Trusts and Estates Blog

Business Owners: Have You Planned Your Exit?

You’ve worked hard building your business, but have you thought about what will happen when you are no longer there running the show?

According to one study (Small Business Review, Summer 2001), only 30% of all family-owned businesses survive to the next generation; only 12% make it to the third generation; and a meager 3% are functioning into the 4th generation and beyond.

Why? Most business owners simply do not plan an exit. They do not do proper estate planning, which often results in unnecessary estate taxes that drain the life out of their businesses. And they do not plan for a successful transition to the next generation.

Who could take over your business? You may have more choices than you think.

Family members are often a logical choice. Most business owners feel a certain pride in being able to pass down a family business. In fact, you may already have a child or two working in the business with you.

Depending on your financial needs, you can gift and/or or sell your business to family members. Some techniques will provide you with retirement income and let you transfer the business at a discount, saving estate and gift taxes. Most let you keep some control.

Be sure to consider family members who will not be involved with the business. Life insurance is often used to “equalize” inheritances. You also need to be objective when considering the abilities of family members whom you consider potential successors.

Business partners are also logical options. You can have reciprocal buy/sell arrangements with each other, so that when one of you is ready to retire or dies, the other automatically buys his/her share of the business. Life insurance is often used to fund these arrangements.

Your employees could also be a source. An Employee Stock Ownership Plan lets your employees enjoy the benefits of ownership, yet you can keep control until your retirement or death.

How about a charity? Charitable trusts can provide terrific income, capital gain and estate tax savings. With a charitable remainder trust, you can receive a lifetime income. And you have the added benefit of helping a charity that has special meaning to you.

Of course, you can also consider an outright sale to another company. But the tax benefits are usually not as good as other planning options.

A good business succession (exit) plan should also provide for the possibility of a long-term illness or disability. Make sure you work with an experienced professional who can help you evaluate your goals and objectives, and can provide you with the best options for your situation.

Grantor Retained Annuity Trust (GRAT) & Retained Unitrust (GRUT)

GRATs and GRUTs have much in common with the qualified personal residence trust. The main difference is that a GRAT or GRUT lets you transfer any asset (not just your home) out of your taxable estate. And, with a GRAT or GRUT, you receive an income, instead of continuing to live in your home, for a set number of years.

When you set up a GRAT or GRUT, you transfer an income-producing asset (like a family business, stocks or real estate) into an irrevocable trust for a set number of years. During this time, the trust pays you an income.

If the income you receive is a set dollar amount and does not fluctuate each year, the trust is a GRAT (Grantor Retained Annuity Trust). If the income is a percentage of the trust assets and the amount of income you receive fluctuates each year, the trust is a GRUT (Grantor Retained UniTrust).

At the end of the trust term, the asset will be owned by the beneficiaries of the trust (usually your children) and will not be included in your estate when you die. However, depending on the duration of the trust, if you die before the trust term is over, some or all of the asset may be taxed as part of your estate.

Like the qualified personal residence trust, the beneficiaries will not receive the asset until sometime in the future (when the trust term is over). So the value of the gift you are making (transferring the asset to the trust is considered a gift) is reduced. This uses less of your federal gift and estate tax exemptions than if you had kept the asset (and any future appreciation) in your estate.

A GRAT or GRUT can be a great way to save estate taxes by transferring an asset (especially a business) and any future appreciation, to your children at a discounted value, especially if you want (or need) the income.

Happy 18th Birthday, Honey.

You’ll Never Guess What I’m Giving You!
Here’s the perfect gift for the new adult in your family….

What are you planning to give your teenager when he or she legally becomes an adult? A car? A deposit for an apartment? A trip to Europe?

Those are all fine gifts, depending on how much you can afford to spend. But here’s one you may not have thought of…and it won’t cost you a bundle.

Take your son or daughter to your attorney’s office and have them prepare a trio of documents: a simple trust or will, a durable power of attorney, and a medical power of attorney.

Actually, it’s a gift for both of you, because once your child reaches legal age, you will no longer be able to automatically make medical and legal decisions for him or her without the appropriate legal documents authorizing you to do so.

