Is Your Business Included in Estate Plan?

Is Your Business Included in Estate Plan?

Forbes’ recent article entitled “The Importance of Estate Planning When Building Your Business” says that every business that’s expected to survive must have a clear answer to this question. The plan needs to be shared with the current owners and management as well as the future owners.

The common things business owners use to put some protection in place are buy-sell agreements, key-person insurance and a succession plan. These are used to make certain that, when the time comes, there’s both certainty around what needs to happen, as well as the funding to make sure that it happens.

If your estate plan hasn’t considered your business interests or hasn’t been updated as the business has developed, it may be that this plan falls apart when it matters the most.

Buy-sell insurance policies that don’t state the current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.

If your agreements are not in place, or are challenged by the IRS, your estate may find itself with a far greater burden than anticipated.

Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries and new tax laws and regulations.

There are a range of thresholds, exemptions and rules that apply. Adapting the plan to make best use of these given your current situation is well worth the effort. Talk to an experienced estate planning attorney about your plan.

Including your estate planning as part of your general financial planning and management will frequently provide a valuable guidance in terms of how best to set up and manage your broader financial affairs.

Financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively. The same is also true of your business.

A tough conversation about what happens in these situations can be a reminder to management that over dependence on any key person is not something to take for granted.

Reference: Forbes (Sep. July 12, 2019) “The Importance of Estate Planning When Building Your Business”

What’s the Most Important Step in Farm Succession?

What’s the Most Important Step in Farm Succession?

There are countless horror stories about grandchildren in tears, as they watch the family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.  Farm Succession planning is crucial.

Another tale is siblings who were once in business together and now don’t talk to each other after one felt slighted because they didn’t receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you’re going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That’s because they’re successful in business in the city or they just don’t have an interest or the management ability to continue the operation.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.

Just remember to work out that first decision: What happens to the farm if I’m dead?

Once you work with an experienced estate planning attorney to create this basic framework for your Farm Succession planning, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

Will Inflation Have Impact on My Retirement?

Will Inflation Have Impact on My Retirement?

Inflation means fluctuations to the dollar’s purchasing power may have a significant effect on a retiree’s ability to cover costs of living and maintain a quality of life, says Kiplinger’s recent article entitled “Is Inflation Costing You More as a Retiree?”

  1. Why Could Inflation Impact Disproportionately Retirees. Inflation impacts people differently. There are many who may not feel the effects of inflation when compared to others. However, retirees tend to spend larger portions of their income on items highly impacted by inflation, such as housing, food, gas and health care, all of which are seeing the full effect of inflation.

The recent rise of inflation forces a lot of retirees to address tough questions about how to protect their retirement savings, while covering their costs of living.

  1. The Cost of Inflation. Retirees’ sources of income may be at risk to large inflation spikes. Retiree likely have most of their income tied to markets or in fixed income. These two sources are highly impacted by inflation. Social Security does offer COLAs, but the last increase was 5.9%, which falls short of the 8% to 9% increase in prices we’ve seen over the past year.

Retirees frequently use savings to get them through retirement. However, when inflation happens, the purchasing power of savings declines. As a result, retirees must withdraw larger amounts of savings to cover the costs of living. This shrinks the lifespan of retirement savings.

  1. Protect Yourself with Hedges against Inflation. Inflation-protected securities can be a way to keep income on pace with inflation. Treasury Inflation-Protected Securities, commonly known as TIPS, offer an interest distribution rate that keeps pace with the CPI inflation rates. This investment has helped retirees mitigate inflation and maintain their quality of life throughout retirement without worrying about outliving their savings.

Retirees and their savings face a stormy forecast ahead due to inflation. Income sources for retirees are largely inflation-exposed, and their spending habits tend to be on products and services affected by inflation.

Reference: Kiplinger (July 16, 2022) “Is Inflation Costing You More as a Retiree?”

When Should I Think About Business Succession?

When Should I Think About Business Succession?

The pandemic has made many business owners rethink their business succession and retirement planning. Insurance News Net’s recent article entitled “Succession Planning For Business Owners: More Important Than Ever” reports that according to PwC’s 2021 US Family Business Survey, only a third of US family businesses have a robust, documented and communicated succession plan in place.

