Why Everyone Needs An Estate Plan

With the current estate tax exemption over $5 million – $5.25 million to be exact – many people wonder if estate planning is necessary for them. As a recent article points out, the answer is yes.

Estate taxes are only one of a myriad of reasons why a person should put together an estate plan. The main reason for which people create estate plans is so that they can be sure that their assets will be distributed according to their wishes. No matter if you are very wealthy, or have a modest estate, an estate plan is vital if you wish to direct the distribution of your assets. Moreover, by providing instructions for an orderly distribution of your assets, you can save your heirs from the infighting that often results.

It is also important to draft a valid will if you wish to avoid probate. Many people falsely believe that if their estate is not subject to estate taxes, it is not subject to probate. This, however, is not the case. If you would not like your estate to go through the process of probate, you must put together an estate plan that utilizes various estate planning tools that will transfer the bulk of your estate outside of probate.

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Insurance Considerations When Transferring An Asset To A Trust or LLC

Two popular and time-tested methods of wealth transfer are the trust account and limited liability company. While both of these options can provide an excellent vehicle for the transfer of assets, it is important that the creator consider all the related details. One such detail that must be addressed is insurance.

Without addressing insurance considerations while forming a trust or limited liability company, a person may face an unexpected and catastrophic loss of insurance coverage. All insurance policies, no matter what type, are written to provide the owner or titleholder of an asset with coverage. Problems may occur, therefore, when assets are transferred to a trust or LLC.

For example, a person may transfer ownership in their home to a trust fund, LLC for various reasons including estate planning, tax considerations, or protection from creditors. Upon making such a transfer, the homeowner must be sure to change the homeowner’s insurance policy to reflect the fact that the home is now owned by the trust or LLC. Should the previous homeowner fail to make this change and the home is damaged, the insurance company may question the ownership change. Without making the appropriate changes, therefore, a homeowner could become potentially liable to pay any arising damages out-of-pocket.

Succession-Planning: Separate Ownership & Management

A succession plan is an important tool for any business owner who wishes his or her business to continue on after his or her death. Essentially, a succession plan allows a business owner to dictate who will take over the business and under what terms after his or her death. A recent article discusses one major mistake that many business owners make in this process.

In the process of succession planning, the current business owner must consider the ownership and management of the business. These two areas are “different, but inextricably linked.” The mistake that many business owners make is that they attempt to deal with both ownership and management simultaneously. This decision to deal with these two facets combined often proves to be risky.

There are a multitude of reasons why ownership and management should be dealt with separately. First, changes in both areas may become quite complex. There may be many internal and external stakeholders with expectations for each role, which would be easier to manage on an individual basis. Secondly, dealing with these areas separately reduces decision-making pressure on all parties. Moreover, it allows you to address each separately, with more clarity and objectivity.

Considering ownership and management separately allows a business owner to create workable solutions for a successful transition.

A Permanent Estate Tax For The Wealthy

After nearly a decade in flux, there is finally a permanent federal estate tax. In 2013, however, a mere 3,800 estates will be required to pay the tax. Moreover, the total amount paid by this small number of estates will only amount to $14 billion, which is a mere half of the total revenue from five years ago.

Prior to passage of the American Taxpayer Relief Act of 2012 (ATRA), the federal estate tax was in a state of constant flux. In 2001, the effective exemption was $675,000. The exemption amount jumped to $3.5 million in 2009. The ATRA has created the first permanent estate and gift tax in over a decade. As a result of this, wealthy Americans will be able to spend less time arranging gifts in anticipation of changing laws.

With the current exemption of $5.25 million, most estates – approximately 99.9 percent – will pass to beneficiaries tax-free. Large estates, however, now face a significant tax bill. For example, a $100 million estate will have to shell out approximately $5 million more in federal taxes.

As Forbes explains, the most important part of the ATRA is not the details of the taxes, but the fact that Congress has made the tax permanent. Although wealthy families are still likely to hire estate planning attorneys and financial advisors to create personalized estates that avoid taxes, the professionals that they hire will not have to face the challenges of a constantly changing rate.


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Contingency Planning For Your Business

As the economy tip-toes back in the right correction, businesses must still be sure to implement contingency plans in the event of another economic recession. As a recent article in Forbes explains, a recession can cause a business not only sales and profits, but time as well.

The first step of contingency planning is to make a list of the major decision-making areas that will be subject to short-run change during any recession. Although all companies are different and will therefore create different lists, some areas that most companies will include are prices and terms, labor, materials and inventory, capital spending, and financing.

