Divorced Business Owner Sets Up Estate Plan for Minor Children

I was working with a divorced business owner recently. His financial advisor recommended that he come see me. The business owner had been very successful in business, but he knew little and had no previous exposure to estate planning.

It was kind of funny when he said he wasn't sure what he needed from me, but he knew he needed to do something to protect his estate. I started a conversation by letting him know what would happen if he died with no legal plan in place.

I told him, "If you die with no legal program in place, then all of your assets left in your name alone will be frozen. Your ex-wife will hire an attorney to start the probate proceeding. Your ex-wife will kick your fiancé out of your house. After several months or years of court proceedings, your ex-wife will start to gain control over all of your assets, including your businesses. Your business partners will have to co-own your businesses with your ex-wife. Your ex-wife will have the right to hire another set of business attorneys to search and review all of your business records. One of our local elected judges will be in charge of over-seeing how your ex-wife is handling everything on behalf of your four minor children. Ultimately, if the court proceedings ever end, your ex-wife will gain complete control over your estate. If she does not pay the $1.5 million estate tax bill within nine months after you die, interest and penalties will accrue against your estate. Then, as your children reach their 18th birthday, they will sue your ex-wife who will be forced to dump roughly $2 million into your children's laps, likely spoiling any desire they may have to get a good college education."

He said, "That would not be good for my four kids, my fiancé, my business partners, or my ex-wife. I don't think my ex-wife would be the best person to handle my children's inheritance."

About an hour later, after much discussion about his family, he was anxious to put in place an estate plan so that, when he dies, the right people will be put in charge of managing his estate. Probate will be avoided so the courts and judges and lawyers would be kept out of his estate. He designated a trusted and responsible colleague to handle the trusts for his four children so nothing would be dumped into their laps at age 18. His children would have money available to them for their college education, and they would receive their inheritance in stages at later ages. Plus, we set up the trusts for his four kids so that if they get married and divorced, they will not have to split the inheritance with their spouse.

We also had a discussion about the estate and gift tax. He was surprised to learn that if he stayed single, then only $5.49 million of his estate would escape the 40% estate tax. But if he gets married, then through the appropriate use of the marital deduction and portability, he could protect $10.98 million from the 40% estate tax.

Bottom Line: If you are divorced with children, and you don't want your ex-spouse to control everything when you die, and if you'd prefer that what you've worked for doesn't get dumped into your kids' laps at age 18 (after being overseen by judge until then), then perhaps you should give us a call at 925-400-7753.  We can have a conversation so that you can sleep well at night knowing all of your estate legal affairs are in order.

How to Protect an Inheritance from Children’s Divorces

I am working with several couples right now who want to make sure that their children do not lose their inheritance if the children get divorced.

None of the children are are married yet, but some have "significant others", and the couples anticipates that a marriage may coming up in the near future. They fear that one of their children will continue to invest in their spouse's business.

We discussed the options that are available to the couple. We are setting up their estate plan so that when the children inherit, they will inherit in a trust - we often call this trust the Children's Inheritance Trust.

By having the couple leave their estate to an Inheritance Trust for the benefit of their children, they help ensure that the inheritance will be kept separate from any community property that the child may acquire with their spouse. If a child subsequently gets a divorce, the child will keep their trust truly separate - because the trust will not have been commingled with the assets that the child acquired with their spouse.

Many families these days have divorce circumstances. If you want to set up an estate plan so that your children's inheritance is protected, give us a call to start a conversation about the easiest ways to protect what you've worked so hard to build. You may also feel free and visit our website for a free report entitled California Legal Strategies to Protect Your Family’s Inheritance from Divorce, Creditors, and Lawsuits.”

Top 5 Reasons to Plan Your Estate

Let’s face it, we rarely believe that something will happen to us this year..but what if it did? Are you confident in what the outcome will be for the people that you love the most?

There are plenty of reasons to plan your estate now. I have listed five of the top reasons below. Although numbered, they are in no particular order of importance because everyone has different priorities and concerns.

