Category: Succession Planning

At Stewart Law we consider estate planning a form of legal planning intended to get the most value out of all that you have, tangible and intangible assets, for yourself and those you care about.  A key point is minimizing risk of loss – to creditors, income, estate or other taxes, administration fees, etc.

Of these, income taxes are on everyone’s mind in the late winter and early Spring and here are 4 places where you want to watch for any unnecessary loss of assets in your estate due to income taxes.

Retirement Accounts.  When the US established income tax benefits to encourage individuals to save for retirement, it also allowed the income tax deferral feature of these accounts to benefit the account owner’s heirs over potentially a very long period of time such as decades.  The theme of more recent legislation, including Secure 2.0, has been to make the account a little more valuable for the retiree through strategies like pushing back the age when you have to start emptying the account but, at the same time, they’ve made the account less valuable for most heirs.  This has happened mainly through rules that require most of these accounts to be emptied not more than 10 years after the account owner’s death and sometimes much sooner.  There are exceptions if your heir is in a narrow window of permissible beneficiaries such as the account owner’s spouse or a disabled child.  Since these accounts will remain fully subject to income taxation in the hands of your heirs and will be taxed in a relatively short period of time after your death, consider that in many cases these assets may be worth approximately 70 cents on the dollar compared to most non-retirement assets in your estate.  One option is to fulfill any charitable requests with these funds, either during your life or after death in your estate plan, as the charity will benefit from all the dollars since they do not pay income taxes.

S Corporations.  S Corporations remain the most popular income tax classification for closely-held businesses.  However, it’s important to remember that S Corporations have strict rules about who can be a shareholder and if your estate plan includes non-qualifying entities, and many plans do, then you will want to provide a solution to retain the S Corporation status or, at least, be prepared for it to terminate.

Who pays taxes on income earned in a Trust?  Trusts are core tools in the estate planning toolbox and date back centuries since they were first used in England in a manner very similar to how they’re used today in the United States.  In sum, they allow you to appoint a Trustee (such as an adult family member) to manage property for the benefit of another person (such as your minor child). So if you leave a $1 Million term insurance policy to a trust for your minor child and your brother manages and disburses it for her, who pays the income taxes on the interest, dividends and other income earned by the Trust?  In short, it depends.  The general rule is that if all the income is retained in the Trust for the year (for example your daughter is living comfortably off other funds), then the Trust will pay income taxes on the Trust income when it prepares and files its income tax return.  If instead the income is distributed for your daughter’s benefit, such as her education or health care needs, then it will be reported and taxed as if it was her income.  The strategy is to balance getting the income where it does the most good for your daughter while taking into consideration the different income tax rate that may apply.

Basis step up for assets in a Trust.  If a Trust owns Apple stock worth $1 Million for which it paid $600,000 and the trust beneficiary dies, will the next beneficiary have the stock with a basis of $1 Million or $600,000?  Here too the answer is that it depends.  If the stock is being sheltered from a 40% estate tax on the beneficiary’s estate, which is a fairly common use of trusts, then it will not get a step up in basis at the beneficiary’s death and the next beneficiary will retain the $600,000 basis.  That means if that beneficiary sells the stock then $400,000 of gain will be subject to income tax.  On the other hand, there are techniques that will “pull” the Apple stock through the beneficiary’s estate for income tax purposes with the result that the next beneficiary gets a basis of $1 Million, the fair market value of the Apple stock at the first beneficiary’s date of death.  This erases $400,000 of gains that would otherwise be subject to federal and state income taxes and the next beneficiary gets substantially more value from the Apple stock.  The key point is that there are many cases where an estate planning attorney can help you achieve a better income tax result out of these existing trusts.  The answer that was “right” when the trust was established is not necessarily the right answer today.  What we see pretty often is that the estate tax savings will not be a benefit in a world where the beneficiary currently has a very large ($12.92 Million) exemption but it would be very beneficial to eliminate the unrealized gains and associated income taxes.

About the Author

Todd A. Stewart, CPA, JD
Managing Partner

The new year brings to mind opportunities for self-betterment—going to the gym more often, eating healthier, or starting a new hobby. However, these goals that we set, though well intended, are often short-lived. To offer a different perspective on New Year’s resolutions, consider setting estate planning goals in 2023 that will not only be beneficial in the short term, but also offer benefits for you and your loved ones that have the potential to last for generations.

