Business Planning

If you own a business, you probably took a lot of time and effort to plan it before you started the business (at least I hope you did). You probably thought about what kind of product or service you wanted to sell, from where you would provide it, how much to charge, and how to market yourself.

Have you ever thought of how you will exit from your business? It doesn’t happen overnight, not if you want to be successful at it.

You may be planning to sell your business – to your family, maybe a key employee, or a total stranger. Each scenario requires different planning to achieve the optimal outcome for you. If you want to sell your business to a family member, the dynamics of that relationship will filter through the planning and execution of the sale. You may want to wait to sell the business to your children until you are no longer able to work at all in the business. Frequently, I hear of children who are running their parents business, who are not sure that they will ever own the business, because the parents haven’t discussed their plans with the children. It becomes even more complicated if there are several children but only one actually works in the family business. Who gets ownership – the child who is now running the business or do they all share?

Are you aware that different strategies may create income tax issues for you or may create an estate that will cause you to pay estate tax?

It takes several years to plan your business exit strategy and to carry it out (maybe up to ten years). So start early. Make an appointment with your lawyer and your accountant and get everyone thinking about the best way to maximize what may be your biggest asset. This will allow for a better plan and a smoother transition.

If you have children who are interested in working in your business, involve them in some of the discussions. Listen to their wishes. But you do not have to give them what they want if it does not mesh with your wishes and plans. Remember, it is still your business. But be upfront about what you are doing. It is not fair to a child to have put significant time and energy into your business only to be told that you intend to sell to a third party who will have his own team.

If the business is to stay in the family, you must realistically assess which of your children are capable of managing the business. Management issues must be kept separate from ownership issues. A child can own a share of the business and never step foot inside its doors. If there are no children to take over the business, you must start looking at outsiders to buy your business.

Don’t let a crisis hit you before you plan your exit strategy. If you die or become disabled before you have a business succession plan, the results will be disastrous. Do it now and don’t do it alone. Call your lawyer and your accountant before it is too late to plan.

 

What Does Estate Planning Cost?

People who do not have an estate planning documents signed are hesitant about going through the process for many reasons. One of the ones I hear very frequently is that it costs too much.

I am asked about the cost of doing a will before I set up an appointment with a potential client. I wish I had a quick answer. For many clients, after I speak with them and get answers to questions about amount of assets, whether a will has been previously signed, whether there is a divorce decree in the picture, I can get a better handle on whether the client has a fairly simple estate plan to write or a time consuming one, where I will have to read other wills, trusts, or divorce agreements. I will be able to see whether estate taxes are part of the picture and ask whether the client wishes to spend an extra $2,000-$3000 to save $99,000.

It is always the client’s choice as to whether they want the basic documents - a will, durable power of attorney and living will – without any tax planning desired because it’s too complicated or too expensive. Or, they may decide that it’s worth it to spend extra money now to save money later. So, I apologize for not being able to immediately answer that question of how much it costs. Sometimes, it takes a couple of hours of talking to each other to find out what the clients want and how I can help my clients achieve their goals. If there are no estate taxes involved, I can probably quote you a flat fee. If I am doing tax planning and reading lots of documents that you already have signed 10 years ago, I may charge on an hourly basis. I urge you not to be penny-wise but pound-foolish about your estate planning. It will be worth it.

Life Insurance – Do You Need It?

Life insurance can be a great tool in the event you die when you still have to support your family. It has other uses in helping your family survive when you die.

If you have a life insurance policy in effect when you die, your family receives a lump sum of cash that it can use to replace your income. This payment of cash helps them to pay the mortgage and other debts and to have an income from the investment of the life insurance proceeds. If you purchase a large enough policy, your family will have enough money to send the kids to college and for your spouse not to worry about paying the bills each month.

If you own a business, the business should have a life insurance policy on your life. This will enable your partner to have the cash to buy out your interest in the business. That way, your spouse can convert the value of your share of the business to liquid cash. Without proper planning, your death might result in the business being sold to a third party or being liquidated.

