Small businesses are the engines for innovation. They not only account for 75% of all businesses in the U.S., they also provide for over 50% of jobs. It is readily apparent that small businesses are vital to the U.S. economy and help shape our great nation. Yet, a majority of small businesses fail to pass to the next generation. Even worse, only 13% of small businesses survive to the third generation. Why is this? As Benjamin Franklin said, “failure to plan is planning to fail.”
Think of business succession planning as a plan to manage issues that create a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs. In most cases, the "killer" is taxes or family discord, both issues that a good family business succession plan will cover.
When considering your business succession plan, it is easiest if you break your planning into three main issues: management, ownership, and taxes. Let’s start with the easy one. Estate taxes. Currently, the Unified Credit (the coupon the federal government gives everyone to pass their assets upon death free from estate tax) is set at $3.5 million. In 2011, it drops to $1 million. Any excess is taxed at approximately 50%. If a person dies owning a successful small business, that business may have to be liquidated to pay the estate tax.
Let’s assume that either the estate tax is not an issue. What other issues may derail all the hard work someone put into growing a business? It could just be family dynamics. Sibling rivalry could hinder the succeeding generation for management. Or the older generation may not wish to let go of management because of the fear of losing their leadership role in the family. Or there may be different expectations and ideas on the direction the business should grow in the future. Consider the sacrifices the founding member made to make the business successful. 80 hour work weeks. Missing baseball games and dance recitals. The younger generation may not understand or appreciate the hard work.
So what can be done? First, ensure that the business is structured properly so that it may be passed easily to the next generation and ease the tax burden if needed. There are many, many ways to do this based upon the goals of the family.
Second, schedule family meetings where business planning such as short and long term strategies are discussed. It is important that the older generation explain the values in which the business was started and grown, while the younger generation decides whether they are willing to manage the business and if so, what direction they envision the business heading. These meetings are also an opportune time to facilitate identifying if, or which child can be groomed to be an heir. Erase the concept that the only fair thing to do is to divide the business equally between your children. While this is a nice idea in theory, it may not be in the best interests of your business. Remember that management and ownership are separate business succession planning issues. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children. Consider inviting a third party advisor, the business’s CPA or attorney, to identify this protégé.
Finally, it may be that the next generation simply does not want the family business. While that can be disheartening, it is best to address this issue when both the business owner and business is healthy. If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. By discussing the issues with the family and creating a plan unique to your business and your family you can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.
Stephen J. Lacey, JD, LLM-Tax is a partner in the law firm of McClelland, Jones, Lyons, Lacey & Williams, LLC. Mr. Lacey concentrates his practice in the areas of Estate Planning, Asset Protection, Medicaid Planning, Probate and Real Estate. To contact Stephen call (321) 984-2700 or visit www.mjlandl.com.
Showing posts with label retirement. Show all posts
Showing posts with label retirement. Show all posts
Tuesday, October 20, 2009
Tuesday, August 18, 2009
10 Good reasons to have an Estate Plan
1. No matter your net worth, it's important to have a basic estate plan in place.
An estate plan ensures that your family and financial goals are met after you die. It is a process. It involves people—your family, other individuals and, in some cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. Overall, it addresses your future needs in case you ever become unable to care for yourself. It is not only for the elderly – even young people are faced with unfortunate circumstances: health related, automobile accidents and so forth.
2. An estate plan has several elements and considerations. It can determine:
* A will.
* How and by whom your assets will be managed for your benefit during your lifetime if you ever become unable to manage them yourself.
* The assignment of a power of attorney (POA)
* When and under what circumstances it makes sense to distribute your assets during your lifetime.
* How and to whom your assets will be distributed after your death.
* A living will or health care proxy. How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.
* For some, the establishment of a trust, may also be suitable.
3.What is involved in estate planning?
Taking inventory of your assets is a good place to start.
Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. A good place to start is to ask yourself the following questions:
1. What are my assets and what is their approximate value?
2. Whom do I want to receive those assets—and when?
3. Who should manage those assets if I cannot—either during my lifetime or after my death?
4. Who should be responsible for taking care of my minor children if I become unable to care for them myself?
5. Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?
6. What do I want done with my remains after I die and where would I want them buried, scattered or otherwise laid to rest?
Once you have some answers to these questions, our office can help you create an estate plan, and advise you on such issues as taxes, title to assets and the management of your estate.
