Estate Planning is Over, Or Maybe Not
So far, this year’s most popular question from clients is, now that the estate tax is gone, do we still need to do estate planning?
The short answer is that if estate planning was only about the tax, then estate planning would not be necessary. (Remember that some states have estate taxes of their own. Those that don’t may impose them in the future.)
However, for most clients, estate planning is about much more than taxes.
Estate planning is about planning to make sure your assets are available to take care of you in the event that you become incompetent or disabled and cannot manage the assets yourself. Proper planning allows you to choose the people you think would best manage your assets if you are not able to do so.
Failing to plan for this event could have negative consequences. (Who doesn’t remember the famous Brittany Spears guardianship case.)
Estate planning is also about ease of administration. By having fully funded trusts the surviving family members don’t need to go through the lengthy and cumbersome (and expensive) probate process to settle the estate; trust administration of a fully funded trust is quicker; easier and less expensive.
Estate planning is also about asset protection for any inheritance you may leave to your surviving spouse and children, and perhaps grandchildren.
If a surviving spouse gets remarried, the trusts can protect family assets from remarriages that don’t go well, e.g., future divorces. While prenuptial agreements are advisable, trust planning can yield even better protection than those agreements.
Similarly, your children’s inheritance will always be protected from any (potential) divorces of their own so long as they elect to keep their inheritances in protected trust shares. The same is true for other types of creditor claims made against your children or grandchildren, such as law suits from auto accidents or the like.
So, even if the federal exemption amount is such that your estate will not be subject to estate tax, there are other very important reasons to utilize all of the effective estate planning tools to protect your assets during life and after death.
For years there has been talk about doing away with the Federal estate tax.
The tax bill, passed in the closing days of 2017, partially achieved that goal for most American taxpayers. The new law increases the amount that a single person can pass during life or at death to $10M. This amount is to be adjusted based on an inflation index.
Important Note: The law increasing the exemption is only good until January 2026. After that, the exemption goes back to $5.5M.
Crazy? It would seem so, but this is the best Congress could do given the other tax priorities on their agenda.
Key take-away: If you plan to be alive in 8 years, and your estate is more than $5.5M ($11M for married couples) then Federal estate tax planning should still be a priority. Of course, estate tax planning is still necessary if you live in a state that has estate or inheritance taxes.
Other aspects of the tax law changes include:
Basis step-up at death. The tax law did not change the rules concerning stepped up basis at death. With the step-up in tax cost retained and a much higher federal estate tax exemption, income tax planning becomes a much more important element in estate planning and estate administration.
Annual exclusion gifts. Individuals are still permitted to make annual gifts during their lifetimes in the amount of $15,000 per person. The gift tax annual exclusion amount remains subject to an inflation adjustment.
Gifts made during lifetime continue to pass the donor’s tax cost. It will make sense to analyze the income tax savings possible with a step-up vs estate and gift tax savings of making a gift.
In addition to tax planning, clients should continue to look at advance estate planning techniques for:
Asset protection. Certain trusts can provide protection from creditors and divorcing spouses and provide control over how beneficiaries inherit wealth (particularly important for families with spendthrift, mental illness and addiction considerations) and help preserve wealth for generations.
Charitable Planning. Many clients plan to leave significant sums to charity. Advanced planning can help clients achieve these goals in the most tax effective manner possible.
Portability election. The portability election, which allows a surviving spouse to use the deceased spouse’s unused federal estate and gift tax exemption, is unchanged. This means a married couple can use the full $20 million exemption (indexed for inflation). But each family situation is unique and in some cases, the portability election will not be the best way to accomplish desired estate planning goals.
In all, the estate tax changes are beneficial to those who die in the next 8 years. For those intending to live longer, it may be best to ignore the temporary changes and plan with long term goals in mind.
Selling Your Business
You’re selling your business. What should you watch out for?
As our population ages, more and more business owners are looking to sell their business. Some want to cash out and retire. Others want to bring in employees as owners and stay involved in the business. And others would like to transfer the business to the next generation of family members.
In this issue, we will look at the client of a colleague who wanted to cash out and retire.
Max had been running a small manufacturing company for over 25 years. He bought it when he was “downsized” out of a major corporation. The first 5-6 years in business were a struggle. Max fought to turn the company around and establish the business as one of the leaders in his market niche. For the next 20 years he ran a successful, but tiring business as he adjusted to new market realities, changes in laws and technology, and selling to a global market. While successful, Max was tired. He just did not have the energy to continue the good fight. And truthfully, he wanted to spend more time with his grandkids (and maybe a little more time on his fishing boat.)