If your son becomes ill or injured and cannot handle his own financial affairs, you will not be able to step in for him and conduct business (sign checks, sell assets, etc.) unless he has a trust or a durable power of attorney and has named you as his successor or agent. If he hasn’t, you’ll have to go through the courts…and that will take time, cost money, and restrict you in ways you cannot imagine. (Some financial institutions also require their own forms; make sure you and your child check with each bank, etc.)

If your daughter cannot make her own medical decisions, it will be much easier for you to make them if she has a medical power of attorney that names you as her agent. And what if she should be so ill or injured that she is placed on life support before you get to the hospital? Unless she has made her wishes known through a legal document, you may not be able to have the equipment removed without court approval.

Finally, if your adult child should die without a will, the court will distribute his assets according to the laws of the state in which he lived…regardless of what you (or he) would have wanted.

Make sure your new adult understands that all of these documents will need to be changed as his (and your) life changes…as he accumulates more assets, and as he and those he cares about move, marry, have children, divorce, die, and so on.

Helping your child get started with this adult responsibility at the moment when he or she becomes an adult is just one more responsibility we have as parents. It fits right in there with how to balance a checkbook, how to handle a credit card, and how to buy insurance.

Chances are, it will be a long time before any of these documents will be needed. But you’ll be sending your child out of the nest with a full layer of protection…just in case.

Private Charitable Foundation

Instead of giving all that tax money to Uncle Sam after you die and letting Congress decide how to spend it, you can set up your own charitable foundation, donate your assets to it and keep some control over how the money is spent! (The IRS does have a few restrictions on how the money is used.)

You can set up the foundation while you are living, or it can be established after you die. To qualify, a small percentage of the trust assets must be distributed to charity each year. But you can name whomever you wish to run the foundation, including your children, and the foundation can pay them a reasonable salary. You can be very specific about which charities you want to support, or you can leave that up to the trustees of the foundation to decide (within the IRS guidelines, of course).

The tax benefits of setting up your own foundation can be substantial. You can save estate, capital gains and ordinary income taxes:

* The assets you give to the foundation will be removed from your taxable estate. So, for example, if you give your entire estate to the foundation (or the entire amount over the estate tax exemption), your estate will pay no estate taxes!

* There will be no capital gains tax when the assets are sold by the foundation, so it’s great for appreciated assets.

* And, if you donate publicly traded securities to a private foundation, you can get a charitable income tax deduction for their full fair market value – up to 30% of your adjusted gross income. (The deduction is less than the 50% limit for standard charitable contributions because this is a private charitable foundation.)

Finally… Some Reasons to Thank the IRS!

New IRA Distribution Rules Are A-Okay.

Can you believe it? People are actually thanking the IRS!

In case you haven’t noticed, calculating the amount you must withdraw each year from your IRA (your required minimum distribution) is much easier now that it used to be.

Now, you just take the year-end value of your IRA account and divide it by a life expectancy divisor from the Uniform Lifetime Table. (The entire table is shown below). The result is the minimum you must take out for that year. (You can take out more if you wish. Remember, it’s your required minimum distribution.)

For example, the divisor at age 70 is 27.4. Let’s say your year-end account balance is $100,000. You divide $100,000 by 27.4, and that’s your required minimum distribution for that year. (The answer is $3,650.)

Notice that the divisor gets smaller each year, but it never goes to zero. Even at age 115 and older, the divisor is 1.9. “To recalculate or not to recalculate” is no longer an issue. Everyone now gets the benefit of recalculating their life expectancy.

Practically every IRA owner uses this table to calculate your distributions, even if you don’t have a beneficiary. (If you are more than ten years older than your spouse, you can use a different table that will make your distributions smaller.)

The good news doesn’t stop there. Nope, there’s more.

The big attraction of having an IRA, of course, is the tax-deferred growth; you don’t pay income tax on this money until you take it out of your IRA. And, if you don’t use all the money in your IRA before you die, you’d probably like to let it continue to grow tax-deferred for as long as possible. Naming the right beneficiary is still critical to getting the most tax-deferred growth on your IRA…and the new rules make it much easier to do that.

* First, while you are living, the required minimum distributions are based on your life expectancy (the divisors from the table below). Whom you name as beneficiary has no effect on your distributions while you are living.

