If It’s Good Enough for the Clintons, It’s Good Enough For You

The Clintons recently made the news simply for taking advantage of Estate Planning and financial planning strategies that maximize wealth and limit the encroachment of taxes. With an estate tax that has an upper limit of 40 percent of assets on death, it only makes sense for those with bigger estates to conduct some planning well in advance.

If Its Good Enough for the Clintons Its Good Enough For You
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One of the most important steps taken by the Clintons was the transfer of their New York house into a residence trust, a move they made back in 2011. These trusts have major advantages, including house value appreciation as an occurrence outside the taxable estate. The overall goal for many estate planning attorneys and other financial experts is to help build up the nontaxable estate as much as possible.

This transfer of ownership of the house specifically is a tool that could have implications for numerous Americans concerned about the tax hit on their estate. A sample strategy involving this plan is to divide house ownership in half and storing that ownership in two separate trusts. While continuing to live in the house, ensure that the trust is structured to pass on to heirs in 10 years. Remember, the growth value during that period falls outside your estate. At the end of the 10 year period, pay rent to the heirs if you plan to continue living in the house. Those rent payments are also shielded by passing outside of the estate, protecting them from tax.

For more tax-saving strategies and long-term financial planning, contact our office today. Call us at 732-521-9455 or send an email to info@lawesq.net

Is the New Jersey State Estate Tax Too Prohibitive?

Most people recognize that it can be costly to live in New Jersey, but they don’t realize that it may also be expensive to die here. Unless you have had a direct personal experience with some kind of estate planning, it’s unlikely that you understand the full implications of the state estate tax. It’s worth considering in advance to prevent a major hit on your assets and investments.

Is the New Jersey State Estate Tax Too Prohibitive
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New Jersey is one of only two states (Maryland is the other) that collects both an estate tax and an inheritance tax. In the state of New Jersey, the estate tax is factored into any estate worth $675,000 or more and the estate tax includes stocks, bods, and real estate in addition to more common sources like savings or checking accounts.

A recent study from Fairleigh Dickinson University shows that New Jersey residents aren’t thrilled about the major tax hit on their assets, with 57 percent of New Jersey residents indicating their plans to leave the state on retiring since affordability is such a major issue. Are you one of the 57 percent? Estate tax planning using a DING trust, for example, may help to alleviate some of the impact on your estate by allowing you to transfer assets into a trust that avoids some of the negative implications of New Jersey taxes. To learn more about your options, contact our office today to discuss long term financial planning for your estate. Send us an email to info@lawesq.net or contact us via phone at 732-521-9455

Inheritance Taxes and State Estate Taxes

On top of federal estate taxes to which your estate can be subject, you may also need to plan in advance for state estate and inheritance taxes. As far as inheritance taxes go, six states use these to obtain funding from assets passed on to heirs. In the past, state estate taxes largely weren’t an issue for most of the population because the federal government gave an estate tax credit based on how much was already paid into state taxes. Now it’s largely up to the states, and if you’re a resident in one where your assets could be subjected to a pretty substantial hit, it’s simply prudent to plan in advance.

Inheritance Taxes and State Estate Taxes
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The state thresholds aren’t so high that many people can be exempted, either: New Jersey’s exemption stops at $675,000. Factoring in the value of many people’s homes, retirement accounts, and other assets, it’s not hard to surpass that. And New Jersey is a double whammy- state taxes and inheritance taxes apply there, so it’s very common for individuals and business owners especially to consider their planning options well in advance.

The good news is that there are strategies and opportunities to identify and mitigate risk, but they do depend on your state. You want to find a professional that is up to date on all relevant state laws and regulations to ensure that your estate is protected properly. Contact us today to begin or to review your existing plans by email at info@lawesq.net or at 732-521-9455.

Minimize Estate Taxes Through Gifting

Your estate planning goes farther than figuring out who should be named as a beneficiary and how much they should receive. Comprehensive planning also thinks about the best way to distribute assets and how the methods you choose influences the beneficiary’s life.