If you wait too long, you may not have the right people in place to run the business. It also restricts the tax planning options for the business and your personal estate. Either error can cause a business to fail, when it passes from one generation to the next.

An exit that is too sudden or without direction can leave a vacuum at the top and damage relationships with existing clients and customers. With clear objectives, a sense of urgency and an experienced estate planning attorney, you can help ensure that your business, and your future, are secure.

There are a number of areas of transition that should be addressed:

  1. Founder Transition: Determine how long you plan to stay with the business, and what your retirement plans are;
  2. Family Transition: If you plan to leave your business to your children, determine the way in which the roles and power relationships will change;
  3. Business Transition: How will the company’s operations and customer relations be maintained through other transitions;
  4. Management Transition: Decide who will make up the new management team, such as family, non-family, or both, and how new leadership will be evaluated. You should also map out the schedule for transferring control of day to day decisions;
  5. Ownership Transition: Determine how ownership is to be transferred; and
  6. Estate Transition: see how you will coordinate your estate plan to ensure that the other transitions above occur as planned.

Many of these transitions will be accomplished through formal documentation, such as an operating agreement, buy-sell agreements and trusts. Sit down with an attorney soon rather than later to sort this out.

Reference: Insurance News Net (December 30, 2021) “Succession Planning For Business Owners: More Important Than Ever”

How to Protect Valuable Assets in Estate Planning

How to Protect Valuable Assets in Estate Planning

If you fail to take the necessary measures, you can lose your assets and property, which might cause financial challenges when you will not be working in retirement.

Legal Reader’s recent article entitled “How to Legally Protect Your Assets” says there are different strategies you can use to protect your personal assets.

This will help you to prepare for any eventuality. Let’s look at some of them:

A Family Trust. This may be one of the best strategies to protect your personal assets. A trust will help protect your assets when you lose all your money. A family trust can also provide tax benefits to family members in lower tax brackets. However, talk to an experienced estate planning attorney before setting up the trust to make the right decisions.

Start a Company. This may be an alternative to setting up a family trust, since your property will be more secure than when operating a sole proprietorship or a partnership business. This gives you a more secure future, even when you face financial challenges. However, there are many legalities in starting a company, so talk to an attorney.

Register Your Most Valuable Assets in the Name of the Low-risk Spouse. This tactic will make it difficult for a trustee or liquidator to gain access to the property in case of bankruptcy. However, ask an attorney to help you to structure the purchase to make certain that the low-risk partner’s name appears on the legal documents. An experienced estate planning attorney can also help you access benefits, such as Social Security and Medicaid.

These laws keep changing. You might miss an opportunity of getting long-term care planning, if you keep postponing a review with an experienced estate planning attorney.

As you spend your hard-earned cash, take some time to learn how to protect what you buy.  You should also use the legal strategies above to keep your property secure.

Reference: Legal Reader Jan. 26, 2022) “How to Legally Protect Your Assets” 

Will Moving to a New State Impact My Estate Planning?

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

  1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
  2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
  3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
  4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
  5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
  6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

What Should Small Business Owners Know about Estate Planning?

What Should Small Business Owners Know about Estate Planning?

Not having an estate plan can place business owners and entrepreneurs in jeopardy because they may face difficulties in keeping the business running, if they have to withdraw from the business at any point in time.

Legal Reader’s recent article entitled “What Small Business Owners Should Know about Doing Estate Planning” explains that estate planning is necessary to ensure business continuity. Think about who can take control when you’re no longer around to have the business continue according to your wishes contained in your estate plan. An experienced estate planning attorney can help business owners create a comprehensive estate plan, so things do not become chaotic for their family in the event of premature death or any permanent disability. Consider these steps when it comes to good estate planning for business owners.

Create an estate plan if you haven’t got one. A will is designed to detail your wishes about how you want the business to run and the manner of sharing your property at your death. A power of attorney allows an entrusted individual to undertake your business transactions and manage your finances, if you are incapacitated by injury or illness. A healthcare directive permits a trusted agent to make medical decisions on your behalf when you can’t do so yourself.

