Succeeding at Business Succession

According to a recent study by U.S. Trust, 64% of millionaire business owners over 50 have no formal succession plan.¹ While the number may shock you, it is not surprising that many small business owners are consumed by the myriad responsibilities of running their businesses.

Nevertheless, owners ignore succession planning at their peril, and possibly at the peril of their heirs.

There are a number of reasons for business owners to consider a business succession plan sooner rather than later. Let’s take a look at two of them.

The first reason is taxes. Upon the owner’s death, estate taxes may be due, and a proactive strategy may help to better manage them.² Failure to properly plan can also lead to a loss of control over the final disposition of the company.

Second, the absence of a succession plan may result in a decline in the value of the business in the event of the owner’s death or unexpected disability.

The process of business succession planning is comprised of three basic steps:

  1. Identify Your Goals: When you know your objectives, it becomes easier to develop a plan to pursue them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure, perhaps as they relate to your employees or community?
  2. Determine Steps to Pursue Your Objectives: There are a number of tools to help you follow the goals you’ve identified. They may include buy/sell agreements, gifting shares, establishing a variety of trusts or even creating an employee stock ownership plan if your desire is that employees have an ownership stake in the future.
  3. Implement the Plan: The execution step converts ideas into action. Once it’s implemented, you should revisit the plan regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.

Keep in mind that a fundamental prerequisite to business succession planning is valuing your business.

As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. Before moving forward with a succession plan, consider working with legal and tax professionals who are familiar with the process.

  1. CNBC, March 15, 2016
  2. Typically, estate taxes are due nine months after the date of death. And estate taxes are paid in cash. In addition to estate taxes, there may be a variety of other costs, including probate, final expenses, and administration fees.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

What is the Value of Your Business?

In the first quarter of 2015, nearly 2,000 small businesses were sold. The median sale price was $200,000, up from $175,000 the year before.¹

As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates, or qualifying for a loan.

There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three of the different approaches to valuing a business.

  1. Asset Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
  2. Earnings Based: Seeks to arrive at a business’s value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry and the outlook for the business.
  3. Market Based: Compares the business to recent sales of similar companies.

Business valuation is not just a formulaic exercise. For instance, there is a value to the business of being a “going concern” as opposed to the start-up alternative. Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business impact value. A greater premium will likely apply to a company engaged in a leading-edge technology than to one involved in a mature market.

Valuing a small business is not an exact science. Some aspect of the valuation may be debatable (e.g., the remaining life expectancy of a machine), while other aspects may be positively subjective (e.g., the value of the company’s reputation).

Willing Seller & Buyer

The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.

Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to offer some valuable insight.

  1. BizBuySell, 2015

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Choosing a Business Structure

In March 2015, about 679,072 new business had been created in the preceding year.¹ All individuals pursuing the dream of exercising their entrepreneurial muscles, will face the same question, “Which business structure should I adopt?”

Each option presents its own set of pros and cons. This overview is not intended as tax or legal advice and may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding the most appropriate business structure for your organization.

Sole Proprietorship/Partnership

This structure is the simplest. But it creates no separation from its owner. Income from the business is simply added to the individual’s personal tax return.

Advantages: Easy to set up and simple to maintain.

Disadvantages: Owners are personally liable for the business’s financial obligations, exposing their personal assets (house, savings, etc.). It does not offer the prestige or sense of permanence of a corporation or LLC.

C-Corporation

A corporation is a separate legal entity from its owners, making it easier to raise money, issue stock, and transfer ownership. Its life is perpetual and will survive the owner’s death.

Advantages: There may be tax advantages, including more allowable business expenses. It protects owners from personal liability for the company’s financial obligations and may lend a measure of prestige and permanence.

Disadvantages: More expensive to set up, the paperwork and formality are greater than for a sole proprietorship or LLC. Income may be taxed twice, once at the corporate level and when distributed to owners as dividend income.

S-Corporation

After forming a corporation an owner may elect an “S-Corporation Status” by adopting a resolution to that effect and submitting Form 2553 to the IRS.

The S-corporation is taxed like a sole proprietorship, i.e., the company’s income will pass through to shareholders and be reported on their respective personal tax returns.

Advantages: S-corporations avoid the double taxation issue associated with C-corporations, while enjoying many of their tax advantages. Owners are shielded from personal liability for the company’s financial obligations. It provides the prestige of a corporation for small businesses.