4. Everybody needs a will.
A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will - also known as dying "intestate" - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.
5. Trusts are only for wealthy people.
Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.
6. Don’t I only have to discuss my estate plans with my family (heirs) to prevent disputes or confusion?
That would be nice, but upon death emotions rise and there are often hard feelings among those you loved. Inheritance can be a loaded issue and at times full of mixed emotions and even greed. By being clear about your intentions with your loved ones, you may help dispel potential conflicts after you're gone, however, there may be issues you do not wish to speak of. Discussing your true wishes in confidence with your attorney can help provide you with peace of mind.
7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has hit $3.5 million in 2009.
The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.
8. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic.
By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death.
9. There are two easy ways to give gifts tax-free and reduce your estate.
You may give up to $13,000 a year to an individual (or $26,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
10. There are ways to give charitable gifts that keep on giving.
If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.
An estate plan ensures that your family and financial goals are met after you die. It is a process. It involves people—your family, other individuals and, in some cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. Overall, it addresses your future needs in case you ever become unable to care for yourself. It is not only for the elderly – even young people are faced with unfortunate circumstances: health related, automobile accidents and so forth.
2. An estate plan has several elements and considerations. It can determine:
* A will.
* How and by whom your assets will be managed for your benefit during your lifetime if you ever become unable to manage them yourself.
* The assignment of a power of attorney (POA)
* When and under what circumstances it makes sense to distribute your assets during your lifetime.
* How and to whom your assets will be distributed after your death.
* A living will or health care proxy. How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.
* For some, the establishment of a trust, may also be suitable.
3.What is involved in estate planning?
Taking inventory of your assets is a good place to start.
Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. A good place to start is to ask yourself the following questions:
1. What are my assets and what is their approximate value?
2. Whom do I want to receive those assets—and when?
3. Who should manage those assets if I cannot—either during my lifetime or after my death?
4. Who should be responsible for taking care of my minor children if I become unable to care for them myself?
5. Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?
6. What do I want done with my remains after I die and where would I want them buried, scattered or otherwise laid to rest?
Once you have some answers to these questions, our office can help you create an estate plan, and advise you on such issues as taxes, title to assets and the management of your estate.
4. Everybody needs a will.
A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will - also known as dying "intestate" - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.
5. Trusts are only for wealthy people.
Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.
6. Don’t I only have to discuss my estate plans with my family (heirs) to prevent disputes or confusion?
That would be nice, but upon death emotions rise and there are often hard feelings among those you loved. Inheritance can be a loaded issue and at times full of mixed emotions and even greed. By being clear about your intentions with your loved ones, you may help dispel potential conflicts after you're gone, however, there may be issues you do not wish to speak of. Discussing your true wishes in confidence with your attorney can help provide you with peace of mind.
7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has hit $3.5 million in 2009.
The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.
8. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic.
By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death.
9. There are two easy ways to give gifts tax-free and reduce your estate.
You may give up to $13,000 a year to an individual (or $26,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
10. There are ways to give charitable gifts that keep on giving.
If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.
Wednesday, August 12, 2009
I have a will, so why do I need an Estate Plan?
Many people mistakenly think that estate planning only involves the writing of a will. Estate planning, however, can also involve financial, tax, medical and business planning. A will is part of the planning process, but you will need other documents as well to fully address your estate planning needs.
Who needs estate planning?
You do—whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself.
If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets.
If your estate is large, your attorney will also discuss various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death.
If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. Your assets then, will be distributed to your heirs according to a set of rules known as intestate succession.
Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state.
Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.
What is included in my estate?
All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry.
Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).
The value of your estate is equal to the “fair market value” of all of your various types of property—after you have deducted your debts (your car loan, for example, and any mortgage on your home.)
The value of your estate is important in determining whether your estate will be subject to estate taxes after your death and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.
Who needs estate planning?
You do—whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself.
If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets.
If your estate is large, your attorney will also discuss various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death.
If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. Your assets then, will be distributed to your heirs according to a set of rules known as intestate succession.
Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state.
Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.
What is included in my estate?
All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry.
Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).
The value of your estate is equal to the “fair market value” of all of your various types of property—after you have deducted your debts (your car loan, for example, and any mortgage on your home.)