Minimize Estate Taxes Through Gifting
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On your death, your estate is subject to Generation Skipping Tax and Estate Tax. In states like New Jersey, your estate will also be subject to a State Estate Tax plus an Inheritance Tax in some cases. Without realizing the impacts, a portion of your estate can be swallowed up before your beneficiaries ever receive it. Some states also impose their own estate tax, diminishing your estate even further. The good news is that some advance planning with a professional can reduce the impact of these taxes.

To start with, you can take advantage of the federal exemption amount of $5.34 Million, which allows you to give away up to that amount during lifetime and death (total) without initiating that estate tax. Annual exclusion gifts, too, can be helpful for minimizing the blow of a big tax. Married couples are able to combine exclusion powers to give up to $28,000 per year per person without being hit with a tax, and this is separate from the federal gift-tax exemption.

This is just the tip of the iceberg when it comes to strategies to protect wealth and minimize taxes. Many tools are available and you can learn more from contacting us today for a consultation. Send us a message at info@lawesq.net or contact us via phone at 732-521-9455 to begin.

Put Your Trust in a Trust

Now is a great time to evaluate how using a trust can help you achieve your financial goals. The federal gift tax and estate tax laws give big incentives for using trusts in estate planning. In the pasts, trusts have been used mostly to transfer gifts to children while limiting estate taxes on wealth, but there are numerous other benefits.

Put Your Trust in a Trust
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An appropriately funded trust can help ensure that your assets are protected and available in the event that you become incapacitated. When you pass away, that same trust can be used to pass on assets to your beneficiaries. You can also protect your legacy by keeping your assets away from any of the heir’s creditors, too.

There are probate savings and privacy reasons that a trust can benefit you, too. There are potentially large fees for going through probate and your probate records will also be public. Putting your assets into a revocable trust instead can keep them from having to go through probate at death- therefore protecting you and your family’s privacy.

Finally, trusts can be a good tool when you live in a state that has an estate tax. Some states levy estate taxes that are rather substantial, but trust planning is one way to cut down on how many estate taxes will be levied on your death. This can also be a good tool for those who have real estate located in a state that imposes estate taxes.

Thanks, But No Thanks. State Estate Taxes & Disclaimer-Based Approach

Twenty-one states have their own estate taxes, including New York and New Jersey. Many of these states have exemption amounts beneath the federal exemption, so it’s worth factoring in state estate taxes in your overall estate planning process.

Thanks But No Thanks State Estate Taxes & Disclaimer-Based Approach
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One way for married couples domiciled in those states with it’s own estate taxes to plan is to use the disclaimer-based approach. A disclaimer refers to a refusal by a beneficiary of a gift transferred to that beneficiary during life or at the time of death through a will, trust, or another mechanism.
The government makes a distinction between “nonqualified” and “qualified” disclaimers.

Using a disclaimer-based approach, the residuary estate passes on to the surviving spouse in a plan that provide that if the surviving spouse disclaims the interest, those assets will pass to a disclaimer credit shelter trust. This approach can add an element of flexibility to planning by empowering the spouse to make any needed changes. The surviving spouse will need to execute a disclaimed within nine months of the date of death. In order to ensure that you are prepared to use this disclaimer, work with an estate planning attorney to learn more. For all your complex estate planning, contact us at info@lawesq.net or via phone at 732-521-9455 to get started.

The N.Y. State of Mind: Changes to New York Gift Tax and Estate Laws

The NY State of Mind Changes to New York Gift Tax and Estate LawsAt the end of March, Governor Cuomo approved changes to New York’s estate and gift tax laws while also making amendments to income tax rules. One of the most important changes was in relation to the estate tax exclusion amount. The amount that an individual can pass without being hit by the New York estate tax, which was previously $1 million, has now been increased based on the follow specifications:

  • For those individuals who pass away between April 1, 2014 and April 1, 2015, the exclusion amount is increased to $2,062,500
  • For those individuals who pass away between April 1, 2015 and April 1, 2016, the exclusion amount is increased to $3,125,000.
  • For those individuals who pass away between April 2, 2016 and April 1, 2017, the exclusion amount is $4,187,500
  • For those individuals who pass away between April 1, 2017 and January 1, 2019, the exclusion amount is $5,250,000.

