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Make Sure Your “S” Is Covered: Estate Planning Considerations for S Corporations

It is important for those who hold shares in an S Corporation to carefully plan for the distribution of those shares. The stakes for these transfers are high, as a faulty transfer may result in the inadvertent termination of the corporation’s S status. A recent article discusses several considerations to make when planning for the transfer of S Corporation shares.

Individuals or entities such as estates or certain types of trusts may hold shares in an S Corporation. The types of trusts that are qualified to hold S Corporation shares include grantor trusts, qualified Subchapter S trusts, electing small business trusts, testamentary trusts, and voting trusts. All other trusts are considered to be non-qualifying shareholders.

If a shareholder’s estate plan inadvertently transfers his or her S Corporation shares to a non-qualifying shareholder, not only will the S Corporation be inadvertently terminated, but corporate level taxes may be triggered on the other shareholders. To avoid this fate, it is important to review your estate plan to ensure that your plan does not transfer S Corporation shares to a non-qualifying trust. On the other hand, the right kind of trust can be a powerful tool to achieving Estate Planning, Asset Protection & Business Succession Planning goals.

S Corporations can also work to avoid costly missteps by employing shareholder agreements, which provide that the shares may only be transferred to qualified shareholders. Additionally, S Corporation shareholders should carefully monitor shareholder trusts to ensure that the trusts remain eligible to hold S Corporation shares.

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When You Aren’t Sure Where to Start: Having an Estate Planning Discussion with an Elderly Parent

A majority of adults find it difficult to discuss financial issues with their aging family members. Although these are often difficult and uncomfortable conversations to have, they are often necessary. Moreover, it is important to have these conversations with your parents early, before they become unable to handle their financial lives. A recent article discusses how to start this conversation, and what topics to cover.

One way to ensure that you bring up this topic is to make an appointment with yourself to do so. A good idea is to plan the discussion for after a family gathering such as a birthday party. This way, other family members can join in the conversation. If you believe that your parents and family members will be receptive to the idea, select a date and time and then invite them to join in on the conversation.

During the conversation, it is important to discuss several different aspects of your parent’s estate. The first aspect is legal. Determine whether your parent has done any estate planning. If yes, ask where the legal documents are and what estate planning tools are employed, such as wills or trusts. Your parent may also wish to explain any distributions.

Another important aspect to discuss is healthcare. Determine what types of health coverage your parent has aside from Medicare. This may include long term care insurance, or simply some money set aside for anticipated health care costs. Finally, determine whether your parent has executed a health care power of attorney. If he or she has not, encourage him or her to do so. This will be an essential step should the time come when your parent is unable to make their own decisions on their healthcare.

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Applying the K.I.S.S. Principle: – Simplifying Estate Planning

For members of the baby boomer generation, estate planning is about more than organizing their financial affairs. Many Boomers wish to create estate plans that leave a legacy and make a difference in the world. However, when considering these estate planning goals, Boomers might quickly become overwhelmed with the task at hand. A recent article offers simple tips for Boomers to get started on their estate plan and create their legacy.

The first step in creating an estate plan is making a list of all of your assets. This list should include all real estate, valuable personal property, insurance accounts, retirement accounts, the value of any trusts, and any amounts you expect to receive before you pass on. When making this list, be sure to note if any of these assets are tied to debt, such as a mortgage or lien on a home. After you list your assets, consider how you would like to distribute them, and who you would like your beneficiaries to be.

Next, consider who you would like to serve as your financial power of attorney. This is the person who is tasked with managing your financial affairs should you become incapacitated. Remember that incapacity can take many forms, such as mild dementia or an intensive hospitalization after an accident. You may limit this power if you wish. For example, you could provide a limited power of attorney to only handle your small business. With these important decisions, creating an estate plan will be essential in detailing your wishes should you become incapacitated.

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Don’t Keep it a Secret! – The Truth About Estate Planning Conversations

Recently, BMO Management conducted a survey concerning communication of estate plans. Although 90% of American adults surveyed stated that estate planning is “an important topic to discuss,” only 19% of those adults reported actually having detailed estate planning discussions with their parents. A recent article discusses why these results are problematic.

Family Discussion
Family Discussion (Photo credit: LRJ53)

The absence of an estate planning discussion can cause trouble down the road. This trouble often leads to fighting among heirs, and a long, drawn out process of estate distribution. Through estate planning conversations, parents can discuss the reasoning behind their estate planning maneuvers and ensure that their children understand the intent behind the estate plan.

