For individuals who wish to manage their estate portfolio as they would manage their investment portfolio, having the peace-of-mind that comes with a finished, thorough estate and business succession plan is often far from reality. Why? Certainly many of us simply have yet to get around to it, or never move beyond a basic Will. Others start the estate planning process but do not see it to completion. Why not start now?
Why is Estate and Business Succession Planning Important?
There are at least two compelling reasons to plan your estate. First, proper estate planning ensures that your assets will be distributed in accordance with your wishes. Second, proper estate planning can minimize or eliminate estate tax upon your death. Having professional assistance is critical, in order to ensure your plan is not derailed by failure to attend to details. For example, did you know that your Living Trust has to be funded to work as designed? Are you confident your beneficiary designations are protected, and not working at cross-purposes to your Will?
What Should You Consider for Your Estate and Gift Tax Planning?
Gifting. In order to limit the growth of your taxable estate, you may gift up to the annual exclusion, or $14,000 in 2015, per person per year without using your lifetime exemption. You may choose to gift cash, an interest in a business, or other property. You may also contribute to a child’s 529 college savings plan: these plans may also be front-loaded with five years’ worth of annual exclusion gifts. If you pay a beneficiary’s medical or education expenses directly to the institution, these payments will not be counted against your annual or lifetime gifting exclusions. In the event you have charitable goals, gifting to a charity reduces your taxable estate and also provides a current income tax deduction. Finally, it is always advisable to review your estate planning documents, especially if you have had any material changes in your life.
Review Current Estate Plan. If you have experienced significant changes in your family, you should make sure the appropriate family members are named and taken care of consistent with your plan. If your financial circumstances have changed considerably, adjustments may be required for formulas, set amounts or specific bequests in your Will, and various tools or gift plans. In addition, updates to your Will may be required based upon changes in the law.
Portability. In 2015, each individual has a $5.43 million Federal estate tax exemption. With spousal portability, if the first spouse to die does not use his or her estate tax exemption, it is transferred (ported) to the surviving spouse so that any unused exemption can be used at the surviving spouse’s death. Portability can be helpful when a married person dies intestate, an estate is left outright to a surviving spouse, or there is unequal asset ownership. It can also be a useful capital gains and income tax planning tool and can allow individuals to take better advantage of trusts. Spousal portability is just one of many considerations in your estate planning. However, an important note is that we do not have spousal portability for the State estate tax.
In the State of Washington, the estate tax exemption is only $2,054,000 million per person. While this may seem high enough per person, it can be more easily exceeded when adding in life insurance policy proceeds or when one spouse leaves everything outright to the surviving spouse without using their exemption. Since Washington does not have portability, if an individual does not use his or her exemption, it is lost and the surviving spouse has the entire estate with the benefit of only one exemption. Through proper planning with trust formulas in your estate planning documents, this issue can be avoided.
Naming Representatives. Careful consideration should be taken when naming personal representatives and trustees through your Will or Trust documents, as well as attorneys-in-fact in your Durable Power of Attorney. If you have these documents in place already, the named representatives should be revisited to make sure they are still appropriate, taking into consideration the type of assets in your estate, potential beneficiaries, and the overall role expected. There are many factors to consider when choosing your representatives. First, you should trust your representative to perform his or her duties with your best interests or the best interests of the beneficiaries in mind. Second, your representative should be organized and capable of managing assets, paying bills and providing accurate reporting. While an expertise in financial or legal matters is not required, it may be helpful. Finally, your representative should be available, which means having the time and being in close proximity. While you may choose a spouse, family member, or friend to serve in any of these representative roles, remember that there are professional fiduciaries that could be appointed as well.
Review the Titling of Assets and Beneficiary Designations. It is also important to review the titling of your assets and beneficiary designations. Based upon the intent of your Will, all or a large portion of your estate assets may need to be available to fully fund trusts or provide for specific bequests. However, non-probate assets pass outside of your Will, even though these assets are still included in your estate for estate tax purposes. Non-probate assets include assets held as joint tenants with rights of survivorship, payable on death accounts, life insurance, and retirement plans. If you are relying on any of these assets to be available to fund a testamentary trust, then accounts or property should be held as community property or tenants in common. Moreover, depending on the direction of your Will, beneficiary designations should name the trust itself or provide for a disclaimer into the trust.
Name a Charity as a Beneficiary. If you have charitable goals as part of your estate plan, naming a charity as the beneficiary of your traditional IRA or retirement plan can be compelling. When you name your spouse, children, or others as beneficiaries, the full value of your traditional IRA or retirement plan will be part of your taxable estate. In addition, the beneficiary will be subject to income tax on the distributions received. In contrast, if you name a qualified tax-exempt charity as your beneficiary, your traditional IRA or retirement plan will not be subject to estate tax as your estate will receive a charitable deduction. Moreover, the charity will not have to pay any income tax on the funds received. If you are including charities in your estate plan, you should consider if this is the right choice for you.
Finally, if you are a business owner, your succession plan in the event of your death or incapacity should be updated based upon the current ownership, management, and overall plan.
Have You Reviewed Your Succession Plan?
As a business owner, making sure your business succession plan is coordinated with your estate plan is important. A succession plan can provide for the management of your business, ensuring that your business will continue to operate in the event of your incapacity or death. This protects your family as well as preserves what you have worked hard to build. A succession plan may also be a means of transferring the business to employees or family members and can be structured as a sale or as a gift.
In order to implement a plan, it is important to identify your goals, consider the goals of family, other owners or key employees, review the management of the business, explore various options of succession, and ultimately design the plan.
In reviewing the current business, you should consider other owners, key employees and management. In relation to the family members, determine which family members are currently active in the business, what positions they hold, what their competence and commitment levels are, and whether any other family members want to be involved in the business. Keep in mind any key employee or management issues. Outline whether ownership has been promised to anyone, whether a buy-sell agreement current exists, and whether a promise has been made about who will succeed to control. If there is a buy-sell agreement, also determine how it will be funded. Finally, if there is a long-term business plan, this should be incorporated into the succession plan.
You should have an idea of the value of the business, considering the assets and liabilities of the business. Also, keep in mind whether operations have been profitable, what the sources of cash flow have been, and what is expected.
Review your current succession plan, if you have one, and determine the timing of the plan. If you plan for transition during your life, consider gifting, use of nonvoting versus voting stock, employee equity compensation, and a sale or transfer structure. If you plan for transition at your death, consider restrictions of a buy/sell agreement, life insurance funding, and transfers to trust for the benefit of your spouse and/or children. You should also consider your plan in the event of your incapacity by reviewing the restrictions in your buy-sell agreement, as well as your Durable Power of Attorney and any powers specific to the business.
Even if you have a plan in place, it is important to review it often. For example, you should review your shareholders’ agreement or LLC operating agreement for restrictions on transferability in certain situations. Consistent with above, you should also review your Will and/or revocable living trust, as well as the representatives that you have named keeping in mind their inclusion in business decisions if serving as a representative, such as a trustee or attorney-in-fact. As always, there are many considerations to keep in mind to make sure your succession plan is consistent with your estate plan.
Estate and business succession planning can be viewed as a tremendous opportunity to build a lasting and dynamic legacy. Traditional estate planning leaves so much of this potential untapped. Make 2015 the year your estate plan becomes be the capstone on a life lived with purpose and foresight.
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