Resources & News

Our Newsletter: April 2017

Using Incentive Trusts to Build Character in Your Heirs

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:

  • Your plan could provide that the Trustee will pay all the expenses for a college education at the undergraduate and/or graduate level. Or you might specify that only tuition will be paid, and that the beneficiary will be responsible for other costs.
  • You could authorize funds for a traditional 4-year degree program as well as for technical training for pursuing a career that does’t require a traditional college education.
  • You could instruct the Trustee to match any scholarship earned by beneficiaries, thus encouraging them to do their best to earn those scholarships.
  • You might provide extra distributions to those beneficiaries who achieve top grades, or provide different levels of distribution for different grades earned.

To Preserve and Strengthen Family Bonds and Harmony:

  • You might designate funds that are to be specifically used for regular family vacations or to maintain a family vacation home.
  • You could assist your child or grandchild in getting financially established by paying for the expenses of their first wedding, and/or providing the down payment for their first home.

To Inspire Your Beneficiaries in Their Work Ethic:

  • You can provide distributions to match the beneficiary’s annual income. As they work hard and grow in their career, they are rewarded by both their employer, and by you.
  • Or you might decide to provide extra distributions to a beneficiary who chooses to become a member of the clergy, who joins the military, or who pursues a career that has social value, in spite of lower pay.
  • If you want to encourage entrepreneurial activity, you might provide the funds to start a new business.

To Encourage Your Loved Ones to Emulate Your Philanthropy:

  • You could create a charitable Family Foundation, allowing your children and/or grandchildren to participate in making decisions and contributions to charities supporting your philanthropic goals. This not only creates charitable awareness, it also gives them a special favorable status in the community.

Of course, in addition to encouraging behavior, your planning can also discourage unwanted behavior.

  • Your plan could provide that the Trustee may cut off distributions to a beneficiary who becomes addicted to drugs, alcohol, or gambling; or pay for a program of treatment for the addiction.
  • You can discourage your beneficiaries from wasting their inheritance, or becoming dependent or lazy by providing that distributions will be made only as long as they remain gainfully employed or demonstrate steady progress toward becoming gainfully employed.
  • You can also establish guidelines providing that funds are to be used only for needs, and not for luxury items; providing specific examples, or leaving it to the discretion of the Trustee.
  • You could restrict funds if a beneficiary gets involved with a cult – although you’ll have to specify how that is defined, or appoint people to make that determination after you’re gone.

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.

Our Newsletter: March 2017

business planning Business Legacy Planning

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.

Our Newsletter: February 2017

philanthropy-definitionSuccess With Significance Through Philanthropy

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.

Our Newsletter: January 2017

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I Love My Business, but I Love My Family