The sooner such conversations can take place, the better. As BMO vice-president of financial planning Stephen Williams explains, “Your personal legacy depends more on the effective communication of your values, plans and beliefs than on the items that can be neatly summarized in the paragraphs in your will and trust.” If you are a parent, begin this conversation on a positive note. Inform your children of what estate planning documents you have put in place and then begin a deeper discussion of your plans. If possible, have this conversation as a family.

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“It’s For Your Own Good! – Protecting Your IRA For & From Your Children”

One important asset that many people pass on to their beneficiaries is their Individual Retirement Account (“IRA”). For many people, it is important to protect their beneficiaries from immediately draining the IRA. A recent article discusses the new option of a Trusteed IRA, which helps to prevent this outcome.

A relatively new financial product, the Trusteed IRA is offered by several financial firms. Trusteed IRAs are marketed towards affluent investors who might otherwise put their IRA in a trust. Through a Trusteed IRA, the bank becomes trustee over the IRA assets. The bank then works with the beneficiary’s financial advisor in order to manage and distribute the assets.

If you are interested in a Trusteed IRA, be sure to discuss it with your CPA, financial advisor, and estate planning attorney. These members of your professional team should review the plan thoroughly and be comfortable with how the Trusteed IRA will be managed. A carelessly set up Trusteed IRA may impact an individual’s ability to utilize his or her estate tax marital deduction. The marital deduction, which is vital to many high net worth married couples, allows the estate of a deceased spouse to pass, tax free, to the surviving spouse.

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“Non-Tax Issues Within Estate Planning that Impact Everyone”

Estate planning is not solely about tax avoidance. A recent article discusses several other issues that render estate planning paramount, despite the value of your estate.

Medical Care
Every estate plan should include details as to how your medical needs should be addressed. A medical power of attorney designates who will make medical decisions for you, should you become unable to make these decisions for yourself. A living will designates what type of care you would like to receive. If you do not want life-saving medical treatments to be performed on you in the event of an emergency, consider a do-not-resuscitate order.

Avoiding Disputes
Poorly thought out estate plans often lead to chaos and disputes among a person’s heirs. Adult children often fight about the management and distribution of assets. Moreover, disputes become more common as a person’s family becomes more complicated. Do not assume that your children will work everything out after your death. Consider what disputes are likely and plan for them accordingly.

Care of Others
If you are caring for or anticipate caring for a relative, it is important to ensure that the person receives the appropriate care after you are gone. This person may be a child, elderly parent, grandchild or special needs family member.

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Are the Kids Alright? – Your Children Need an Independent Estate Plan

Middle-aged Americans are constantly reminded that they need to create estate plans in order to protect their family from the unexpected. As a recent article explains, however, it is just as important for your adult children to create an estate plan as well, even if it’s a simple one.

Once your child turns 18, you lose any authority you had to view his or her medical records or make decisions about his or her medical treatment. The only way to avoid this is to encourage your child to participate in some simple estate planning maneuvers.

The Cool Kids
(Photo credit: TheMarque)

This planning is especially important as your child heads off to college. If your child suffers a major accident and is left unable to communicate, you would have to go through the daunting process of petitioning a court to appoint you the legal guardian of your child before you could make any medical decisions for him or her.

For less serious medical incidents, the Health Information Portability and Accountability Act (“HIPAA”) makes it difficult, or sometimes impossible, for a parent to receive critical medical information, including whether or not your child was admitted to a hospital, and to which one. If you and your child wish to avoid this, ask your adult child to complete a health care proxy and HIPAA release, which allows you to receive medical information concerning your child and to make medical decisions should he or she become incapacitated.

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How’s This for GRAT-itude? – Basics of the GRAT

As a recent article explains, a Grantor Retained Annuity Trust (“GRAT”) is a great estate-planning tool for high-net-worth individuals.  This type of irrevocable trust permits you to make a lifetime gift of assets to an irrevocable trust in exchange for a fixed payment stream for a specified term of years.

Often, individuals making large transfers to their beneficiaries choose to utilize GRATs because of associated tax benefits.

A key aspect of GRAT transfers is that they minimize or even eliminate estate and gift tax liability on the transferred assets. Moreover, the creator of a GRAT may receive fixed annual payments for the life of the trust. Through receiving this annuity, the creator is paid back his or her principal, as well as interest. After the trust term has concluded, the remainder of the trust passes to the trust beneficiaries.