The next step in contingency planning is to create plans for each decision-making area for mild, moderate, and extreme economic downturn. In the area of prices and terms, for example, it is often wise to tighten credit terms during a mild recession. Although sales representatives may wish to offer eased credit terms to consumers during harsh economic times, it is important to ensure that your accounts payable do not turn into write-offs.

In a moderate recession, it may be necessary to lay off workers and cancel expensive projects. If the economic situation becomes extreme, your company must enter survival mode. In this final category, it is most important that the company survives. Often, extreme measures are necessary.

The advantage of having three levels of contingency plans in place is that, should there be an economic downturn, you will be able to act quickly to reduce losses.

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Lacking a Business Succession Plan? You’re Not Alone

An alarming number of business owners do not have succession plans for what will happen to their businesses when they retire, die, or become disabled. Financial professionals expect the demand for business succession planning to grow as the baby boomers continue to age.

When creating and growing a small business, many business owners never think of succession plans. However, all small businesses should have a plan for succession if they want their business to continue on after they are gone.

As with any part of a business, the earlier you create a succession plan, the better your chances that the plan will be successful. With such a plan, you can not only decide who your successor will be, but exactly how the business will be transferred. Moreover, a solid succession plan can assist you in transitioning into retirement.

The first key step to creating a succession plan for your business is determining how profitable the business may be after you are no longer running it. Along with this consideration, consider what steps you need to take in order to keep your business profitable. You also need to think about what your ultimate goals for the business are, whether you want a family member to run the business, or whether you want to sell it to a key employee.

Pointers for Asset Protection Planning

An article in Forbes likens asset planning to “taking chips off the table in good times, so that you can still walk away from the table a winner.” With that idea in mind, the article offers several tips for protecting your assets from creditors.

One of the first things you can do to protect your assets is to have a plan for asset protection before a claim even arises. This is important because creditors can potentially undo many asset transfers undertaken after a claim arises under various “fraudulent transfer” laws. Moreover, if a creditor is successful in undoing a fraudulent transfer, he may also be able to hold the debtor, as well as anyone who assisted in executing the transfer, liable for attorney fees.

Clients must also realize that asset protection is not a substitute for having a proper insurance policy. Asset protection, rather, should be seen as a supplement to one’s liability and professional insurance plans. Moreover, in the event of a lawsuit, proper liability and professional insurance will pay to defend and settle the lawsuit. An asset protection plan will not.

A final note offered by the article is that asset planning should be based on the underlying assumption that creditors will be aware of and understand the purpose and extent of your asset protection plans.


Equalizing Inheritance for Your Children

When one estate planner hears his business-owning clients say, “I love my kids equally, so I want to share my assets equally,” what he actually hears is, “I don’t know how to handle this, so when I’m gone, I’ll leave the business to the kids and let them sort it all out.”

The article in Forbes goes on to state that clients who truly want their business to continue to grow and thrive after their death, but also want their children to succeed in whatever career path they have chosen, should speak with an estate planning attorney about logically equalizing their children’s inheritance.

One potential method of inheritance equalization is through life insurance. Using this strategy, one can set up their estate plan so that, upon their death the children who would like to take an active role in the family business inherit your stock in the business, while those children who have chosen another career path receive monetary inheritance equivalent to the value of the stock through life insurance death benefits and other non-business assets you hold at the time of death.

Through inheritance equalization, parents can create equal and equitable transfers to the next generation.


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Estate Planning for Married Couples

In light of the fiscal cliff bill, a recent article in Forbes offers some estate planning advice for married couples.

One important item made permanent by the fiscal cliff bill was portability, the ability for a widow or widower to increase their $5.25 million tax-free amount by the unused exemption of their recently deceased spouse. When using the two exclusions in tandem, a widow or widower can potentially transfer up to $10.50 million tax-free.

Regardless of portability, spouses are able to transfer unlimited funds to each other both during life, as well as part of their respective estate plans. This is known as the marital deduction. Without portability, however, the first spouse’s tax exemption is often lost when the second spouse dies. Careful tax planning maneuvers, such as bypass or credit-shelter trusts, are often used to avoid this problem.

With the extension of portability, spouses who qualify will not have to create bypass or credit-shelter trusts for the sole purpose of preserving their deceased spouse’s federal exemption amount. The extension of portability only applies to spouses who died after December, 31, 2010. It is important to remember that portability is not automatic. In order to utilize this tool, an estate planner will have to assist you in transferring the unused exemption to the surviving spouse.