* Second, after you die, the distributions will be based on your beneficiary’s life expectancy. If you haven’t named a beneficiary by the time you die, the remaining distributions will be determined by using your age at the time of your death.

* Third, you can change your beneficiary at any time and that beneficiary’s life expectancy will be used after you die. You are no longer locked into using the life expectancy of the beneficiary you named when you started taking your distributions. So if you are already taking distributions and have wanted to change your beneficiary to a younger one in order to get more tax-deferred growth after you die, now you can do it!

* Fourth, your final beneficiaries do not have to be determined until September 30 of the year after you die, which allows for greater flexibility and “clean-up” after you die. For example, your spouse could disclaim some benefits so a grandchild could inherit. No new beneficiaries can be added after you die (unless your spouse does a rollover), so it is very important to name both primary and contingent beneficiaries.

* Finally, under a new rule, a nonspouse beneficiary can also inherit a tax-deferred plan and roll it into an IRA to continue the tax-deferred growth over his/her lifetime. (This is not the same as a spousal rollover; only a spouse can name additional beneficiaries for maximum stretch out.)

It is still easy to make a costly mistake and, because there is often a lot of money at risk, you’ll need expert advice. But, go ahead and call your local IRS agent. Tell him, “Good job!” for a change. See if you don’t just make his day.

Got Stuff? You Need An Estate Plan!

George Carlin would have been a great pitchman for estate planning. You may remember his stand-up routine on “stuff.” We all have stuff, and we’re pretty particular about our stuff. We move it around with us, it’s hard for some of us to get rid of it, and some of us don’t like our stuff mixed up with other people’s stuff.

During your lifetime, you collect a lot of stuff, some of it valuable and some of it not. But because it’s your stuff, it means something to you. You already know you can’t take it with you when you die, so there has to be some way of distributing your stuff to other people who are still living. Normally, you want your stuff to go to people you care about…usually your family and special friends, sometimes a worthwhile cause. And you may want certain people to have certain things to remember you by.

When you die, all your stuff, no matter how valuable or invaluable it is, is called your “estate.” In the simplest terms, an “estate plan” is your instructions for getting your stuff to the people you want to have it after you die.

An estate plan must meet certain legal requirements, including that it must be written down, it must be signed by you, and it must be witnessed by other people who see you sign it. Your estate plan may be very simple, or it may be more complex, depending on how much stuff you have, how long you want your stuff to provide for the people you care about, and when you want them to actually get your stuff. For example, you’d probably want to wait a few years before that two-year-old receives grandpa’s antique pocket watch.

How do you get an estate plan? You decide who you want to get your stuff and when you want them to get it. Your attorney then puts your instructions into a legal document called a will or trust. (There are distinct advantages to using a trust, but we’ll save that discussion for another time.) Also, while you can legally write your own, you’re much better off having an experienced attorney do it for you.

What if you die and you don’t have an estate plan? Well, there still has to be a way to get your stuff to other people, so the state in which you live has a plan waiting if you don’t have one. The only problem is that you won’t have any say in who gets your stuff, and someone might get left out.

Example 1: If more than one of your relatives want the same part of your stuff, that can get messy and expensive…and a lot of your stuff will be used to pay the courts and attorneys to sort it all out. (Happens all the time.)

Example 2: If you’re not married and you want your significant other to get some of your stuff when you die, you’d better get your plan in place, or it just won’t happen. Under the state’s plan, your stuff will go to your blood relatives. Period.

Example 3: If you’re married and you’ve got kids, don’t be too sure that your spouse is going to get all your stuff. Your kids will probably get their share of your stuff, which means your spouse may not get enough of your stuff to live on.

By the way, if your stuff includes kids, then you’ve really got to get a plan. Otherwise, the court will decide who will raise them if something happens to both parents.

Scary thoughts? You bet!

Bottom line: If you’re responsible enough to have your own stuff, you need to be responsible for making sure what will happen to it after you’re gone.

Antelope Valley Estate Planning Attorney Offers Estate Planning With A Biblical Perspective Class

Antelope Valley estate planning attorney Kevin Von Tungeln is offering an Estate Planning With A Biblical Perspective class beginning Sunday, September 20, at Central Christian Church, 3131 West Avenue J in Lancaster.