Disadvantages: S-corporations do not have all the tax-deductible expenses of a C-corporation. The cost of set up, the paperwork, and formality are greater than for a sole proprietorship or LLC. S-corporations have certain restrictions, including a “100 or fewer” shareholders requirement. Shareholders must be U.S. citizens and the business cannot be owned by another business.

Limited Liability Company

An LLC is a hybrid between a corporation and a sole proprietorship, offering easy management, pass-through taxation, and the liability protection of a corporation. Similar to a corporation, it is a separate legal entity, but there is no stock.

Advantages: LLCs provide the protections of a corporation, but are taxed similar to a sole proprietorship.

Disadvantages: Typically more expensive to form than a sole proprietorship, LLCs require more paperwork and formalized behavior.

Remember, the choice of business structure is not an irreversible decision. You may amend your business structure to accommodate your changing needs and circumstances.

  1. Bureau of Labor Statistics, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Financial Strategies in a Post-DOMA World

The Supreme Court’s decision declaring The Defense of Marriage Act (DOMA) unconstitutional was a watershed event that may require some same-sex couples to reconsider the financial strategies they currently have in place.

But uncertainties abound. Federal agencies still need to interpret portions of the Supreme Court’s ruling. And, with some states not recognizing same-sex marriages, challenges remain for those looking to update their financial strategies and approaches.

Here’s a brief overview of the post-DOMA ruling.

Taxes

Legally married same-sex couples are eligible to file joint federal tax returns and may want to consider amending previous years’ returns. Also, they will be eligible for capital-gains treatment accorded to the sale of a home. However, as a married couple, they may also be subject to the “marriage penalty” associated with certain tax treatments and rates.¹

Retirement

Social Security Benefits

Same-sex spouses are now eligible for some Social Security and Medicare spousal benefits.² Medicaid, on the other hand, is administered by the state, so couples living in a state that doesn’t recognize gay marriage may be denied spousal benefits.

Federal Retirement Benefits

For federal government employees with pensions, legal spouses are eligible for survivor benefits regardless of whether the state in which they live recognizes gay marriage.

IRAs

A surviving spouse in a legal same-sex marriage will be allowed to roll over a deceased spouse’s IRA funds to his or her IRA, preserving its tax-deferred benefits. Spousal IRA contributions will also be permitted.3,4

Qualified Retirement Plans

Same-sex spouses will be able to leave a pension to the surviving spouse. Should a married same-sex couple divorce, a qualified domestic relations order (QDRO) would be available to ensure that both spouses receive their share of a qualified retirement plan.5

Estate Strategies

The surviving spouse of a legal same-sex marriage will no longer have to pay federal estate taxes on assets received from the deceased spouse, nor will same-sex spouses be required to pay federal gift taxes when transferring funds to one another.6

Same-sex partners need to take into account the fact that some states still do not recognize same-sex marriage, however.

Same-sex partners should consider:

  • how property is titled, especially the home, so as to ensure transfer to the surviving partner;
  • a revocable living trust to pass assets, in order to avoid the transfer being contested by blood relatives;7
  • a power-of-attorney that allows a partner to manage financial issues if the other partner becomes incapacitated;
  • listing a partner as primary beneficiary on retirement accounts;
  • additional life insurance to cover the assets reduced by estate taxes.8

The DOMA ruling represents an ideal time for same-sex couples to revisit their financial strategies to ensure they reflect the changes in the landscape and fulfill their objectives.

 

  1. Internal Revenue Service, 2013
  2. U.S. Department of Health & Human Services, 2014
  3. Internal Revenue Service, 2013
  4. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
  5. Internal Revenue Service, 2013
  6. Internal Revenue Service, 2013
  7. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
  8. Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policy holder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Understanding the Alternate Valuation Date

When an individual dies, the executor is faced with an important decision that has the potential to impact the taxes owed by the estate and its heirs.¹

The executor will have the option of valuing the estate on the date of death, or on the six-month anniversary of death — the “Alternate Valuation Date.”

Pick a Date

It may seem like an obvious decision and simple choice, but it’s not. Here’s why.

For estates with substantial holdings in stocks, the use of the Alternate Valuation Date may be an appropriate approach if the executor believes stock prices will be lower than they were on the date of death.

