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Aug 1 21

Dangers of Do-It-Yourself Estate Planning

by Webmaster Admin

Occasionally, people who are not estate planning attorneys will attempt to draft and implement their own estate plan. Often, they erroneously believe they can find a document online or use a friend’s legal documents and can figure it out. Unfortunately, there are many pitfalls one could run across when they try to develop a Do-It-Yourself estate plan.

Let’s look at three (3) significant problems they will encounter, as many coupes often do when preparing their own estate plan, without the advice of a competent estate planning attorney:

Problem #1:

Bill and Mary have a house worth $500,000, an IRA valued at $500,000, and non-qualified investments of $500,000. They have three children, Aaron, Betty, and Charlie. At the death of the survivor of Bill and Mary, they want to leave the house to Aaron, the retirement plan to Betty, and the investments to Charlie.

The first problem with this plan, assuming they draw up the proper legal documents to accomplish this distribution pattern, is that they may not have considered the downsides. More specifically, Bill and Mary’s plan did not anticipate that they might sell their house in the future, which they did. As a result, the specific bequest of the house to Aaron lapsed. 

Upon the sale of their house, this couple added the net proceeds from the house to their investment account. Since their plan left the investment account to Charlie, those assets went to him instead of Aaron, which was not consistent with their desires for the distribution of their estate upon the passing of the surviving spouse.

Problem #2:

The second problem with this plan, even assuming they prepared their estate planning legal documents which accomplish their desires, is that they have not considered the income tax implications. 

While their three assets may have the same value currently, the house and the investments get a step-up in basis at death. In other words, when the beneficiary of these two assets will not owe income tax on them. However, the IRA is deemed under federal law to be “Income in Respect of a Decedent” or “IRD,” which is an exception to the step-up rules. 

Assuming Betty has a combined marginal federal and state income tax rate of 40%, $200,000 of the IRA would be lost to income taxes. Therefore, it might have been better to distribute the IRA to Charlie, who is in a lower income tax bracket, or in the alternate, spread the income tax consequences over all three beneficiaries. After the payment of income taxes, Betty would end up with $300,000, while each of her brothers would receive $500,000.

Problem #3:

There is a third problem with this estate plan, even assuming Bill and Mary draw up their legal documents which accomplish their goals and objectives. More specifically, this couple has not considered fluctuations in the values of their assets when they are ultimately distributed to their children. 

For example, let’s say they die ten years after they draft their estate plan and the assets are then worth $3 million. Unfortunately, their three children will not each receive $1 million. In fact, one of the children might get far less than the others. How is that possible? The house devised to Aaron could be in a neighborhood of decreasing, rather than increasing, property values, and it’s value could have significantly declined to $200,000. 

Bill and Mary may continue to contribute to their IRAs over their working years and wherein their daughter Betty is the designated beneficiary, and which accounts may be worth $1 million at the death of the survivor of Bill and Mary. 

The non-qualified investment account bequeathed to Charlie may have appreciated in value and be worth $2 million upon the death of the survivor of Bill and Mary. 

Upon the time Bill and Mary’s estate is distributed to their children, Aaron would get the house worth $200,000; Betty would receive the IRA worth $1 million (but subject to income taxation of $400,000); and Charlie would inherit the investments worth $2 million.

As a result, Charlie would get more than triple the after-tax value of his sister Betty’s IRA inheritance, and 10 times the value of the bequest to his brother Aaron.

As this edition of Estate Planning Matters reflects, estate planning is about far more than just drafting and implementing the proper legal documents in accordance with both federal and state laws. It’s also about the knowledge, experience, and prudent recommendations of the attorney who designs and implements your estate plan. 

Jul 1 21

Plan Now to Ensure a Smooth Success(ion) of Your Business

by Webmaster Admin
man using cell phone

Transitioning ownership of a privately owned business can be very challenging. How you handle putting a business succession plan in place, to pass your business to one or more new owners, can be a difficult task from a legal, financial, and emotional perspective. 

Therefore, if you or your clients are an owner of a privately-held business and are thinking about assembling a business succession plan, this edition of Estate Planning Matters should be of value to you.

Reasons for transition: why now?

There are a variety of reasons why a business owner may choose to sell their business. The most common reasons for ownership transfers include retirement, disability, competitive pressure, financial difficulties, health issues, lack of an appropriate family member to take over running the business, or desire for liquidity.

