2009 LEGAL DEVELOPMENTS IMPACTING CONTRACTORS AND SMALL BUSINESSES

1. 2009 LEGAL DEVELOPMENTS IMPACTING CONTRACTORS AND SMALL BUSINESSES Illinois Road and Transportation Builders Association Presentation - February, 2010 William J. Cotter 2525 Cabot Drive, Suite 300 Lisle, Illinois 60532-0916 630.428.2660 V 630.542.9990 C WCotter@ComanAnderson.com

2. 2009 LEGAL DEVELOPMENTS • IMPACTING CONTRACTORS AND SMALL BUSINESSES • Illinois Road and Transportation Builders Association • Presentation - February, 2010 • Issues impacting company value and wealth transfer planning. • Issues impacting companies in their relationships with third parties: contract and insurance issues. • Issues impacting companies in the workplace: employment law issues.

3. www.comananderson.com/publications.html wcotter@comananderson.com

4. 2009 LEGAL DEVELOPMENTS • IMPACTING CONTRACTORS AND SMALL BUSINESSES • Illinois Road and Transportation Builders Association • Presentation - February, 2010 • ISSUES IMPACTING COMPANY VALUE • AND WEALTH TRANSFER PLANNING.

5. Changes in the Federal Estate Tax?

6. A Brief History of the Estate Tax

7. A Brief History of the Estate Tax • The United States has taxed the estates of deceased persons since 1916. • The estate must file a federal estate tax return within nine months of a person’s death if the gross estate exceeds the exempt amount (which was $3.5 million in 2009). • The estate tax applies to the value of a decedent’s “gross estate.” This generally includes all of the decedent’s assets, including stocks, bonds, CDs IRA’s, Annuities, mutual funds, life insurance, real estate, and interests in closely held businesses and farms. • In computing the tax, estates are allowed to deduct from the value of the gross estate an unlimited amount for transfers to a surviving spouse and for transfers to charity. • Estates may also deduct debts, funeral expenses, legal and administrative fees, and estate taxes paid to states. • The estate tax law provided a credit that effectively exempted a large portion of a decedent’s estate from tax. Since 1997 the amount that is exempt from tax has increased, and the estate tax rate has decreased.

8. A Brief History of the Death Tax

9. A Brief History of the Estate Tax • (This is Brief?) • Congress enacted the companion gift tax in 1932 to prevent wealthy individuals from avoiding the estate tax by transferring their wealth to their heirs before they died. • The gift tax provides a lifetime exemption of $1 million per donor which, when used, also reduces the death time exemption dollar for dollar. Beyond that exemption, donors must pay gift tax equal to 41% of the first $500,000 and 45% of any excess. • Small annual gift amounts were also exempted from both the gift tax and the lifetime exemption. This exemption -- $13,000 in both 2009 and 2010 -- is indexed for inflation in $1,000 increments, and is granted separately for each recipient.

10. The 2001 Tax Act [Who Can Remember That Far Back?] Tax relief legislation passed in 2001 reduced all three taxes -- but only through 2010. That legislation gradually phased out the estate and GST taxes, and repealed both entirely beginning in 2010, leaving only the gift tax. As a result of some arcane Congressional rules the 2001 law had a “sunset” provision. This meant that unless repeal was later made permanent, after 2010 all three taxes automatically revert to their status before the 2001 legislation was enacted.

11. Heck – they’d never let the estate tax reallybe repealed . . . would they?

12. What We’ve Been Watching • Estate tax rates and how they should be applied. • Consideration of reunifying the gift and estate taxes. • The possible “portability” of estate tax exemption unused by a deceased spouse or spouses. • Imposition of term limits on “grantor retained annuity trusts.” • Curbing perceived abuses in valuation discounting. • Regulation of so-called “Crummey” withdrawal powers in insurance trusts and other trusts.

13. Can We Just Stop For a Minute and Put All This In Perspective?? [Warning: Editorial Comment] Graphic Courtesy of The Tax Policy Center

14. More of What We’ve Been Watching • H.R. 4154 was introduced in November, 2009 and was passed by the House in December, 2009. It would permanently extend the current estate tax exemption amount ($3.5 million per person and $7 million total for a married couple) and includes a maximum estate tax rate of 45%.   • Senate Bill 722, introduced in late March 2009, would make the 2009 estate tax law permanent ($3.5 million estate-tax exemption and top tax rate of 45%), reunifies the gift-tax and estate-tax exemptions, indexes the exemption amount for inflation and allows for exemption portability (allows the transfer of a first-to-die spouse’s unused estate-tax exemption to his or her surviving spouse).

