An important concept to remember is that the wealth you are planning for is your own, and there’s nothing wrong with attaching incentives or disincentives to the inheritance because it was created by your own hard work and effort! Nobody wants to think that the results of a lifetime of labor are going to be wasted within weeks or months after death.
The best plan is to educate your beneficiaries throughout your life on how best to manage money. Sometimes that’s possible, but sometimes it’s not. And sometimes the beneficiaries dismiss the training. And although you may feel that you don’t want to “control from the grave” or “attach strings” to the inheritance, incentive planning is often the best (and kindest) way to enhance the lives of your beneficiaries. So here are some suggestions for creating incentives and disincentives in your plan.
To Promote Education:
To Preserve and Strengthen Family Bonds and Harmony:
To Inspire Your Beneficiaries in Their Work Ethic:
To Encourage Your Loved Ones to Emulate Your Philanthropy:
Of course, in addition to encouraging behavior, your planning can also discourage unwanted behavior.
As you can see, the opportunities to use incentives in your planning are limited only by your imagination, your values, your priorities, and your dreams for your heirs.
Ernest Becker, the Pulitzer Prize-winning psychologist and author of The Denial of Death wrote, “…what man really fears is not so much extinction, but extinction with insignificance.” For some business owners, survival of the business beyond their lifetime is viewed as the owner’s legacy. For others, it includes the business…and much more.
Legacy Planning is about creating an estate plan that reflects your core values and beliefs and allows you to pass them on to your loved ones. In doing so, you are able to guide them with your wisdom, help them to understand more fully your beliefs, and set in motion your hopes and dreams for each of them. It allows you to create an estate plan that uses your personal wealth as a means to accomplishing the long-term goals which define you as a person.
Legacy planning may include charitable projects, on-going philanthropy through foundations, or ideas and feelings about how you want the business (and the business relationships you have developed) to continue.
Legacy can also be viewed as having made a difference in the world during life; the world is a better place as a result of the person’s life and business. Legacy is much more than our money and our property. It could very well be a philosophy of life, a set of moral values that we have come to stand for, or the stories of the people from whom we come.
Owners who build their company with thoughtfulness take on a sense of responsibility and concern for their business customers and employees. This aspect of the legacy is the most powerful for some and truly dictates how the business is transitioned.
We have seen owners walk away from offers to purchase because of the values that the prospective buyers have or don’t have. A key element in transition planning is to identify those important values prior to attempting a transition. It wastes a lot of time and money to get most of the way through a prospective deal and then walk away from it. Perhaps worse is to live with remorse and regret over who is now running the business.
Every business is part of a community. The balance of that community depends upon each business. When a business is not adequately transitioned, there is a domino effect that impacts others. Sometimes the impact is a good one; sometimes the impact is destructive to the whole community. As an example, we have all heard how the opening of a Wal-Mart means the closing of multiple small businesses within a radius around the store. On the other hand, Wal-Mart is successful because it provides what people want at prices they can afford. A thoughtful business owner will be aware of the impact his business may have on others in the community. It may or may not change the decisions ultimately made, but it helps to contemplate the results of each potential choice.
Once people reach a certain level of financial success, pursuits often become less about accumulating wealth, and more about creating significance, or leaving a legacy. This most often reveals itself through increased involvement in things that benefit their community and the world. In the world of estate and wealth strategies planning, there are many tools that can help families fulfill their philanthropic goals.
For example, there are a variety of charitable trusts that can serve to both benefit philanthropic causes and aid with tax planning. A charitable remainder trust (CRT) is a tax-exempt trust. It is primarily an income tax planning tool with some estate and gift tax benefits. With a CRT, the appreciation in assets can be realized without immediate recognition of the capital gain, a stream of payments is created for the donor and a deferred benefit is provided to a charity or charities. An income tax deduction, gift tax deduction or estate tax deduction is based on the remainder value that passes or is projected to pass to charity at the end of the trust term.