When setting up a GRAT, it is important to carefully select a trust term. If the trust term ends while the creator is still alive, the remaining assets will be included as part of his or her gross estate for purposes of determining estate tax liability. Those who anticipate outliving the trust term of their GRAT should consider employing a life insurance strategy to offset any additional tax liabilities.

Those who wish to set up a GRAT should act quickly because the Obama administration may soon eliminate the tax benefits that a GRAT strategy would reap as proposed in the President’s latest Green book proposals.

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Back to Some Basics: Estate Planning for a Family

The fact that estate planning is of paramount importance to every American is nothing new. Although it may be uncomfortable to consider your eventual death, a good, updated estate plan is the only way to make sure that your loved ones are cared for after you are gone. As a recent article emphasizes, estate planning is vital no matter how big or small your estate is.

One important part of estate planning is integrating your bank accounts into your estate plan. As business integration executive Ally Bank explains, “Many people often overlook the importance of incorporating their bank accounts into their estate planning strategy.” One way to achieve this integration is to set up an account for trust.

There are several benefits of establishing an account for trust. First, the trust account helps a person to ensure that their beneficiaries are cared for in the future through the assets in the trust. Second, a trust account may reduce a person’s estate tax liability. Third, trusts do not go through the process of probate. Finally, if your account is at a Member FDIC bank, it is insured up to a minimum of $250,000.

If you are considering a bank account for trust, consider accounts that offer competitive interest rates and do not have minimum fees or minimum balances. Visit several financial institutions to determine which institution and type of account is best for you.

 

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When You Lose Trust in the Trustee: How A Beneficiary Can Enforce A Trust

As a recent article explains, sometimes trustees do not do what they are supposed to. Sometimes trustees make mistakes in carrying out their duties while other times, they knowingly fail to comply with the terms of the trust. If you are the beneficiary of a trust, there may be some things you can do to ensure that the trustee follows the terms of the trust.

Because a trust is created by a legal document, each trust contains rights and duties that are legally enforceable. If a trustee has not followed the terms of the trust, he or she is considered to be in breach of his or her duties. There are several steps a beneficiary should take when he or she believes that the trustee of his or her trust is in breach.

The first step that a beneficiary should take is to review the trust documents. The beneficiary should be certain of what the terms of the trust are before he or she confronts the trustee concerning an alleged breach. Often, discrepancies over the behavior of a trustee are based on misunderstandings about what the trust documents actually say.

If you have consulted the trust documents and still believe that your trustee is in breach of his or her duties, speak with the trustee first. A majority of trust issues can be resolved through proper communication. If communication does not solve your problem, review the trust document to determine what the procedure for replacing trustees is. Although each trust is different, many trusts contain a provision that allows for the relatively easy replacement of a trustee.

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Even the Wiseguys: Gandolfini’s Disastrous Estate Plan

After “Sopranos” actor James Gandolfini’s unexpected death at the age of 51, a recent article has described his estate plan as disastrous. Americans should take this opportunity to learn from the mistakes in Gandolfini’s estate plan in order to avoid making the same mistakes themselves.

James Gandolfini
James Gandolfini (Photo credit: Wikipedia)

According to the report, an estimated $30 million of Gandolfini’s $70 million estate will be paid out in taxes. There are many methods through which Americans can avoid a similar fate. These methods are all rooted in proper estate planning, which can dramatically reduce, or even eliminate, the tax burden on your estate.

One way to avoid a large tax bill is through the establishment of trust vehicles. Current federal law allows individuals to transfer $5.25 million into an irrevocable trust without having to pay gift tax on that amount. Married couples can combine their tax-free amounts to make a total of $10.5 million. The different types of trust accounts you may choose include marital trusts, life insurance trusts, and special needs trusts.

It is also important to update your estate plan as the size and characteristics of your estate and family change. Constant updates will also allow your estate to stay current with tax laws.

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For Better or Worse: Estate Planning for Same-Sex Spouses

As a recent article explains, the United States Supreme Court’s recent ruling on same-sex marriage will radically alter estate planning for same-sex married couples.

taking their first steps as a legally married ...
(Photo credit: ehoyer)

Prior to the decision, thousands of federal laws available to married couples were not available to same-sex married couples due to the Federal Defense of Marriage Act (“DOMA”), which defined marriage as between a man and a woman. By striking down DOMA, the United States Supreme Court suddenly made thousands of federal estate planning tools available to same-sex married couples.

