Avoid Inheritance and Estate Tax Traps

Passing wealth and assets to the next generation can be challenging. Potential federal and state estate tax, inheritance tax, and other issues require exceptional planning. They also often require that the plan be executed over time to have the desired outcome. There are many tax traps we can help you avoid. Here are some common tax issues you need to be aware of.

The Gift Tax Exemption

This is a common strategy used by many people. In 2016, you can gift up to $14,000 to an individual. Amarried couple can gift up to $28,000. This works great for transferring small amounts of money to a variety of individuals over time. What most people do not realize, or adequately keep track of, is that the total amount that can be gifted is limited. The total amount you can disburse by gifting is equal to the federal estate tax deduction, which is currently $5.45 million (in 2016). The amount gifted also reduces the amount covered by the federal estate tax exclusion later on. So although it is great to provide tax free gifts to your heirs now, so they can enjoy the benefits and you can get a sense of satisfaction, making tax free gifts does not actually increase the amount that can be passed on tax free (the annual gifting is subtracted from the lifetime total).

Marital and Other Legal Status

Married couples can enjoy tax-free transfer of assets via the marital deduction. Although this is a simple and effective short-term strategy, it can also be a huge mistake if there are children or charitable causes to be provided for in the long-term. Passing the entire estate to the surviving spouse essentially eliminates the benefit of the federal estate tax deduction available to heirs of the decedent. That means the heirs of the surviving spouse will be paying over $2 million in taxes that would not have been necessary if the federal estate tax deduction was fully utilized and the remainder of the estate passed to the surviving spouse.

Citizenship may also impact the marital deduction. If one spouse is not a US citizen, the marital deduction itself may be unavailable. Similarly, unmarried couples, same-sex couples and other relationships may be treated differently from state to state. It is critical to work with an expert to ensure you are aware of the particulars of your specific situation, and the variety of tools available to help you minimize the tax burden on your heirs.

Life Insurance

Life insurance is an under-utilized tool in estate planning. There are a variety of products available that can facilitate effective wealth transfer. However, there are also a number of avoidable tax traps that people fall into without the proper guidance. For example, you may be taxed on the value of a loan against and insurance policy if you let the policy lapse, or under certain conditions if a policy with a loan is changed to a different face value (in consideration of the loan amount). Conversely, it may be reasonable to expect that a loss related to the surrender of a policy for less than the investment in the contract would be deductible, but it actually is not.

Proceeds from life insurance provided by an employer may also have tax consequences, if it is not set up properly. If you are a business owner, with insurance on your key employees, there are several requirements which must be met to prevent the proceeds from being taxed as income.

As your needs change, your insurance strategy will also change. Be sure you are getting expert, unbiased advice, taking potential taxable events into account, during your annual insurance audits.

Trusts

Trusts can be very powerful estate planning tools. When used properly, estates can be transferred virtually tax-free for generations. However, planning and executing a successful trust strategy requires expertise and advanced planning. The state and federal tax exemptions, and the needs of the surviving spouse and heirs, need to be carefully considered. The target is a balanced approach to minimizing tax, and maximizing available income and access to capital for the surviving spouse and future heirs. Specific plans for dependents with special needs, and the heirs in blended families can also be taken into account. The important thing to understand, is that without proper planning, important tax benefits may be lost, costing your heirs millions of dollars in unnecessary tax expense. Even worse, unexpected or unplanned for tax obligations may force valuable assets to be liquidated and your legacy to be irreparably diminished. Planning in advance with unbiased, expert advice is critical. An annual strategy session is also advised to ensure that your plans continue to serve your evolving status and goals.

You owe it to yourself and your loved ones to plan ahead to make the most of your legacy. Schedule a talk with Mark now:

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At Absolute Conclusions, we pride ourselves on staying informed of the best practices and best plans available. Our core goal is to help you create and maintain your legacy. Our independent status enables us to align completely with your interests, and we can also offer fee-based consultations, insurance audits, and reality-checks to provide further peace of mind. Please remember that the buy-sell agreement and funding plan should be reviewed annually, and at any time a significant change in the business size or scope occurs. If you have any questions or feedback on this article, click the Schedule a Call button to set up a no-cost, no-obligation consultation.

4 Steps to Business Succession Planning

Many people find business succession planning confusing, or even intimidating. Few find it fun, which is part of why Absolute Conclusions is here – we see it as a fun and fascinating three dimensional puzzle to be solved. Our passion for helping people create and maintain their legacy demands that we stay on top of our game, and find ways to strip away the jargon and make complex subjects easy to understand. With that in mind, we’ve developed these 4 steps to business succession planning.

1. Decide and agree.You know that you may not want to work forever, and frankly you can’t until we find a way to live forever. Like it or not, you and any partners you have, will eventually exit the business for some reason. Some typical reasons include insolvency, divorce, disability, disagreement, death, and retirement. What happens next? Do beneficiaries become partners? Does the business get sold, and if so, to whom? At what price? On what terms? These things need to be decided and agreed upon, and it is much better and much easier to do it long before an event occurs that requires the action. Planning in advance provides the time to rationally consider the options, and talk through them with your partners, family, and advisors. The first step is to decide and agree on what will happen, and then –

2. Document the decisions in a Buy-Sell agreement. A buy-sell agreement is a key part of the business succession plan, and it is essential to protecting your legacy. Ideally this will be done at the same time as the operating agreement, but this is a must-have for any business. The buy-sell agreement includes the conditions that will result in a sale (often called a trigger event). For example, a trigger event could be a key person becoming unable to work. Another could be they become financially insolvent, etc. The buy-sell agreement defines the trigger events and details what happens next. For example, one partner may purchase another partner’s interest. Or provisions may be made by which employees can purchase and continue the business. The agreement would also include how the value of the business will be calculated, terms of the sale, and more. This helps provide for business continuity and stability. Perhaps more importantly, it helps ensure the financial future for you and your loved ones.

3. Fund the plan. All that planning was great and necessary. However, it is worthless if the money isn’t there to execute the plan. Although a partner may have the net worth, liquid capital is required to execute the buy-sell agreement. It is the responsibility of the business to make sure there are sufficient funds available to implement the agreement and continue the business. Let’s face it, lenders don’t lend to businesses in distress. For them, the disability, insolvency, or exit of a partner puts a business in distress. Funding the plan is not something that can be effectively handled after the fact. It is essential to make provisions to fund the plan from the start. When the business is small, simply establishing a capital reserve may be sufficient. As the business grows, it may become more difficult to maintain sufficient reserves because they may be maintained at the expense of additional growth. Fortunately, there are a variety of options for funding the plan via insurance, as successful people have been doing for generations.

4. Revisit the plan annually. As your business grows and changes, your needs may change and additional opportunities may become available. Your personal situation, goals and desires will also evolve over time. Therefore, we strongly recommend that you review your plan annually or whenever there is a significant change in business or personal strategy. A bit of time with your business partners and advisors will help ensure your plans meet your current needs and goals.

At Absolute Conclusions, we pride ourselves on staying informed of the best practices and best plans available. Our core goal is to help you create and maintain your legacy. Our independent status enables us to align completely with your interests, and we can also offer fee-based consultations, insurance audits, and reality-checks to provide further peace of mind. Please remember that the buy-sell agreement and funding plan should be reviewed annually, and at any time a significant change in the business size or scope occurs. If you have any questions or feedback on this article, click the Schedule a Call button to set up a no-cost, no-obligation consultation.

Please note: This document is intended to provide introductory information on the subject matter. Absolute Conclusions does not provide tax and legal advice. You should consult with independent financial, tax and/or legal professionals before making financial investmentor planning decisions.