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Pitfalls of Joint Ownership

One popular estate tax avoidance device is joint ownership of property between generations. Unfortunately, this device often leads to an ugly and expensive family feud. An article in Forbes discusses common pitfalls to be wary of when considering joint ownership between generations.

When you become a joint owner with another person, you become vulnerable to their creditors. Due to the very nature of joint ownership, one owner’s creditors can attempt to satisfy their claim through some or all of the shared assets. Similarly, if the spouse of one joint owner files for divorce, he or she may claim that the joint assets are part of the marital estate.

Another common pitfall arises when a joint owner decides to borrow from a joint asset, because joint owners can borrow from such assets without getting permission from the other. Finally, once you pass away, there is nothing requiring the joint owner to share the assets with other heirs unless they file a lawsuit to enforce the joint owner’s intent. Such lawsuits often end in bitter family court disputes.

If you are considering joint ownership as part of your estate plan, it is important to speak with an estate planning attorney about these and other pitfalls.

Using a Flexible Irrevocable Life Insurance Trust to Shelter Life-Insurance Proceeds

Many people do not realize that life insurance proceeds are in fact taxed. Although these proceeds escape income taxes, they ARE  counted as part of your taxable estate. An article in The Wall Street Journal discusses one way to shelter such proceeds from estate taxes, the Irrevocable Life Insurance Trust.

In order to avoid such tax consequences, you may choose to transfer ownership of your existing life insurance policy to an Irrevocable Life Insurance Trust (“ILIT”). By transferring such ownership, the ILIT is removed from your estate. Once established, an ILIT also allows you to split death benefits among several beneficiaries any way you wish. You also retain the power to decide how and when the benefits will be distributed to your heirs.

If you believe that an ILIT is right for you, you should act sooner, rather than later. Existing policies transferred to ILITs are subject to a three-year look-back period, meaning that if you die within three years of its creation, your life insurance proceeds will revert back to your name and be included within your taxable estate (Although this is not the case for new policies purchased directly by the life insurance trust.

An ILIT is usually used for life insurance policies that were set up for the sole benefit of the heirs. If you need to own or access your life insurance policy at anytime, an ILIT may still be a good solution for you, but it must be drafted with that goal in mind.

What is a Family Limited Partnership (or Family Limited Liability Company)?

There are many sophisticated estate planning strategies available to affluent families to ensure that the majority of their hard earned money stays within the family, rather than in the hands of the IRS and state taxing authorities. One such device is the Family Limited Partnership (“FLP”) or Family Limited Liability Company (“FLLC”.) FLPs & FLLCs are advantageous because they provide estate tax savings, gift tax savings, and asset protection.

A FLP or FLLC may own a variety of things, such as real estate or shares on your company. In order to retain control over the assets, you may choose to be the general partner or managing member. That way you can comfortably give your children a majority of the equity in the FLP/FLLC while maintaining control yourself.

By gifting limited partnership/membership interests to trusts or directly to members of your family, you reduce your taxable estate. Consequently, the amount of any applicable estate tax that your heirs will have to pay upon your death will be reduced by the ownership interest you gave away. Such gifts also apply for the annual gift tax exclusion.

As an article in Forbes points out, FLPs require not only good planning but good execution as well. Many times an FLP fails not because of a faulty set-up, but because of a poorly carried out transaction. The same can be said of FLLCs. It is therefore vital to coordinate between those who create your Family Entity, and those who will be working with it, such as accountants, to avoid problems.

Cutting the Estate Tax Burden for Private Company Owners

Owners of private companies often hope that the business they have built will benefit their families in the long term. No matter whether you plan to benefit your loved ones by selling the business upon your death and providing them with the proceeds, or passing the business itself on, there are certain steps you can take now that will minimize the tax burden when your business eventually changes hands. An article in the Financial Post details some of these steps.

One of these steps is to provide for charitable donations in your will. Such donations are treated as gifts made in your last year of life, and therefore provide a credit on your final tax return. In the year of and immediately preceding your death, the charitable donation limit is 100%, rather than 75% in all other years.

There are also a multitude of trust arrangements you can set up in your will  (testamentary trusts) as a tax-effective way to transfer business assets to your families. Testamentary trusts pay income tax at graduated rates as though it were an individual. Therefore, by creating a “new taxpayer” through the trust, you may provide your family with an annual tax savings. Moreover, your spouse will not have to pay capital gains tax on assets transferred from your will to a spousal trust.