One of these tools is portability. Portability allows a surviving spouse to utilize the unused portion of his or her deceased spouse’s estate tax exclusion. Portability was made permanent in the new 2012 tax law. In order to use the unused portion of your spouse’s estate tax exemption, the surviving spouse needs to have the executor of the deceased spouse’s estate transfer the unused exclusion, as this is not automatic.

Another estate planning maneuver that will now be available to same-sex married couples is gift-splitting. Every year, federal law allows each individual to gift $14,000 per year, per recipient, to as many recipients as they wish. Any amount gifted over the yearly gift-tax exclusion counts against a person’s lifetime gift tax exclusion. Married spouses, however, can combine their gift amount in order to jointly gift $28,000 to a single recipient.

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The Difference Between an LLP and LLC

In order to transfer assets to the next generation, some people may choose to use an LLP or LLC. Both of these are legal business arrangements that can be implemented into any estate plan.  A recent article discussed the differences between the two.

An LLP, or limited liability partnership, is a general partnership. In this type of partnership, ownership of the business is split between the partners. Profits from the business are distributed based upon the percentage ownership of each owner. An LLC, or limited liability company, is a partnership wherein owners are issued shares of stock. Profits from the business are split between the owners based on their share of the stock.

The use of an LLC or LLP may be beneficial for those Americans who have estates valued above the federal estate tax exemption, are seeking asset protection, or both. This is because these devices lower the value of the entire estate by dividing ownership of the business between yourself and your children. Moreover, if you gift a portion of your LLC or LLP to a child, that gift can be discounted by 20 percent or more for purposes of the federal gift tax exemption. By giving such gifts, you increase the value of your allowed $14,000 gift by 20 percent.

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Million Dollar Babies: Leaving Assets to a Minor

Can you imagine receiving a few hundred thousand dollars in your account when you were 18 years of age? Typically, parents wish to leave their assets to their children or grandchildren. Although many people simply leave their assets to their children and grandchildren outright, a recent article discussed why it might be best to leave gifts to minor children and grandchildren in trust accounts.

If a parent leaves an inheritance to a minor child outright, the inheritance must go through the process of probate. Because a minor cannot legally hold property in his or her own name, a probate judge must appoint a guardian to hold the property until the child reaches the age of 18. The court-appointed guardian may not be a person that the parent or grandparent would have chosen. Moreover, the cost of compensating the guardian may diminish the inheritance.

Creating a trust for your minor child is the only way to remain in control of the assets. Through the trust, you can dictate how the funds may be used, and when they may be distributed to the beneficiary. Moreover, through creation of the trust you can select a trustworthy person to serve as trustee. Finally, a trust will take effect immediately. Therefore, the beneficiary will not be forced to submit to the probate proceedings.

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Some String Attached: Protection Through a Spendthrift Trust

Under the terms of a trust, a trustee holds legal title to the trust assets for the beneficiary. The trust documents dictate how and when the trustee may distribute the trust assets to the beneficiary. There are many types of trusts that can be used to serve various purposes in estate planning. A recent article discussed the purpose and benefits of a spendthrift trust.

A spendthrift trust is essentially a trust with a spendthrift clause. A spendthrift clause prohibits the beneficiary from accessing the assets within the trust. This clause thereby prevents creditors of the beneficiary from intercepting payments meant for the beneficiary. Once the beneficiary receives a distribution, however, his or her creditors may then reach the distributed assets. Spendthrift clauses may also prevent beneficiaries from voluntarily or involuntarily transferring their interest in the trust.

Spendthrift trusts may protect a variety of people. They are a popular choice among parents who want to leave money to their children but are worried that their children will spend it quickly and irresponsibly. Spendthrift trusts may also protect a person against an unexpected creditor, such as the victim of a car accident, a future ex-spouse, or a business creditor.

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RUN FOR SHELTER!!! Or Don’t? Is a Credit Shelter Trust Still Necessary?

Before the statutory portability provisions were made permanent, people often used Credit Shelter Trusts (“CSTs”) in order to maximize the estate tax exemption of the first spouse to die. The use of CSTs therefore reduces the estate tax on the entire marital estate. As a recent article discusses, however, the need of CSTs has been called into question after portability was made permanent.

The portability provision automatically allows married couples to utilize their combined exemption amount. In 2013, this exemption amount was $10.5 million. For high net-worth families, however, a CST is still a beneficial estate planning tool for saving estate taxes.

