Going Back To Basics

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Recent tax law changes are turning traditional estate planning on its head. Indeed, moves long considered savvy–for example, aggressively shifting wealth to younger generations while senior family members are still alive or leaving assets to a “bypass” trust–may no longer be necessary to save estate tax and could now leave many families paying income tax they wouldn’t otherwise owe.

The beast – the estate tax – is not dead. Nevertheless, that multi-headed monster is far tamer these days. On the other hand, there is another less obvious tax monster that you cannot afford to ignore.

The capital gains tax.

The reason for the pivot from estate tax to capital gains tax has everything to do with the same legislation. Actually, it is a fairly recent change, as far as these things go. The budget deal of January 1, 2013, locked in a high estate tax exclusion amount and enshrined the ability for spouses to pass unused estate tax exemption amounts between themselves (so called, “portability”). In the same swoop, though, the capital gains tax jumped up another 8.3% to 23.8% from the previous 15%.

So, with this capital gains tax in mind, what does that mean for planning? This is a question Forbes explored in a recent article (intriguingly) titled “Freebasing Your Estate.”

The nut of the issue with capital gains is “cost basis,” a term for the original value against which the present value is used to determine the taxable portion of capital gain. Essentially, a “postmortem (at death) bequest” and an “intervivos (during life) gift” may transfer an asset with the same current value. However, they transfer a different cost basis to the inheritor and donee respectively. The inheritor inherits the “date of death” value as the basis of the inheritance. This is known as the “stepped up” basis. The donee receives and continues to hold the same basis held by the donor. This is known as the “carryover” basis.

With the estate tax now less of a concern, it makes more sense to transfer an asset at death rather than during your lifetime, all other considerations being equal.

What assets will you be transferring? Is the estate tax or is the capital gains tax a greater threat to your family wealth? Regardless, it is wise to keep in mind that what Congress puts into place it can just as easily undo.

Reference: Forbes (February 12, 2014) “Freebasing Your Estate”

The Utah Boomer Inheritance Boomerang

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For heirs, the emotions that come with sudden wealth can be a mix of guilt, loss, anger, regret, relief and hurt, perhaps stewed with long-simmering family rivalries and resentments.

Much of estate planning focuses on the technical aspects of leaving behind or receiving an inheritance. Commonly, these include the tax questions, the legal questions, and the nitty-gritty details. In the midst of all of the numbers and code sections, it is easy to overlook the very emotional nature of inheritance itself.

Indeed, the Boomers of today are experiencing an unprecedented period of wealth transfer. What does it mean for a Boomer to inherit these days? The New York Times approached the subject a short time ago in an article titled “When Boomers Inherit, Complications May Follow.”

We all know that the Baby Boomers are a unique generation in terms of demographics and healthcare, not to mention their relationship to the very history and spirit of the country since their arrival. But did you know that Boomers are in the process of receiving the greatest inheritance windfall in the history of the country? Indeed, and that inheritance is estimated at some $8.4 trillion spread across some 79 million Baby-Boomers.

Against this backdrop, what does inheriting mean? What do you do with an inheritance and how do you deal with having it?

While it is easy to think of an inheritance as nothing more than money, it seems to mean something far more depending on the individual inheritor. Some may receive it as a gift to be honored, some sense spite in it, and others are quick to spend it away. The original article collects a number of voices from diverse viewpoints along the inheritance spectrum.

If you are inheriting, consider pausing for a moment now to think about what that may mean to you. For that matter, this personal reflection can guide you through your own estate planning. How are you leaving an inheritance for your heirs? Why are you leaving it as you are?

Reference: The New York Times (February 10, 2014) “When Boomers Inherit, Complications May Follow

Unequal Utah Inheritances – Handle With Care

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Advisors say it doesn’t happen often, but parents who divide their assets unevenly are playing with fire. That said, there are things they can do to try to keep the fire under control, so it doesn’t become a conflagration that blows the family up.

Sometimes it is easy to split up your assets like pieces of the pie, with equal pieces for everyone. Sometimes, the assets just do not split that way or maybe you do not want to split them equally. For those who receive something less than equal, they may feel spurned or sense favoritism.

How do you split your estate unevenly and still keep the peace in the family or, at the very least, keep it out of the courts?