15. House Bill 2023 drops the estate tax exemption level to $2 million and creates a tiered tax-rate structure starting at 45% for estates valued from $2- $5 million, 50% for estates valued at $5 to $10 million, and 55% for estates valued over $10 million, all indexed for inflation. Like S.B. 722, this Bill reunifies the estate and gift-tax exemption, allows for exemption portability and restores the state estate-tax credit in lieu of the current state estate tax deduction. House Bill 3905,labeled the “Estate Tax Relief Act of 2009,” was introduced last October. It called for an increase in the estate-tax exclusion from its $3.5 million level by $150,000 a year each year from 2010 through 2019. At the same time the bill calls for a reduction in the effective top tax rate by 1% a year. In 2019 this results in an exemption amount of $5 million (indexed for inflation thereafter) and a top tax rate of 35%. In addition, the deduction for state estate taxes would go down 10% per year through 2019, when it would cease to exist.

16. So Many Options . . . What Did Congress Choose to Do? That’s Right -- Nada

17. What Does Congressional Inaction Mean? • Under the “sunset” provisions of this law, the previous $3.5 million exemption will revert to $1 million for both estate and gift tax purposes starting in calendar year 2011.  • Under the 2001 law, the top estate and gift tax rate was also reduced incrementally - dropping to 45% for transfers made in 2009.  As we saw from the earlier chart, in 2010, there will be no estate tax and the top gift tax rate will be 35%.  But then the top estate and gift tax rates revert to 55% in 2011. • Prior to 2010, beneficiaries received a “step up” in basis when they received inherited property. Now those beneficiaries of decedents dying in 2010 only will receive inherited property at the decedent’s tax basis. This means that in the case of appreciated property, the beneficiary may owe substantial capital gains tax if the assets are later sold. • Under the “sunset rule,” when the estate tax kicks back in, the step-up in basis rules return.

18. So Is This All Going This Change . . . Again? Your Guess Goes Here: _______________________________.

19. Changes in the Federal Estate Tax? THE BUSINESS OWNER'S TAKEAWAY(S) Planning Review, Part 1. You might want to revisit your current planning structures to make sure that your planning is flexible enough to respond to exemption levels at $1 million, $3.5 million or higher, and to make sure that coordination with the Illinois estate tax has been addressed. Possible “Hiccup” With Tax Planning Language in Current s Documents. Many clients have estate plans that have been designed to minimize estate taxes upon the death of the first spouse to pass away. That result is often achieved with language like: “I give to the credit shelter trust the greatest amount that will result in no tax being due at my death”. In 2010, this will direct all of the decedent’s estate to the credit shelter, or family, trust. This may not be the result the family intends. Gifting – Annual Exclusion. For some clients, using the annual exemption from gift tax ($13,000 per person, per year) continues to be a simple and effective estate tax reduction strategy by removing value from the donor’s estate.

20. Other Estate Reduction Strategies. Other popular wealth transfer tools will continue to have vitality – such as: • grantor retained annuity trusts (GRAT) • family limited partnerships (FLP) • transfers of residential property to qualified personal residence trusts (QPRT) • intra-family loans • other structures that take advantage of depressed asset values and a low interest rate environment continue to be effective • If a strategy like this has been on your radar, get in touch with your estate planning attorney now to discuss whether the time is right to put such techniques to work to benefit you and your family. • 5. Planning Review, Part 2. Some clients have simply not had their plans reviewed in a long time. Even for clients for whom estate tax minimization isn’t critical, periodic reviews make sense to address other important -- non-tax-motivated – issues, such as making sure that named executors and trustees remain appropriate, assuring that powers of attorney for property and for health care are current and appropriate, to consider whether ages for distributions to children need to be revisited, and so forth.

21. 2009 LEGAL DEVELOPMENTS IMPACTING CONTRACTORS AND SMALL BUSINESSES Illinois Road and Transportation Builders Association Presentation - February, 2010 B. ISSUES IMPACTING COMPANIES IN THEIR RELATIONSHIPS WITH THIRD PARTIES: CONTRACT AND INSURANCE ISSUES.

22. Revisiting Certificates of Insurance In Construction Contracts • The Nautilus Insurance Co. Case • The United Stationers Supply Co. v. Zurich American Insurance Co. Case

24. “THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER.  THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.”

25. Revisiting Certificates of Insurance In Construction Contracts • THE BUSINESS OWNER'S TAKEAWAY(S) • 1. Your construction contracts should carefully and clearly describe every type of insurance that is being requested, including terms like “commercial general liability” or “professional liability” and describe the coverage needed with specificity. Review your contract forms with your counsel and your professional insurance consultant. • 2. Where it applies, make sure that your contract clearly states that you will be named as an additional named insured – and identify the coverages for which additional named insured status is being requested. Again, review this with your counsel. • 3. Require that you be named on an endorsement to the policy in question – and not just a certificate. Get a copy of the endorsement or make sure it has language sufficiently broad enough to include you as someone who has required the insured to name them as an additional insured.

26. Recovering for Loss to Stored Materials [Bad Graphic Above Depicts Destructive Tornado]

27. Twenhafel v. State Auto Property and Casualty Insurance Co. “CAUSES OF LOSS—SPECIAL FORM “Exclusions: We will not pay for loss or damage caused by or resulting from any of the following: . . . rain, snow, ice or sleet to personal property in the open.”

28. Recovering for Loss to Stored Materials • THE BUSINESS OWNER'S TAKEAWAY(S) • If you have inventory or materials stored outside: • First make sure that you have a policy of insurance covering them, and • Second, make sure you review the terms of your insurance policies covering them.

29. If You Elect Arbitration – Make Sure It Sticks Timmerman v. The Grain Exchange

30. Timmerman v. The Grain Exchange These words appeared in bold letters just above the signature line on the front page: “THE TERMS PRINTED ON THE BACK HEREOF ARE A PART OF THIS CONTRACT.”

31. If You Elect Arbitration – Make Sure It Sticks • THE BUSINESS OWNER'S TAKEAWAY(S) • If arbitration or mediation is your favored dispute resolution process, make sure that your contracts and subcontracts clearly describe what the process is, how it can be invoked and the arbitration or mediation rules to be used. • If you are going to incorporate arbitration provisions by reference, do so clearly and consider having your contracting parties initial the provision.

32. 2009 LEGAL DEVELOPMENTS IMPACTING CONTRACTORS AND SMALL BUSINESSES Illinois Road and Transportation Builders Association Presentation - February, 2010 C. ISSUES IMPACTING COMPANIES IN THE WORKPLACE: EMPLOYMENT LAW ISSUES.

33. The IL Supreme Court Takes Another Look at Sexual Harassment In the Workplace: Sangamon County Sheriff's Department v. Illinois Human Rights Commission

34. Sangamon County Sheriff's Department v. Illinois Human Rights Commission The first clause of the Illinois statute prohibits sexual harassment broadly. The second clause in the statute then limits the first clause by stating that: “an employer shall be responsible for sexual harassment of the employer's employees by non-employees or non-managerial and non-supervisory employees only if the employer becomes aware of the conduct and fails to take reasonable corrective measures.”

35. IL Supreme Court Takes Another Look at • Sexual Harassment In the Workplace • THE BUSINESS OWNER'S TAKEAWAY(S) • Review your employment policies and procedures as they relate to sexual harassment and hostile work environment – if you don’t have them, develop them. NOW. • 2. Make sure that all of your supervisory personnel have reviewed those policies and sign statements confirming that review. • 3. Continue training all of your supervisors on harassment, including what it is, how to recognize it, and how to prevent it. Engage a firm to provide in-service training if appropriate.

36. Changes to The Illinois Equal Pay Act • New Extended Time to File Complaints • Adoption of the Federal Lilly Ledbetter “Paycheck Standard” for Determining Statute of Limitations. • Extension of Record-Keeping Requirements

37. Changes to The Illinois Equal Pay Act • THE BUSINESS OWNER'S TAKEAWAY(S) • All employers should be proactive and have their human resource depart review payroll records to ensure their compliance with Equal Pay Act, and if there are violations, take prompt action to correct same in order to avoid potential penalties.

38. New Obligations Imposed on Employers to Curb Child Pornography Problems 800-THE-LOST (800-843-5678) https://securemissingkids.com/missingkids/servlet/cybertipServlet?LanguageCountry=en_US

39. New Obligations Imposed on Employers to Curb Child Pornography Problems THE BUSINESS OWNER'S TAKEAWAY(S) Set up a procedure for reporting child pornography found on any technology equipment.  Designate a company representative who should be notified of the discovery and who will be the person responsible for notifying the proper authorities.  Advise your IT workers (inside and outside) about the new requirement and ensure they are aware of the procedure for reporting the discovery to the designated person.  Make sure that all your employees are advised of this new law (perhaps through a updated policy guideline), and are aware that if they are notified by an IT worker that child pornography has been discovered on company tech equipment, they are required to inform the company’s designated representative.   

40. Illinois Extends Leave of Absence Rights in Certain Cases Victims’ Economic Security and Safety Act Seek medical attention for, or recovery from, physical or psychological injuries caused by domestic or sexual violence to the employee or employee’s family or household member. Obtain victim services for the employee or employee’s family or household member. Obtain psychological or other counseling for the employee or the employee’s family or household member. Participate in safety planning, including temporary or permanent relocation or other actions to increase the safety of the victim from future domestic or sexual violence. Seek legal assistance to ensure the health and safety of the victim, including participating in court proceedings related to the violence.

41. Victims’ Economic Security and Safety Act THE BUSINESS OWNER'S TAKEAWAY(S) Consult with your human resource personnel and your counsel and review these amendments to the Victims’ Economic Security and Safety Act. Take the opportunity to review this new law in conjunction with your FMLA leave policies and other leave policies, and determine what additions or modifications should be made. After any changes are made to your company’s policies, communicate them to your staff.

42. www.comananderson.com/publications.html wcotter@comananderson.com William J. Cotter 2525 Cabot Drive, Suite 300 Lisle, Illinois 60532-0916 630.428.2660 V 630.542.9990 C WCotter@ComanAnderson.com