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.
2 Very Important Ps in a Smallbiz Estate Plan
Knowing why and when to start succession planning (read here) allows us to move on and address the personal and professional practical considerations of succession planning. The first personal consideration can be assessed by thinking about the following questions: What do YOU want from your succession plan? Do you want your business to continue after you retire, to stop when you have sufficient income to retire, both – which would be similar to semi-retirement, or something else? The 4 basic personal goals surrounding succession planning are: (1) creating a legacy; (2) obtaining sufficient income to retire completely; (3) both – creating a legacy and semi-retirement; or (4) something else, perhaps creating a new career entirely. Once you’ve answered these questions, next you should consider another personal matter and how it aligns with the answer above. This helps define realistic objectives. This personal consideration involves your dependents: Who depends on you now? Who is likely to depend on you in the future? And what might that dependency look like? Being an emotional and psychological support weighs heavier than we often know. So, if this type of support isn’t managed well, it will drain our energy, time, and motivation. How we sustain this loving nature without harming ourselves will be discussed in another week or so, but let’s move on to look at other dependencies. Sometimes supporting someone financially is easier than providing emotional support; sometimes it is not. Perhaps you have or someone you know has family members who phone when the electric bill is too high, when the basement has flooded, or when the church needs a new roof? Perhaps you have a relative whose spouse or partner passed away leaving a minor child to be taken care of by a single parent? Often connected to emotional and financial dependency is physical dependency, typically accompanying caring for a disabled loved one. Your succession plan must account for of these factors and possibilities or your objectives may fall short and you or loved ones may suffer. Once completing this difficult work, we can address the less difficult matters – professional considerations. Last week’s digression, covers the first professional consideration, which is deciding your business’s legal entity, i.e., a LLC or S-Corp. In very limited situations, would one actually consider a sole proprietorship, partnership, or C-Corporation, so those entity choices weren’t discussed. Having decided on a legal entity, the next professional consideration is your market. Who is your market and how can you differentiate your business from your competitors? First just think about the people who may want or need your services or product, e.g., women with bird cages that need regular cleaning. But what if you’re already in business? One idea, for those who provide personal services, is to take the average age of your oldest and youngest client; next consider the source of your highest quality referrals who fit within that average; and then of those clients, what work did you find most enjoyable: talking to the birds, letting them fly around the house, or making their cages shiny? After creating this “niche,” the issue of differentiation remains, which requires performing a lot of research – the competition, customer demand, external variables, and more. After compiling your research, you should be able to determine how you can differentiate your business from your competitors. And yes, we’re still talking about succession planning because to create a winning succession plan, you have to create a winning business. And why is succession planning important to estate planning? If you\’re a smallbiz owner, what are you going to do with the business you once owned? A good estate plan will help answer that question. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
3 Tips on Succession Planning – Before Needing an Airbag
The previous article discussed succession planning formula for a more successful business today. This week I’ll briefly cover how succession planning helps improve retirement and more importantly, when that succession planning should begin. At its core, succession planning is about tomorrow, our “retirement.” And proper succession planning creates important retirement benefits. As an estate planner with a number of financial planning colleagues, I can attest to the fact that we may have several methods and vehicles to protect and grow your assets and with a proper succession plan, those options may increase dramatically. However, without a proper succession plan, the options could dramatically decrease. Added benefits to retirement include: Being able to withstand harsh bear markets; Having a more secure retirement because your plans are more realistic; Retiring more efficiently and with fewer adverse tax implications; and A Less stressful retirement, even if you experience 1 or 2 bumps in the road. Most importantly, a properly executed succession plan eliminates the need for a “garage sale.” So as I said previously, in addition to making more money, establishing and implementing a succession plan results in an even more successful business today and a relatively stable and peaceful retirement. Now, some of us have a good idea on when we would like to retire but there is an ideal time to start succession planning and that time is before opening your doors for business. If you incorporate succession planning when drafting your business plan, then you will ultimately use and allocate resources more efficiently and plan realistically. Moreover, you\’ll establish processes that are key to a successful business sale or shareholder transfer. You may also realize that the most important factor in executing a successful succession plan is having a well-developed successor. Sometimes, we don’t start actually planning at the beginning. Many of us just do and do and do without stopping and taking the time to think about where all this “doing” is leading. But even if you’re 10 years into your business with about 10-15 years to go, it’s not too late. You probably have some advantages, e.g., a steady clientele or a steady and established referral base; a solid understanding of the rules, regulations, and best practices applicable to your business; “brand equity” among your peers and in your community; staff, if you have them, who