The uneven distribution of an estate is always a challenge. Nevertheless, when it must happen, it must happen carefully. Why might you split assets differently among your children and what are the challenges? Private Wealth investigated this matter recently in an article titled “Playing Favorites.”

While “favoritism” may be the sole motivation, such is generally the exception to the rule. Commonly, after a “lifetime” of rearing their children, parents may want to level the playing field out of a sense of fairness. Whether making adjustments for unrepaid lifetime “loans,” helping children who were less “successful” financially than their siblings, or protecting an inheritance from a squandering prodigal, the reasons for unequal inheritances as unique as families themselves.

Since there are so many variations on the unequal inheritance theme, the key is to ensure that your reasons are thought-through, valid, and, better yet, conveyed. Remember: inheritance and disinheritance are complicated subjects, both legally and emotionally. Depending upon your reasons, you may even find another path forward to be more useful.

Reference: Private Wealth (January 7, 2014) “Playing Favorites”

Planning Your Utah Family Business Legacy

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These two experiences taught me a lesson about family businesses. Making a family business a family legacy takes planning and preparation. While each family business has its own unique issues, there are some common strategies associated with succession planning.

Sometimes, passing along your assets to the next generation is simply a matter of passing them along. You just let the gift and the potential represented by that gift be your legacy (emphasis on the “sometimes”). However, when the asset is a business, it is rarely that simple.

A business is not merely a thing. No, a business is a mindset, an activity and, oftentimes, even a lifestyle. It can get complicated. If your legacy is the family business, then with great responsibility comes the need for equally careful planning, preparation and dialogue.

Because every business is different, as every family is different and every individual is unique, what is right for a family business is something to be figured out and understood. That said, businesses have been coming and going for generations. Some have transferred successfully and others less so. Consequently, there are some tried and true strategies to consider when planning for your own family business succession.

Whether your objective is a sale, windup or succession, Forbes has provided a practical roadmap in a recent article titled “Six Steps For Making Your Business A Family Legacy.”

Here are the six steps by heading alone:

  1. Give the family a reason to continue the family business
  2. Develop a management team
  3. Structure a business succession plan
  4. Fund the business succession plan
  5. Wealth replacement for other family members
  6. Have a successful business

So what is right for you, your family and your business? I recommend reading the original article and then consulting with your team of professional advisors. Your attorney, accountant, financial planner and insurance agent will each bring a valuable and unique skill set to the table.

Reference: Forbes (February 3, 2014) “Six Steps For Making Your Business A Family Legacy”

Utah Wills And Trusts: Do You Need One Or Both?

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The question that many Americans want answered is: is a will or trust best for retirees?

There are simple solutions to simple problems, and complex solutions to complex problems. That being said, when it comes to estate planning many Americans ponder the following: “will or trust?”

If you have found yourself between these horns of dilemma, the simple will and the (sometimes) complex trust arrangement, then you will want to consider a recent Forbes article titled “Wills vs. Trusts: What’s Best For Retirees?”

There is a debate and for good reason. The last will can be simple, and everyone needs one even when they have settled a revocable living trust (i.e., commonly known as a “pour-over will”). Even with a “simple” last will, a period of probate is required and there may be some adverse tax implications. However, this is less likely these days with the federal estate tax exemption pegged at $5.34 million (but do not forget to check state estate taxes that may apply).

A revocable living trust arrangement can move assets very efficiently outside of the probate process. It may aid in the handling of assets as you age and become unable to hand your own affairs.  That said, trusts are not as simple as signing on the dotted line.. It must hold title to your assets now, or upon your death to do its work outside of probate. It takes effort, and sometimes the dedication of resources, to achieve these goals. Unless trusts are funded, either now or at death, the pour-over will would have to be probated anyway.

In the end, it will always come down to your needs, the needs of your family, and the nature of the assets to leave behind. However, the question is very real and worth asking: do I need a revocable living trust or can you do it with a last will alone?

Properly answering this question, given your own unique circumstances and objectives, is not a do-it-yourself project. Consult competent legal counsel regarding how each approach may (or may not) be appropriate for you.

Reference: Forbes (February 18, 2014) “Wills vs. Trusts: What’s Best For Retirees?

Approach A Utah Inheritance With Careful Consideration

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You may need to take some initial measures to protect your new wealth, but don’t jump into making big decisions immediately.