A gift annuity is essentially a bargain sale in which the consideration paid by the charity is in the form of annuity payments. The IRS specifies how the income is categorized; i.e., how much is return of principal and how much is ordinary income. It also specifies how gains are recognized, and limits payments to one or two persons.
A charitable lead trust (CLT) is the opposite of a charitable remainder trust in that the income stream is paid to charity with the remainder going to private individuals. A CLT is primarily an estate or gift tax tool. If it is set up as a grantor trust, it can also provide some income tax benefits.
One strategy that is often considered by affluent families is the creation of a private foundation. A private foundation is a special type of tax-exempt entity that is most often established by a single family to fulfill its charitable mission. There are operating and non-operating foundations, though most private foundations are of the non-operating type.
Private foundations have very specific rules and regulations that must be followed. Most well-known is the rule that mandates a 5% distribution to charity annually. However, there are also rules against self-dealing, holding certain types of investments known as “jeopardy investments,” and rules against creating excessive personal benefits from the foundation. While it is common to have family members on the Board of Directors get paid for their services, pay must be reasonable compared to other similar-sized charities.
Contributions to private foundations generally create an income tax charitable deduction subject to the deductibility limitations. Deductions are available in the year of the gift and can be carried forward for five succeeding years if needed. Contributions may be deductible at fair market value or cost basis, depending on the type of asset contributed. Private foundations are tax exempt under most circumstances, but caution must be taken if assets are being considered that might create Unrelated Business Taxable Income (UBTI).
While there is no legal minimum under the law to establish a private foundation, there is a practical dollar amount needed to justify the cost. While that amount used to be $5 or $10 million, it is now common to see private family foundations established with $250,000 or less.
An alternative to a private family foundation is a donor-advised fund. These funds are established as public charities and contributions are tax deductible as charitable gifts. They can be established with a relatively small contribution (many require an initial gift of only $5000) and the expenses are often charged as an asset-based fee. This makes them substantially less expensive to establish than a family foundation.
Distributions or grants are processed on the recommendation of the donor to qualified charities. The grant can either identify the donor or they may choose to remain anonymous. Donors can also name successor donors to continue the charitable objectives of the fund beyond their lifetime.
Some funds allow the donor to appoint his own money manager or to direct the money management independently. This type of flexibility has become very popular among the giving community since it allows a significant amount of control to remain with the donor. Further, many donor-advised funds allow the fund to remain in force for multiple generations. Contributions to donor-advised funds are deductible in the year of the contribution and for five succeeding years.
I Love My Business, but I Love My Family
Would it surprise you if your professional advisor recommended “special needs” planning when you don’t have any special needs children or grandchildren?
It’s important to think about things that might happen to your loved ones after you’re gone. Especially as they might be affected by your estate plan.
As advisors, we always try to help you plan for unforeseen financial circumstances and build creditor protections for our beneficiaries whenever possible.
The same type of preventive planning can be done to protect loved ones in a tragedy that leads to physical and/or mental disability.
Consider what happened in this situation, taken from the files of one of our colleagues.
John and Elizabeth had one child and several grandchildren. Their estate documents included a living trust that passed their estate to their only son, Jerry in trust.
At John and Elizabeth’s death, the trust was funded with approximately $1,000,000 after taxes and expenses, which Jerry was free to spend as needed.
The trust provided that if Jerry passed away, anything left in the trust was to be distributed to the grandchildren.
One day Jerry was involved in a terrible automobile accident. Jerry was injured so badly that he was no longer able to care for himself.
The person named as his guardian immediately sought help for Jerry’s medical expenses from Medicaid or other means-based government programs. They were shocked to learn that Jerry’s entire inheritance of $1,000,000 would have to be spent on medical expenses before Medicaid would assist him. As an alternative, the guardian learned that the assets could be placed in a special kind of trust to be used for Jerry’s benefit. But at Jerry’s death, that trust must reimburse Medicaid for what was spent for care during his life. The result in either case is that little or nothing will be left for Jerry’s children.