The value of your estate is important in determining whether your estate will be subject to estate taxes after your death and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.
Friday, August 7, 2009
Silver Lining
Silver Lining
Yes, your business is down. Yes, we may (or may not) be slowly coming out of the recession but the economic climate will not be the same as it was a few years ago. Yes, the value of your business is at its lowest point since you began the business in 1984.
Even in the darkest of times, I always try to find a silver lining. So here it is: this is the perfect time to explore gifting shares of the business to younger family members.
Let’s look at an example: Mr. Gates owns a tech business called Computers R Us, LLC (as you saw in previous article, there are advantages to owning small business as LLC rather than corporation). Mr. Gates owns 80% of Computers R Us, LLC, while his son owns 10% and his daughter owns 10%. In 2007, the business was valued at $3,500,000. It is now worth $2,500,000. Mr. Gates has a meeting with his attorney and realizes that if the Unified Credit drops to $1,000,000 as it is set to do in 2011, significant estate tax will be owed on the value of his business alone at his death. After exploring several tax strategies and planning tools, Mr. Gates decides to transfer 20% of his interest to each of his children. Now, Mr. Gates owns 40% and each of his children own 30%. So what has Mr. Gates achieved?
First, the Internal Revenue Code allows an annual gift of $13,000 to be excluded from tax. Mr. Gates is married so between the two of them, they can pass $26,000 under the annual exclusion. The above-described transfer of business interest is eligible for this gift exclusion. Currently, the marginal estate tax rate is 45%. Therefore, Mr. Gates provided savings to his family of $23,400 ($26,000 x 45% x two children).
Second, the value of the interest transferred to each child is $500,000. If the value of the business returns to 2007 levels, the value of those interests will be $700,000. Yet, Mr. Gates transferred $400,000 free from estate or gift tax because the value of the transfer is frozen at the $500,000 level (value at the time of the gift). Thus Mr. Gates provided additional savings to his family of $180,000 ($200,000 x 45% x two children).
Third, the Internal Revenue Code allows certain valuation discounts due to minority interests and lack of marketability. Often times, these discounts can be 25% or more. Due to the fact that the transfers to the children were minority interests and lacked marketability (unlike shares of stock traded on the Stock Exchange, there is no readily available market to buy interest in Computers R Us, LLC), such gifts may be discounted by 25%. As a result, the gift of $500,000 may be discounted by $125,000 resulting in Mr. Gates’ family saving $112,500 ($125,000 x 45% x two children).
Lastly, at Mr. Gates death, his estate can claim a minority interest and lack of marketability discounts against any remaining interests. Thus, Mr. Gates passes away in 2012 when the value of Computers R Us, LLC is $5,000,000. His estate may be able to claim a minority interest and lack of marketability discounts since Mr. Gates owns 40% of the company at his passing. So Mr. Gates has saved his family an additional $675,000. (45% x ($2,000,000 – $500,000).
So, yes, the economy is terrible. Yes, the value of the company is less than what it used to be. But through proper planning, Mr. Gates saved his family over $990,000 in estate taxes. See, I can always find a silver lining.
WORD OF CAUTION: Currently, there is proposed legislation threatening the viability of lack of marketability and minority interest discounts. With the White House spending into historic deficits, money will need to be raised through taxes. Therefore, please consult with a qualified attorney so that proper planning may be done specific to your factual situation and current laws.
Yes, your business is down. Yes, we may (or may not) be slowly coming out of the recession but the economic climate will not be the same as it was a few years ago. Yes, the value of your business is at its lowest point since you began the business in 1984.
Even in the darkest of times, I always try to find a silver lining. So here it is: this is the perfect time to explore gifting shares of the business to younger family members.
Let’s look at an example: Mr. Gates owns a tech business called Computers R Us, LLC (as you saw in previous article, there are advantages to owning small business as LLC rather than corporation). Mr. Gates owns 80% of Computers R Us, LLC, while his son owns 10% and his daughter owns 10%. In 2007, the business was valued at $3,500,000. It is now worth $2,500,000. Mr. Gates has a meeting with his attorney and realizes that if the Unified Credit drops to $1,000,000 as it is set to do in 2011, significant estate tax will be owed on the value of his business alone at his death. After exploring several tax strategies and planning tools, Mr. Gates decides to transfer 20% of his interest to each of his children. Now, Mr. Gates owns 40% and each of his children own 30%. So what has Mr. Gates achieved?