He contacted his business lawyer for advice on selling his business. His lawyer, pulled together a team, consisting of Max’s CPA and financial advisor. The lawyer also brought in a business broker.
Here are some of the key pieces of advice that this team provided to Max.
Do a general clean up exam on the business (often called “due diligence”). Make sure your profit and loss and balance sheet are in a form that an investor can understand and count on. Make sure contracts with key suppliers, customers and employees are up to date. Look for operational weaknesses and see what can be done to create strength in these areas.
Keep yourself and your management team focused on operating the business. It often takes a while to sell a business and you may have to go through the sales process more than once to complete a transaction. Making sure that the business continues to be well run and profitable is a key to maximizing value. Remember, it is not easy to sell a business. But it is much harder if the business starts to decline because of unfocused management.
Look at the cost of taxes. Most business sales result in tax. In most cases, there are alternate ways to structure a deal to minimize tax to the seller. However, these often create more tax for the buyer. Both sides will be looking at ways to factor tax savings into the overall price.
Understand your own financial picture. Many owners have had good lifestyles supplied by their business. Be sure to work with your financial planner to make sure you will have enough money from the sale of the business to make up for the loss of income from the business.
Think about life after sale. Will you continue with the business as an employee or consultant? Will you take another job? Volunteer? Do you have hobbies that will keep you involved and interested? Many owners have second thoughts about selling when they don’t have a clear picture of the future after they sell their business.
Of course, everyone’s situation is different. But if you are thinking about selling your business, these are certainly some of the items you will want to consider.
How to Plan for Minor Children – Part 2 Parents & Grandparents: A Trust May Be the Best Option for Asset Distribution
Last month we looked at guardianship, the first of two issues that affect planning for minor children. This month we will look at some ideas for leaving money to minor children.
We start with the idea that minors cannot really own investments outright. As such, dealing with gifts of sizeable amounts of money, investments, and other property must be handled differently than giving small amounts of money for birthdays or holidays.
Most states have laws allowing you to set up custodial accounts for minor children. These accounts are commonly known as UGMA (Uniform Gift to Minors) or UTMA (Uniform Transfers to Minors) accounts. The primary difference between the two is that UGMA must terminate at 18 and UTMA accounts can last until the minor reaches 21 years old.
These accounts are often used by parents and grandparents who want to gift modest sums to their children or grandchildren. They are usually not used for more significant amounts since the accounts terminate at a relatively young age. It is also possible to include the accounts in the estate of the person who set them up, increasing the potential for estate taxes.
For these reasons, most professionals recommend the use of trusts to hold money for young children.
There are multiple types of trusts that can be used, including living trusts, gifting trusts, irrevocable trusts, life insurance trusts and even under some circumstances, charitable trusts.
All the trusts share the idea that the person who creates the trust also creates the rules for management and distribution of the funds being left for the minor child or children. For example, clients who want to leave money for college or education, can limit the use of funds held in trust for those purposes. Similarly, clients who want to make sure that their children or grandchildren are not able to use the money for frivolous purchases, can use trust language to guard against extraneous spending.
A major consideration when setting up a trust is appointing a trustee, who is charged with following the rules and looking out for the best interests of the children or grandchildren.
Trusts also allow you to extend the date of distribution well beyond the ages of 18 or 21 which are common in the UGMA or UTMA accounts.
If you are a parent or grandparent (or uncle or aunt) and want to leave money to minors and even young adults in a protected manner, consider the use of a trust.
We can help you think through which trusts might provide the right structure for you and your specific circumstances.
How to Prepare Your Estate Plan to Protect Your Minor Children
As a parent, planning and caring for the well-being of our children takes priority over most things in life. Without question, we want to be sure should anything happen to us, our minor children will be well looked after and that money or property we leave for them will be used wisely for their care. Many of these concerns also apply to grandparents or aunts and uncles who may want to leave some of their assets to help support grandchildren, nieces and nephews.
Two Key Issues
There are two broad issues concerning this type of estate planning. The first is guardianship.
Should something happen to you such that you are not able to care for your children, you will want to name a guardian. This is a person who stands in your place to make day-to-day decisions on behalf of your children. From the mundane (what’s for dinner) to the more significant life choices, guardians play a vital role in protecting your children and making sure they grow to be responsible adults. For most people, a guardian is named in a will. Spouses will often name each other as first choice.
Beyond that, the choice of guardian usually becomes much more difficult; even with plenty of good options, it’s an emotionally-charged decision and should not be taken lightly. Most young couples consider parents or siblings for the role of guardians, but in many cases, the question can cause tension. Should you pick your parents; should you pick your spouse’s parents? Will feelings be hurt? Possibly. Will you ever make the perfect choice? Maybe not.