are loyal; and if you’re anal, like me, you have helpful processes and spreadsheets in place to get you through the day, week, month, year, and decade. Conversely, 10 years in you may have some disadvantages: too many processes, some of which are inefficient or redundant; and you could be stuck in a time warp working against yourself, treating yourself like an employee and your business like a job, instead of CEO and enterprise. New business owners even with great business plans are also disadvantaged because the business is…new. So mistakes are going to be made and newbiz owners won’t be able to plan for all of them. It is when the business shingle is rusty that folks should proceed quickly but with caution. At age 60-65, triage may be needed, but there\’s still hope. At 66 – 70, like Will Smith said in the movie, Independence Day, “I hope ya gotta an airbag!” And at 70 ½, I think land in Jamaica is reasonable. Knowing why and when to start succession planning, we can move on and discuss the personal and professional practical considerations..Next week! The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
How to Create Value in Your Smallbiz Now
Recently, I spoke to a group of women business owners about succession planning. Some were in business for more than 15 years, others for 4-5 years, and others had just started. Because succession planning is an integral part of estate planning, over the next couple of months, I will share a few insights from that meeting for readers who are or who advise smallbiz owners. So, let’s get started… When considering succession planning, where WE are also our clients, we must ask ourselves 2 questions and answer realistically: (1) WHY are we planning and (2) WHEN is the best time to plan. We all know the obvious answer to why to make MORE MONEY for “retirement.” However, beyond making more money later, succession planning provides 2 ancillary benefits. One benefit is that it can provide a more successful business NOW; the second benefit is that “retirement” will not be chaotic. How does succession planning help your business now? As you begin succession planning, to ensure your plan’s success, you must shift your perspective from that of a “job holder” who happens to run the job to that of a CEO who runs a multi-faceted enterprise. This “multi-faceted enterprise” idea may seem a little wonky at first. But if you consider all the hats you wear during the week to accomplish all the functions needed to service your clients or customers, you’ll get the picture. With proper succession planning, even solo business owners eventually shift from doing everything to delegating non-critical components to others, freeing up time to address critical components, performing essential leadership functions, and doing some fun business activities, such as blogging, tweeting, or connecting in person. As you make this shift from job holder to CEO, finding personnel or appropriately using current personnel to perform non-critical client/customer functions, something else occurs to benefit your practice now and in the future: personnel morale increases and, consequently, personnel become more productive. By shifting our perspective, we become more conscientious when hiring, even interns or part-timers, and create more current value for our business. You will recognize – for the sake of your succession plan – the need to nurture, groom, and develop the talent. Today’s buzz word is mentoring. But these aren’t just mentees; these are individuals who work for you and who you want to continue working for you. As a solo or smallbiz, your talent development program may not be formal, but it should at least be a cognizable, supervisory, mentoring program with regular reviews and 30-60 minute “check-in” meetings. Now, you may wonder how you can afford to carve out this time in such a competitive environment like the one we’re in today. Frankly, that’s being short-sighted. Because if you’ve been mentored or supervised by an outstanding boss, then you can probably recall your morale lift and sense of pride you felt as you developed. You can also probably recall the converse, when you were treated like a minion, degraded, and dismissed. By providing personnel with meaningful tasks, constructive feedback, and respecting and giving them credit for their good ideas, we’re creating more productive personnel, thereby actually giving us more time to devote to VIP client and customer matters. This makes clients happier and happy clients are good referral sources. So this answers one of the “why\’s.” The next piece, will consider the other \”why.” Stay tuned… The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
How Do I Love Thee? Let Me Count the 8 Articles
On Valentine’s Day it may seem off-kilter to some to read an article on death, but not here in the Shark Free Zone. The interesting truth about estate planning is that it can be a genuine measurement of how much someone loves you. If we consider the 8 basic articles that are found – or should be found – in wills, the evidence is undeniable. So, from a potential beneficiary’s perspective, hoping he or she is loved, let’s look: Article 1: Family. Love = your name is in this article. Article 2. Definitions. Love = your name is listed in the “partner” definition since you and the testator (person writing the will) are cohabiting, i.e., unmarried and un Civil Unionized, because Illinois doesn’t recognize in-state Domestic Partnerships or common law marriage. Article 3: Guardianship. Love = if you’re 14 years old (why are you reading this?), your parent or parents have named at least 2 other individuals to take care of you, just in case… Article 4: Debts, Taxes, Expenses. Love = The estate has sufficient funds to cover memorial services, credit card debt, taxes, and any other bona fide expenses that belonged to the dearly departed and not you. Article 5: Personal Property. Love = you get the Beatles White album, first edition. Article 6: Residuary Estate. Love = you get a whole lot more than the Beatles White album, first edition. Article 7: Personal Representative. Love = your name isn’t listed, so all you have to do is accept the Beatles White album, first edition and any other bequests; and you don’t have to worry about a greedy beneficiary trying to sue you for breach of fiduciary duty, such as not handing over the Beatles White album, first edition. Article 8: Disaster Awaits. Love = hoping this article isn’t triggered.