“There are many ways to look at the distribution of your assets after death,” said Kevin Von Tungeln, partner at Thompson Von Tungeln. “The Estate Planning With A Biblical Perspective class will offer sound, biblical advice about the distribution of wealth at the end of our lives. Participants in this course will work through many of the most important documents you need to complete a simple Will-based estate plan. At the end of the course they will also have their financial and personal documents organized in a manner that eases the burden on their heirs”

There are many ways to look at the distribution of your assets after death The eight-week course, offered on Sundays at 9:00 a.m. will address the reality that for many of us, our financial affairs are not entirely in order. Wills and trusts will be part of the curriculum, and participants will be given a workbook to put all of your financial information and important documents in order. The cost of the class is $10 for the “Set Your House In Order” materials and workbook. For additional information or to register, please call (661) 945-7902.
About Kevin Von Tungeln

With more than 17 years’ legal experience, Kevin L. Von Tungeln serves Thompson Von Tungeln in the areas of estate planning, probate, trusts, wills, trust administration, conservatorships, guardianships and elder law. He is certified by the State Bar of California Board of Legal Specialists as a Board Certified Specialist in Estate Planning. Get to know more about Kevin’s approach to estate planning by viewing his informational videos at: http://www.youtube.com/user/EstateLawyers. Kevin can also be found at LinkedIn by going to: (www.linkedin.com/in/kevinvontungeln)

About Thompson Von Tungeln

Antelope Valley estate planning law firm Thompson Von Tungeln (TVT) offers sophisticated estate planning and administration for the affluent, discriminating client. As Board Certified Specialists in Estate Planning, Trusts and Probate as certified by the State Bar of California Board of Legal Specialization, partners Mark E. Thompson and Kevin L. Von Tungeln are expertly equipped to serve these clients with the creative, effective and custom solutions they demand. For more information, contact TVT at 661-945-5868 or visit their website at EstatePlanningSpecialists.com.

Antelope Valley Estate Planning Attorney Joins Board of Antelope Valley Hospital Foundation

Antelope Valley estate planning attorney Kevin Von Tungeln has been elected to the board of directors of the Antelope Valley Hospital Foundation, which serves Lancaster, Palmdale and the surrounding communities.

“I am honored to be asked to join the Antelope Valley Hospital Foundation board of directors,” said Kevin Von Tungeln, partner at Thompson Von Tungeln. “The hospital foundation is a critical component in providing the services that Antelope Valley residents need, such as incubators for the neonatal intensive care unit (NICU) that has saved the lives of more than 10,000 babies during the past 25 years.”

Antelope Valley Hospital Foundation has helped fund many mission-critical activities at the hospital including the Emergency Department expansion, Charity Care of under/uninsured, Women and Infants Pavilion, AVH/City of Hope Medical Group Cancer Center and Healthy Community Initiatives, such as Healthy Homes, Sexual Assault Response Team (SART) and others. The Foundation’s board of directors is comprised of community and business leaders committed to the care of Antelope Valley residents. For more information on the foundation, visit www.avhospital.org.

About Kevin Von Tungeln

With more than 17 years’ legal experience, Kevin L. Von Tungeln serves Thompson Von Tungeln in the areas of estate planning, probate, trusts, wills, trust administration, conservatorships, guardianships and elder law. He is certified by the State Bar of California Board of Legal Specialists as a Board Certified Specialist in Estate Planning. Get to know more about Kevin’s approach to estate planning by viewing his informational videos at: http://www.youtube.com/user/EstateLawyers. Kevin can also be found at LinkedIn by going to: (www.linkedin.com/in/kevinvontungeln)

About Thompson Von Tungeln

Antelope Valley estate planning law firm Thompson Von Tungeln (TVT) offers sophisticated estate planning and administration for the affluent, discriminating client. As Board Certified Specialists in Estate Planning, Trusts and Probate as certified by the State Bar of California Board of Legal Specialization, partners Mark E. Thompson and Kevin L. Von Tungeln are expertly equipped to serve these clients with the creative, effective and custom solutions they demand. For more information, contact TVT at 661-945-5868 or visit their website at EstatePlanningSpecialists.com.

Trusts and Estates Blog