Life insurance can also buy you the funds to pay your administration and estate taxes. If your estate owes taxes, but most of your wealth is tied up in a business, or artwork, or real estate, it may be difficult to come up with the cash to pay those taxes. You may not want your family to sell those assets to pay the taxes. The lump sum cash payment from a life insurance policy would give you the means to pay off your debts and taxes, while allowing your family to continue to own your art collection and your real estate.

Some people do not need life insurance – if your children are on their own and not dependent on you, if your spouse earns a good living, if you do not have anyone dependent on your earning capacity, you may not need life insurance. But if you do need it, don’t procrastinate – get it now so you are protected.

What is the Value of Your Estate?

In New Jersey, a fair amount of estate planning has to do with avoiding paying estate taxes. We are more concerned about it here than in other states because residents of New Jersey start paying estate taxes if their estate is more than $675,000. How do you calculate the amount of your estate?

Your estate is the value of everything you own at the time that you die. That includes your bank accounts, any mutual funds, stocks and bonds that you own, the value of your home and all other real estate, your interest in a business, 401K and IRA accounts, life insurance proceeds, your art collection. If you own anything jointly with someone, you include your portion of the joint asset.

You can then deduct the liabilities and allowable deductions of the estate. This includes the cost of your funeral (it must be paid from the estate’s assets), the mortgage on your real estate, any other debts that you owe, charitable gifts, and any bequests to your spouse (only if your spouse is a U.S. citizen).

If your taxable estate is over $675,000, then it must pay New Jersey estate taxes. The estate pays the tax before it is distributed to your heirs. Your estate may be liable for state estate taxes even if your estate does not owe federal estate taxes.

Gift Giving and Estate Planning

I will bet that you are not aware that the tax code requires you to keep track of how much you give to others as a gift. If you give up to $12,000 per year to any one person, you do not owe gift tax and you do not have to file a gift tax return. If you are married, you and your spouse can each give up to $12,000 to any one person and not be required to pay gift tax or file a gift tax return.

How does this fit into your estate plans? Suppose you and your spouse have 3 children. You and your spouse each can give $12,000 to each of your children. That takes $72,000 out of your estate. If each of your children have 2 children, you and your spouse can give away another $24,000 to each of your grandchildren. So, in one year, you can reduce the size of your estate (and possibly reduce your estate tax) by $216,000 ($24,000 times 3 children and $24,000 times 6 grandchildren).

If you do this for a few years (and in 2009 you can give up to $13,000 to any one person), you can reduce the amount of estate taxes that might be due and make your children and grandchildren very happy. I do not recommend this strategy if you need the money for your own expenses or if you feel that the recipient will spend the money foolishly. You do not get a tax deduction on your income tax return unless you give a gift to a qualified charity. So that excludes your family and friends. The gift does not need to be in cash. You can give a gift of stock or other property. If you give a gift of property that can appreciate in value, you can escape estate tax on the amount of the gift as well as the appreciation in value. To give an example of this, suppose you and your spouse gift each of your 3 children stock that as of the date of the gift is worth $24,000. And suppose that the value of the stock increases over the next 5 years to $50,000. That means that not only did not your estate not have to pay estate tax on the original $24,000, but it will not be paying estate tax on the $26,000 of appreciation.

Estate taxes

Do you know whether you would owe the government any estate taxes when you die? Did you immediately think “no – my estate is too small.”

There are two kinds of estate taxes that may be due when you die – federal estate tax and New Jersey estate tax (you never hear about our state estate tax). Most of the discussion is about the federal estate tax. It can be quite likely that you do not owe federal estate tax. In 2008, the tax code allows you to pass up to $2 million to anyone and an unlimited amount to your spouse. In 2009, that amount goes up to $3.5 million and in 2010 there is no estate tax at all. However, in 2011, the amount you can give without paying estate tax is $1 million. The most common scenario is that the husband dies first and everything has owns goes to his wife. That means his estate (all assets that he owned) pays no federal estate tax. Unfortunately, it is all too common that the widow does not re-write her will (assuming she has one in the first place) after her husband dies. And depending on how much money she now has, she may have an estate large enough to pay estate taxes.

What most residents of New Jersey do not know is that our state estate tax starts at an estate of $675,000. If you live in a fairly modest house with some equity built into it from the increase in house values in the past few years, and have some savings and a retirement account, you may have an estate large enough to pay New Jersey estate tax. If you have a will that was written before the law changed in 2002, or your estate has increased so that you might have to pay New Jersey estate tax, you should talk to a lawyer. You may wind up paying tens of thousands of dollars in New Jersey estate tax, when a little estate planning would change that outcome.

What You Need to Do After You Sign Your Estate Planning Documents

Congratulations! You did the best thing for your family and signed a will, advance health care directive and durable power of attorney. Your lawyer gave you a fat stack of documents. What do you do now?

Your original will should be safeguarded in a fireproof lockbox in your house. Even if you have a safe deposit box at a bank, your family may have problems accessing that box in the first weeks after you die.

If you have signed a durable power of attorney, the agent that you have appointed should have an original of the power. A power of attorney lets another person that you have designated handle your financial matters for you if you cannot. Banks and brokerage companies will not accept a copy of the power of attorney and may insist on their own form (you should find this out now, before you need to use the power of attorney). If you were smart enough to choose a back-up agent-in-fact, in the event your first choice agent-in-fact cannot or will not serve, the back-up person should also have an original power of attorney. You should have signed a few originals. If you do not wish to distribute the original to your agent-in-fact, you should keep the originals in the same fireproof lockbox that you have stored your will in and make sure that your agent knows where the original is located.

The third document that you should have signed is an advanced health care directive that appoints a health care proxy to make medical decisions on your behalf if your are unable to do so. The advance health care directive may also state your wishes as to what kind of medical treatment you would want, whether you would want nutrition if you are in a persistent vegetative state and whether you would want to donate your organs. Copies of this document should be given to your primary care doctor, the person you have chosen as your health care proxy, and your back-up health care proxy. It is important to discuss with your health care proxy and your family members what your wishes are in the event that you cannot speak for yourself. By going through various scenarios with them and talking about what medical care you would want or that you want no medical care in certain circumstances, the chances are much higher that your family will understand what you want and don’t want and will carry out your wishes. As unpleasant as it may be to have this talk, if you don’t say anything, they will be guessing what you would have wanted and those guesses might be the opposite of what you would have wanted.

Finally, if your estate is more complicated, do you understand what the estate plan that your lawyer has created and how it accomplishes your goals? Does it require your to set up one or more trusts while you are alive and to transfer assets into that trust? Do you need to have certain assets re-titled, perhaps so that it is not in a joint tenancy with your spouse? Do you know how to set up the trust or re-title your assets? If the answer to any of these questions is “no,” then you must go back to your lawyer, have him explain everything to you in simple language and have him take care of setting up the trusts and re-titling the assets. Yes, he will charge you for it and it will cost more money, but would you rather spend some extra money now and get it done right or hope that you did it right and find out that you owe thousands of dollars in estate tax because you did it wrong? It’s always cheaper to spend the money now to get it done right.

Have You Signed Your Documents?

If you are one of the smart ones, and you met with an estate planning lawyer, did you sign the documents that your lawyer prepared?

I just read an article in a magazine that stated that a frighteningly large percentage of people who consult with an estate planning lawyer never wind up signing the documents that the lawyer prepares. The article mentioned a few reasons why this happened: the client didn’t feel comfortable with the lawyer that they met with, they didn’t understand the plan that the lawyer drew up, or they didn’t like the plan that the lawyer created.

If you are serious about protecting your assets from estate taxes, transferring your wealth to your loved ones when you want to, and naming a guardian for your children, then you need to take the time and effort to find the right lawyer and to follow through. It may take more than one try to find an estate planning lawyer that you feel at ease with. When you were looking for a doctor or dentist, didn’t you ask around to find out whether any of your friends had a recommendation for you? It’s the same with a lawyer. Ask around and get more than one name if possible. And sit down with each and ask them questions. Are they talking to you in legalese? Do you feel that they are listening to you to find out about your ideas for your estate plan? If the answer is no, cross them off your list and move one to the next name. Keep going until you find a lawyer that you like.