This result could have been avoided by creating a special needs trust. A special needs trust is specially designed to hold the inheritance of a beneficiary, and to be used for needs above and beyond those covered by government programs. These trusts contain instructions that allow the Trustee to meet the needs of the beneficiary, but prohibit the Trustee from providing for those needs if already covered by Medicaid or other programs. It also prohibits the Trustee from using the assets to reimburse any government program after the beneficiary’s death.
The result in Jerry’s case would be that his needs would be met during his lifetime, and anything left over at the time of Jerry’s death could be passed on to his children.
The Coles-Cumberland Bar Association is pleased to announce that it has established the Coles-Cumberland Bar Association Law School Scholarship Program.
The Coles-Cumberland Bar Association is a private organization composed of attorneys practicing in Coles County and Cumberland County, Illinois. The organization has established this scholarship program to recognize and assist law students who have a close connection to the Coles County and/or Cumberland County, Illinois communities. One or more scholarships will be awarded annually, based upon academic and extracurricular achievements, background and financial need.
The Coles-Cumberland Bar Association anticipates awarding one or more scholarships in the amount of $1,000.00 following the application period. The Coles-Cumberland Bar Association reserves the right to modify the amount and number of scholarships awarded based upon the number and suitability of applications received.
The Coles-Cumberland Bar Association Law School Scholarship Program is open to law students having a close connection to the Coles County and/or Cumberland County, Illinois communities who will be enrolled at an accredited United States law school during the 2016-2017 academic year. Applicants are evaluated for their academic and extracurricular achievements, for their background and financial need, and for their
connection to the Coles-Cumberland communities.
An application form can be obtained via Facebook on the “Coles County Bar Association Scholarship Committee” page or by calling the Bar Association’s Secretary at 217-639-7800. Applications are due by February 1, 2017.
The 2016-2017 recipient or recipients will be announced at the Bar Association’s winter “Guest Night” meeting in February.
Beginning April 28, 2014, The Social Security Administration implemented its “Trust Centralization Project” to improve the quality and efficiency of its review and approval of special needs trusts. This Project is the result of efforts by a group known as the “SNT Advocates,” primarily attorneys who work with special needs clients and had concerns about how their special needs trusts were being viewed by the Administration.
As a result of the Project, many cases, including cases in our area, are being reviewed. In some instances, trusts which were previously approved by the Administration are now being rejected. If you or someone you know has received a notice about a trust, you should see an Elder Law Attorney immediately to determine what steps to take to protect eligibility for SSI benefits. It is important to remember that Medicaid benefits follow the same rules, so loss of benefits could mean loss of needed medical care and treatments.
There is a short deadline of only 60 days for appealing a Social Security decision, and the deadline may be shorter for Medicaid. It is important to seek help right away, because an attorney needs time to analyze the case and prepare the necessary appeal documents, something which may not be possible on day 49 or 53 or 59.
A little background:
The Project affects disabled people who receive SSI, which is a needs-based benefit. It does not affect people who receive SSDI, which is an insurance program. SSI rules require that recipients have no more than $2,000 in “countable resources,” which includes cash and accounts which can be liquidated, regardless of cost, penalties or taxation. Recipients are also very limited as to income.
Because of the restrictive SSI rules, families sometimes set up trusts for SSI recipients. These trusts, often called special needs trusts or supplemental needs trusts, are designed to protect the person’s benefits by creating restrictions on the control and use of trust funds such that those funds are not considered as countable resources.
SSI rules require that a recipient who is the beneficiary of trust submit the trust to the Administration for review. The Administration then determines if the trust meets the requirements and is an exempt resource. In the past, the reviews could take many months or a year or two, and the decisions across the country and even within single field offices was inconsistent. So, it is important to remember that, just because the government sends you a notice doesn’t mean the notice is correct.
If you have received such a notice, Kaye Dent at Frisse & Brewster Law Offices will be happy to provide you with a free consultation to help you determine what, if anything, you may need or be able to do.
Read more here.
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