When heirs inherit assets, such as stocks, they may receive a step-up in the cost basis if the value of the asset is higher than it was when the original owner acquired it. The heir’s valuation is reset to either the value on the date of the owner’s death — or the value on the Alternate Valuation Date — whichever is chosen by the executor.

Market Moves

Let’s take a look at a hypothetical example. Say Dad bought Out of Date Technologies at $10 per share several years ago. At his death, the stock was worth $35. The executor used the Alternate Valuation Date and six months later, due to market movements, the stock was worth $28.

His heir, Julie, will inherit this asset and receive a step-up in the cost basis to $28, the value declared by the estate. Let’s now assume that Julie sells the stock a short time later at $35.

If the estate had used the value on the date of death — $35 — she might not have owed capital gains tax, since she would have been selling the stock at the same price as her cost basis. But, since she received the stock with the lower cost basis — $28 — because the executor chose the Alternate Valuation Date, capital gains tax on the $7 per share gain may be due.²

In this example, the estate saved money by electing the Alternate Valuation Date, but the heir was exposed to a lower cost basis and the prospect of paying higher capital gains tax in the future.

Consider & Balance

As the executor thinks through this balancing act, he or she should consider the relative prevailing tax rates for the estate and for the heirs to ascertain what approach may result in the most efficient transfer, net of taxes, to the heirs.

Keep in mind the information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

  1. The article assumes the deceased has a valid will and has named an executor, who is responsible for carrying out the directions of the will. If a person dies intestate, it means that a valid will has not been executed. Without a valid will, a person’s property will be distributed to the heirs as defined by the state law.
  2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Planning for Special Needs Children

It has been said that the best inheritance we can give our children is a few minutes of our time every day. It’s also true, though, that our children will not always have us in their lives.

Children with special needs may require lifetime assistance, which can necessitate that parents prepare for their child’s care after they are gone, or are unable to care for him or her any longer.

Envisioning a Life Without You

Parents have to think about the potential needs of their surviving child. Will he or she require daily custodial care? Ongoing medical treatments? Will their child live alone or in a group home? Can family assume some of the care?

Answers to these and other questions can help form the vision of what may need to be done to plan for your child’s care.

Planning Your Estate

Supporting lifetime needs can outstrip your resources. One funding resource is government benefits, which your child may qualify for when he or she becomes an adult, e.g., Supplemental Security Income (SSI) and Medicaid.

Because such government programs have low asset thresholds for qualification, you may want to consider whether to make property transfers to your special needs child.

Ensure you have an up-to-date will that reflects your wishes. Consider creating a special needs trust, the assets of which can be structured to fund your child’s care without disqualifying him or her from government assistance.1

Involve the Family

All affected family members should be involved in the decision-making process. You will want a united front of surviving family members to care for your child after you’ve passed.

Identify a Caregiver

In order for caregivers to make financial and healthcare decisions after your child reaches adulthood, the caregiver must be appointed as guardian. This can take time, so contemplate starting early.

Consider a “Letter of Intent” to the caregiver and family to express your wishes, along with information about your child’s care. This isn’t a legal document, but it may help to communicate your desires. Store this letter alongside your will in a safe place.

Planning for a special needs child can be complicated, confusing, and even overwhelming. Be sure to work with qualified professionals to help you navigate the myriad considerations attendant this challenge.

  1. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

A Primer on Irrevocable Life Insurance Trusts

I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.
Entertainer Arthur Godfrey1

The irrevocable life insurance trust (ILIT) can be an important estate strategy tool that may accomplish a number of estate objectives, though it may not be appropriate for every individual.2,3

What Is an ILIT?

An ILIT is created by an individual (the grantor) during his or her lifetime. The ILIT owns a life insurance policy on the grantor’s life via the transfer of ownership of an existing policy, or through the grantor’s annual contribution of cash to pay the premiums on a policy purchased by the trust.

The grantor designates beneficiaries, usually family members, who will typically receive the proceeds upon the death of the grantor.

The trust is irrevocable, meaning that the grantor forfeits all rights to the property contained in the trust. Its irrevocable nature is integral to accomplishing the ILIT’s objectives.

What Can an ILIT Accomplish?

The ILIT may be able to accomplish several estate objectives, including:

  1. Meeting liquidity needs;
  2. Managing estate taxation on the policy proceeds;
  3. Providing income to survivors.

How Does an ILIT Work?