These hurdles should not stop you from deciding. Keep in mind, as your children grow, their needs will change and your choice of guardian may change as well. Your parents will age, and you may find your siblings or very close friends start to look like a better option over time. The good news is most guardians never need to step into their role and changing your choice of guardian is very easy to do.
Failing to decide is a decision with significant consequences. It is a decision to leave the choice in the hands of the court system. In the absence of a named guardian, someone, usually a family member, will go to the courts to ask that a guardian be appointed. Sometimes this process is extremely smooth and timely. In a few cases, family members do not agree on the best choice and can create extensive uncertainty while lawyers and the courts work to achieve what they think is the best possible outcome.
To see how bad this can get, simply Google “Fight for guardianship of Michael Jackson’s children.”
All of the uncertainty and potential issues down the road can be avoided by naming a guardian and keeping that decision up to date.
Next month we will look at ideas for leaving money to minor children in ways designed to support growth and stability.
Why You Need to Protect Your Digital Assets
When you think of estate planning you probably think of your home, cars, investments, real estate, personal possessions, bank accounts, and so on. For the most part, tangible items you can touch and hold.
But what about your digital assets? Digital assets include:
If we think back just 10 years, digital estate planning wasn’t a priority for most, but as our digital sphere increases, it has become more and more important to protect digital assets.
Much like any other assets, if you don’t manage your digital assets before death, your family may not have the necessary access and rights, thus increasing the risk and difficulty of dealing with your assets, or letting them fall into the wrong hands.
Unfortunately, federal privacy laws don’t always inherently encompass digital spheres unless the individual takes specific action. While some states have risen to the challenge and passed laws to remedy the issue, their solutions are still far from perfect. In fact, your accounts may be automatically deleted after death or your family may have to obtain a court order for rights to access. Either scenario is not ideal and the latter can take upwards of years!
Some platforms such as Google and Facebook have built-in features, such as a “legacy contact” or “inactive account manager” which allows a trusted individual to manage your accounts after passing. However, a proactive approach to digital estate planning is still the best course of action.
How do you start to set up a digital estate plan?
Inventory Digital Assets
Make a list. Think about financial, purchasing, and social accounts. This includes banking, credit cards, email, social media, personal blogs and websites. In addition, provide information on how to access each account, as well as a brief description of each account.
Safely Store Your Information
After collecting all your account details, set up a space for safe keeping. Talk with us about options if you do not have a clear idea on how best to safeguard this information. Make sure that someone you trust knows where this information is stored.
Designate A Digital Executor
Check with us for details on naming a digital executor, in other words, the person (or persons) who will have the rights to manage your digital assets after death. Some states recognize this distinction while others may require you to set up a similar function aligned with your state’s law. This can be more complex for those with multiple residences.
A digital executor is often a spouse, child, parent or trusted individual; they will have full responsibility of your digital assets based on your predefined instructions.
Digital estate planning is an entirely new consideration for most people. As the digital sphere grows and more of our lives take place online, it becomes more important to keep yourself protected.
Who Should I Choose As Trustees of My Trust
We often are asked for advice regarding choice of trustees. Of course every situation is different, but here are some points to consider.
You can select an individual as a Trustee, such as a close friend or family member; or a professional can be selected, such as an attorney or CPA; or you may choose a financial institution or a bank. A good Trustee should be someone who is honest and trustworthy, because they will have a lot of power under your trust document. The person you choose to act as a Trustee should also be financially responsible, because they will be handling the investments for the benefit of your beneficiaries. The Trustee should be someone who can get along and have a good relationship with the beneficiaries of your trust. They should also possess good record-keeping abilities.
In many cases, you may want to consider appointing co-trustees. A Trustee is required to abide by the terms of a trust. If that Trustee fails to do so, a beneficiary of the trust is not without recourse. One of the benefits of naming co-trustees is that they tend to hold one another accountable. In addition, most trusts will provide a way for the beneficiaries to remove a Trustee, and replace them with the next successor trustee on the list.
It is wise to name not only your immediate successor, but subsequent successor Trustees as well. An individual Trustee may refuse to accept the position, or may resign from the position due to any number of reasons. The Trustee may become disabled or die. Many clients want family members or close friends to act as successor Trustees. But since all individuals eventually pass away, it is good practice to name a bank trust department or other corporate trustee as the final successor trustee on the list. Some clients with very high net worth, or very complex assets, may name an institutional trustee from the very beginning – either as a co-trustee with a trusted family member, or serving as the sole trustee.
