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.
Tuesday, October 20, 2009
Sunday, October 18, 2009
We Are Excited To Join You At...
The Brevard Association of Human Services – 2009 BAHS Annual Senior Health Fair
November 11, 2009
8:00am – 1:00pm
Hilton Rialto Hotel
For More Information Click Here >>
November 11, 2009
8:00am – 1:00pm
Hilton Rialto Hotel
For More Information Click Here >>
RAISE YOUR HAND IF YOU NEED AN ESTATE PLAN
There is a common misconception that estate planning is only for the rich. So let’s do a test to determine whether you need an estate plan.
Now imagine you have everyone you care about in your left hand, your family, friends, maybe a charity or even if it is only your dog and in your right hand, you have everything you own, all of your stuff. Now imagine someone has a gun to the head of someone in your left hand and tells you give me all of your stuff or I pull the trigger. What do you do? You give him all of your stuff. Congratulations, you need an estate plan. The reason is that you just said that you care more about the people that matter, then about your stuff. Now, let’s consider what matters to you:
Do you want to make sure you give your stuff to whom you want, when you want and the way you want?
Are you concerned about your assets going to a second spouse’s family after you have passed away? We have all heard stories of one spouse passing away, getting remarried then passing away without an estate plan. All of your assets are now passed to second spouse. Who do you think is going to benefit from her estate plan?
Do you have a child or relative with special needs? The loss of governmental benefits can devastate an estate. Moreover, designating someone (and their successors) to ensure that the child always has someone assisting him or her throughout their lifetime.
Do you want to safeguard your stuff for your spouse in case you must join the millions of residents in nursing homes at $75,000 per year? Unfortunately, nearly half of people over the age of 65 will need nursing home care during their lifetime. Proper planning is essential to not only preserve assets but also to create the most choices for your care.
Do you want to protect your stuff from your children’s creditors or divorce after your passing? Make sure your stuff is inherited by the people you want, not by their ex-spouses, creditors or the IRS.
Do you want to avoid the “lottery Winner Syndrome” whereas your beneficiaries spend all the stuff that you spent your whole life building within 18 months? Giving a child more money is not going to make them more happy, it seems that often it makes them less productive and less happy. Encourage and reward your children for making smart life decisions and not depleting all of your stuff.
Do you want to designate someone to manage your affairs if you become disabled? Without a Power of Attorney, Health Care Surrogate or sometimes a Revocable Trust, if you become disabled and unable to make decisions for yourself, someone will be forced to open an expensive and lengthy guardianship proceeding so decisions may be made for your benefit.
Do you want to designate someone to care for your minor children if something happens to you? In Florida, if a minor child receives money from an inheritance (this includes designated beneficiaries) exceeding $15,000, then a guardianship must be created for the benefit of the child until they reach 18. Moreover, do you want to designate who is raising your child? Do you want to designate someone who has similar values, religious views, educational goals, etc. as you do? Or do you want to leave it to chance?
Are there specific charities that are near and dear to your heart? If you do not create an estate plan to assist such beneficiaries, then those charities will not benefit from your estate.
If your answer is yes to any of these questions, then raise your hand, you need an estate plan.
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.
Now imagine you have everyone you care about in your left hand, your family, friends, maybe a charity or even if it is only your dog and in your right hand, you have everything you own, all of your stuff. Now imagine someone has a gun to the head of someone in your left hand and tells you give me all of your stuff or I pull the trigger. What do you do? You give him all of your stuff. Congratulations, you need an estate plan. The reason is that you just said that you care more about the people that matter, then about your stuff. Now, let’s consider what matters to you:
Do you want to make sure you give your stuff to whom you want, when you want and the way you want?
Are you concerned about your assets going to a second spouse’s family after you have passed away? We have all heard stories of one spouse passing away, getting remarried then passing away without an estate plan. All of your assets are now passed to second spouse. Who do you think is going to benefit from her estate plan?
Do you have a child or relative with special needs? The loss of governmental benefits can devastate an estate. Moreover, designating someone (and their successors) to ensure that the child always has someone assisting him or her throughout their lifetime.
Do you want to safeguard your stuff for your spouse in case you must join the millions of residents in nursing homes at $75,000 per year? Unfortunately, nearly half of people over the age of 65 will need nursing home care during their lifetime. Proper planning is essential to not only preserve assets but also to create the most choices for your care.
Do you want to protect your stuff from your children’s creditors or divorce after your passing? Make sure your stuff is inherited by the people you want, not by their ex-spouses, creditors or the IRS.
Do you want to avoid the “lottery Winner Syndrome” whereas your beneficiaries spend all the stuff that you spent your whole life building within 18 months? Giving a child more money is not going to make them more happy, it seems that often it makes them less productive and less happy. Encourage and reward your children for making smart life decisions and not depleting all of your stuff.
Do you want to designate someone to manage your affairs if you become disabled? Without a Power of Attorney, Health Care Surrogate or sometimes a Revocable Trust, if you become disabled and unable to make decisions for yourself, someone will be forced to open an expensive and lengthy guardianship proceeding so decisions may be made for your benefit.
Do you want to designate someone to care for your minor children if something happens to you? In Florida, if a minor child receives money from an inheritance (this includes designated beneficiaries) exceeding $15,000, then a guardianship must be created for the benefit of the child until they reach 18. Moreover, do you want to designate who is raising your child? Do you want to designate someone who has similar values, religious views, educational goals, etc. as you do? Or do you want to leave it to chance?
Are there specific charities that are near and dear to your heart? If you do not create an estate plan to assist such beneficiaries, then those charities will not benefit from your estate.
If your answer is yes to any of these questions, then raise your hand, you need an estate plan.