4 Estate Planning Facts Everyone Should Know
1. You have an estate and a plan even if you’ve not done anything. The answer to how this is possible is found in the definition of “estate” and the law – at least for the state of Illinois. Your estate is everything you own – tangible and intangible. It includes retirement benefits, debts owed to you, your bicycle, your bodily tissues and organs, whatever may be in your bank accounts, and whatever remains of your coming paycheck after obligations are paid. Probate assets of those who die without a plan or a will in Illinois will be distributed according to the laws of intestacy per the Illinois Probate Act of 1975 as amended. Accordingly, debts, your bike, your bank accounts, and your paycheck will go to who the laws of intestacy and the court decides. So, regardless of what you possess and your actions, you have an estate plan. 2. Your estate plan, even the one you don\’t know about, is in effect during your lifetime. Documents you sign at medical and dental treatment facilities before being treated, and even some sporting events, typically involve you implicitly designating your “next of kin” to act on your behalf if you became incapacitated. Sometimes, this isn’t who you think it is. Since you’re going to sign these forms anyway, wouldn’t you rather make an actual decision before the dental cleaning? 3. Family and friends fight over stuff and the fight can become war. Love is love until death and then it becomes war. Folks will fight about could be grandma’s old cookie jar, gold coins, or memorial arrangements. Nevertheless, once a battle ensues, the only real winners are the litigators; they get most of the cookies. Considerations for this fact include: apathy for one\’s family; family harmony; good karma; and increasing the wealth of trial attorneys.* 4. The most important decision you can make in estate planning is not what to give away or who to give it to, but who will manage it or give it away for you. Even if you don’t interact with a certain individual regularly, they protect the cookie jar. These individuals, called “fiduciaries,” include personal bankers, financial planners and advisors, accountants, lawyers, trustees, agents under powers of attorney, guardians, and executors or personal representatives. A large part of guardianship and estate litigation involves the “breach of fiduciary duty,” where the fiduciary has dipped his or her hand into the cookie jar. Sometimes the fiduciary is a family member; sometimes a long-time, trusted friend and advisor; and sometimes not such a long-time friend but is still trusted. Thus, even if you’re not at the point of naming an executor, perhaps you should carefully consider who is going to step into your shoes and manage your finances if you become seriously ill or just go for an annual check-up; then designate someone…in writing. A thoughtful and appropriate designee may prevent abuse, breach, litigation, and possibly war. * Some of my dearest friends are trial attorneys.
The 5-Letter Word\’s Evil Twin
I often comment fervently about trusts, as any good estate planning attorney would, that is, talk a lot…about trusts. So, yes, if someone asks me how best to plan for their family and I learn that they have more than $100,000 in assets or that they’ve got other family members with bones to pick, I spell out the word T-R-U-S-T in as many ways as possible. “However folk,” in the words within a great Sinatra monologue, a trust just ain’t the answer to all of life’s woes. A few “folk” can tell you why: Tammy Lewis is being sued for $50,000. She owns a piece of property with her sister. The property value is $100,000. A revocable living trust came to Tammy’s mind when she found out about the judgment. And the thought should have made like the rabbit in the black hat and disappeared. Whether the property is held in joint tenancy or tenancy in common, Tammy’s interest in the property is attachable by a creditor. If held in a revocable living trust, the trust assets are still considered owned by the grantor (which could be Tammy), so there is no creditor or judgment protection for Tammy. Sean Davidson and his wife were happily married for 15 years. His wife worked for 9 years and then took time off to give birth, nourish and nurture the kids, volunteer with the PTA, and so forth. Initially, she worked a little from home but not much, ultimately deciding that being a full-time wife and mother at least until the youngest was in first grade was important. However, when Ms. Davidson worked, she and Sean contributed equal amounts financially to buy and help pay the mortgage on the $600,000 family residence. Now, Sean wants a divorce. He contacted an attorney to place the house held in joint tenancy with the soon to be former Ms. Davidson in a trust for Sean and Sean alone. The flow of this particular scenario would work something like this: House + Sean Davidson Revocable Living Trust + Divorce = Wife Awarded 50% of Marital Property (incl. part of the house) = Invalid Trust = Sean Sues Lawyer = Lawyer Pays and Is Possibly Disciplined Of course, other avenues exist to address some of these issues but the main point is if you owe a debt, you can’t hide from it with a trust. It’s called F-R-A-U-D. The names of individuals found within this blog are purely fictional, unless otherwise expressly stated.