One of the advantages of naming a corporate fiduciary is that they manage trusts professionally every day, and usually know what they are doing. They act very objectively to follow the instructions set forth in the trust document. They have investment experience and record-keeping skills. They know the law, and follow the prudent investor rule. If they make a mistake, they have errors and omissions insurance, so the trust beneficiaries have a source to recover any potential damages.
The primary disadvantages of a corporate trustee, however, are cost and the fact that they may not have a personal relationship with the beneficiaries. A family member acting as trustee may better understand the family dynamic, and make better discretionary decisions when it comes to your loved ones.
On the other hand, although family members will usually serve for little or no compensation, they may not be the best choice for a Trustee. While the trust may allow for some discretion, some family members are prone to make decisions on an emotional basis. Most times, the family member is not an experienced Trustee and does not know what is required of him or her under the law. If they make mistakes, they may face the wrath (and legal action) of the beneficiaries, or the beneficiaries may be unwilling to take action, and your plans and goals for the beneficiaries are not fulfilled. If you do choose a family member as a Trustee, it is best to train them for the responsibility before you die. Perhaps your attorney or advisor provides successor trustee training, or you can spend time educating them now, before they are called upon to act.
Sometimes the best solution is a combination of a professional or corporate Trustee and a family member Trustee working together as co-trustees. The family member brings knowledge of the family situation, and the corporate trustee knows how to invest and maintain records.
Avoiding Family Disputes Over Personal Property
It is quite often the personal property that causes the most heartache and disruption in families after a death. Money doesn’t usually have any sentimental attachment, but personal property can have a perceived value far beyond its actual monetary worth. For example, there may be souvenirs from family vacations, various collectibles, or other items of sentimental value that are impossible to divide or duplicate. It’s helpful to discuss these things ahead of time, so you have a clear understanding of who wants what, and can anticipate and avoid problems after you’re gone.
Generally speaking, personal property is distributed under the laws of the state in which the decedent was a resident on their date of death. Real property (real estate), on the other hand, is subject to the laws of the state in which it is located. If you have significant personal property located outside of your official state of residence, distribution can be confusing. For example, if you own a Steinway piano that is located in your vacation home, the vacation home and the Steinway piano could be treated differently.
Personal property such as jewelry, antiques, artwork, family heirlooms, and household effects can be passed on to your beneficiaries through a specific bequest: “I leave my Ming Vase to my sister Betty.” For most people, it would be overwhelming to try to inventory and choose a beneficiary for every last item you own. Instead, it is common to use a separate “Personal Property Memorandum” that is attached to, and incorporated by reference into your trust.
The memo is generally a handwritten or typed list of your bequests to family or charities, which is signed and dated by you. They could cover each personal item that you own, but typically include only those items of financial value or of strong sentimental value; the types of things that could lead to disagreements among the heirs.
The benefit of a memo is that it can be easily changed if you sell something, give it away during life, or change your mind about who should receive it after you’re gone. You simply throw the old memo away and replace it with a new one. Each personal property memorandum should be dated, and the trust should contain instructions that if more than one memo is discovered after your death, the one with the most recent date is binding.
Of course, you should also provide for personal property that is not specifically listed on the personal property memorandum. Over the years, parents have come up with interesting ways to distribute personal property items that aren’t the subject of specific bequests. They might instruct the executor or trustee to divide Monopoly money among the children, and let them “bid” on the remaining items. Or they might say that each child can choose one object, starting with the oldest and moving to the youngest (or vice versa), until all items are accounted for. Anything that is not selected can be given to Goodwill or the Salvation Army, or be included in an estate sale.
Most trusts will state that the trustee can dispose of personal property equitably to the beneficiaries, and if they can’t agree on the disposition, the trustee can sell the items and split the proceeds of the sale according to the trust distribution plan.
Why Would I Need a Buy-Sell Agreement
Many of our clients are business owners. Although these businesses tend to be successful, we have found that many of the owners do not have clearly defined succession plans. This month, we will look at one of the best ways to outline a succession plan, especially when partners or family members are involved in a business.
Tom and Julie met as project managers for a Fortune 500 company. After a couple of years of collaboration, they decided they could accomplish more and make more money in their own business. They’ve worked out most of the details about their individual roles, financial contributions, how they were going to raise capital, and even who else they might invite to join their venture. Their attorney advised that they also give some thought to a “buy-sell agreement” – a term that was new to both of them.