If anything on this list strikes you as a concern, imagine the effect on your loved ones if you fail to take action. This should inspire you to make a firm to commitment to resolve this as soon as possible. Pick a date this year in which you will commit to competing your estate plan, and stick to it!

Okay, here are the top 5 reasons…

1)      Protect your family in the event of your incapacity. Without a properly drafted estate plan, your family will likely have challenges in managing any assets in your name, including your home. A court supervised conservatorship (otherwise referred to as a living probate) in which all of your transactions are recorded and affirmed through a series of court hearings will generally be required.  This public process goes on indefinitely, and requires your family to convince a judge (and in some cases even a jury) that you are unable to manage your own finances.

2)      Make your wishes known regarding distribution of your assets in the event of your death. Without an estate plan, any assets left in your name alone at your death will be left up to state law, and the probate court system, to determine who will receive those assets. 

3)      Avoid the delay and expenses of probate, and keep your affairs private with a living trust. Even if you have a valid will at the time you pass away, a court supervised process called probate will be required to inventory everything that you own and approve its distribution to your beneficiaries (spouse, children etc). The probate process is a public process in which anyone can review your probate file and determine what you have, who is scheduled to receive it, and when. Especially in today’s society, many people prefer to protect their loved ones by keeping their affairs private, which can only be accomplished through a properly drafted (and funded) living trust.

4)      Protect assets and keep them in the family.  Many people are concerned that property left to a child will be inherited by his or her spouse if that child were to die prematurely, or if the couple were to divorce. Leaving property to a child in trust helps ensure that those assets are kept separate and pass according to your wishes (i.e. to grandchildren).  These trusts may also protect asset from creditors if a child is ever involved in a lawsuit (business or personal) or collections effort. 

5)      Protect minor children by designating a guardian. Parents with minor children must ensure that they can decide who will raise their children if they die before those children become adults. Without a proper estate plan, a judge will make that decision under his or her own discretion. 

Will My Family Have to Pay Estate Tax?

I get asked the following question often "will my family have to pay estate tax when I die?" For 99% of the population, the answer to that question is no. An individual can pass up to $5.25 million in 2013 Estate Tax Free. In 2014, each person has a credit of up to $5.34 million. Furthermore, as of last year,  spouses may combine their unused individual credit amounts and pass on up to $10.68 million at the death of the second spouse (In 2014, current law is $10.5 million), assuming none of the credits were used during their lifetimes.

To calculate the value of an estate to see if it is above or below that threshold (again, only about 1% of people exceed the threshold), take the fair market value of the items (generally at the date of death), not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses, and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify. 

Estates in excess of the exemption can utilize advanced planning techniques to address the potential estate tax liabilities.

For those of us that do not have potential estate tax problems the basic benefits of estate planning are as significant as ever, if not more so when considering the back log of probate courts. Probate is generally a very costly, inefficient and unnecessary way to transfer property. And don't even get me started on Conservatorships (living probates), which is what happens when someone loses mental capacity without having a proper disability plan documents (generally powers of attorneys and living trusts) in place. 

Basic Estate planning allows you to control your property while you are alive and well, provide for the handling of your affairs if you become disabled, and give your property at death to who you want, when and how you want to leave ot to them. It is a necessary part of any financial plan. If you have life insurance, or a home, or a child, your family needs and deserves a proper estate plan.

Why Not Just Repeal the Estate Tax?

In a Stanford Law Review Article, Professor  Edward J. McCaffery wrote an interesting piece discussing  Estate Tax (Death Tax) Reform and had the following to say:

"neither Obama nor any other Democrat is going to call for a stronger tax, for the simple reason that he or she would be tarred and feathered by the upper-middle class mobs who, in a time of falling stock markets and evaporating home equity, would suddenly be hearing from every business reporter that they just had to go see a lawyer or other planner to avoid this deadly tax. 