First, the Internal Revenue Code allows an annual gift of $13,000 to be excluded from tax. Mr. Gates is married so between the two of them, they can pass $26,000 under the annual exclusion. The above-described transfer of business interest is eligible for this gift exclusion. Currently, the marginal estate tax rate is 45%. Therefore, Mr. Gates provided savings to his family of $23,400 ($26,000 x 45% x two children).
Second, the value of the interest transferred to each child is $500,000. If the value of the business returns to 2007 levels, the value of those interests will be $700,000. Yet, Mr. Gates transferred $400,000 free from estate or gift tax because the value of the transfer is frozen at the $500,000 level (value at the time of the gift). Thus Mr. Gates provided additional savings to his family of $180,000 ($200,000 x 45% x two children).
Third, the Internal Revenue Code allows certain valuation discounts due to minority interests and lack of marketability. Often times, these discounts can be 25% or more. Due to the fact that the transfers to the children were minority interests and lacked marketability (unlike shares of stock traded on the Stock Exchange, there is no readily available market to buy interest in Computers R Us, LLC), such gifts may be discounted by 25%. As a result, the gift of $500,000 may be discounted by $125,000 resulting in Mr. Gates’ family saving $112,500 ($125,000 x 45% x two children).
Lastly, at Mr. Gates death, his estate can claim a minority interest and lack of marketability discounts against any remaining interests. Thus, Mr. Gates passes away in 2012 when the value of Computers R Us, LLC is $5,000,000. His estate may be able to claim a minority interest and lack of marketability discounts since Mr. Gates owns 40% of the company at his passing. So Mr. Gates has saved his family an additional $675,000. (45% x ($2,000,000 – $500,000).
So, yes, the economy is terrible. Yes, the value of the company is less than what it used to be. But through proper planning, Mr. Gates saved his family over $990,000 in estate taxes. See, I can always find a silver lining.
WORD OF CAUTION: Currently, there is proposed legislation threatening the viability of lack of marketability and minority interest discounts. With the White House spending into historic deficits, money will need to be raised through taxes. Therefore, please consult with a qualified attorney so that proper planning may be done specific to your factual situation and current laws.
Wednesday, July 15, 2009
Common Mistakes in Estate Planning (Part One)
This is the first part of a two-part article which will alert readers to changes they may need to make to their own estate plans. While not having any estate plan in the first place is the greatest mistake, this article assumes the reader has already adopted some form of Will or Trust Agreement. While the mistakes described below and in the next article can result in added financial costs, their impact on the lives of children can be even greater.
MISTAKE #1 – PARENTS WHO FAIL TO ESTABLISH TRUST PROTECTION FOR THEIR CHILDREN
Most people adopt their first Wills in order to designate legal guardians for their minor children. Unfortunately, the authority of a legal guardian terminates when a child attains age 18. At that same age, a child may also gain unrestricted control of their inheritance despite their lack of maturity or the wrongful influence of outside parties at that time. Parents can and should prevent this mistake by providing in their estate plan for the continued trust control of a child’s inheritance until the child’s education is completed and the child has attained a more mature age.
MISTAKE #2 –GRANDPARENTS WHO FAIL TO ESTABLISH STANDBY TRUST PROTECTION FOR THEIR GRANDCHILDREN
The typical Will or Trust Agreement provides that the inheritance due a deceased child shall instead be distributed to the surviving issue of that child. In the event one of their children later dies, grandparents often fail to provide the same trust protection for their grandchildren as recommended above. This mistake by the grandparents often involves an even larger inheritance than the grandchild may receive from their deceased parent and could also result in the control of a grandchild’s inheritance being managed by inlaws or non-family members.