When a loved one passes along an inheritance, it is often a gift of great potential. Therefore, the heir should take some time to reflect on the gift and determine how to make the best of it.

Making the best of an inheritance begins with recognizing the gift and its potential as something worthy of careful consideration. For some thoughtful counsel, consider reading a recent Kiplinger article titled “Heirs Should Treat Windfall With Special Care.”

There is simply much to be done, and much that can be done, but not all of it need be done at once. For example, you might begin the process by asking yourself some questions worthy of the gift and worthy of reflection. How was the inheritance received? What is the form of the inheritance, cash or illiquid assets? Are there any limitations or restrictions regarding the inheritance?

In addition to these questions, determine whether the inheritance must be protected and preserved. For instance, is personal liability or property insurance required? Will a new account need to be opened, especially if the inheritance is to continue in trust? Should the assets themselves be repositioned or restructured? Will you be passing them along as well?

In short, a windfall inheritance is and ought to be a moment of reflection. It can be difficult, but the moment of reflection may be rewarding and prove invaluable. In point of fact, families need not wait until the windfall itself to consider their options and their future.

Part of estate planning is doing what is best for the next generations.  Consequently, that fact alone may require working with them from the beginning, and well before the gift, to ensure all is in place and aligned when needed.

If you are planning for your own estate, then how would you want your loved ones to treat their inheritance? What can you do today to ensure that they receive the greatest good from your largesse tomorrow? A little bit of planning on your part in coordination with your loved ones can keep the family strong in the process, too.

Reference: Kiplinger (February 2014) “Heirs Should Treat Windfall With Special Care”

Multi-Generational Living: Who Owns The Utah Home?

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Multi-generational living arrangements present legal and financial challenges around home ownership.

The family home is that special place where the family lives and comes together. In fact, some families take it one step further and actually all live under the same roof. Some 17% of the population have multi-generational living arrangements.

All that said, there are significant issues at play when it comes to actual home ownership and occupancy. How can a family keep everything straight and keep the family home?

A house is not a simple kind of thing to own. Anyone who has seen a mortgage knows this. On the other hand, a multigenerational family living together with elderly parents is likely to present unique issues of inter-reliance, the upcoming need to transfer ownership, and even Medicare or Medicaid asset restrictions.

This is not a new problem, but reveals itself in various ways from family to family as ElderLawAnswers pointed out in a recently updated topic titled “What Are the House Ownership Options When Parents and Adult Children Live Together?”

It seems options are always in response to actual problems encountered. In this regard, and as the updated topic elucidates, there are a few easy options worth understanding and, perhaps, implementing:

  1. Joint Ownership, where an elderly parent and an adult child own the home in tandem and the house passes outside of probate to the co-owning child.
  2. Tenants in Common, where an elderly parent and an adult child own shares of the home and the parent’s shares can be passed by bequest, thereby involving probate but allowing the ownership to pass to another adult child other than the tenant child.
  3. A Life Estate, which allows an elderly parent to name an adult child as a “remainderman” and recipient of the house upon their passing, directly and without probate but not until their passing.
  4. A trust arrangement, by far the most flexible and powerful tool, especially when there may be many hands or interests to spell out or even a tax situation to resolve.

These are, at least, the basics of the problem and a few solutions. How do you and your loved ones own the family home? Are you prepared to safely and easily transfer the house? Have you considered the tax implications, whether to the estate or in the form of capital gains?

If you do not have the answers to these fundamental questions, there is no time like the present to find them.

Reference: ElderLawAnswers (February 25, 2014) “What Are the House Ownership Options When Parents and Adult Children Live Together?”

A Family Loan Vs. A Family Gift

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Be prepared to demonstrate that the loan is legitimate, and that repayments are being made regularly. This documentation can also help sort matters out if the lender should die before the full value of the loan has been repaid.

If you are compelled to help out a family member by way of an intra-family loan, make sure you are aware of all the ins and outs before you extend the offer. The benefits of incorporating family loans into your estate plan were pointed out a short time ago in an article titled “Estate planning benefits of intra-family loans” on LifeHealthPro.com.