While business transition is a natural part of a business’ life cycle, it’s important to consider all factors when deciding the timing along with the terms of a business succession plan.

Understanding goals: an imperative step

Once you begin structuring your transition process, it is important to understand your goals and objectives.

Once you have thoroughly defined your objectives and priorities, you can develop an optimal exit strategy that will bring the most value to you and your family in the event of your disability, retirement, or death. 

Some of the significant questions you will need to ask yourself include: Will I stay on as part of a management transition team? For how long? Do I want to retain a financial stake in the business post-sale? Do I clearly understand what my personal financial needs are in the future?

Asking these types of questions requires an owner to consider the future strategic direction of the business. Whatever your decision, the only way to choose an exit option, that will best meet your financial needs after the transition, is through a clear understanding of your personal and business priorities so that you can choose the exit options that will best meet your needs.

When to Structure a Business Transition Plan 

In many cases, privately held companies are reactive when it comes to planning an exit strategy for their business. Whether it’s because they are caught up in day-to-day operational demands, or emotional resistance to letting go of the business, many business owners fail to have a cohesive transition plan in place.

Unfortunately, a reactive mode when selling a business will never yield the maximum value when compared to a proactive strategic plan. A sufficient time frame (generally, two to five years) allows time for the company and its owner to:

  • Build an effective management team to ensure future stability
  • Establish customer and vendor longevity
  • Properly document financial records and accounting systems to maximize value to the seller and potential buyers 
  • Strategically search for optimal buyers, understand their value drivers and ensure the company’s matching attributes are best positioned to maximize value
  • Critically examine the company’s strengths and weaknesses and make necessary adjustments 
  • Continue to run the business in a seamless manner, once the time does come for a sale, without losing value
  • Plan early, which can dramatically increase the leverage a seller will have during negotiations with suitable buyers

Tips for a Successful Business Succession 

Many times, when owners becomes involved in a transition process, especially if they are attempting to run the process themselves, it becomes very easy to lose focus on the day-to-day operations of the business and value is lost.

Therefore, keeping all members of the business transition team coordinated throughout the process is vitally important.

If you or your clients are considering the assembly of a business succession plan, we recommend they you take a team approach to the process by consulting with legal, tax, and financial planning experts who are knowledgeable and skilled in properly handling business succession transactions.

Jun 1 21

Proposed Tax Law Changes – American Families Plan

by Webmaster Admin
elderly couple on bench

On April 28, 2021, President Biden unveiled his $1.8 trillion American Families Plan, a ten-year plan of increased federal government support of education, child care, paid leave, nutrition and families.  The American Families Plan would be substantially funded by tax increases, primarily from wealthy taxpayers, and by improved tax compliance and enforcement.

While most details of the Plan have not yet to been provided, the tax plan includes the following anticipated legislative changes: 

  • The highest marginal federal individual income tax rate would be increased to 39.6% from 37%.
  • Capital gains and dividends would be taxed at ordinary income tax rates (i.e., like compensation income) for households making over $1 million. The 3.8% investment income (Medicare) tax would be added, resulting in a 43.4% federal income tax on such income.  (That income would continue to be subject to state and local income tax, which could make the effective tax liability on such income even higher.)
  • “Step-up on Basis” for transfers to beneficiaries  – which allows estates to revalue assets to their fair market value at the time of a decedent’s date of death for purposes of later sales – would be eliminated for gains in excess of $1 million (up to $2.5 million per couple when combined with existing real estate exemptions.)
    • This change would not apply to donations to charitable organizations. 
    • This change would be “designed with protections” so that family-owned businesses and farms would not have to pay taxes when such property is given to heirs who continue to run the business.
  • The deferral of tax on “like-kind” exchanges of real estate – for gains greater than $500,000 – would be eliminated.
  • The limitation on the deduction of large “excess business losses” would be made permanent.
  • The application of the 3.8% investment income (Medicare) tax would be changed to ensure that it is applied consistently to those making over $400,000 per year. 
  • Substantial additional funding would be provided to the IRS, leading to better compliance and reporting. 

No effective dates for these provisions have yet been proposed. 

Not included in the plan are any changes to the $10,000 limitation on state and local tax deductions or an increase in the federal estate tax rate (top bracket currently 40%) or a lowering of the estate tax exemption amount ($11.7 million in 2021).

