Garland Law Offices, P.A.

Not a Billionaire? Trusts Can Still Be Beneficial

“Even if your asset base doesn’t measure up to the Bill Gates standard, you may consider using trusts in estate planning. This is because they can help your heirs in many different ways.”

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

• Protect assets from creditors
• Allow heirs to avoid probate of assets in the trusts
• Avoid, minimize or delay estate taxes, transfer taxes or income taxes
• Control how assets are disbursed or invested
• Facilitate business succession planning and manage business assets
• Shelter assets for descendants, if a spouse remarries
• Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

Business Owners Should Start End-Game Planning Now

“Running and owning a business is just like raising a child: Both are investments in the future and both require a lot of time, resources and effort to raise successfully.”

Most parents understand that the ultimate goal of child-rearing is to help a child become an independent adult. For the business owner, this means building a business that would continue after they have retired or passed away. However, when it comes to estate planning, says the article “Why Business Owners Should Think About Estate Planning Sooner Than Later,” from Forbes, many business owners think only about their personal assets and their children.

For a successful business owner who wants to see their business continue long after they have moved on to the next chapter in their lives, the best time to start succession planning is now.

Succession and estate planning should not be something you wait to do until the end of your life. Most people make this mistake. They don’t want to think about their own mortality or what will happen after they’ve died. Very rarely do people realize the value of estate planning and succession planning when they are engaged in a start-up or when their companies are just getting solid footing. They are too busy with the day-to-day concerns of running a business than they are with developing a succession plan.

However, any estate planning attorney who has been practicing for more than a few years knows that this is a big mistake. Securing assets and business planning sooner, not later, is a far better way to go.

Business continuity is the first concern for entrepreneurs. It’s not an easy topic. It’s far better to have this addressed when the owner is well and the business is flourishing. Therefore, the business owner is making decisions and not others, who may be emotionally invested but not knowledgeable about the business.

A living trust and will can put in place certain parameters that a trustee can carry out. This should include naming the individuals who are trusted to make decisions. Having those names and decisions made will minimize the amount of arguing between recipients of assets. Let them be mad at you for your choices, rather than squabbling between each other.

Create a business succession plan that designates successor trustees who will be in charge of managing the business, in the event of the owner’s incapacity or death. A power of attorney document is used to nominate a fiduciary agent to act on your behalf if you should become incapacitated, but a trust should be considered to provide for a smoother transition of the business to successor trustees.

By transferring a business to a trust, the inconvenience and costs of probate may be avoided and assets will be passed along to chosen beneficiaries. Timely planning also preserves business assets, since they can take advantage of advanced tax planning strategies.

Estate and succession planning is usually not top-of-mind for young business owners, but it is essential planning. Talk with an experienced estate planning attorney to get yourself and your business ahead of the game.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

What are the “Six L’s” of Small Business Planning?

“Small-business owners pour their blood, sweat and tears into their enterprises, so it’s no wonder that such dedication can cause a little tunnel vision. In being so focused on day-to-day operations, owners often fail to spend the appropriate time on personal planning.”

Failing to conduct long-term personal planning can create a reality, where a business owner under-insures and underinvests outside her own companies.

Think Advisor’s recent article, “The 6 L's of Small-Business Planning” says that a successful business essentially becomes a security blanket. That’s because business owners don’t adequately prepare for events that could change the course of their financial well-being. It’s critical to address the important events that can disrupt everything personal and business.

Liquidity: If a business owner has to write a big check for some unexpected repairs after a storm, the money must come from somewhere. Small businesses rarely have substantial liquidity, because so much of their capital is tied up in the company. Therefore, a line of credit is the most frequent solution for owners with this situation.  You should instead try to ensure that you have access to cash in the short term, if necessary.

Long-term disability: In many instances, business owners are the main contributors to their small company’s success. If they can’t work, the whole company can suffer. She should have a plan to protect against this scenario. First, it is important to identify who can step into a leadership role for a short time. If the disability is long term, examine the ways in which it might affect the company’s value and succession plan. You can purchase business overhead insurance or policies that offer income replacement. You can also create buy-out agreements, so key employees can buy out the disabled business owner.

Loss of life: In the event that an owner suddenly dies, you should have life insurance to fund a buy/sell plan. Without a plan, you may become forced to work with your deceased business partner’s spouse.

Long-term care: Baby boomers with business wealth may wonder what will happen if they need significant medical care, which is a legitimate concern. There’s an additional consideration: the elderly parents of business owners. If an owner steps away to help provide care for an ailing parent, the potential disruption to the company may be significant. Look at where the capital is going to come from, to offset the cost of long-term care for family members, because you don’t want a forced liquidation of business assets.

