5 Reasons Why the \”Permanent\” Exemption Matters to You
Many people probably know that Congress made permanent the Federal estate tax, which is $5 million, indexed for inflation, per person and $10 million per married couple. This means that approximately 98% of Americans will not have taxable estates on their deaths with respect to the government’s estate tax. A sigh of relief for many families could be heard across the land. However, folks shouldn\’t sigh too heavily because the same matters that existed before for individuals and families were not eliminated by Congress’s act. So the following are 5 issues that have nothing to do with the federal estate tax but are still very important to protecting yourself and your family: You have children. Even families with modest-sized estates should ensure that their children are cared for according to their wishes and values if a tragedy occurs. Minor and disabled children are of primary concern. I’ve written before that without a will that nominates a guardian, minor or disabled children may be placed with someone a parent would consider less than ideal. Beyond that, consider retirement proceeds. If a minor or even young adult child is the beneficiary on a retirement account, depending on the language of that account, Uncle Sam may still take a large bite or equally troubling, a relatively young adult may come into a large sum of money in one fell swoop. You aren\’t married BUT you are in a loving committed relationship with someone. So that means your significant other or partner, while being able to benefit from your lifetime exemption, cannot benefit from portability. Also, the same issue with respect to retirement proceeds as mentioned above also apply in this scenario. If your unmarried in the eyes of the federal or state government but you and your partner have a child, just bring the issues of number one right on down. You are a professional or small business (smallbiz) owner. Unfortunately, we Americans are a litigious bunch. If we believe we have suffered an injury related to professional services, e.g., doctor, lawyer, dentist, or a small business, then many of us have no problem pursuing litigation that will cost much more than the malpractice insurance covers. Estate taxes have little or nothing to do with covering your assets from multimillion dollar litigation. You have income producing assets. The federal government and many state governments tax beneficiaries on 2 levels: estate and income. If your daughter\’s trust has income producing assets, such as the 3-flat apartment building you gave her, then there is a likelihood that the trust will have to pay income tax. How much depends on how well your team works to protect you. Still, like number 3, this has nothing to do with estate taxes. You live in a \”decoupled\” state. Some states are \”coupled\” with the Federal estate tax regime, meaning their state\’s lifetime estate tax exemption is identical to the Federal government\’s. However 28 states are decoupled, and most of those states, unlike Illinois, have a significantly lower estate tax exemption amount. So that means that while estate tax may not be due to Uncle Sam, it may be due to Uncle Quinn – Illinois\’ governor, for example. Estate taxes were a primary focus of estate planning because no one likes paying taxes. Well, estate taxes are no longer a primary focus and those other issues still need to be considered, just like they did before December 31, 2012.
#3 of 3,987: LLC or S-Corp?
So you’ve decided to start your own small business (\”smallbiz\” or \”SMB\”). Welcome! It’s one of about 3,987 decisions you will have to make. Presuming you’ve already selected a name, for Illinois citizens – at least checked the name with the Illinois Department of Business Services, and then registered your domain name, the next important step is deciding on your business’s legal entity. In most states, including Illinois, business entity choices are; Sole proprietor, Partnership and its various forms, Limited Liability Company (LLC), or Corporation and its various forms, including Subchapter S Corporations (S-Corps). Because individuals tend to believe, however erroneously, that business owners are wealthy, business owners are often litigation targets. Accordingly, it’s unreasonable to operate a business today without some type of legal liability shield in addition to your insurance, which is lacking if you\’re operating as a sole-proprietor or even a partnership. Limited Liability Partnerships (LLPs), while providing limited protection, are not as owner-friendly as LLCs and corporations. Consequently, the use of partnerships has declined substantially. A smallbiz owner is typically advised to choose a LLC or corporation. By doing so, not only can the business take advantage of the legal liability shield, the owner can “pass through” the income profits and losses to his or her individual tax returns. A LLC is treated like a partnership for tax purposes and shareholders of a corporation that selects S-Corporation (S-Corp) treatment can pass through profits or losses. So, unlike C-Corporations, no double-taxation occurs with LLCs and S-Corps. Smallbiz owners tend to prefer LLCs over S-Corps because LLCs, which can also elect S-Corp tax treatment, require fewer formalities. S-Corps require annual shareholder meetings, corporate record-keeping, and quarterly tax filings. Additionally, the Illinois LLC Act allows for either narrow or expansive provisions in a LLC’s Articles of Organization and Operating Agreement. LLCs also offer other advantages, including: an unlimited number of shareholders, no citizenship requirements, few restraints on purpose or asset class, and different stock classes. Still, LLCs that don’t select to be treated as S-Corps, must pay estimated self-employment tax on all income received whereas S-Corps are not required to pay income tax on profits held for reasons other than employee wages. Also, if one depends on profits for your wages, as a single-member LLC (SMLLC), you may lose earnings if your business is sued and no distributions can be made without settling the judgment first. As a smallbiz owner, your entity selection depends on how much flexibility you want and what your current situation dictates, i.e., how much capital you need, how much liability protection you need, and the type of business partners you have. LLCs require less administrative work than S-Corps but capitalization needed for growth is often obtained from institutions that require a record of formalities, which S-Corps also require. Still, an LLC can, through its Articles of Organization and Operating Agreement, require all the formalities of a corporation and more. So… Now, you only have 3,986 decisions to make. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire