed changes in irrevocable grantor trust treatment seem to be causing the most concern among estate planners, because they represent a radical shift.

Not only would irrevocable grantor trusts automatically be included in the grantor’s estate at death, but any action to terminate irrevocable grantor trust status before death would trigger an immediate taxable gift, as would distributions from a irrevocable grantor trust to beneficiaries.

As proposed, trusts in existence before the effective date – likely when signed by the President – will be “grandfathered” and not subject to the new rules. This means that irrevocable grantor trusts already in existence should not be included in the grantor’s estate, if no new contributions are made to the trust after the effective date. Therefore, non-grantor trusts will become much more common once again as they were before the early 1990’s.

If you are drafting a trust to use the increased exemption, it can be difficult to know whether to create an intentionally "defective" grantor trust, or whether it is a better strategy to draft a non-grantor trust.

We are now looking at ways to allow for flexibility, such as drafting the trust as a grantor trust and including a mechanism that can fully eliminate grantor trust status before the effective date of the law. Another option might be to draft a non-grantor trust with a mechanism to turn on grantor trust status if this portion of the proposed law is not enacted.

It also might be prudent to have two trusts ready to sign – one grantor and one non-grantor – so that you can decide after it becomes clear what changes in the law will take effect (i.e., once passed by Congress but before signed by the President) and take quick action before the law becomes effective.

The Impact of Grantor Trust Changes on ILITs.

The grantor trust changes will impact irrevocable life insurance trusts – or “ILITs” – which typically receive contributions annually to pay policy premiums. Those annual contributions will trigger the grantor trust inclusion even in an existing grandfathered ILIT, so pre-funding ILITs with enough funds to pay future premiums is recommended, to the extent the client can afford it. Split dollar life insurance arrangements may also be a viable option for certain clients.

Don't Ignore Other Proposed Changes.

Although much of the focus in the estate planning world has been on the possible changes noted above, the proposals under consideration include a wide array of provisions that could impact estate planning clients in other ways.

For example, the Net Investment Income Tax (NIIT) would be expanded in a way that could seriously impact S Corporation shareholders who currently are not subject to FICA tax. Meaning, S-corporation profits, for the first time in history, would be subject to social security tax, which is 15.3% on the first $142,800 of S-corporation net income, plus 2.9% on income above that level, plus a surtax of another 0.9% on income tax exceeds $250,000 of S-corporation profits for joint filers ($200,000 for single filers).

Additionally, proposed valuation limits could curtail often-used planning techniques involving the transfer of family-owned entities considering valuation discounts.

In addition, the proposed grantor trust changes could have other sweeping effects. For example, they would have a chilling effect on grantor retained annuity trusts (GRATs) and sales to grantor trusts because satisfying annuity or note payments owed back to the grantor in kind would trigger taxable gain.

Additionally, the end of a GRAT term would appear to trigger a taxable gift to the remaindermen (the ultimate beneficiaries) under the grantor trust proposals discussed above. Without clarifying language in the statute (or forthcoming regulations), this would impact existing GRATs as well, which seems at odds with the other grandfathering available for grantor trusts created prior to the effective date.

The Takeaway – Be Prepared but Don't Panic.

With the crystal ball cloudy on what provisions will be enacted and when, it’s wise to keep track of the legislative process and keep informed and ready to pull the trigger on trust planning in progress. There likely will not be more than a day or two between the time the news breaks that legislation has been passed and the time the President signs it, so the time to prepare is now.

Times of change require attentiveness and diligence, but don't despair – none of us have, or can be expected to have, all the answers in the face of legislative uncertainty. The best thing we can do is to be prepared, and to open a frank dialogue about the potential changes and the possible benefits and risks involved in planning before those changes take effect. With the right drafting tools and good communication, we can help our clients navigate an uncertain and unnerving situation with calm and ease, by planning ahead and being ready to act when the time is right.

Adapted by John Balian, Esq, from a 10/5/2021 article written by

The ILS Legal Team of Interactive Legal

About John Balian

John Balian has been designated a Certified Specialist in Taxation Law by the Board of Legal Specialization of the State Bar of California.  John's areas of practice includes tax planning for sales of businesses and real estate, income and estate/gift tax audit representation, IRS Appeals, Tax Court representation, tax planning for judgments and settlements, estate and wealth transfer planning, and inheritance dispute consultation and mediation.

Don’t Miss Out on New State Income Tax Deduction for your Federal Tax Returns!

To Qualify, Single Member LLCs and sole-proprietorship would have to become S-corporations or Partnerships for Tax Filing Purposes.

  • Since the Tax Cut and Jobs Act was passed, there’s been a $10,000 cap on the state and local/property tax deduction on individual federal income tax returns.
  • However, California now offers workarounds, allowing some pass-through business owners to sidestep the limit on state income and property tax write-offs.

A growing number of states, including California, are offering pass-through businesses (S-corporations, LLC that file a partnership tax return, and partnerships) a workaround for the $10,000 federal deduction limit for state income and property taxes, known as SALT (state and local taxes).  

Note, however, single-owner LLCs and sole proprietorships do not qualify for this tax break.

A controversial part of Republicans’ 2017 tax overhaul (“The ax Cut and Jobs Act),  the SALT write-off cap was and remains very costly for filers who itemize deductions and can’t claim more than $10,000 for property and state income taxes. 

The limit has been a burden to those in high-tax states, such as California.

The IRS has issued official guidance on these new state laws as in November 2020, offering the green light to certain businesses.

More than a dozen states have passed legislation to approve the workaround, including Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin, according to the American Institute of CPAs. There is pending legislation in Illinois, Massachusetts, Michigan, North Carolina, Oregon and Pennsylvania.

However, it may not be the right move in all cases, financial experts say. 

How the tax on pass-through businesses works

Many companies are pass-through businesses with profits flowing to owners’ individual tax returns.

The new law allows the state income tax that would normally be paid by the owner, to be paid by the business entity.  If paid by the business entity, its federal taxable income passed-through to the owner will be lower by the amount of the state tax so paid, effectively giving the business owner a reduction in federal taxable income for the state income tax paid by the business, which is otherwise not available as a tax deduction for high-income individual taxpayers.

California Senate Bill 150 allows these qualifying businesses to pay an extra 9.3% tax on each owner’s share of the company’s net income.  Owners who participate may then claim a credit on their California tax return equal to the 9.3% tax, so that they only pay tax once company pass-through income.

By: John Balian, J.D. MS Tax, Of Counsel to Schneiders & Associates, L.L.P.

Adapted from CNBC Article published July 22, 2021