MISTAKE #3 – CREATING UNEQUAL TREATMENT BY PROVIDING EQUAL SHARES TO CHILDREN
The age spread between the oldest and youngest children in a family often ranges from 5 to 15 years. Even when trust protection is provided to prevent a child from inheriting at age 18, an even worse result can occur if each child’s share is made equal without regard to each child’s age. For example, the three surviving children of the Jones family are ages 23, 18 and 12 at the time of their parents’ death. The estate plan of Mr. and Mrs. Jones provides for equal division among the children at their death, followed by distribution as each child attains age 23. Until distribution, each child’s separate share can be used in the discretion of the Trustee toward that child’s support, education and medical care. While Mr. and Mrs. Jones never intended such a result, the older child (whose college education has already been provided by the parents) will receive a full one-third share, the middle child will likely spend all or most of their share in order to complete college, while the youngest child may exhaust their share and never go to college due to lack of funds. This mistake can be prevented by providing trust protection and equal division of assets only after the youngest child has received the same opportunities as each other child (e.g., until the youngest child attains age 22). Until that time, the Trustee can provide support to each of the children according to their needs from time to time (not necessarily in equal amounts) and as the parents would do themselves if living. Once the remaining assets are divided after the youngest child attains the designated age, distribution of each child’s remaining share will occur at such later age of maturity as designated by the parents.
MISTAKE #4 – PARENTS WHO FAIL TO TREAT DIFFERENT CHILDREN DIFFERENTLY
Most parents love their children equally and treat their children equally in their estate plans. The reality in many cases is that once all of the children have reached adulthood, they have achieved different levels of maturity, career and marital success. While parents with a disabled child usually provide special trust protection for that child, the same parents often fail to protect the inheritance of those children threatened by creditors, broken marriages or bad lifestyles. Many options exist for parents to provide all or some of their children with added trust protection and should be discussed with their advisors.
MISTAKE #5 – PICKING THE WRONG TRUSTEE
In selecting a legal guardian who may become the caregiver, mentor and substitute parent for a minor child, my advice has always been to “let your heart rule your head.” In selecting a trustee to manage a child’s inheritance, make investment decisions and say “no” when necessary, you should instead “let your head rule your heart.” The family member or friend, who may be best choice as legal guardian, may be unqualified or overwhelmed with the responsibility of also being trustee. Parents and grandparents alike should consider designating an independent and qualified investment firm or other financial institution to serve as trustee or trust advisor and made responsible for investment management, bill paying and recordkeeping. This is especially important in trust protection arrangements that may last for many years and beyond the lifetimes of friends or family members. When an independent and qualified trustee is designated, I recommend a friend or family member be provided the authority to replace that trustee with another investment firm or financial institution if circumstances or personnel later change. The second part of this article will cover other common estate planning mistakes, including, purchasing life insurance, designating beneficiaries and using joint ownership.
MISTAKE #1 – PARENTS WHO FAIL TO ESTABLISH TRUST PROTECTION FOR THEIR CHILDREN
Most people adopt their first Wills in order to designate legal guardians for their minor children. Unfortunately, the authority of a legal guardian terminates when a child attains age 18. At that same age, a child may also gain unrestricted control of their inheritance despite their lack of maturity or the wrongful influence of outside parties at that time. Parents can and should prevent this mistake by providing in their estate plan for the continued trust control of a child’s inheritance until the child’s education is completed and the child has attained a more mature age.
MISTAKE #2 –GRANDPARENTS WHO FAIL TO ESTABLISH STANDBY TRUST PROTECTION FOR THEIR GRANDCHILDREN
The typical Will or Trust Agreement provides that the inheritance due a deceased child shall instead be distributed to the surviving issue of that child. In the event one of their children later dies, grandparents often fail to provide the same trust protection for their grandchildren as recommended above. This mistake by the grandparents often involves an even larger inheritance than the grandchild may receive from their deceased parent and could also result in the control of a grandchild’s inheritance being managed by inlaws or non-family members.
MISTAKE #3 – CREATING UNEQUAL TREATMENT BY PROVIDING EQUAL SHARES TO CHILDREN
The age spread between the oldest and youngest children in a family often ranges from 5 to 15 years. Even when trust protection is provided to prevent a child from inheriting at age 18, an even worse result can occur if each child’s share is made equal without regard to each child’s age. For example, the three surviving children of the Jones family are ages 23, 18 and 12 at the time of their parents’ death. The estate plan of Mr. and Mrs. Jones provides for equal division among the children at their death, followed by distribution as each child attains age 23. Until distribution, each child’s separate share can be used in the discretion of the Trustee toward that child’s support, education and medical care. While Mr. and Mrs. Jones never intended such a result, the older child (whose college education has already been provided by the parents) will receive a full one-third share, the middle child will likely spend all or most of their share in order to complete college, while the youngest child may exhaust their share and never go to college due to lack of funds. This mistake can be prevented by providing trust protection and equal division of assets only after the youngest child has received the same opportunities as each other child (e.g., until the youngest child attains age 22). Until that time, the Trustee can provide support to each of the children according to their needs from time to time (not necessarily in equal amounts) and as the parents would do themselves if living. Once the remaining assets are divided after the youngest child attains the designated age, distribution of each child’s remaining share will occur at such later age of maturity as designated by the parents.
