November 5th, 2011
We have previously reported to you about a window of opportunity for significant gifting and estate tax planning as part of the 2010 Tax Act (Click Here to Read). That opportunity is scheduled to expire at the end of 2012. But wait, it may be sooner than that.
As you probably already know, Congress recently formed a “Super Committee” (12 members of Congress evenly split between Democrats and Republicans). That Committee is charged with the task of finding $1.2 to $1.5 trillion in debt savings over a ten-year period. If reductions cannot be agreed upon by November 23, $1.2 trillion in spending cuts automatically kick in.
Word spread this week that some members of the Committee are suggesting changes to the estate and gift tax portions of the 2010 Tax Act effective January 1, 2012, including the following:
- Reducing the gift tax exemption from$5 Million to $1 Million.
- Reducing the estate and GST tax exemption from$5 Million to $3.5 Million.
- Increasing the maximum gift, GST and estate tax rates from 35% to 45%.
- Eliminating the use of several estate planning strategies, such as GRATs (Grantor Retained Annuity Trusts) and discounts for family transfers.
There are even rumors that some members of the Committee would like to make these changes effective November 23, 2011.
While it remains to be seen what actions the Committee will recommend and Congress will ultimately take, if you are intent on taking advantage of the previously reported “window of opportunity”, you may not want to wait until next year. Our attorneys continue to monitor these developments. Should you have questions about your planning needs or recommendations for year-end planning, please contact one of our estate planning attorneys: Craig W. Wendland, Mark E. Utz, David M. Pederson, or Christopher C. Wendland.
February 8th, 2011
One area of concern that we frequently help our small business clients with is succession planning. It is never too soon to begin considering your exist strategies, as some aspects of a comprehensive succession plan can take years to develop. Here are some excerpts from a letter we recently sent to one of our successful small business owners who, though just 40 years old, is wisely considering his options regarding succession:
One of the elements in any complete business succession plan is personal estate planning. The two are so related that we really cannot address one without also thinking about the other. As a first step in the business succession plan, therefore, we need to make a start on your personal estate plan.
Life Insurance is another element in the succession plan that you should consider. This plays a role in a number of separate areas. First, adequate life insurance will provide short term liquidity to pay possible estate tax (state and federal) liabilities resulting from your passing. Second, it provides additional assets for your family – replacing income that may otherwise have come from your work. Third, the right type of policy (a key person policy) provides additional, immediate capital to your business in order to find and replace your role in the company. What constitutes the right amount of coverage is something you should research further (there are lots of opinions) and discuss with an insurance agent that you trust. Similarly, the type of policy or policies that you purchase (term, universal, whole life) is also the subject of lots of opinions and should be approached and answered. Finally, do not forget to consider life insurance on your spouse as well – married couples with one employed spouse tend to under-insure the spouse who is not working outside of the home.
We also talked about your long-term goals for your current business. It was evident that, in the near future (5-10 years) you would like to see the business sold. This kind of a strategic goal needs a strategy in order to make your wish a reality, so we discussed several options, all of which focused on the potential buyer.
There are two basic categories of buyers to be thinking about with your business; an internal/succession buyer or an external/strategic buyer. Generally, an internal/succession buyer would be a family member or key employee (or group of employees). Obviously, the family member/purchaser is not an immediate likelihood now (this could change as the children grow, of course), and you have not yet identified any current employee having the interest or capacity to become a viable purchaser. I recommended that you take some time to reflect on what qualities, experience, characteristics, skills/training and aptitudes someone would need to have to be a viable, internal/succession buyer. This exercise will be helpful for you in hiring future employees – not so much for necessarily going out and looking to hire that person, but in recognizing such a possible buyer in someone who you were otherwise interviewing or hiring.
The external/strategic buyer will most likely be another company that does what you do, whether a local competitor or another company looking to expand into this market. It is possible that someone with no prior experience in your business could be a purchaser as well; this circumstance is pretty rare however. There are a number of ways to go about exploring this avenue, including formally listing the business with a broker. Under your circumstances, the best approach will be discreet and direct discussions with other companies that you select and approach about a possible sale.
In that regard, you should bear in mind that you are negotiating from a position of strength right now, as the business is currently doing well and you have no immediate need to sell. Nevertheless, as I noted above, you do want discussions that develop beyond a preliminary stage to be discreet and should therefore be covered by a written non-disclosure agreement (“NDA”). This will help protect your business in at least three areas: (i) non-disclosure of your financials, (ii) erosion of customer base that can arise when word of a possible sale is leaked, and (iii) unease or flight of employees who believe their continued employment is at risk. I can provide you with a form of NDA to use if discussions progress as well as advice on when in that process the NDA is important.
Finally, the item that started this whole line of discussion was the phantom stock plan that I had put together for you last year. This project still has a role to play in your long-term strategy, even if that role is not immediately evident or necessary. The fundamental usefulness of a deferred compensation plan such as the phantom stock plan is that it builds loyalty by creating an incentive for key employees to stay with the company and to work hard to increase its value. So as key employees are hired or developed over time, the phantom stock plan is available as a means to retain those employees, whether or not they might also be or become internal/succession buyers.
October 4th, 2010
Few people realize that, even though they may have a modest estate, their families may owe hundreds of thousands of dollars in estate taxes because they own a life insurance policy with a substantial death benefit. This is so because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax. (Even though the estate tax has been repealed, the repeal is effective only for 2010. The estate tax is scheduled to return in 2011, and may even return before then if Congress reinstates the tax retroactively.)
The solution to this problem is to create an irrevocable life insurance trust that will own the policy and receive the policy proceeds on your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries from their own “excesses”, against their creditors, and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here’s how the irrevocable life insurance trust works.
You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the trust is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion, so you won’t have to pay gift tax on the contributions.
The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee’s discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.
If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you.