Longevity: Consider the impact to the company, if the owner has an unusually long life. This should include an examination of how that person’s role will change and who will succeed them through phases of potentially decreasing interest and capacity.

Legacy/legal: Look at what the business owner envisions as her legacy for the future. There are numerous types of trusts, gifts and legal vehicles can be used to help make certain that the business won’t be ruined by taxes, when ownership is passed to the next generation. Talk to an estate planning attorney about doing this the right way.

At each annual business review, review your plans to see if they can still be effective responses to the six Ls of small business planning.

Reference: Think Advisor (May 28, 2019) “The 6 L's of Small-Business Planning”

Does the Owner of the Cleveland Cavaliers Have an Estate Plan?

“News that Detroit real estate billionaire and Cleveland Cavaliers owner Dan Gilbert suffered a stroke over the weekend, has raised interest in his succession plans for his many business interests.”

Fifty-seven-year-old real estate mogul Dan Gilbert is the owner of the NBA’s Cleveland Cavaliers and several minor-league franchises. He suffered a stroke recently, and he may fully recover and go on to run them for years to come. But then again, he may not, and every owner eventually sells or wills the team to family or new owners.

Crain’s Cleveland Business’s reports in the recent article, “Dan Gilbert situation raises sports team estate planning question,” that as sports teams have grown into billion-dollar businesses, the stakes have dramatically increased over the fate of ownership.

Sometimes, it can be quite complex when an owner dies, since some of them aren’t very clear on what should happen to the team when they die. Other owners have made elaborate plans that are run aground by estate tax issues or family politics.

Gilbert is in charge of an investment group that paid $375 million for the LeBron James-led Cavaliers in 2005. That investment has paid off with an NBA championship in 2016 that likely endears him to the people of a city that had been without any pro sports championship since 1964.  Gilbert has now poached the popular University of Michigan basketball coach John Beilein to coach the rebuilding Cavaliers to try for another title next year.

Gilbert hasn’t given any indication about what his succession plan is for the team is, although each of the major leagues requires owners to inform them of these plans. Placing a team in a trust is a frequent practice. This can protect an owner’s heirs from federal estate tax bills that can run into the hundreds of millions of dollars for pro sports franchises (spouses are exempt from estate taxes, but not children).

Entrusting an asset will freeze its value under federal gift tax law at the time it was placed in the trust—that’s a way an owner can decrease the eventual tax bill. However, because professional sports team values have been skyrocketing with huge TV deals and other revenue streams, the tax value of a team can be staggering, even for the wealthy.

Another strategy is for a sports team owner to buy an insurance policy. The proceeds can pay the estate taxes, so heirs don’t struggle with tax bills, which sometimes can force a team sale. This occurred when the estate tax bills from the IRS precipitated the sale of the NFL’s Miami Dolphins in 1993 and St. Louis Rams in 2008. The Lerner family had to sell 40% of its stake in credit card giant MBNA to pay its estate tax bill, when Cleveland Browns owner Al Lerner died in 2002.

Reference: Crain’s Cleveland Business (May 29, 2019) “Dan Gilbert situation raises sports team estate planning question”

Why Do Even the Middle Class Need Estate Planning?

“There’s a misperception that estate planning is only for the ultra-wealthy.”

When it comes to estate planning, you may think that you don’t have the wealth that would require you to engage in extensive estate planning. If you have a will, you might think that’s good enough.

Forbes’ recent article, “Why Estate Planners Aren’t Just for the Ultra-Rich,” says that nothing could be further from the truth.

Although some estate plans are more complicated than others, just about everyone can benefit from having one. Let’s examine the main reasons why:

Avoiding probate. This is a big reason why the importance of estate planning is for everyone. You don’t have to be part of the 1% to want to avoid putting your family through the stress and expense of probate. Creating a trust and strategically placing assets within its control, eliminates many headaches.

Maintaining control from the grave. Even after death, you can still impact how your assets are distributed, as well as to whom and when.

Protecting your legacy. When you consider leaving a legacy for the next generation, it may have lofty pursuits. However, those aren’t necessarily reasonable goals for everyone. Leaving a legacy can also mean making certain that heirs properly respect all the effort and sacrifice that it took to save and create a retirement fund—whatever its size.

Creating a business succession plan. Among the countless small businesses in the U.S., most will continue to remain viable after the legacy owner dies. A business owner can plan for this within an estate plan, which details exactly what they want to happen, if they die unexpectedly. That could include outlining specific roles and responsibilities for surviving heirs or putting into place a buy-sell agreement with a business partner and directing the distribution the proceeds of the sale.

Be sure to revisit your estate plan regularly, especially if your life includes big events, like a birth of a child, a divorce, or an irreconcilable difference with a loved one.

It’s a myth that estate planning is something only wealthy people do. It’s for everyone.

Reference: Forbes (April 15, 2019) “Why Estate Planners Aren't Just For The Ultra-Rich”

How Do I Make a Seamless Transition of a Family Business?

“Planning to hand off significant assets, especially a business, to the next generation is a financial decision. However, it is one that also requires the careful handling of a family’s internal dynamics.”

The North Bay Business Journal’s article, “How to plan for a smooth transition of your family business,” explains that in wine families, usually one or two children go to work in the business. There’s often some kind of preferential treatment for them with economics or voting and control. A business owner needs to plan carefully in transferring her business to the next generation.

A crucial step in handling family dynamics is calling a meeting with everyone to discuss what’s going on with their business. A family meeting is an opportunity to discuss decisions with family members with reduced conflict and confusion.

To have a successful business succession plan, start with a business plan for the business. Next move to both financial planning and estate planning, especially estate planning for the current owner. You should then do tax planning around all of that.

Addressing the tax exposure is a challenge faced by those transferring assets. There are some tax issues with estate planning and asset transfer, unless it’s done during life. Transferring a business, or other assets when the owner is still alive, can be beneficial in the long run. Lifetime gifts can be a way to reduce estate taxes, because making a gift today before there’s been substantial appreciation is a way to leverage your gift and estate tax exemption.

A parent who transfers assets while still alive, would have to be willing to say goodbye to the income from an asset.

However, that doesn’t necessarily mean giving up control of the business. The process of transferring control of a business can benefit from a gradual approach. If you want to transfer the business to one or more of your children, but you want them to succeed on their own, you could bring them into the business as a manager and give them a little bit of ownership.

As a business owner selling out of a business, you need an experienced attorney to help you understand the impact of the amount of significant wealth that you may have, after the sale of the business. He or she will create a plan that will respect your values, goals and commitments, while making sure you have flexibility.

Reference: North Bay Business Journal (April 9, 2019) “How to plan for a smooth transition of your family business”

Did Rapper Nipsey Hussle Have an Estate Plan?

“Rapper Nipsey Hussle was gunned down outside his L.A. store on Sunday, March 31. He is survived by his two minor children and longtime girlfriend Lauren London. Assuming that Hussle died without an estate plan, all his assets would pass to his children in equal shares, since he was not married at the time of his death.”

This raises significant issues, because minors can’t own more than a certain amount of assets, explains Rolling Out in the recent article, “RIP Nipsey Hussle: 5 reasons you need an estate plan.”

This means that a guardian or trustee must be appointed to manage the funds for them, until they reach the age of majority. If the deceased doesn’t have a will that instructs who that guardian shall be, they will be chosen by the court. In this case, Nipsey’s longtime girlfriend Lauren London would get nothing from Hussle’s estate (even though that may not have been his intention), because it looks like she wasn’t his spouse or an heir. Consider these important reasons for an estate plan:

Property transfer wishes. This is the primary objective of estate planning. Your estate consists of all your property (real, personal, and intellectual) minus your debts. Your estate plan will determine who gets what and when. Create clear goals, as to who should inherit your property and alternative beneficiaries, in case someone predeceases you.

Transfer costs and taxes. Another goal of estate planning is maximizing any available tax benefits. You can limit estate taxes by creating trusts, making charitable donations and by establishing a family limited partnership for a business.

More net assets to heirs. An estate plan will help avoid the expense and delays of probate.

Liquidity at death. Funds need to be available to satisfy the immediate needs of the family. This can be accomplished with life insurance policies, IRAs, stocks and bonds. If all of your property is being transferred by will or intestate succession, no one gets anything, until the estate is probated.

Personal wishes surrounding death. Write down all of your preferences concerning burial, cremation, and organ donation to help your family.

Hopefully Hussle created an estate plan, so his family doesn’t have to grieve his death, while figuring out his personal, business and family matters.

Reference: Rolling Out (April 1, 2019) “RIP Nipsey Hussle: 5 reasons you need an estate plan”

Why is Succession and Estate Planning a Process?

“Succession planning is a process. 10 years of time goes by very quickly, so the earlier you can start having these conversations, the better.”

If you hear of someone heading off to her attorney to do their succession planning, it’s really just one of several meetings that are necessary to draft a sound succession plan, says Dairy Herd in the article “Estate Planning Is A Process, Not An Event.”

In fact, succession planning is a process. Ten years of time can fly by very quickly, so the earlier you can start having these conversations with your attorney, the better.