MISTAKE #4 – PARENTS WHO FAIL TO TREAT DIFFERENT CHILDREN DIFFERENTLY
Most parents love their children equally and treat their children equally in their estate plans. The reality in many cases is that once all of the children have reached adulthood, they have achieved different levels of maturity, career and marital success. While parents with a disabled child usually provide special trust protection for that child, the same parents often fail to protect the inheritance of those children threatened by creditors, broken marriages or bad lifestyles. Many options exist for parents to provide all or some of their children with added trust protection and should be discussed with their advisors.
MISTAKE #5 – PICKING THE WRONG TRUSTEE
In selecting a legal guardian who may become the caregiver, mentor and substitute parent for a minor child, my advice has always been to “let your heart rule your head.” In selecting a trustee to manage a child’s inheritance, make investment decisions and say “no” when necessary, you should instead “let your head rule your heart.” The family member or friend, who may be best choice as legal guardian, may be unqualified or overwhelmed with the responsibility of also being trustee. Parents and grandparents alike should consider designating an independent and qualified investment firm or other financial institution to serve as trustee or trust advisor and made responsible for investment management, bill paying and recordkeeping. This is especially important in trust protection arrangements that may last for many years and beyond the lifetimes of friends or family members. When an independent and qualified trustee is designated, I recommend a friend or family member be provided the authority to replace that trustee with another investment firm or financial institution if circumstances or personnel later change. The second part of this article will cover other common estate planning mistakes, including, purchasing life insurance, designating beneficiaries and using joint ownership.
Monday, July 13, 2009
Common Mistakes in Physcian Asset Protection Planning
Any Physician named as a Defendant in a malpractice lawsuit can tell you there is a world of difference between the “what if” world of asset planning and the “what now” world of real litigation. While the vast majority of lawsuits are settled before trial and within policy limits, the resolution of one bad experience is no guarantee that another bad experience won’t follow it in the future.
At least some of the stress and concerns about financial security can be relieved by reviewing what asset protection is available and avoiding certain common mistakes.
ASSETS HELD IN MARITIAL JOINT NAMES (Tenancies by the Entirety):
Simply putting of the husband’s and wife’s name on the same asset title does not automatically protect that asset from the creditors of one spouse. The marital status of the owners must be clearly identified on the Deed for account title (e.g. Harry Jones and Sandy Jones his wife or Harry Jones and Sandy Jones Tenants by the Entirety). Common mistakes in this area include certificates of investments in privately held companies entitled to out of state real estate. The mare fact that the owners listed on the title are married does not automatically create marital protection.
Another common mistake occurs after one spouse is faced with an actual lawsuit for potential claim that could exceed insurance coverage. At that point, the spouse “at risk” should ask the questions “what happens to the joint marital property if my spouse dies before or after this lawsuit is over?” The answer in all cases is that the joint marital property loses its’ protection and can then be attached by a judgment creditor. In the face of a real threat, joint marital ownership is no guarantee of asset protection other steps (e.g. spendthrift Trust) must be taken.
HOMESTEAD PROPERTY:
The Florida Constitution provides absolute and unlimited protection against attachment of a “Florida homestead” whether owned in joint marital names or in a singe name. However, this asset protection extents only to one half acre inside a municipality and 160 acres outside the municipality. The lots and many upscale residential areas exceed one half acre and are not protected by the Florida Constitution.
RETIREMENT PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS:
Besides being a good financial and tax planning option, qualified retirement plans and individual retirement accounts are fully exempt from creditors under both state and federal law. The key word in the last sentence is “qualified”. While the IRS may allow you to correct discrepancies in coverage, contribution and permitted investments, a creditor may be able to seize Plan assets due to these technical defects. If asset protection is a concern, use of experienced third party plan administers is a must.