Starting in 2019, the exclusion amount will be indexed for inflation purposes. Presently, the New York estate tax will stay at 16 percent. It’s also worth knowing that there’s an estate tax cliff for those with taxable estates between 100 percent and 105 percent of the state exclusion amount. There’s never been a better time to meet with an estate planning specialist to ensure that you are maximizing protection of your assets. Since estate planning and tax rules are complex and constantly changing, an annual review is recommended so that your documents and plans are fully up to date. To capitalize on your assets with a comprehensive estate plan, contact us at 732-521-9455 or email us at info@lawesq.net

3 Estate Planning Mistakes From Which To Learn

If you haven’t already done your estate plan, perhaps hearing a few horror stories about people who made common mistakes will prompt you to do it — and do it right.

Last Will And Testament
Last Will And Testament (Photo credit: Ken_Mayer)

An article in the Green Bay Press Gazette, recounts a few cases that detail classic mistakes involving estate planning, or the lack of it.

  • A former Supreme Court justice wrote his own will, using just 176 words. It cost his family $450,000 in estate taxes and court fees because he didn’t take the time to do it right.
  • Lesson: Know what you know, know what you don’t know.

  • A young woman left her assets to her minor son. When she died, she had $1 million in her estate due to a wrongful death claim. Her son died soon afterwards and the money went to his only heir, his father, who was a drug addict.
  • Lesson: She could have put the assets into trust with a contingency plan were he to die, so the money could not go to the father.

  • A father had a stroke and had to go into a nursing home. His children closed his bank account but never went through his mail. After he died, they found a statement for a $1 million life insurance policy. But the premiums had not been paid since the bank account was closed. They didn’t get the money.
  • Lesson: Make sure somebody knows what assets you have, usually the person who has power of attorney, a trustee named in a trust you have set up or the personal representative named in your will.

These are common mistakes that can be avoided if you engage a qualified estate planning attorney to help you with your estate plan.

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Where Not To Die, Part II

As we told you a week ago, in addition to federal estate taxes, state estate taxes form a crazy quilt of different rules across the country. So much so that Forbes Magazine recently published an article on “Where Not To Die in 2014.”

Tax (Photo credit: 401(K) 2013)

Any guesses as to which state is the worst?

That’s right. New Jersey. Runner-up: Maryland. Both states impose not only an estate tax, but also an inheritance tax. As the Forbes article states:

“New Jersey, for example, imposes an estate tax between 4.2% and 16% on estates above $675,000, and an inheritance tax of between 11% and 16% on assets left to a sibling, nephew, niece or friend, but no inheritance tax on money left to parents, children or grandchildren. (Any estate tax owed is reduced by the inheritance tax paid.)”

See? We told you it’s a mess. That’s the bad news. The good news is that you can do something about it if you go see a competent estate planning attorney before it’s necessary.

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Where Not To Die

Although the federal estate tax exemption has been raised to a generous $5.3 million, what about the states?

The truth is that, despite the large federal exemption, estate taxes still pose a worry in many states. In fact, 19 states as well as the District of Columbia impose estate taxes. The list includes New Jersey.

New Jersey
New Jersey (Photo credit: tico_manudo)

And every state’s rules are slightly different, making it confusing should one be considering moving for whatever reason, whether it be to save tax money or to be closer to grandchildren.

So some wealthy individuals are now consulting estate planning attorneys to help them with what has become known as “domicile planning,” to help them not escape income taxes but estate taxes, according to an article on Forbes.com.

The federal estate tax exemption of $5.3 million is now permanent, with a 40 percent tax applied to anything over that figure.

States typically have far lower exemptions and impose up to a 16 percent tax on anything over the exempt amount. New Jersey’s exemption, for example, is only $675,000. The tax on anything over that is from 4.2 percent to 16 percent.

But some states are making changes. Illinois reinstated its tax in 2011. Delaware made its “temporary” tax permanent.

That’s why estate planning attorneys are counseling some clients to move to Florida where there is no income tax and no estate tax. To benefit, you have to consider Florida to be your home at the time of your death even if you don’t live there all the time. It is a subjective evaluation.