When they learned that it was an agreement for the eventual disposition of their business, they decided they had plenty of time to worry about that later – maybe 10 or 20 years from now. Fortunately, their attorney was able to explain why a buy-sell agreement should be part of the start-up documents, and they saw the wisdom of making it a priority.
A Buy-Sell Agreement is a written agreement among the owners of a business in which each owner agrees what will happen to their shares in the business upon the occurrence of a specified event (death, disability, termination of employment, etc.). Often the shareholders will agree that the shares will be sold to the surviving owners at a specific price. Each owner commits to buy the shares of their departing co-owner upon the occurrence of a specified event.
There are several reasons a good buy-sell agreement is important to you:
Buy-Sell Agreements can be funded (often with life insurance) or unfunded (usually with promises to pay). Funding a Buy-Sell Agreement with life insurance is the most practical method to fund a buy-sell as long as the owners are insurable. With life insurance, the heirs receive cash and walk away, and the surviving owner gets the deceased owner’s shares immediately. Unfunded Buy-Sell Agreements are usually better than no agreement, but the odds of the heirs ever getting paid are substantially reduced. Quite often the earnings of the company going forward are not sufficient to pay off the heirs.
There are three basic different types of buy-sell agreements:
How to Value the Company
The valuation section of a buy-sell agreement is very important because it defines how the value of the owner’s interest will be valued when there is a change in ownership. Changes will inevitably occur. Partners or shareholders of closely-held companies will decide to part voluntarily or an event such as death will trigger the buy-sell agreement. If this section of the agreement is skipped, it will lead to increased costs and time to determine the value of the interest at the time of the change.
The method of valuation should be clearly defined. A method should be selected that determines fair value at the time of the triggering event. Vague language for a formula that establishes a range of prices, rather than a firm price should be avoided. The reason is that two valuation professionals using vague language may calculate two very different values, either of which is within “the range.” If a company has only one owner, it’s up to that owner to find a successor and enter into a buy-sell agreement. Sometimes the successor will come from the next generation of the family.
When there is no related heir apparent and no co-owners, finding a successor can be difficult. A key employee might be designated. Or the owner of a successful medium-sized company or professional practice might actually acquire a smaller firm headed by a younger individual, in the hope that the prime mover behind the acquired entity will someday take over the larger firm. In any event, a buy-sell agreement should be in place between the current owner and the designated successor.
If you have questions, click here to have our office call to set up a time to discuss this with you.
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Medicare. Medicaid. Part D. Supplemental Insurance. These are important products to many Americans, but most of us don’t really know much about them. If you or a loved one is facing skilled nursing care (i.e., “nursing home care”) the details are especially important.
Medicare is a health insurance program administered through the Federal government and paid for via payroll taxes, individual premiums and general revenue funds. It is available to disabled people and to people age 65 and over. Medicare has several “Parts,” including Part D, which pays for prescriptions.
Supplemental insurance is private insurance which can be purchased to supplement Medicare coverage. It can “fill the gap” by paying for copays so that there are few or no surprise bills after a hospitalization, for instance.
(For more detailed information about Medicare and supplemental insurance coverage, talk to your insurance professional. This guide is not intended to help you determine exactly what policy you need.)
Medicaid is a Federal program for needy individuals which can pay for medical care, including nursing home care. It is administered by the individual states, which means that the rules may vary a little from state to state.
Many people don’t realize until it’s too late that their insurance doesn’t pay for nursing home care, and neither does Medicare.
Medicaid, however, can pay for nursing home care. When someone receives such assistance, Medicaid also provides other basic medical coverage. It’s important to understand, however, that the assistance is limited in some ways. For instance, Medicaid may only pay for so many tests or x-rays per day if you are hospitalized, may only pay for certain medications and not newer ones your doctor prefers and that might better help you. Durable equipment might not be replaced as often as it needs to be.
For these reasons, it is often advisable for people receiving Medicaid assistance with nursing home care to keep their supplemental and Part D plans. If you don’t have such plans, it might be advisable to purchase something. It may not cost you anything under the Illinois Medicaid rules. This is because the rules require that your income (with few exceptions) be spent on your care, and “care” includes the insurance premiums. In other words, in many cases, you can’t keep most or all of your income, so spending it on insurance which will help you obtain better treatment and quality of life may be worthwhile. These are issues you should discuss with a qualified Elder Law Attorney.
This article is not intended as legal advice but is provided for informational purposes. Always consult with an attorney experienced in dealing with situations similar to yours. You can visit Frisse & Brewster Law Offices in Paris and Effingham, Illinois and Terre Haute, Indiana. For information about the author, the firm and its free workshops go to www.frissebrewsterlaw.com
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