The Issue of Issue, Deers, and ART
A couple of days ago, I read an article on alternative reproductive technology, “ART,” and posthumously born children. It reminded me of conversations and cases about heirs that I’d also recently encountered. The article, conversations, and readings affirmed for me that the question of who is an “heir” or “issue,” while initially may seem simple to answer, can be complex. Thirty years ago, the definition of “child” found in a will or trust may have been a few sentences. Today, that definition is – or should be – a few paragraphs. Consider the following: Jeremy and Jessica were in a loving, committed, cohabiting relationship for more than 10 years and were unmarried because they refused to institutionalize their relationship. Still they wanted to have a baby, but Jay was sterile. However, Jeremy’s best friend, Keith, agreed to b a sperm donor. Eventually, they found a clinic that would perform the procedure and Keith was asked to sign a consent form. One statement on the form provided that Keith waived all rights of parentage with respect to the child that would be born to Jeremy and Jessica using Keith’s sperm. He was to check that box if he agreed with this statement. Keith thought about his significant other, Karen. He and Karen were also in a long-term relationship and discussed marriage and children a few months ago. But no definitive plans were made. Keith was in his early 40s and very successful; if he and Karen didn’t work out, he reasoned that this could be his only chance at quasi-parenthood. He decided not to check the box and think about it more but he signed the form. Jessica underwent the procedure the day Keith signed the form. Then, the 3 left the clinic; Keith headed home to Karen. Unfortunately Keith never arrived home. He was killed when a deer darted out in front of his car and Keith swerved onto a patch of ice, careening him and his car into an oncoming semi-tractor trailer. Karen was more than distraught because she was going to tell Keith about the bundle of joy that was produced when she and Keith had far too much to drink a couple of months ago. Keith died without a will, so who will eventually inherit his estate? Illinois law provides that posthumously born children are children of the decedent. Consequently, if both ladies were successful giving birth, then both children would have been Keith\’s heirs. This also illustrates the importance of another provision now becoming a standard in wills and trusts – the genetic reproductive material provision. If Jessica chose to store Keith’s sperm until a day she was more fertile and Keith died before that day with a will that had a genetic reproductive material provision, then Jessica could have been precluded from using his sperm. Keith could have also changed the definition of children in his will to expressly disinherit any children born of ART except those born during the time he is in an intimate, cohabiting relationship with the mother of said child. Still, all this presupposes that Keith would not have wanted 2 daughters. The point? No one can predict who or what our family will be or look like, but when we make a decision about what part or all of that family may look like, we need to write it down in a legal instrument ASAP.
