Analysis

Position
The Department of Consumer and Industry Services did not take a formal position on the bill. The department's only concern regarding the bill was that the bill was the third enacted in a brief time amending the Professional Service Corporation Act. However, Senator Bouchard's bill amends sections of the law not amended in either of the previous bills. House Bills 4944 and 5120 both amended Section 4. Senate Bill 775 amends Sections 2, 8 and 10.

Content of the Bill
The bill amends the Professional Service Corporation Act, PA 192 of 1962, to allow shares of a corporation organized under the act to be sold or transferred to a trust or split interest trust. Both the trustee and the current income beneficiary must be licensed persons in the professional corporation.

The intention of the amendment is to permit owners of a professional corporation to take advantage of the estate planning advantages of living trusts or charitable remainder trusts (also called split interest trusts). Under a living trust a person may transfer ownership of his or her property to a trust, which he or she then serves as a trustee. Following the transfer, the trust and not the trustee is the owner of the property. Such a trust offers significant estate planning advantages, including protecting the assets of surviving spouses, avoiding unintentional disinheritance of family members and minimizing estate taxes. This option is not currently available for the portion of one's estate represented by ownership of a professional corporation.

Owners of professional service corporations may also be prohibited from disposing of their shares by contributing them to a charitable remainder trust. This trust is also known as a split interest trust. Under such a trust an individual may make a deferred gift to charity in return for current economic benefits during his or her lifetime. The remainder of the trust goes to the charity upon the death of the professional. The split interest trust is a relatively recent development in the Internal Revenue Code and has apparently become increasingly popular in the last 10 years.

Supporters/Opponents There was little testimony on the bill in either the Senate or House. An estate planner did testify at one point.

Arguments
For: Professional owners of a professional service corporation should enjoy the same flexibility with respect to trusts as they would if they were owners of a regular business corporation.

This bill together with two other previous unrelated bills will make Michigan's Professional Service Corporation Act a more flexible and attractive option for professionals.

Against: The change may be unnecessary. There are two Attorney General opinions (Nos.5190 and 5285) which suggest that trusts may own stock in professional corporations.

This is an exceedingly complex area of law, and there may still be unanswered questions. For instance, can the trustee and the current income beneficiary be a shareholder in any professional corporation or must the corporation provide the same service as the one in which the trust or split interest trust will be a shareholder? To some extent, answers to such "technical" questions, at least insofar as this bill is concerned, may be dependent on the also complex provisions of the Internal Revenue Code.