In the meantime, there are moves afoot in some states to try and repeal the tax. Your estate planning attorney will know the latest changes that are being passed or considered.

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Hoffman’s Will Raises Legal Issues

Actor Phillip Seymour Hoffman, who died of a drug overdose in February, had not updated his will in years. The mistake could prove troublesome for two of his daughters and their mother.

Philip Seymour Hoffman won a Academy Award for...
Philip Seymour Hoffman (Photo credit: Wikipedia)

The will was signed in 2004 when the actor had just one child, Cooper, now 11. But he subsequently had two daughters, Tallulah and Willa, neither of whom are mentioned in the will.

This may or may not be a problem.

The award-winning actor, who was just 46 when he died, left everything to his longtime companion, Marianne O’Donnell, the mother of his three children. But that’s just the beginning of the story, according to an article on Forbes.com.

Since Hoffman and O’Donnell were not married, she does not get any of the estate tax breaks available to spouses. You can give an unlimited amount to your spouse during life or in an estate plan, with no federal or state tax applied.

Hoffman was worth an estimated $35 million at the time of his death. The federal estate tax exemption is $5.3 million, but the rest is taxed at up to 40 percent. New York has its own estate tax of up to 16 percent for non-spouses, with a $1 million exemption.

In all, Hoffman’s estate will be taxed at more than $15 million. And since they were not married, any assets that remain at O’Donnell’s death would be taxed again.

There may be a way out for O’Donnell, however, The will allows for her to turn down all or part of her inheritance and put it into a trust. Any assets that go into the trust bypass her estate and cannot be taxed when she dies.

But the fact that only Cooper was mentioned in the will, complicates the matter. The will provides that he get half the principal of such a trust when he turns 25 and the other half when he turns 30. However, the law of New York and most states protects children not named in a will that has not been updated from being disinherited.

The article suggests that O’Donnell, who is the executor of the will, should appoint a guardian to represent the two sisters.

Other matters that could complicate matters include if Hoffman had set up a retirement account or a life insurance policy.

But all the confusion could have been avoided if Hoffman had included a clause in the will stipulating that any reference to Cooper includes any other children born after him.

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It’s Good Enough for Walmart: Tax Avoidance with a GRAT

Billionaire Sheldon Adelson is not alone in his disdain for estate taxes. As one of the world’s richest men, Adelson has the ability to hire top attorneys and advisors to employ financial and estate planning tools that ensure his estate pays little or no taxes. One of these tax avoidance tools is the Walton grantor retained annuity trust (“GRAT”). A recent article discusses the use of this popular trust.

Walmart exteriorcropped
(Photo credit: Wikipedia)

Named after Walmart heir Audrey Walton, the Walton GRAT is a popular tool used by the wealthy to avoid estate taxes. Essentially, a Walton GRAT works by rapidly transferring large quantities of stock into a trust fund that requires that the initial investment be returned after two years. If the stock gains value while in the Walton GRAT, the additional value will be left over in the trust. The trust can then transfer the remaining value to a third party without incurring gift tax liability.

Recognizing this loophole, the government sued Audrey Walton for using a similar scheme in 1993. The court ruled in Walton’s favor, thereby legitimizing and nicknaming the Walton GRAT. Since then, many wealthy individuals – such as Facebook chief executive Mark Zuckerberg and Goldman Sachs chief executive Lloyd Blankfein – have benefited from their own use of the Walton GRAT.

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Believe in Vacation Ownership? Estate Planning for Your Timeshare

Some assets are more difficult to plan for than others.  As a recent article explains, timeshares can be the source of an extreme headache when it comes to estate planning.

First, it is important to realize that, after death, the deceased owner’s estate remains responsible for paying any timeshare maintenance fees and property taxes incurred. These fees can quickly add up, especially when the decedent’s heirs are unaware of them.

Most often, the decedent owner’s estate wishes to sell the timeshare. Unfortunately, timeshares are difficult to sell and it is often necessary for the estate to go to the timeshare company itself. The company may assist in selling the timeshare, however it will likely charge a large commission.