3 New Year\’s Resolutions & the Great Cliff Compromise
On December 31, 2012 the United States Senate passed what I like to refer to as the “Great Cliff Compromise” and sent the bill to the House for its blessing. Knowing the House as being one of the most unpredictable entities within the U.S. government, speculation abounded as to whether the blessing would come or whether the bill would be cursed upon and sent back or rewritten in which case the Senate would curse it. However, for reasons that will likely remain with Representative House Leader Boehner and is compatriots, on January 1, 2013, the House voted for the Great Cliff Compromise. Now, many lawmakers, policy wonks, and concerned citizens don’t consider this so “great” or a “compromise.” They aren\’t seeing fireworks of the pretty, sparkly, ooo-ahhh, kind. Instead, they have visions of gray skies and storms in their heads. The disdain lies with the fact that spending cuts were not addressed, and neither was the debt ceiling. And it is the issue of spending cuts that causes as much, if not more, contention between Democrats and Republicans than increased taxes on the affluent. I’d love to see a poll on that one without “both” and “neither” being offered as a choice. Sorry, I digress… So the brow-furrowing continues because over the cliff we went, landed without too many bumps or bruises, but with another nosedive staring America in the face in two months. Still, the Shark Free Zone is most concerned, at least for now, with that part of the parachute involving estate planning. While both Congressional chambers have a lot of work to do to prevent the nosedive, the uncertainty surrounding the federal lifetime estate tax exemption is primarily gone. Some pieces about annual gifting and GSTT indexing must be ironed out but according to esteemed colleagues, they are “being worked on.” Therefore, the lifetime federal estate tax exemption remains at $5 million and indexed for inflation and the marginal rate of the excess of $5 million increased from 35% to 40%. If you were worried because you didn’t have a chance to gift your gazillion dollars away in 2012, you may have time… If you were concerned that you gave a bazillion dollars away but that, upon your death, your loved ones would still have to give more than half to Uncle Sam in taxes, you can relax, probably… BUT, if you’ve not done anything, such as downloaded a power of attorney and had it signed and notarized; confirmed life insurance designations weren’t minor children; or talked with family…even the most harmonious of U.S. Congresses won’t be able to help your loved ones. Not comparing myself to the likes of Biden or McConnell by any stretch of the imagination, may I suggest a few New Year’s Resolutions? Revisit your existing plan; or Create your plan; or Talk to your family about wanting a plan. You have at least 363 days to go…or until the next bipartisan Congressional vote decides to repeal the law and lower the tax rate…
3-Cubed Lessons for Families & Lawyers who Serve Them
As the year draws to a close, reflection is a natural activity. So, below are reflections about relationships that are key to “family work,” whether you’re working on yours or working for someone else’s. Reconnecting. Most of us have various “families,” including the one into which we were borne. High school or college classmates who take the journey with us from late childhood into early adulthood is one example. Coworkers who eventually become close friends is another. Neighbors who share the block on which we raise our children and wave to the mail carrier is yet another. Therefore, staying connected or reconnecting with our several families provides us with multiple layers of protection, comfort, and enjoyment. Relationships – good and bad – take time. Even in a most loving family, a newborn crying, pooping, and sleeping takes adjusting to. We all have unique cycles that require a little getting used to. The question is, however, how soon can we identify relationships that aren’t beneficial so that the extraction is less difficult. Logically, identifying this point sooner rather than later is key or else we may end up paying attorneys a great deal of money to unravel a ball of thorns that could have been prevented. Women matter. We work just as hard as men, if not harder. But we’re paid less and that monetary standard reflects our diminished value in the eyes of our employers. That diminished value is based on the fact that we bring and nurture life – eventually more employees – and must take time off to do so. Continual and de facto ignoring women\’s value will cost employers, advisors, and society dearly. So it behooves all of us to recognize the true worth of our mothers, daughters, wives, partners, and sisters. Team estrogen is moving forward, making powerful decisions about family, community, and nation. Forced networking sucks. Understanding someone’s value system, work ethics, and motivation takes more than the 30-minute coffee klatch. I value my friends, family members, and colleagues so I don’t want to waste their time and the time of others with referrals who are a bad fit. Consequently, even if you’re just a referral source, that doesn’t change the fact that the first rule of networking is grounded in Lesson #2. Generations are unique. Matriarchs, patriarchs, other leaders, and managers should recognize that each generation has its own set of rules. Passing on the family fortune with a heavily detailed blueprint created by Great-Grandfather Algernone will probably not bode well for the fortune or the family. Algernone\’s framework may work with regular retrofitting, but the details must be fleshed out using the world as it exists in the eyes of the current generation and possibly next generation. If not, just leave the family fortune to the family pooch. Reach back. At the first glimpse of success, take the hand of a junior and bring him or her along. Make the time and take the time. Even if you didn’t see it; somebody had a hand in making your bootstraps. Thank you. Sincerely articulated, that 2-word sentence carries more gravitas than Olympic weight-lifters. Causes are everywhere – for a reason. Millions need food, shelter, clothing, books, medicine, water, and peace. Causes are everywhere – for a reason. Marriage doesn’t make the family, authentic relationships do. “She has hers; I have mine; what we build during our relationship will be ours.” This is a favorite mantra among divorce attorneys and it wreaks havoc for estate planners later when intent changes but the walls were never torn down. We must be mindful that where there are people and relationships there is overlap and trying to build one wall may undermine what could have been a solid and lasting foundation.