Plan for taxes. Tax planning is a major component of estate planning. Our tax laws keep changing frequently, so you have to stay in constant touch with your attorney to develop strategies for decreasing your tax liability, as well as creating a strategy for minimizing inheritance/estate taxes.

Buy life and disability insurance. Small business owners should think about purchasing life insurance, so their families can have a source of income after their death.

Create a succession plan. In addition to estate planning, a business owner should have a succession plan that specifies exactly how your company, and your family will prepare for a transition of ownership. The purpose of a well thought out succession plan is to keep the business operating or to take steps to sell it. This plan also includes the organizational structure of the business in case of maintaining business continuity.

Finally, you should keep everyone impacted by your decisions apprised of your estate plan and your business succession plan.

Reference: Legal Reader (Aug. 26, 2021) “What Small Business Owners Should Know about Doing Estate Planning”

Learn about Estate Planning in Your New State

Learn about Estate Planning in Your New State

Did you know that a lot of states—especially the ones that have a state income tax—actively challenge claims by former residents that they’ve moved out of state and changed their tax domicile. These states may try to use any connection a former resident maintains with them to justify their continuing to tax the former resident.

J.P. Morgan’s recent article entitled “Changing your state of residence” says to have your move  respected, you really have to move. Half-measures don’t cut it and could leave you open to claims by your former home state that it should still be able to tax you. Domicile for tax purposes is a matter of intent, and that intent is implied by your actions.

Changing your residence is a legal issue, so consider this checklist of items. There’s no bright-line rul., However, the more of these you can check off, the more likely it is that you’ll be deemed to have changed your residence for tax purposes.

  • Change your driver’s license to your new state and cancel your old state’s driver’s license.
  • Register your vehicles in your new state and notify your insurance company of the move.
  • Register to vote in your new state and cancel your old state’s voter registration.
  • Move your membership to a local house of worship in your new state and make local contributions.
  • Purchase a home in your new state and if possible, sell your home in your old state. If you can’t buy right away, rent with a long-term lease.
  • Claim a homestead exemption in your new state (if applicable), and relinquish any homestead claim in your old state.
  • Revise your estate planning documents (wills, trusts, powers of attorney, health care powers of attorney, advance care directives, etc.) to indicate your new state of residence with a local estate planning attorney.
  • Change your financial accounts to your new state and don’t keep accounts in your former state.
  • Get a library card in your new state.
  • Use local medical professionals and send your medical records to them.
  • Change your address with the IRS and list your new address on your returns; and
  • Focus your activity (economic, social, and financial) in your new state.

As a general rule, you want to stay out of your former state more than 183 days in each calendar year (this number may vary by state). Therefore, the closer you are to this tally, the more likely your former state will want you to prove that you were outside of that state for more than 183 days. You should keep a daily calendar (with receipts) that demonstrates you were outside your former state for each day. In the first year you claim non-resident status in your former state, you may be more likely to experience a residency audit than in future years, no matter how close you are to the threshold.  While you don’t have to be in your new state for more than 183 days, your former state will look at how many days you spent in your new state as a factor in determining if you have established residency in the new state.

Reference: J.P. Morgan (July 22, 2021) “Changing your state of residence”

Are Roth IRAs Smart for Estate Planning?

Are Roth IRAs Smart for Estate Planning?

Think Advisor’s recent article entitled “Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool” says that Roth IRAs offer an great planning tool, and that the Secure Act 2.0 retirement bill (which is expected to pass) will create an even wider window for Roth IRA planning.

With President Biden’s proposed tax increases, it is wise to leverage Roth conversions and other strategies while tax rates are historically low—and the original Secure Act of 2019 made Roth IRAs particularly valuable for estate planning.

Roth Conversions and Low Tax Rates. Though tax rates for some individuals may increase under the Biden tax proposals, rates for 2021 are currently at historically low levels under the Tax Cuts and Jobs Act passed at the end of 2017. This makes Roth IRA conversions attractive. You will pay less in taxes on the conversion of the same amount than you would have prior to the 2017 tax overhaul. It can be smart to make a conversion in an amount that will let you “fill up” your current federal tax bracket.