Life is never easy for the spouse and family of an entrepreneur. And that was certainly true of Tim’s family. Over the years, they had to learn to cope with a certain level of insecurity and fear of the unknown, to live through periods of excitement and depression, through days of exuberance and days of anger, and through feast and famine. And though the business went through many days of uncertainty, Tim was always sure about one thing – he loved his family and they were more important to him than the business. Most business owners feel the same way.
Nothing seems to stretch the familial bonds further than when it’s time for the successful business to change hands – either to be passed to the children, or to be sold to a non-family member. The impact on the family can be wonderfully rewarding, or it can be devastating. The difference usually depends on how much advance planning has been done by the owner.
An owner/parent occupies two roles in a family business and it’s extremely difficult to separate those roles without dramatically affecting the members of the family. Sometimes both parents and children find it hard to be honest about their true feelings. The strong, independent father doesn’t want to show vulnerability, that he actually needs the help of the children, or that he longs for them to carry on the business to which he has devoted his life.
Children may resent the fact that the business has kept Dad too busy and distracted while they were growing up, but are reluctant to bring that up because they know how important the business is to Dad, and know that the business has also provided them with financial stability.
Unfortunately, there’s no shortcut to family succession planning. It requires serious (and sometimes tough) discussions with total honesty and openness. If a child takes the reins of a family business only because a parent wants that, it usually leads to either a business or personal disaster. It is far better to keep the family intact than it is to keep the business in the family.
Questions about the ChildrenMany business owners assume that their children will want to carry on the family business, but this is not always the case. So begin with a heart-to-heart discussion. It’s important to understand what the children want and expect. If any of the children are interested in carrying on the business, you’ll need to realistically and objectively assess each child’s qualifications and abilities to do so.
If your children already work in the business, you can evaluate their performance and their strengths in such areas as marketing, administration, finance, and operations. If a child is interested in the business but not currently working there, you should get them involved as soon as possible. You should provide that child with the necessary experience in the day-to-day operations of the business. Let that child work his or her way up the ladder in non-management positions, gaining important experience. This will help non-family employees accept that child more readily.
One of the biggest obstacles in transferring to family is how to ensure that the business will continue to be profitable and growing. Selling or transferring to family has the same problems as transferring internally to employees. The big hurdle is management training. If you have been running the company successfully then you will now need to train family members to do “what you do.” This takes time, often three to five years.
It is helpful to have your business plan outline the steps of the transfer, and establish goals that can be monitored and measured at regular intervals. If enough time is allowed, the training can be carried out in a slow, purposeful, and organized fashion. A multi-step transfer allows you to control the process, and relinquish management duties over time in small pieces.
To have someone in charge of a business who doesn’t have the personality, skills, or knowledge to successfully run the business is unworkable – even if that person is your child! However, the best person to run the business is often not the same person that a family’s dynamics would indicate. It’s not necessarily the oldest child, the “born salesman,” or the daughter with the MBA. Every business is unique, and there are no easy answers in succession planning.
In addition, as a parent you may be hesitant to face the emotions or even accusations about having a favorite child, or arguments about who is smarter, or better with people, or better with money. It’s easy (and not uncommon) for emotional issues to cloud and confuse the discussion about what is best for the business. Using an outside advisor who specializes in both family and business dynamics allows a more objective input into the decision. Once that decision is made, ensuring that the family members are groomed to be successful becomes equally as difficult to do.
How the Sale of a Business Affects the FamilySometimes family members have an inflated sense of the value of their contribution to the family business, and feelings of jealousy can easily arise. Also, it seems that, no matter how large the sales price, nor how high the payouts to family members, sellers are overcome with uncertainty about the sale process. Was the price high enough? Will I be able to continue or improve my lifestyle with this newly- found wealth? Will my future business endeavors be as successful as the business we just sold? These are all very normal emotions for the selling family.
The family routine probably suffers the most. Family discussions of routines, how the new at-home person fits into the routine (not dictates it), voicing the hidden expectations and fears, all become very important.
Working hard in the business may serve to mask family, communication, and relationship issues. Once the business routine is lost, the underlying relationship issues become obvious. Being home full-time exacerbates those same issues.
Plan on spending regular discussion and planning times prior to the transition, make the transition gradual if possible, and most importantly, include the thoughts and feelings of all of those involved to help move through these intense family and personal changes.
The sale of the business frequently changes family finances dramatically. Family expenses have been run through the business, and the income stream is typically consistent. Whatever the expectations of the finances have been, most often the new finances will be different. Fear is a routine visitor when any change occurs, and the more dramatic the change, the deeper the fear. An open discussion about the impact, planning for the impact, and understanding the underlying feelings becomes more important than ever.
Oddly enough, many selling families realize that their financial position is even more precarious after the sale than it was before the sale. That’s because the business usually paid some discretionary expenses, such as automobile, entertainment, and travel that are now borne by the individual. The selling family may be surprised to learn how much their lifestyle has actually cost, and they may have trouble sustaining that lifestyle.
Also, most sellers are now faced with the prospect of investing a large sum of money, and most people have limited experience or expertise in investments outside the family business. The prospect of losing some of their sale proceeds in the investment markets is very troubling, and for some, it is the biggest challenge they face. Couple that with the fact that most people have an unrealistic view of what is needed to live for the remaining 30+ years of their lives, and it’s easy to understand why the sale of the business is so stressful.
A partial solution is found in advanced planning to figure out your real costs of living for the rest of your life, and a realistic value for your business. Because of the blood, sweat, and tears that have been invested by owners in their businesses, many have an inflated view of its value. Purchasers look at how the business compares to the return on other investments, commonly seeing a much lower value. The gap between those two figures has to be closed in order for the financial end of the transaction to be successful. Thorough planning with the help of a professional advisory team can help reduce the stress to manageable levels for everyone involved.
The Impact on You“Honey, I’m home!” While those words sound great the first day after a successful sale, they may become the source of considerable consternation soon thereafter. The typical business owner works an extended work week; 50+ hours is not uncommon. And most of the mental energy of that person is used at work. When they are at home, time is quickly filled and they are back to work.Meanwhile, the family has learned to go about and build their own lives, rather than just sitting around waiting for the business owner to appear. In addition, most business owners are used to being in charge. Coming home full-time and being in charge usually just produces a lot of conflict.
Another major source of conflict comes from the fact that the business owner has many emotional needs met at work. Their sense of value or importance, the challenges, the sense of accomplishment, and many more subtle needs are no longer being met. Having a place to go, as opposed to just moving away from the business is a completely different psychological position. Ask yourself where you want to go next, how that will help you feel good, and then plan for that change.