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.
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.
Tuesday, August 4, 2009
Lessons from the Rich and Famous
Lessons from the Rich and Famous
It was a sad day in June when two legends passed away, Michael Jackson and Farrah Fawcett. Both under completely different circumstances, one died unexpectedly while the other succumbed to a long battle with cancer. So what lessons can we learn from these two tragedies?
Guardianships for Minors
While it may be questionable whether Michael Jackson was biologically responsible for his three minor children, we are certain that those children were legally his. According to his Will, Jackson named his mother as guardian over the children. While the mother of the children apparently gave up any parental rights some time ago, it would not stop her from trying to contest it. Still, the court would give great deference to the wishes of Jackson because of his Will. Therefore, it is very important that anyone with minor children should have a Will designating who they want to take care of their children if something were to happen to them.
We are not aware whether Jackson established a Trust for his minor children. In Florida, a minor cannot receive more than $10,000 as an inheritance. If any amount is passed to minor children in excess of that amount, then the law requires that a guardianship is set up. A requirement of a guardianship is that an annual accounting is filed with the court along with a fee that is calculated by the amount of assets in the guardianship account. This can be an expensive process which would deprive that child of money that would otherwise be left to them.
Asset Protection Trust/ Special Needs Trust
Unfortunately, Farrah had a different set of issues. Her son Redmond was incarcerated in LA County Jail at the time of her death. This was due to a possession of heroin charge. Obviously, Redmond has a horrible addiction problem as this prevented him from being at his mother’s bedside when she passed away. Without any knowledge of Farrah’s estate plan, let’s hope she received quality advice. So how does one provide for their child but “save them” from their addiction problem rather than feeding it? Or sometimes, a drug problem progresses so far that it leads to a disability, how does a loving parent plan?
Sometimes, despite a parent’s best efforts, their child does not turn out the way they had planned. Maybe their son has a problem with addiction. Maybe their daughter has declared bankruptcy three times despite making over $100,000 a year. Or maybe they are good kids but are involved in a bad marriage or an unlucky car accident. With proper estate planning, a parent can plan around these types of foreseen and unforeseen events and still protect and provide for their children. If that child has cognitive impairments or other disabilities whereas they are provided with government assistance, proper planning is required so that the child is well taken care of without losing such valuable assistance.
Many of us procrastinate, minimize our personal need or the legal importance of drafting wills, trusts, living wills, and durable powers of attorney. The complexities of combining and coordinating diverse assets such as individual assets, jointly held assets, retirement plans, life insurance, annuities and business interests seem just too daunting for some. For others, they do not realize the importance of looking at all of their assets from an overall perspective; namely, when all is said and done who ends up with what.
Estate planning is not only for the wealthy. As you see in these two examples, Michael Jackson and Farrah Fawcett faced real life problems that we all may face. Estate planning is about family and making sure that you are passing on your assets to whom you want, when you want and the way you want. Protect yourself, and your family.
It was a sad day in June when two legends passed away, Michael Jackson and Farrah Fawcett. Both under completely different circumstances, one died unexpectedly while the other succumbed to a long battle with cancer. So what lessons can we learn from these two tragedies?
Guardianships for Minors
While it may be questionable whether Michael Jackson was biologically responsible for his three minor children, we are certain that those children were legally his. According to his Will, Jackson named his mother as guardian over the children. While the mother of the children apparently gave up any parental rights some time ago, it would not stop her from trying to contest it. Still, the court would give great deference to the wishes of Jackson because of his Will. Therefore, it is very important that anyone with minor children should have a Will designating who they want to take care of their children if something were to happen to them.
We are not aware whether Jackson established a Trust for his minor children. In Florida, a minor cannot receive more than $10,000 as an inheritance. If any amount is passed to minor children in excess of that amount, then the law requires that a guardianship is set up. A requirement of a guardianship is that an annual accounting is filed with the court along with a fee that is calculated by the amount of assets in the guardianship account. This can be an expensive process which would deprive that child of money that would otherwise be left to them.
Asset Protection Trust/ Special Needs Trust
Unfortunately, Farrah had a different set of issues. Her son Redmond was incarcerated in LA County Jail at the time of her death. This was due to a possession of heroin charge. Obviously, Redmond has a horrible addiction problem as this prevented him from being at his mother’s bedside when she passed away. Without any knowledge of Farrah’s estate plan, let’s hope she received quality advice. So how does one provide for their child but “save them” from their addiction problem rather than feeding it? Or sometimes, a drug problem progresses so far that it leads to a disability, how does a loving parent plan?
Sometimes, despite a parent’s best efforts, their child does not turn out the way they had planned. Maybe their son has a problem with addiction. Maybe their daughter has declared bankruptcy three times despite making over $100,000 a year. Or maybe they are good kids but are involved in a bad marriage or an unlucky car accident. With proper estate planning, a parent can plan around these types of foreseen and unforeseen events and still protect and provide for their children. If that child has cognitive impairments or other disabilities whereas they are provided with government assistance, proper planning is required so that the child is well taken care of without losing such valuable assistance.
Many of us procrastinate, minimize our personal need or the legal importance of drafting wills, trusts, living wills, and durable powers of attorney. The complexities of combining and coordinating diverse assets such as individual assets, jointly held assets, retirement plans, life insurance, annuities and business interests seem just too daunting for some. For others, they do not realize the importance of looking at all of their assets from an overall perspective; namely, when all is said and done who ends up with what.
Estate planning is not only for the wealthy. As you see in these two examples, Michael Jackson and Farrah Fawcett faced real life problems that we all may face. Estate planning is about family and making sure that you are passing on your assets to whom you want, when you want and the way you want. Protect yourself, and your family.
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