Why not just repeal the tax then, as Republicans have been seeking for decades by now? Because if that ever happened, the spigot would turn off, and the money from campaign contributions would dry up. It is important to understand that TRA 2010 had a very big winner—the financiers who perpetuate “Dynasty” and “Perpetual” trusts. A 2005 study estimated that such trusts held roughly $100 billion in assets, mainly in South Dakota, an early mover in eliminating the rule against perpetuities (okay, so some good might be coming from this story). These trusts are set up to limit distributions and to last for a very long time. Who benefits? For one, a very large class of trust companies and other financial intermediaries. Take a small piece of that enormous pie (say, 1% or 0.5% per year) in fees for assets under management, then lock the underlying assets up into perpetuity, and you will do very well for yourself. The increase in the current gift tax exemption to $5 million greatly helped this group of financiers. Wealthy families, like those of the Facebook founders, can get the dynasty-trust game going now, using their families’ $5 to $10 million in exemptions. The rich setting up dynasty trusts are willing to pay their advisers for the privilege of avoiding transfer taxes forever. Those advisers and financial intermediaries, in turn, are willing to pay Congress to keep the fear of a death tax—and hence their lucrative business model—alive (forever). Congress is happy to cash the checks.

On the estate tax, then, it is easy to predict what will happen: not much. We will not see a return to year 2000 levels, and we will not see repeal. The one cautionary note I must add is that, going back to the game, something has to happen sometime, or the parties paying Congress and lobbyists will wise up and stop paying to play. But that has not kicked in yet, decades into the story, and it may not kick in until more people read this Essay, and start to watch the watchdogs. Fat chance of that happening, too, I suppose. In the meantime, without a meaningful wealth-transfer tax (the gift and estate taxes raise a very minimal amount of revenue and may even lose money when the income tax savings of standard estate-planning techniques, such as charitable and life insurance trusts, are taken into account), one fundamental insight of the special interest model continue to obtain. Big groups with small stakes—that is, most of us—continue to pay through increasingly burdensome middle class taxes for most of what government does, including stringing along those “lucky” enough to be members of a special interest group. It’s a variant of a very old story, and it is time to stop keeping it secret."

The Article is Available online at http://www.stanfordlawreview.org/online/dirty-little-secret-estate-tax-reform.

Succession Planning in Uncertain Times

These are challenging times for analyzing potential estate tax burdens. Last year, individuals could pass $3.5 million in assets upon their death free of federal estate taxes. Now in 2010, there is no federal estate tax whatsoever (maybe). Next year, current law would revert the exemption back to $1 million.

The impact of a $1-million estate tax exemption is significant. Many more Americans will potentially be faced with a maximum estate tax rate of 55%. Whether the law will change at this point is uncertain. A bill was recently introduced that would increase the exemption to $3.5 million retroactively back to Jan. 1. Unfortunately, the reality is that we simply do not know what will happen.

Whether a new estate tax law is enacted, or we revert to a $1 million exemption, the best approach is to put a sound, well thought-out estate plan in place now. This article outlines various tools available to reduce or even eliminate the estate tax burden, regardless of the exemption amount.

1. Properly drafted living trusts

Living Trusts have become an increasingly popular technique for avoiding lengthy, expensive and public court processes such as probates and conservatorships in the event of a person’s death or mental incapacity. Probate avoidance alone can mean large savings in the cost of estate administration.

Beyond saving estate administration costs and maintaining privacy, a properly drafted Living Trust can also mean substantial estate tax savings. For example, suppose Husband and Wife, with a taxable estate of $2 million, have a simple Living Trust that directs the transfer of all of their property to the other upon the first spouse’s death, and equally to their children thereafter. Assume Husband dies first, leaving everything to Wife. On Husband’s death, no estate tax will be owed because of the unlimited marital deduction, which defers estate taxes until a surviving spouse’s death. When Wife dies, however, she will only be able to pass the exemption amount in the year of her death before triggering an estate tax. Therefore, assuming an exemption of only $1 million when Wife dies, the children would receive approximately 50 cents on the dollar for all assets in excess of $1 million.