The IRS implemented an estate and gift tax exemption of $12.92 million (an $860,000 increase from the previous year) and an annual gift tax exemption of $17,000 (or $34,000 for married couples) for 2023.  While currently high, these large exemption amounts are scheduled to sunset back down to $5 million (inflation adjusted) starting in 2026.  This current opportunity affords clients whose estate values fall (or will fall at their death) within the range of $5+ million an opportunity to “lock in” these unprecedented exemption amounts for asset preservation and tax minimization.

The most common strategy to “lock in” the current exemption amount is by way of lifetime gifts. Lifetime gifting is extremely effective by allowing gifted assets to increase in value over time, outside of the donor’s taxable estate.  Yet many are left with the concern that gifted assets may not be managed properly by the recipient. Creating an irrevocable trust with the recipient as the beneficiary is a method that allows one to put rules in place stipulating how and when the beneficiary can access gifted assets.

Another gifting option to consider is the creation of a Family Limited Partnership (“FLP”). Unlike an irrevocable trust solely benefiting the donee beneficiaries, an FLP serves as an investment company holding investment assets in which minority interests can be gifted to a beneficiary (most often children).  This gifting of minority interests enables clients to utilize the annual gift tax exemption (or lifetime exemption, if larger gifts are intended) while allowing the majority owners (e.g., parents) to maintain a level of control over the gifted assets that are now outside of their taxable estate. Rather than making a large gift to a beneficiary at one time, this is the perfect vehicle for those wishing to decrease their taxable estate size gradually.

New Year’s resolutions can be daunting, especially when trying to accomplish them alone. Fortunately, our team has the expertise to provide guidance and work alongside our clients to create manageable timelines and achieve estate planning goals now and into the future.

About the Author

Madison J. Jones
Legal Assistant

 

By way of a brief primer on Estate and Gift Taxes, the U.S. tax system requires a decedent’s representatives to calculate the value of all of his or her assets owned at death and pay a tax (current rate is 40%) on the value of this property.  The good news is that there are some deductions allowed (the two most common big ones are the marital deduction for property left to your spouse and the charitable deduction).  The other good news is that the tax only applies to asset values exceeding a certain threshold amount known as the applicable exclusion (or exemption) amount.

This exemption amount can have a very substantial impact on the amount of taxes you’ll actually pay.  For this reason and others, it’s tinkered with fairly often by Congress.  For example, when this author started practicing law in 1990, the Estate Tax Exemption amount was $600,000 where it stayed until it was increased by $25,000 in 1998.

Fast forward to 2022 where the exemption amount stands at $12.06 Million.  Because this amount is inflation adjusted, the new exemption amount for 2023 will increase to $12.92 Million.  Not only is this the biggest inflation jump ever, but it is also an increase that itself is larger than the full exemption amount was until the early 2000s.

The catch?  The exemption amount is basically “use it or lose.”  If you are one of the many who don’t give away any significant amount this year or next, then those limits are irrelevant for you.  It’s only the estate tax exemption limit in the year of your death that matters for your family.  Under current law, the exemption will decrease to $5 Million, inflation adjusted (probably to about $6.5 to $7 Million), in just over 3 years because the current laws sunset at the end of 2025.

So if you are someone with a valuable estate who really doesn’t like paying taxes, we will gladly talk you through some innovative ways to use this inflation adjustment to minimize taxes and keep more of your family’s wealth intact.

About the Author

 

 

 

 

 

 

Todd A. Stewart, CPA, JD
Founding Partner

As we enter the last few months of 2022, we want to remind you that it’s a great time to start thinking about ways to end your year strong so you can truly celebrate over the Holidays. Here’s a brief checklist:

1. Annual Gifting.   With the lifetime estate and gift tax exemption amount still at all time highs, many are not giving much consideration to the Estate Tax that can consume 40% of the asset value that exceeds the Exemption Amount. However, the only Exemption Amount that applies for the Estate Tax is the one for your year of your death, which is not yet known. It’s very likely this exemption amount will both increase and decrease before you die. Therefore, consider whether Annual Giving to children or grandchildren makes sense.  Annual exclusion gifts are not subject to gift tax and fall completely outside of the unified tax system making it a valuable estate planning component. Currently, the annual exclusion amount is $16,000 per child, or $32,000 for a married couple (choosing to split gifts) per child.
2. Review Your Estate Plan.   As each year passes, circumstances change. Before you get too deep into Holiday travel, we recommend reviewing the key areas of your estate plan to ensure that it still meets your needs and aligns with your goals. Here at Stewart Law, we provide clients with a one-sheet diagram that serves as an Estate Plan Overview, including their assets, disposition, and named fiduciaries. It’s a good time of year to review not only this information but also your beneficiaries named on life insurance policies and retirement accounts. You should also see that assets are titled properly.  We are always happy to have a consultation about these items and any tax law or other legal changes that could have ramifications for your plan.
3. Corporate “Clean Up”.   With so many other “To Do” items on a business owner’s list, many times we see a tendency of falling behind in ensuring the corporate records are not only in good standing with the Secretary of State, but also in good order internally. All too often this comes to light when businesses are looking at bank financing, a potential sale, or simply needing to have the appropriate persons sign an important legal document.  While there are many good reasons to do it, a well-ordered and organized corporate minute book is a must for every business over the long term.
4. Children’s POAs.   As we draw nearer to the Holidays, we want to remind you that this is a great season for your child(ren) off at college to utilize their time at home by getting Powers of Attorney in place. Recall that in North Carolina minors become adults at age 18 and need to provide for their own legal planning. Accordingly, please take this time to ensure peace of mind when your child(ren) are back from school by letting Stewart Law help them with legal documents memorializing the persons who will make financial and health care decisions for them in case of a temporary incapacity.
5. Family Meetings.   Families benefit significantly from knowing there is a plan in place to protect the family’s lifestyle, even in case of an incapacity or death. In fact, over the last several years we have found that introducing your children to your advisor team and letting your family know that you have thought about, and have a plan for, their long-term wellbeing provides an increased sense of security for your family. Everyone benefits from building an open line of communication between your family and the professionals with direct knowledge of your situation. In a Family Meeting, we can work together to continue to educate your family, as well as develop a focus on being good stewards of business and personal wealth. Bottom line, YOU choose what YOU want to accomplish in your Family Meeting and we will help you make it happen.

If you would like to discuss any of these checklist items to help you accomplish an end of year goal, please contact one of our attorneys.

About the Author

L. Mackenzie Reid
Legal Project Manager
Senior Paralegal

If you have a family member who is disabled or who faces special challenges, you know that solutions to their needs often require an individual touch.  When addressing your estate planning needs, consider using a Supplemental Needs Trust to allocate some of your resources to alleviate the unique needs or burdens of your loved one with special needs.

A threshold question for parents of children with special needs or family members of disabled individuals is how to leave funds to help these individuals without threatening the support they may receive from the Federal or State government or otherwise creating a burden despite good intentions.  Direct transfers to individuals who are disabled or considered incompetent for financial purposes may create a need for a guardianship or conservatorship.  If a minor or incompetent donee receives significant assets but is not able to manage his or her finances, his or her caregiver will likely need to petition the courts to establish a custodial fiduciary relationship.  Essentially, the caregiver needs the court’s permission to open an account for the benefit of the incompetent person.  The caregiver acts as a manager of the account for the incompetent person’s benefit, and he or she must prepare routine accountings for court approval; the assets may be restricted for use for particular purposes.  This process can be expensive and may take months.  Additionally, the assets may still disqualify the beneficiary from receiving government benefits.

Instead of making outright bequests or gifts to a disabled or incompetent individual, a supplemental needs trust can empower a manager or caregiver to improve the quality of life of the beneficiary without threatening their existing (or potential future) benefits and without the burden of a court process.

Supplemental Needs Trusts are a form of third party planning; this means that the funds for the trust come from a third party, not the person who needs the benefit of the assets.  The donor or provider of the assets sets up the Supplemental Needs Trust for the benefit of the individual with special needs.  First party planning is a separate matter outside the scope of this article.

Supplemental Needs Trusts are intended to do just that: supplement the other assets available to the individual.  When assets are left directly to the individual or are put into an instrument with provisions that provide for the trustee to use the assets for the benefit of the individual in ways that overlap with purposes of government funds, the government may reduce the amount of support provided to the individual on the basis that his or her needs are being met.

Many standard estate planning vehicles include language where the trustee is directed to provide for the health, education, maintenance, or support of the beneficiary.  However, Supplemental Needs Trusts should avoid use of this language so that there is no question that these funds are not for overlapping purposes.  Instead, the trustee should be given discretion for how to use the funds.  The grantor’s intent should be clear: that the trust assets are to supplement and not supplant other benefits.

By adding supplemental needs planning to your legacy or by creating a current Supplemental Needs Trust, you can greatly improve the quality of life of an individual with special needs.  This planning can be delicate and should take the individual’s existing and potential future benefits into account.  Plan for the potential elimination of additional benefits caused by well-intentioned but insufficiently focused planning.  When combined with the right trustee and the sound advice of a team of professionals, a Supplemental Needs Trust can be the most impactful piece of your estate plan.  Contact our office today to further discuss how best to achieve your supplemental needs planning goals.

About the Author

S. Blaydes Moore, JD
Associate Attorney