It is important to understand that, under portability, a deceased spouse’s exemption freezes at the time of his or her death. Therefore, if the first spouse dies many years before the second spouse dies, he or she could miss significant estate tax savings. CSTs are also beneficial for appreciable assets. The value of any assets placed in a CST is frozen at the time of the spouse’s death. Therefore, if the assets were worth $1 million at the time of the spouse’s death, and $5 million when the surviving spouse dies, all $5 million would be excluded from the estate of the surviving spouse.

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Estate Planning: Lessons from Warren Buffett

One of the most interesting parts of Warren Buffett’s estate plan is how he designed it to leave his children just enough so that they can do anything they like, while also not leaving them so much that they never have to do anything. As a recent article explains, many people would like to replicate this part of his estate plan.

Warren Buffett
Warren Buffett (Photo credit: MarkGregory007)

Many parents wonder how much they can leave their children, before their children become lazy spendthrifts. However, simply leaving money to children may not be the whole problem. As Warren Buffett recently explained, “I think that more of our kids are ruined by the behavior of their parents than by the amount of the inheritance.” Parents who do not want their children to grow up as spoiled brats should focus on the environment that they raise their children in, rather than the inheritance they will give them.

Buffett also believes that it is “crazy” for your children to read your will for the first time after you have died. This is because communication is key to a smooth estate transition. If you discuss your will with your children before your passing, you stand a far better chance of avoiding disaster after your death. Although this conversation may be awkward, it is often necessary to outline your intentions and reasoning.

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Estate Planning for Business Owners: Make it Salable

Many business owners do not have a plan in place to sell their business. Therefore, when it comes time to sell the business, approximately 80 percent of businesses are not salable. As a recent article explains, businesses are not salable because “they offer no strategic fit to a buyer.”

It is therefore vital for business owners to put a strategy in place that will protect the business by ensuring that, when it is time to sell, the business is salable. The author suggests crafting such a plan at least five to seven years before you plan to sell the business.

Before considering whether your business will be salable, it is important to determine what personal goals you have for your life beyond the business, and determine how the business can help you reach these goals. For example, if you determine that you need $7 million to retire, but your business is only worth $4 million, you will need to determine a way to close that gap by increasing the value of the business. Increasing the value of the business may also make it more attractive to potential buyers.

If you decide that you want to transfer the business to a key employee or family member rather than sell it outright, the buyer may not have the funds necessary to purchase the business outright. In this case, you will need to have a plan in place that will assist the new owner in determining how they will get paid from the cash flow of the business.

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Estate Planning May Assist Retail Investors

Retail investors who have investable assets amounting to less than $100,000 often overlook an important aspect of financial planning. As a recent article explains, this part of financial planning is creating an estate plan.

According to attorney Michael Brennan, “The mistake these folks are making is assuming that an estate must consist of millions of dollars. But, the truth is that nearly everyone has an ‘estate’ for purposes of estate planning.” According to Brennan, pieces of an estate include personal residences, insurance policies, various accounts, and personal possessions. Often, these assets can add up to a sizable estate. Estate planning is further important to high net worth investors, because such investors are more sensitive to the changing tax and estate laws than the average American.

The many benefits of creating an estate plan include ensuring that assets are divided according to the owner’s wishes, as well as reducing the eventual estate tax burden. Although there are many benefits to estate planning, the article reports that 56 percent of retail investors die without any estate plan in place. In comparison, of investors with $5 million or more in investible assets, only 6% die without an estate plan.

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Advantages Of An Irrevocable Life Insurance Trust

Many Americans may be unaware of what an irrevocable life insurance trust (“ILIT”) is, let alone the benefits it may provide to them. A recent article discusses several of the benefits offered by ILITs.

Typically, life insurance policy proceeds are not subject to income taxation. However, they are included in the calculation of a person’s gross taxable estate. This is where the ILIT comes in. If a person puts their life insurance policy into an ILIT, the proceeds of the policy are kept out of his or her taxable estate. The proceeds will therefore be available to his or her heirs free of income and estate tax.

Additionally, ILITs are a great way to provide cash to help pay for the taxes that will be levied on your estate. Beneficiaries of your ILIT can use some of the proceeds to pay the taxes owed on your estate. By doing this, your actual estate is kept in tact. This strategy is especially beneficial to those whose estate consists largely of illiquid assets such as a business or real estate. Through setting up an ILIT, you can ensure that your family will not have to sell the illiquid assets in your estate in order to satisfy the estate taxes.