BENEFICIARY DESIGNATIONS AND INHERITANCES:
One of the most common mistakes occurs when an otherwise fully protected position unexpectedly receives life insurance proceeds, retirement plan benefits or an inheritance. While such assets may have been fully protected on the previous name of a spouse or other family member, that protection is lost the minute it is received by the beneficiary or heir. Asset Protection Trust should be used in the case of life insurance, annuities, or retirement plan assets payable to a Physician as beneficiary. In the case of a future inheritance a candid discussion with other family members may be necessary, no matter how difficult.
PRACTICE ASSETS:
A common concern and common mistake is the protection of accounts receivable. Leveraged life insurance “protection” programs are often promoted as a means for both large and small medical groups to shield their accounts receivable. In my opinion, these programs costs too much, provide uncertain protection and may result in IRS tax issues. Simpler and cheaper solutions include: (i) Pledging the accounts receivable toward a revolving line of credit to be used if and when necessary; (ii) Pledging the accounts receivable as additional security toward medical office lease payments (if the medical office is owned by related parties).
MALPRATICE AND OTHER LIABILITY INSURANCE COVERAGE:
The debate will never end whether minimum coverage is enough or extra coverage makes the Physician a “target”. Experienced Plaintiff and Defense attorneys alike can attach a “price” on almost any malpractice lawsuit once the full extent of permanent injury is ascertained. While many “worst case” injuries are still within minimum policy limits, certain procedures on certain patients can have catastrophic results. In my opinion, Physicians who perform high risk-high injury procedures should increase their coverage. The stress and worry of defending the claim for two or three times insurance coverage is a great deal worst that the extra premium expense.
Whether minimum or greater malpractice insurance is purchased, be certain the insurance company is solvent and determine if defense costs are “included” or in addition to the stated coverage amount. The legal fees and expert witness expense to fully defend a lawsuit through the stage of a jury trial can be expected to exceed $75,000.
In the case of other types of lawsuits (e.g., automobile negligence, teenage drivers and parties without adult supervision), every parent and every person with assets worth protecting should have “umbrella” liability insurance of at least $3 million (preferably $5 million).
LIMITED LIABILITY COMPANIES (LLC) AND OTHER GROUP ENTITIES:
LLC’s have become the entity of choice for group ownership of medical offices and substantial practice assets. Because the creditor of an individual member is only to entitled to a “charging order”, a member’s interest cannot be directly attached and the creditor cannot interfere with the operation of the LLC. However, the day will eventually come when the other members of the LLC will want to refinance, sell or otherwise make distributions as a return on their investments. At the time of such distributions, the charging order creditor can attach a member’s share and the asset protection of the LLC is lost.
In the case of a group medical practice, many LLC Operating Agreements are written to allow Physician Ownership only and to provide for forced sale in the event of a member’s bankruptcy or other financial trouble. In the case of all such group investments, the following questions should be asked and answered:
1. Can ownership be held by another protected entity (e.g., spouse or another LLC)?
2. Is the purchase of a distressed member’s interest mandatory or discretionary?
3. Is each member fully liable (jointly and severally) for the debts of the LLC or just their proportion and share?
TRENDS AND TRIBULATIONS:
While the states of Alaska and Nevada has been promoting themselves as asset protection havens, they have yet to be any federal court decisions on the effectiveness of this strategy. For those Physicians facing “last resort” asset protection planning, several offshore jurisdictions still offer the best “and most expensive” options.
As a result of one single Bankruptcy Court decision in Colorado, many advisors have become skeptical of singe member LLC’s. Because Florida law expressly limits creditors of a LLC member to charging order protection only, single member LLC’s remain a valid asset protection option in Florida. Where appropriate, additional LLC members (e.g., other family members eliminate this Bankruptcy Court issue altogether.
Given the recent opportunity to either expand or restrict various asset protections statutes, the Florida Legislature has favored increasing rather than reducing asset protection options.
Wednesday, July 8, 2009
Estate Planning in Second Marriages
Estate planning by both spouses in a second marriage can be difficult. Divided loyalties may exist between providing for the surviving spouse and providing for the children of a prior marriage. In addition, various state laws made interfere with each spouse’s intended estate plan.