Reduce Future RMDs. The money in a Roth IRA is not subject to RMDs. Money contributed to a Roth IRA directly and money contributed to a Roth 401(k) and later rolled over to a Roth IRA can be allowed to grow beyond age 72 (when RMDs are currently required to start). For those who do not need the money and who prefer not to pay the taxes on RMDs, Roth IRAs have this flexibility. No RMD requirement also lets the Roth account to continue to grow tax-free, so this money can be passed on to a spouse or other beneficiaries at your death.

The Securing a Strong Retirement Act, known as the Secure Act 2.0, would gradually raise the age for RMDs to start to 75 by 2032. The first step would be effective January 1, 2022, moving the starting age to 73. If passed, this provision would provide extra time for Roth conversions and Roth contributions to help retirees permanently avoid RMDs.

Tax Diversification. Roth IRAs provide tax diversification. For those with a significant amount of their retirement assets in traditional IRA and 401(k) accounts, this can be an important planning tool as you approach retirement. The ability to withdraw funds on a tax-free basis from your Roth IRA can help provide tax planning options in the face of an uncertain future regarding tax rates.

Estate Planning and the Secure Act. Roth IRAs have long been a super estate planning vehicle because there is no RMD requirement. This lets the Roth assets continue to grow tax-free for the account holder’s beneficiaries. Moreover, this tax-free status has taken on another dimension with the inherited IRA rules under the Setting Every Community Up for Retirement Enhancement (Secure) Act. The legislation eliminates the stretch IRA for inherited IRAs for most non-spousal beneficiaries. As a result, these beneficiaries have to withdraw the entire amount in an inherited IRA within 10 years of inheriting the account. Inherited Roth IRAs are also subject to the 10-year rule, but the withdrawals can be made tax-free by account beneficiaries, if the original account owner had met the 5-year rule prior to his or her death. This makes a Roth IRA an ideal estate planning tool in situations where your beneficiaries are non-spouses who do not qualify as eligible designated beneficiaries.

Reference: Think Advisor (May 11, 2021) “Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool”

When Did You Last Review Beneficiary Designation Forms?

When Did You Last Review Beneficiary Designation Forms?

For many people, naming beneficiaries occurs when they first set up an account, and it’s rarely given much thought after that. The Street’s recent article entitled “Secure your IRA – Review Your Beneficiary Forms Now” says that many account holders aren’t aware of how important the beneficiary document is or what the consequences would be if the information is incorrect or is misplaced. Many people are also surprised to hear that wills don’t cover these accounts because they pass outside the will and are distributed pursuant to the beneficiary designation form.

If one of these accounts does not have a designated beneficiary, it may be paid to your estate. If so, the IRS says that the account has to be fully distributed within five years if the account owner passes before their required beginning date (April 1 of the year after they turn age 72). This may create a massive tax bill for your heirs.

Get a copy of your listed beneficiaries from every institution where you have your accounts, and don’t assume they have the correct information. Review the forms and make sure all beneficiaries are named and designated not just the primary beneficiary but secondary or contingent beneficiary. It is also important tomake certain that the form states clearly their percentage of the share and that it adds up to 100%. You should review these forms at any life change, like a marriage, divorce, birth or adoption of a child, or the death of a loved one.

Note that the SECURE Act changed the rules for anyone who dies after 2019. If you don’t heed these changes, it could result in 87% of your hard-earned money to go towards taxes. For retirement accounts that are inherited after December 31, 2019, there are new rules that necessitate review of beneficiary designations:

  1. The new law created multiple “classes” of beneficiaries, and each has its own set of complex distribution rules. Make sure you understand the definition of each class of beneficiary and the effect the new rules will have on your family.
  2. Some trusts that were named as beneficiaries of IRAs or retirement plans will no longer serve their original purpose. Ask an experienced estate planning attorney to review this.
  3. The stretch IRA has been eliminated for most non-spouse beneficiaries. As such, most non-spouse beneficiaries will need to “empty” the IRA or retirement account within 10 years and they can’t “stretch” out their distributions over their lifetimes. Failure to comply is a 50% penalty of the amount not distributed and taxes due.

For many, the beneficiary form is their most important estate planning document but the most overlooked.

Reference: The Street (Dec. 28, 2020) “Secure your IRA – Review Your Beneficiary Forms Now”