When you have found that lawyer, you should have one or more discussions on how you want your estate plan to work. You should have some ideas about whom to leave your assets to and when. Your lawyer should be listening to what you say and raising issues that you may not have thought about – at what age should your children inherit, would you want to name a couple as your children’s guardian, have you thought about how your spouse would manage your business if you were incapacitated or died? Through presenting your different options to you, your original plans should be refined or may undergo complete revision. But at all times, your estate plan should be something that you understand and agree with. If you don’t understand the estate plan that your lawyer suggests or the documents that he/she drafts are totally gobbledy-gook to you, then you must ask for clarification. If your lawyer can’t explain your plan to you in simple English, then either you have the wrong plan or the wrong lawyer.

Don’t be embarrassed that you don’t understand or the plan doesn’t carry out your wishes, it’s up to your lawyer to ask the right questions so that both sides come to an agreement about what you want done with your wealth. And it is up to your lawyer to explain your documents in such a way that you understand what they say and how they accomplish your goals.

It would be a shame if you were to take the time and trouble to sit down with an estate planning lawyer and never get an estate plan out of it. Take my advice and keep asking questions until you get to the point where you want to sign your will and then do it.

Have Your Team Help You With Estate Planning

I recommend to all of my clients that their team should all work together with me to help with their estate plan. What is your team?

In your life, you may have an accountant, a banker, a financial planner, an insurance agent, as well as your family. Each of these persons has a role to play in helping you make your estate planning decisions.

Your accountant will be aware of your tax situation and many of your decisions involving estate planning include issues of estate taxes. If you have a business, your accountant will be familiar with its structure and profitability, enabling you to make plans for exiting your business, either by selling it or leaving it to a family member. If living trusts are set up as part of the estate plan, your accountant will need to prepare the trust tax returns. If you give gifts to family members and others during your lifetime, your accountant may need to file gift tax returns, depending on the size of the gifts.

Your banker is familiar with the amount in your bank accounts, in whose name they are in, and whether any of the accounts have “pay on death” designations. All of this information is important when talking to your lawyer about your assets and which assets are part of your estate.

Your financial planner is the person who is informed about the rest of your monetary assets – your stocks, bonds, retirement accounts, and your children’s college funds. These assets, plus your bank accounts, are the core of the wealth that you wish to transfer to your family and loved ones.  Your financial planner needs to know what your plan will be and he/she will be the one changing the names on the accounts to your living trust or to your heirs.

Finally, if you have a spouse or children that you are supporting, then life insurance should be part of your estate plan. Life insurance provides immediate cash after you die, cash that will replace your income. If your spouse can work, and your children are grown up, then you may not need life insurance. But, if you do have life insurance, your insurance agent can be helpful in updating your beneficiary designations after you create your estate plan.

By working together as a team, you can get all of your experts working for you at the same time. This gives you the best shot at creating the estate plan that accomplishes your goals.

The Cost of Estate Planning

I talk to a lot of people who tell me they know they should get a will or appoint a guardian for their children, but they don’t want to spend the money for consulting an estate planning lawyer.

If you talk to anyone who has had a close family member die without having a will, you will never think about the cost again. Often the expense incurred in retaining an estate planning attorney to prepare and help you put an estate plan into place is worth hundreds of times what you and your family would pay with no planning or poor planning. It would also avoid the financial and emotional nightmares that can occur with a poorly drafted (or improper) plan. People who didn’t spend the money on hiring an estate planning have unintentionally cut their children out of their will, given money to their children outright which was spent on expensive cars and vacations, or unintentionally gave Uncle Sam thousands of dollars in estate taxes.

Many people assume that they have a simple estate and don’t need estate planning. They hear that the federal estate tax doesn’t touch people who have less than 2 million dollars (and going up to 3.5 million dollars in 2009) in their estate and believe that estate planning is not necessary for them. They don’t realize that in New Jersey, estate tax starts at $675,000, a number that many families easily surpass.

Estate planning and tax planning are not just about the documents. Yes, you will have the necessary documents after you have consulted with an estate planning lawyer. But more importantly, you will know that your plan is the

But if you’re at all serious about planning for your family’s future, and being in charge of what becomes of your assets, the time must come when you’ll have to address the issue. And like most things of importance, there’s no better time than the present. You’ll probably be quite surprised at how much easier you feel once you’ve formulated your plans, knowing that your loved ones will be taken care of in the way that you’ve envisioned.