This article will point out both the pitfalls of having no or an outdated estate plan following a second marriage and the importance of taking the right steps both before and after the new marriage to avoid these pitfalls. Let’s start by looking at the pitfalls or what the law entitles every surviving spouse to receive—whether at the end of a 50-year first marriage or 50-day second marriage:
HOMESTEAD PROPERTY
In many second marriages, the husband and wife establish their marital residence in the former home of one or the other. No intention may exist between the spouses to make a gift of the home and the non-owner spouse may be expected to vacate the home if the owner spouse dies first.. The Florida Constitution provides a very different result. In Florida, every surviving spouse is provided a “life interest” in the marital residence, whether or not the surviving spouse chooses to live there. While this right to a life interest can be released voluntarily, a surviving spouse may be unable due to poor health or unwilling due to poor relations with other family members to provide such a release.
ELECTIVE SHARE
As a matter of public policy, every state provides surviving spouses with some minimum inheritance which they can “elect” to receive instead of the inheritance that may or may not have been provided them by their deceased spouse. Florida law refers to this amount as the “Elective Share” and Florida has one of the most generous elective share laws in the country. While there are exceptions to the Elective Share beyond the scope of this article, a surviving spouse in Florida may be entitled to receive a share of 30% of most probate and non-probate assets.
JOINT MARITAL PROPERTY
Bank accounts, real estate and other assets titled jointly in the names of both the husband and the wife are commonly referred to as “Marital” property or “Tenancy by the Entirety” property. For inheritance purposes, all such Marital property automatically and completely passes to the surviving spouse. Contrary instructions in the Will or Trust Agreement of a deceased spouse will not change this result.
RETIREMENT PLAN BENEFITS
Retirement plans governed by the federal law known as “ERISA” and certain other types of plans require that the surviving spouse automatically be beneficiary of any death benefits. While a spouse can voluntarily waive all or part of these death benefits, such a waiver can only be exercised after marriage and according to the specific procedures and forms provided by the employee’s Plan Administrator.
LIFE INSURANCE AND ANNUITY BENEFITS
The distribution of life insurance and annuity benefits is generally governed by the specific beneficiary designation forms on file with each insurance company. Typically, such an important decision is only made once when the application form is first filled out and with little thought to other estate planning documents. If a spouse is designated on the beneficiary form, the insurance company will follow those instructions regardless of any intent or other documents to the contrary. Even worse, some courts have ruled that such the designation of a spouse continues even after divorce and until new a new beneficiary forms is filed.
To summarize these pitfalls, Florida law will do more to protect the surviving spouse of a short term second marriage than the surviving children of a long term first marriage.
Let’s look now at how to avoid these pitfalls:
PRE-NUPTIAL AND POST NUPTIAL AGREEMENTS
Written agreements entered into either before or after marriage are not just for movie stars. Most second marriages (and many first marriages) would benefit from a signed agreement that provides for both the financial protection of the surviving spouse (if needed) while assuring the current or future inheritance of assets by the original family. Don’t look at such agreements as adversarial, but rather as the mutual desire of both parties to protect each other from the pitfalls described above.
To make such agreements valid and enforceable, the following steps should be followed:
1) Hire legal counsel with experience in preparing and enforcing such agreements. Both parties should also be represented by separate counsel.
2) Each party should make full financial disclosure of all their assets and income in order that any waivers to future income or assets are made by the other party with full knowledge and understanding.
3) Avoid the “last minute” preparation and negotiation of such agreements on the eve of the marriage. Such hasty agreements could later be challenged as signed under “duress.” If circumstances and budget permit, consider videotaping the meeting at which the final agreement is discussed and executed
4) Be sure any specific waivers of homestead, retirement benefits or elective share rights are clearly spelled out and the impact of such waivers understood by both parties.
5) While the marriage itself may qualify as sufficient “legal consideration”, the party with the greatest financial means should be careful to provide adequate consideration to the other party, often measured by the length of the future marriage.
6) Last, but not least, leave the children and other family members out of it. Rely on the advice of your legal counsel and tell the family you intend to treat every one fairly. They will find out when the time comes.
After the marriage, follow up immediately on any necessary changes to your previous estate planning documents, beneficiary designations and property titles. Don’t forget to address the right of the surviving spouse to continue using any automobiles, household furnishings or other personal property that has been shared during the marriage. Also update your previous Living Wills and Designation of Health Care Surrogates ( Medical Power of Attorney) to either designate the new spouse or confirm your other choices.
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