If the timeshare is deeded – rather than leased – the decedent owns a real property interest in it. This means that after the owner dies, the transfer of the timeshare will be controlled by the laws of the state where the timeshare is located, regardless of where the owner resides.

Alternatively, if the timeshare is held in a joint tenancy with a right of survivorship, the timeshare will automatically pass to the joint tenant. The surviving joint tenant will need to file an affidavit of death in order to have the deceased joint tenant removed from the deed.

Survey Says! Many High Net Worth Individuals Still Fail to Plan

Although estate planning is vital for high net worth families, a recent survey released by Spectrum’s Millionaire Corner reveals that less than one quarter of millionaires have sought estate planning advice from their financial advisors.

Although estate planning is vital for everybody, it comes as no surprise that it is even more essential for America’s wealthier residents. Estate planning is an important component of financial planning, as it ensures that a person’s assets are managed and distributed according to his or her wishes. Additionally, estate planning allows for a person to provide for the care of any minor children, direct decisions concerning end-of-life care, and select a power of attorney to deal with finances in the case of incapacity.

The younger and least wealthy millionaire investors surveyed indicated that they would seek estate planning advice in the future. However, it is important to remember that the future is not guaranteed. All too often, illness and accidents can cut lives tragically short.

If you do not have an estate plan in place, consider meeting with an estate planning attorney soon. Although it may be difficult to deal with the reality of your own mortality, it is the only way to ensure a smooth transition of your assets and the protection of your family after you are gone.

Watch That Step!: Estate Planning Oversights to Avoid

In order to have a solid estate plan, it is important to not only carefully put the plan together but to revise it regularly as well. With all the work involved, it is not surprising that estate planning oversights are common. A recent article discusses several estate planning oversights that can lead to unintended consequences.

  1.       Failing to Plan: The largest estate planning mistake a person can make is failing to create an estate plan. If a person dies without an estate plan, his or her assets are distributed to his or her heirs in accordance with state law. This might provide the outcome the decedent had wanted, but often it does not.
  2.       Failure to Understand the Difference Between Probate and Non-Probate Assets: A probate asset is any asset that is transferred through a will. These assets go through the process of probate. A non-probate asset is transferred by contract, outside of the will. In order to create the most efficient and cost-effective estate plan, it is important to understand the differences between these two types of assets.
  3.       Failing to Pay Attention to Tax Apportionment Clauses: State and federal taxes may be assessed to various assets according to different rules. While some assets may be taxed, others may not. This becomes problematic when two children receive two inheritances of equal value but one has to pay taxes while the other does not.

How to Plan for, or Avoid, Transfer Taxes

As a recent article suggests, estate planning encompasses a lot more than most people would think. Not only does estate planning allow you to structure the final distribution of your assets upon your death, but it also allows you to provide for the management of your assets during life, plan for the care of your children, and make important decisions about what kind of medical care you would like to receive at the end of your life. Although estate planning encompasses all of these things, most people come to the table with an overwhelming goal of avoiding transfer taxes, namely Estate Taxes, Inheritance Taxes and Gift Taxes.

There are plenty of ways that estate planning can be used to minimize the tax liability an estate will face after the owner’s death. In many situations, it is possible to plan for zero estate taxes. Some strategies involve giving up control of certain assets. For example, a person could zero out their tax liability by setting up a charitable trust. Others, such as Family LLCs (FLLCs) and Family Limited Partnerships (FLPs) allow owners to maintain more control..

For the ultra-wealthy, there are many sophisticated asset transfer mechanisms that can be used to avoid transfer taxes. These mechanisms include foreign grantor trusts, dynasty trusts and private placement trusts. Again, these mechanisms often mean that a person has limited or no access to the assets within the trusts.

For those who want to maintain full control of their assets, life insurance is another way to provide money for anticipated taxes. These policies are often used to provide quick cash for a person’s heirs to pay any taxes and fees on the estate.

Our version of TMZ: Estate Planning Blunders & The Famous People Who Committed Them

Famous people are like us in many ways. They are born, they pay taxes, they make estate planning blunders, and they die. A recent article discussed several of the more common estate planning mistakes and the famous people who committed them.

English: US Congressional picture of Sonny Bono
English: US Congressional picture of Sonny Bono (Photo credit: Wikipedia)

Failing to Plan

Perhaps the worst estate planning blunder is failing to create an estate plan. When entertainer and Congressmen “Sonny” Bono died unexpectedly in a 1998 skiing accident, he left no estate plan. Therefore, his wife had to petition the court to administer his estate and continue his business ventures.

Failing to Seek a Professional

If anyone should be able to draft his own will without incident, it would be a former Chief Justice of the United States Supreme Court. However, even United States Supreme Court Justice Warren E. Burger couldn’t get it right. Burger drafted his own will, which contained simple errors, failed to address important things, and cost his family $450,000 in taxes.

Failure to Update

Importantly, a person’s estate plan should grow and change with him or her. Sometimes an out-of-date estate plan is worse than having no estate plan at all. When Actor Heath Ledger died at a young age, he had a will prepared. However, the will was drafted before the birth of his daughter, Matilda, and therefore left nothing to her.

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Calling an Audible: Avoiding Taxes Caused by a Bypass Trust

Since estate-planning maneuvers can cause unintended consequences, it’s important to plan with flexibility. A recent article discusses how one man dealt with the unintended consequences of a bypass trust he inherited from his wife before it was too late.

Bypass trusts are a very common estate-planning tool used to pass wealth to several generations. Angie Stephenson, partner at ParenteBeard Wealth Management LLC, explains that “these [bypass] trusts were common years ago when the estate-tax exemption was much lower, so you see them in many wills.”

When this particular man’s wife passed away, he received a bypass trust worth $730,000. In creating the trust, his wife’s intentions were that the trust provide him with income for the remainder of his life, and then distribute the remaining assets to their children. The problem was that when the children receive the remaining assets, they would also receive a large bill for capital gains taxes.

Through planning, the man was able to work out a way to include the trust assets into his estate, thereby eliminating the capital gains tax liability for his children. In order to accomplish this transfer, the man was granted the power of appointment over all assets held by the trust. Importantly, this maneuver gave him control over the assets which would then be considered as part of his estate upon his death. Such a result illustrates the benefit of planning with flexibility.

Income Tax Planning While Planning Your Estate

Now that the American Taxpayer Relief Act of 2012 has bumped the federal estate tax exemption up to $5.25 million, a recent article explains that many individuals are now turning their energy to estate planning maneuvers that will reduce their income tax bills.

Most income tax planning strategies are aimed at individuals who have a high net worth, yet do not anticipate their estate to be valued at or above $5.25 million upon their death. One popular strategy is making a loan to a family member or friend in a lower tax bracket at a low interest rate. The borrower can invest the money and take out the dividends, interest, and capital gains. Eventually the borrower will pay the loan back and the lender will have his or her money back so he or she can pay for retirement or medical expenses.

Like the maneuver described above, income tax planning often involves the shifting of assets in order to reduce the income tax liability on those assets. Incorporating a trust into the strategy may also fortify the plan to protect against creditors and State Estate taxes.

Minding Mom & Pop’s Shop: Five Steps to the Succession of Your Family Business

Succession planning for a family business is often no easy task. Recently, an article in Forbes outlined the five necessary steps for a viable succession plan. The five steps include:

English: Demise of a family business? Coulson ...
(Photo credit: Wikipedia)
  1. Planning for the general transition of the business: The article notes that only one third of family businesses successfully make this transition.
  2. Creating a plan that aligns the family interests: This is important because the succession of a business must serve many family goals. Not only must it pass the business on to the next generation, but it must also provide a retirement income for the current owners.
  3. Creating a buyout agreement that balances financial returns: Often it is difficult to value a family business. While the retiring owner may look to the balance sheets for the value, the real value of the business is often based on a model of earnings capitalization.
  4. Creating a succession plan that quells any potential interfamily disputes: Often, interfamily disputes can spell the end of a family business. These disputes are most typical where the interests of all family members are not aligned. Pay particular attention when there is a divorce or death that leaves a non-involved family member stock.
  5. Avoid potential estate and inheritance issues, such as tax and probate delays that may hold up the succession of the business.