Estate Planning Tips for Female Entrepreneurs

For female entrepreneurs who juggle running a business as well as a family, it is often hard to find time to create an estate plan. However, as an article in Forbes discusses, not creating or updating an estate plan may create undesirable consequences for a female entrepreneur’s family after she passes.

The article suggests that female entrepreneurs take three simple steps to avoid leaving chaos for their families and business partners. Moreover, even if the female is responsible for managing the business and household finances, it is vital for her to make sure that her spouse — if any — has a working understanding of the finances.

One key area to focus on is ensuring that your business assets travel in the right direction. While many owners would like their ownership interest in the company to pass to their business partners, the laws of intestate succession  — which dictate disposition of your assets if you die without a will — will most often pass your share to your spouse or children. One way to avoid this is to put in place a buy/sell agreement. Such agreements provide instructions for how shares will be sold or distributed if a partner dies or otherwise disposes of his shares.

It is also important to assemble and make sure that you and your family are familiar with your team of advisors, and to put mechanisms in place to protect your family assets.

Increase the Value of Your Charitable Giving

As the economy continues to heal, charitable giving is again growing. Following two consecutive years of decline, charitable giving increased 3.8 percent from 2009 to 2010. According to nonprofit leaders, however, it could take years for charitable giving to return to pre-recession levels.  A recent article in InvestingDaily discusses strategies for those who are able to make charitable contributions to maximize the current and future value of the gifts transferred.

Property (Photo credit: mallix)

First, consider giving property that you know is going to appreciate. By gifting such property out before it appreciates, you remove that appreciation from your own estate. Gifting appreciable assets should happen early in the year so that any subsequent appreciation during the year will not count against your exclusion amount. Alternatively, you can also save on appreciation costs by giving an asset when it has a low market value.

On the other hand, it is wiser to retain “loss property.” If a piece of property decreases in value during your ownership of it (rendering it “loss property”), neither you nor a future recipient is allowed to deduct that loss upon gifting the property. A better choice would be to sell the loss property so that you can deduct the loss on your tax return, and then gift the cash instead.

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Succession Plans for Franchises

Although most people do not enter into a franchise agreement with the goal of creating a family business, children are increasingly choosing to succeed their parents in owning the family franchise. However, the International Franchise Association (“IFA”) reports that only 30 percent of family-owned franchises survive into a second generation. A recent article in Entrepreneur discusses how franchise owners can best prepare for a successful succession.

Succession plans for franchises are inherently difficult because the franchisor generally yields veto power over any proposed succession, and is the sole decider of whether a person is qualified to succeed his or her parents as a franchise owner. According to attorney and co-author of the IFA handbook William Slater Vincent, Franchise Succession Planning and Transfers, “I’ve worked with franchises from over 100 systems, and every single franchise agreement I’ve seen clearly states that if the franchise owner dies, the franchisor has to approve the successor.” Such provisions mainly serve as a protective mechanism for the franchisor. Said Vincent, “I don’t know how many times a husband dies and his wife takes over the business even though she was never involved before. Instead of being a viable business, it becomes an asset sale. Franchisors don’t want that.”

Each franchise has a different protocol for succession planning. These protocols range from not paying attention, to allowing local reps to sign off on proposed successions, to requiring that successors undergo rigorous training akin to that of a new a franchisee. The key to creating a successful succession plan, therefore, is speaking to your franchisor about any succession requirements, and creating a plan that qualifies your chosen successor in the eyes of the franchisor.

Death of Equities? Not So Fast

Many a Wall Street Guru has opined that the American public has simply given up on stocks. To make their case, they point to low trading volumes, as well as the $440 billion that investors have removed from stock mutual funds since the stock market crash of 2008. However, a recent article in The New York Times reveals the bigger picture that equities are far from dead.

Currently, investors have over $5.7 trillion invested in stock mutual funds. This figure is more than the total amount of money investors have in bonds and money markets, combined. Investors have an additional $880 billion invested in stock-centric exchange-traded funds. These numbers show that, while investors have not forgotten the plunge of 2008, they prefer the stock market to alternative investment opportunities.

Treasury bonds, for example, are currently paying an interest rate less than the annual rate of inflation. The interest rates currently being offered on certificates of deposit average .8 percent, and the payout from money market accounts is even less. Many investors are driven to equities because they believe that equities are their best option for a comfortable retirement. According to Adam B. Scott of Argyle Capital Partners, “if your time frame is 10 years or more, you’re better off in stocks.”