Around the Offices: January 25, 2017

5 pointsJoin Attorney L. Kaye DeSelms Dent for a special seminar next month!

Our Newsletter: December 2016

Special Needs Trusts for People Without Special Needs?

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.

Around the Offices: December 2016

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Coles-Cumberland Bar Association Offers Law Student Scholarship

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.

Our Newsletter: October 2016

adult_child_with_parent1 You Can Trust Your Children, Right?

Jane was one of five children. Her mother, Ellen, was 87 and had been ailing for some time.
Jane’s oldest brother, Bob, had been given a power of attorney by his mother to act for her. Under the power of attorney, Bob had broad powers. He also had access to all of Ellen’s accounts. The rest of the family had no idea that Bob was using his access to steal his mother’s money.
Jane and her siblings started to become worried because Ellen kept complaining that she didn’t have any money. The children knew that when their dad died several years ago, he left more than $500,000 in assets and a house that was debt free.
When they began to look into it, they discovered Bob had been using his mom’s money for himself over the past several years and that the money was almost gone.
Jane decided that she needed to consult with a lawyer to see what could be done.
The lawyer explained that the power of attorney allowed her brother to take action to benefit his mother, but it did not allow him to use the property for his own needs.
Jane hired the lawyer to look into the matter and found that most of her mother’s money had been spent. In addition, Jane’s mom had signed social security and pension checks over to Bob. Bob claimed they were gifts. But when Jane asked her mother about these gifts, Ellen said that Bob told her she had to sign the checks over to him. That she had no choice. Ellen said she did not want to cause trouble in the family so she went along.
Jane talked with the lawyer about what options might be available to get the money back. Her lawyer explained to her that the only recourse was to demand that Bob return the money and to sue him if he failed to pay back the cash. Jane knew that suing Bob would be a lengthy, time-consuming and expensive legal proceeding, and that there was no guarantee of success.
The lawyer explained that, many times, elderly parents trust their children and rely on their judgment and do as the children suggest. Sometimes, as in Ellen’s case, the power of attorney is used wrongfully. Even worse, it is often the case that the assets have been spent and there is no way to recover them.
The lawyer explained to Jane it would have been better to have employed more than one child to oversee Mom’s affairs. This approach would have provided some checks and balances.
Jane went back and discussed the matter with her mother and her siblings. In the end, Ellen just was not willing to sue her son.
Bob became scarce once the game was up and the other children had to step in to help. The worst part was Ellen’s sadness and disappointment with her son during her last years.

Around The Offices: November 10, 2016

 Social Security’s Trust Centralization Project Affecting Area SSI Recipients

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.

Around The Offices: October 26, 2016

Once again, Kaye DeSelms Dent has the honor of presenting at an NBI Continuing Education Seminar, titled Protecting Assets While Qualifying for Medicaid. More information and a link to register are available here.

Program Description

Get the Latest on Medicaid Application and Asset Planning Tactics

Middle class Americans seeking asset protection cannot afford to ignore the potentially devastating costs of nursing home and other long-term care. Nursing homes are among the most common and largest creditors an average American is likely to face in his or her lifetime, but only about 10% of the population has long-term care insurance. For the other 90%, Medicaid is the primary source of payment, so a basic understanding of the Medicaid asset protection process is vital for all professionals who work with seniors and their families. This course will provide an overview of asset protection concepts and strategies that elder law attorneys can use to legally and ethically protect assets while facilitating earlier Medicaid eligibility; and a set of crisis-management tools to prevent and correct inadvertent loss of benefits. Register today!

  • Learn what the income eligibility requirements are when applying for Medicaid.
  • Protect your clients’ interests by knowing what’s exempt and what’s not.
  • Employ the most practical and effective asset transfer methods to comply with the spend-down requirement.
  • Explore crisis planning methods to restore Medicaid benefits as quickly as possible.
  • Guide clients through the Medicaid qualification process by knowing what’s involved.

Who Should Attend

This basic-to-intermediate level seminar is designed for:

  • Attorneys
  • Nursing Home Administrators
  • Social Workers
  • Geriatric Care Managers
  • Trust Officers
  • Accountants and CPAs
  • Estate and Financial Planners
  • Paralegals
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