The benefits of making a loan are not immediately obvious because that means, by definition, the loaned assets are to be returned to the estate of the one granting the loan, plus interest. Yes, if you make a loan to a family member you still have to expect it back and charge interest at the federally mandated interest rate, the Applicable Federal Rate (or AFR) for the relevant time-frame of the loan. Otherwise, it is not a “loan,” but a “gift” and is subject to an entirely different set of rules.

You might think of it instead as a tool for “intra-family liquidity” for family members to help their loved ones rather than be at the mercy of the bank. After all, the object of the loan can be to do anything. Significant loans can allow for a significant investment, the appreciation of which need only be greater than the interest rate, and this appreciation will pass to the loved one who accepted the loan. Likewise, it could go toward a home and even generate a mortgage tax deduction.

The central caveat is, again, that there are some serious differences between a loan and a gift, to include some heady tax ramifications if not done according to Hoyle. A loan that is not a loan is a gift. Failure to treat the loan as such or to charge interest will raise red flags with the IRS.

Likewise, to forgive the debt is to effectively make a gift. This is not to be forgotten or treated lightly, but then it does lend a certain power and flexibility if it is intentionally used to re-characterize a loan as and when appropriate.

For many, this loan idea is at least a novel thought to consider. What could you and your loved ones be working toward together? You might be capable of more than you thought. Remember, it is not a strategy without some complications. However, an intra-family loan may be a powerful way to pursue family goals.

Reference: LifeHealthPro (February 10, 2014) “Estate planning benefits of intra-family loans”

Business Succession Through Employees in Utah

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The 1974 ESOP law and later amendments were designed to encourage employee ownership. Company founders who initially sell just part of their stake and stay on as CEO say the best news comes after the deal: employees start to act more like owners. Ideas formerly kept quiet start to bubble up. Costs, once resistant to reduction, come under control more easily.

Once you have decided to sell your business, the million-dollar question becomes: “to whom should you sell it?” If you have no successor in mind, have you considered your employees? As many have discovered over the years, there is much to be said for selling the business to the employees themselves in the form of an ESOP or “Employee Stock Ownership Plan.”

Much has been written on the topics of employee ownership and the ESOP transition before, but a recent Forbes article titled “The Better Exit Strategy: ESOPs Satisfy Business Owners And Preserve Their Legacy” is worth your read.

When there must be an exit from the business, whether a full exit from the business or simply a way to pull out much needed capital, the exit strategy means weighing the available options. To sell the business to a larger company may mean gutting the business to only those elements the buyer wants to keep. Likewise, venture capital means distilling the business to a profit-center to be used and sold for profit.

What if you have an established business with established and trustworthy employees – employees that might make good owners? Consider an ESOP. In fact, the ESOP allows the owners to sell and the employees to buy in a tidy package that helps everyone. Moreover, it preserves the business, and the legacy of the founders. The owners can even stay on as employees themselves and continue at the helm, if the deal is structured accordingly.

Indeed, an ESOP is not a strategy suited to everyone and every business. There are some cases where it went terribly wrong. Nevertheless, ESOPs are quite an intriguing and powerful option for a closely held business. Take a look at the original article and others like it to learn more.

Reference: Forbes (February 12, 2014) “The Better Exit Strategy: ESOPs Satisfy Business Owners And Preserve Their Legacy

Ethical Wills And The Transfer Of Utah Legacies

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What is an ethical will? Think of your will as providing the legally-binding “how” when it comes to your estate plan. How do you want your assets to be distributed? On the other hand, think of your ethical will as providing the unenforceable “why” when it comes to the matters of the heart behind your estate. Why are you distributing your assets as you are?

WealthManagement.com took up the topic of ethical wills in a recent article titled “The Rep’s Guide to Ethical Wills.”

You might say that there are two important aspects when it comes to planning for your estate. On the one hand, every decision is a legal decision. Consequently, you have to appease the law and the court system. On the other hand, every decision intimately and ultimately effects your loved ones who just need to understand your decisions.

The dilemma is that legal language is not too great at expressing an emotive concept, but you can always work outside the lines to ensure that your point gets made with an ethical will in which you write your reasons, emotions and hopes in an entirely non-legal way.

The ethical will can appease the emotional curiosity in the same way that the will sticks around to speak to your legal needs after you are gone.

Reference: WealthManagement.com (February 25, 2014) “The Rep’s Guide to Ethical Wills”

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