T’was The Month Before ‘Cliff’-mas…

As I attended a Christmas play with my family last weekend (TWAS THE NIGHT BEFORE CHRISTMAS @ the Kelsey Theater), I tried for a couple of hours to completely ‘unplug’ myself from the office and focus on being “there” with the family.

Sadly,  I found myself so preoccupied with the year-end planning we are doing in the office (for client’s seeking to tax advantage of the increased exemption this year), that visions of ‘esate-planning’ danced in my head throughout the show.  My mind must have somehow mixed the two concepts, because the idea for the below poem came to me.

(Don’t worry, I won’t give up my day job.)

T’was The Month Before ‘Cliff’-mas…

T’was the month before the New Year and all through the country,

all were in a good mood, except (that is), Trust Attorneys.


It seems like we will miss all the holiday cheer,

as our procrastinating clients finally plan out of fear.


It will be taxed at their deaths or when they give it away,

But much less for those who actually plan today.


The gifts on our minds will involve Gift Tax Exemptions,

instead of Barbie and Wii’s  and Sony Play-stations. 


Oh, how we wished we could drink, eat and relax,

and forget for a while about the Gift & Estate Tax.


The House passed a bill and so did the Senate,

but since the mid-summer, they’ve just sat on it.


As $1 Million may well be the new Exemption,

we are swamped with the tasks of trusts cre-a-tion,


So on New Year’s Eve, make my drink real stiff,

as I’ve tried to steer clients from their own fiscal cliff.

Protecting Your Assets From Potential Lawsuits

While many people write off asset protection as a mechanism for the very wealthy, the reality is that it would be worthwhile for middle class people with a nice home and a couple of cars to consider as well. Engaging in asset protection is even more worthwhile for people who can see themselves being sued one day, such as lawyers and doctors. A new article in The New York Times discusses how to protect your assets in the event of a future lawsuit.

The article begins with the caveat that it is virtually impossible to shield all of a person’s assets. Rather, asset protection involves taking steps to discourage creditors from going after certain assets. As Jason Cain of Credit Sussie Private Banking USA explains, “there is no such thing as asset protection… What there is is good business and estate planning that as a byproduct insulates your assets from future, potential creditors.”

Several tips for protecting your assets from potential lawsuits include:

  • Assess what assets you own, and the respective likelihood of a creditor pursuing them.
  • Remember that insurance is the most crucial part of an asset protection plan. Consider the many different types of insurance, from automobile and homeowners insurance, to an umbrella policy to limit liability to arising from the unexpected, to professional insurance.
  • Check current state law to see what assets are automatically protected.
  • Consider holding money meant for transfer to heirs in an irrevocable trust.

An Update on Developments, or ‘lack thereof’, on Estate Tax Reform, and a Little Estate Tax Trivia

Two articles about this week sought to shed some light on the estate tax developments, political positions as it pertains to the estate taxes & the “Fiscal Cliff.”

The Associated Press went the route of detailing the specifics of bills passed in the Democratic-controlled Senate in July and the Republican-led House in August:

Senate: Does not address the estate tax, allowing the top rate to increase from 35 percent to 55 percent. Currently, the first $5.1 million of an estate is exempt from the federal estate tax; the exemption rises to $10.2 million for married couples. If the tax cut expires, the exemption would be reduced to $1 million for individuals and $2 million for couples.

House: Extends the top rate of 35 percent through 2013, with the larger exemption [$5.12 million.]

You can find the article by clicking here

A Yahoo! article speaks a little more specifically about President Obama’s views on the estate tax, divisions among the Democrats within the party and it’s impact on illiquid assets such as farms and ranches (click here for the full article.) A testament to the discord between the two parties is their inability to agree upon a label for the tax:

The divide between the political parties over the tax is so wide that they cannot even agree on a name for it. Democrats call it the estate tax, as it is described in law.

Republicans, who generally want to repeal it, have another, more provocative name. They call it the “death tax” and characterize it as a penalty on being wealthy and successful.

Ever wonder what the highest rate in history has been for the Estate Tax? Although it has fluctuated, the rate hit a high of 77% before World War II.

According to the article:

“It was a Republican president, Teddy Roosevelt, that proposed the first permanent inheritance tax, arguing that inheritance of “enormous fortunes” does a society no good.

“No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax,” Roosevelt said.