A better plan for Husband and Wife would have provided that an amount up to the exemption would be left in a tax-sheltered trust, frequently referred to as a “bypass trust,” for Wife’s benefit. Wife could then use the bypass trust to support herself during her lifetime, with the bypass trust going to the children free of estate taxes upon Wife’s death.

2. Planned gifting beyond the living trust

For wealthier individuals, basic Living Trust-based tax planning is not enough. In those situations, consider reducing the size of the estate through techniques such as those discussed below.

A. Irrevocable Life Insurance Trust

Suppose Husband and Wife were unable to totally avoid estate taxes despite the use of a bypass trust. In those cases, serious consideration should be given to preparing a specially designed trust commonly known as an Irrevocable Life Insurance Trust, or “ILIT.” If an ILIT is used to purchase life insurance, death benefits are kept out of the estates of both Husband and Wife (and therefore not subject to estate tax). The difference between having Husband or Wife own the policy, as opposed to having it owned by an ILIT, is staggering. For example, a $1 million life insurance policy kept out of the parents’ estates can prevent the children from having to pay roughly $500,000 of those proceeds for estate taxes. That means the full $1 million can pass to the children income and estate tax free.

B. Family Limited Partnerships (FLP’s) and Family Limited Liability Companies (FLLC’s)

Think of these entities just as you would any business, except they are owned by members of the same family. Parents initially contribute certain assets into a partnership or LLC in a manner that allows them to retain full control over those assets (just as any general partner or managing member would). The power for estate tax reduction comes from giving interests in these entities to the next generation during the parents’ lifetime. Since the gifts typically involve minority interests, the gift tax value can be discounted to reflect lack of marketability and control.
In many cases, these types of gifts have been discounted 40% or more. A 40% discount on a family entity could potentially provide for a gift-tax-free transfer of over $1.3 million more than could be achieved without the use of such an entity. Further, all income and appreciation flowing from the gifted property escapes both income and estate taxation at the parents’ generation. It may be important to act quickly with this type of gifting strategy, as there is a significant threat of legislation greatly reducing or even eliminating these discounts.

C. Charitable Giving

Where one has true donative intent, charitable contributions through gifts made outright or in trust may reduce the taxable estate. Private foundations are also becoming a popular tool for charitable giving. These arrangements are beyond the scope of this article, but merit consideration for the charitably inclined.

Conclusion

Planning for the worst in these uncertain times is critical. Regardless of estate size, proper planning will reduce both time and expense in estate administration, and leave loved ones with the clarity they deserve.

Trusts in 1 Minute (Video)

The video below provides a helpful overview of how trusts differ from wills and demonstrates how they are superior planning vehicles.

http://video.about.com/wills/What-Is-a-Will-.htm

Asset Protection For Your Loved Ones

There are two ways to leave property to your loved ones. You can leave it: (1) Outright; or (2) In Trust.

• When you leave property outright to your spouse or children, you leave it to them with "no protection" from: Creditors (a lawsuit brought against them or a business partner, a bankruptcy), Predators (a divorce), or Themselves (youth, lack of financial responsibility, etc.).

• The best way to provide asset protection for your loved ones is to leave your property to them in a trust. These trusts can be structured to be very simple and flexible (leaving the beneficiary with full control), can contain significant detail to accomplish certain legacy goals (such as helping children learn to manage money well by providing them with structured distributions), or do just about anything in between.

• Trusts can be created through will-based estate planning, or living trust-based estate planning. There are advantages and disadvantages to both types of plans, and a qualified estate planning attorney will assist you with finding the right fit based on your individual situation. The only wrong decision is the decision not to plan.

With a proper estate plan, you can have full control over your assets during life (nothing changes) and give your beneficiaries the gift of asset protection by leaving their property in an ongoing Trust after you pass on.