The amount of time needed to draft a solid succession plan is different for every family. If things are fairly straightforward, it may take only six to nine months. However, it’s not uncommon for this process to take a year or more.

That’s especially true in the ag sector, because once the good weather arrives, this process slows down to a halt—good weather means that everyone is focused on crop production.

There’s no magic age to start the process, but again, sooner is better.

You can spend your entire career building your business. However, very few people have really spent  much time thinking about how they will effectively exit from it.

You may not be thinking of retiring or transitioning the farm operation for 15 or 20 years but having an idea of where you're trying to get, gives you a better track on which to run.

Succession planning should happen well before retirement, so that’s why the best plans are flexible and adaptable.

Every plan is unique to each family's particular farm operation and circumstances.

The best plans are dynamic and draw on the expertise of an entire team of professionals. That way you're seeing all of those issues and changes along the way.

Reference: Dairy Herd (January 15, 2019) “Estate Planning Is A Process, Not An Event”

What’s Your Business Worth?

“Small business owners pour years of blood, sweat and tears into building their entrepreneurial livelihood, first to provide for their lives and their families during the working years, and then later to transition as a retirement asset through sale or other succession planning.”

As Southcoast Today reports in the recent article, “Retiring after you sell your business? It may not be as simple as you think,” many business owners don’t have a sense of what their business is worth.

The simple answer is that it’s worth what someone else is willing to pay for it.

However, there are many factors that need to be considered when valuing a business. They include the age of the business, revenue, income, stability of revenue and income, growth rate, industry, management, systems and procedures, key employees, employee turnover, the economy and more.

There are also multiple methods used to value it, such as Book Value, Comparative Business Sales, Multiple of Discretionary Earnings, Discounted Cash Flow and Asset Valuation.

In many instances, the business is the single biggest asset owned by the owner.  It may represent the majority of his or her net worth. If so, the owner should consider how he or she will monetize the value of the business, when it comes time to retire. They also need to protect the business against risks that could close it.

If the business is the owner’s biggest asset, how is she going to be able to retire comfortably?

There should be a succession plan in place to clarify whether the business is to be sold to an outside third party, to company employees or to the owner’s children. The owner will also have to possess enough other non-business assets, if it’s to be left to his or her children.

In a family business, there could be one child who worked in the business, while the other children didn’t. How will this be handled in estate planning?

The small business is usually where the business owner spends most of her time, focus, and energy.  However, it is only a part of her life and financial picture. In the end, the business has a major impact on the personal financial planning of the owner and her family. This includes time spent with family, estate planning, retirement planning, investment management, succession planning, exit planning, charitable giving, health and fitness goals and spiritual goals.

Talk with an experienced estate planning attorney today.

Reference: Southcoast Today (March 2, 2018) “Retiring after you sell your business? It may not be as simple as you think”

What Do I Tackle First: Estate Planning or Exit Planning?

“Once owners see that the two processes share the same goals, they can appreciate how to leverage the time and money they spend developing their exit plans into the design of their estate plans.”

The recent article from Wilmington Insights titled “Which Comes First - Estate Planning Or Exit Planning?” notes that a successful business exit plan accomplishes three important goals:

• Financial security, where the business sale or transfer provides the income the owner and her family need after her exit;
• A successor selected by the owner, such as children, key employees, co-owners or a third-party; and
• Income tax minimization, giving the owner more cash in her pocket.

 A successful estate plan also achieves three important personal goals:

• Financial security for the decedent’s heirs and family;
• Control by the decedent to choose who receives her estate assets; and
• Estate tax minimization to reduce the government’s share and give more to the decedent’s heirs.

If you look at exit planning and estate planning together, you can ask relevant questions in order to see the big picture:

• If you fail to exit the business as planned, how do you provide your family with the same income they’d have enjoyed if you had?
• Can you be sure your business retains its previously determined value?
• Does your estate plan reflect and implement your wishes, if you don’t survive after the exit?
• If you die before exiting the business, will your family still receive the full value of the business?

Business owners should determine if their estate plans address these issues.

Another goal is minimizing creditor risk for you and your heirs, which can be done with both exit and estate plans.

Remember: estate taxes are easier to avoid than income taxes, and estate planning can frequently involve funding from life insurance proceeds, which pay in cash upon death.  However, exit planning often involves the owner’s own accumulated assets. There no correct answer to the estate or exit planning question. You need to do both. Failure to act in either case, brings about lasting problems for you, your business and your family.

Reference: Wilmington Insights (August 1, 2017) “Which Comes First - Estate Planning Or Exit Planning?”