As these potential tax law changes are discussed and debated in the weeks and months ahead, considerable changes are likely to be made by Congress before a final Bill is signed into law by President Biden. 

The Levin Law Firm will keep you informed as new developments continue to occur with respect to the Biden tax proposals. 

May 1 21

Estate Planning for Your Tangible Personal Property

by Webmaster Admin

Most of our clients own tangible personal property which has both financial and sentimental value. Such property usually included jewelry, household furnishings, vehicles, artwork, coin and stamp collections, wine, guns, and even your pets. 

Upon the passing of a client, the executor often encounters significant challenges regarding the distribution of property owned by the decedent. 

Strategies For Distribution

Fortunately, during the estate planning process, there are strategies to ensure that property is distributed to who you want, when you want, and in a manner which can avoid family fallouts. However, it is vitally important to your intentions with a competent estate planning attorney to make sure appropriate distribution provisions are contained in your estate plan which can ensure a smooth transition of your tangible personal property. 

While planning for the distribution of tangible property can present challenges for individuals, dedicating time to think through the ultimate distribution of your property can go a long way to maintain harmony within your family in the event of your passing. 

Distribution of tangible property among surviving family members, including a surviving spouse, along with children and step-children, can result in significant emotional protracted disputes which often cannot be resolved without mediation or litigation. Multi-married clients, including second and third marriages, where there are children from previous marriages, make it especially important to consider how to bequest tangible property to surviving family members.

Steps You Can Take

Some of the steps which you can take to minimize family fallouts over the distribution of personal property include providing a Benedictine with a right of first refusal and lottery disposition. The goals is to make your intentions me wishes abundantly clear through property drafted estate planning legal documents to avoid dispute resolution mechanisms in the future when you are not alive. 

Some of the practical questions we often discuss with our clients who are concerned about maintaining family harmony and reducing the risk of a family dispute over the distribution of their personal property upon their passing include: 

– Does the right for a beneficiary to take an item apply to a single item or to a collection as an item? 

– Might one or more beneficiaries assert that he or she had legs ownership in the property during the client’s lifetime?

– Was an item on loan or gifted during the client’s lifetime?

– Was the property to be distributed owned by a family business, and not directly by the client?

– Was title to a specific item of property transferred to a trust during the life of the client?

– Is the disposition of tangible personal property included in a valid prenuptial agreement? 

At The Levin Law Firm, we often help our clients to effectively address the future disposition of their valuable personal property. We also are sensitive to the income and transfer tax implications, along with the practical considerations when planning for the disposition of personal property. 

We also discuss with our clients the importance of creating and maintaining adequate records regarding the ownership and intended distribution of their tangible personal property, which often includes a professional home inventory. 

Apr 1 21

Potential Federal Estate Tax Law Changes Under Biden Administration

by Phil Levin, Esq.

There has been much discussion in Congress of changes to the tax code in the coming months or years. Tax laws seem to change more often these days, which hampers tax planning for the long-term.

Currently, for your estate to be impacted with federal estate tax upon death, you would have had to accumulate over $11.7 million. Biden’s team has discussed lowering that exemption to between $3.5 and $5 million, with anything above that amount being taxed at a rate of between 40-55%. Even at those levels, the tax would not affect most U.S. citizens.

What may be more concerning for the majority of our clients is the possibility that a new tax law would eliminate “step-up in basis” laws and instead be replaced by “carryover basis.” Under current law, if you passed away today, your heirs inherit any highly appreciated assets (i.e., stock and real estate) with a basis for transfer tax purposes at the value as of your date of death.

If for example, you bought Apple stock in 1980 for $5 and it’s now worth $500. If you sold your stock during life, you would have a capital gains tax due on $495 worth of the value of that asset.

Under current law, upon death your heirs would inherit your assets with a stepped-up basis based upon the value of the asset as of the date you passed away (i.e., the basis for the Apple stock in the example above is now $500, not $5). Therefore, if your beneficiary sells the stock for $500, he or she pays no capital gains tax.

If federal tax laws changes, with a switch to carryover basis, then your beneficiary would inherit your property with your basis (i.e., $5 instead of $500). The effect of this change would impact the vast majority of citizens who own highly appreciated securities, which would impact many more people than a change in the federal estate tax exemption amount, as detailed above.

We will continue to monitor these potential changes in federal estate tax laws, and provide you with updates as we learn of them.