When you die the trust is designed to receive a payment equal to the policy coverage amount, e.g., $500,000. Since the trust’s ownership of the policy is irrevocable, the proceeds are not considered your property. Consequently, they do not fall into your estate, thus potentially avoiding estate taxation. (Remember, generally no income tax is due on such life insurance proceeds.)4

The trust provisions should be set up to provide direction about how and to whom payments may be made. You may direct that the trust pay out cash to cover certain expenses, e.g., funeral costs, probate, taxes, final medical expenses, and debts.

This may obviate the need to sell less liquid assets at an inopportune time to cover such costs.

The trust’s beneficiaries may receive the proceeds (after any payments are made to satisfy liquidity needs), creating an inheritance free of estate taxes.

Finally, creditors should not be able to attack these assets since they belong to the trust, not you.

Creating an ILIT should be done only with the assistance of a qualified estate planning attorney. It is a complicated exercise in which mistakes may result in losing the benefits ILITs offer.

  1. BrainyQuote, November 2016
  2. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
  3. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
  4. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific estate or estate strategy. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

A Living Trust Primer

A living trust is a popular consideration in many estate strategy conversations, but its appropriateness will depend upon your individual needs and objectives.

What is a living trust?

A living trust is created while you are alive and funded with the assets you choose to transfer into it. The trustee (typically you) has full power to manage these assets.1

A living trust will also designate a beneficiary, or beneficiaries, much like a will, to whom the assets are structured to automatically pass upon your death.

If you create a revocable living trust, you may change the terms of the trust, the trustee, and the beneficiaries at any time. You can also terminate the trust altogether.

Why create a living trust?

The living trust offers a number of potential benefits, including:

  • Avoid Probate—Assets are designed to transfer outside the probate process, providing a seamless and private transfer of assets.
  • Manage Your Affairs—A living trust can be a mechanism for caring for you and your property in the event of your physical or mental disability, provided you have adequately funded it and named a trustworthy trustee or alternative trustee.
  • Ease and Simplicity—It is a simple matter for a qualified lawyer to create a living trust tailored to your specific objectives. Should circumstances change, it is also a straightforward task to change the trust’s provisions.
  • Avoid Will Contests—Assets passing via a living trust may be less susceptible to the sort of challenge you might see with a will transfer.

The drawbacks of a living trust

Living trusts are not an estate panacea. They won’t accomplish some potentially important objectives, including:

  • A living trust is not designed to protect assets from creditors. It is also considered a “countable resource” when determining your Medicaid eligibility.2
  • There is a cost associated with setting up a revocable living trust.
  • Not all assets are easily transferred to a living trust. For example, if you transfer ownership of a car, you may have difficulty obtaining insurance, since you are no longer the owner.
  • A living trust is not a mechanism to save on taxes, now or at your death.2
  1. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Tips for Finding Care for Your Special-Needs Child

The need to care for special-needs children may continue into their adult years, and even after the passing of their parents.

The care choices are wide ranging—family, health-care aides, special-care facilities, day programs, and group homes. However, your child’s specific needs and your available financial resources may dictate which is appropriate for your situation.

Family Limits

Family members are a logical first choice for care. However, the physical, financial, and emotional demands must be considered.

Home-health aides can provide respite for family caregivers. You may want to distinguish between individuals who work directly with a family versus those employed by a company, since the former may be less expensive.

In some situations, the relief provided by an aide may allow a family member to earn additional income in excess of the cost of a caregiver.

Some care needs may require an extended care facility.

In any case, there is a wealth of private and public resources available to help you through all phases of securing care for your child.

Ask Questions

Whichever direction you take, you will want to perform due diligence on caregiver candidates.

For individual caregivers, ask about their education, experience, and skills. Do they match your child’s needs? Is the caregiver certified? Pose questions relating to your child’s situation. Be attuned to whether the candidate is empathetic or simply views your child as a job.

Interviewing a care facility is also about gauging competency and compassion. Ask about alleged abuse or neglect. What is the staff-to-patient ratio? Call response time? Is supervision present 24/7? What activities are offered? Does the facility have patients compatible to your child? Is the facility accredited? What’s the staff turnover rate?

In each case, ask for references and contact them.

Stay Involved

Ongoing communication is critical to the caregiver understanding your expectations and meeting them. Set regular meetings with the caregiver and ask questions. Offer to volunteer time or join in activities, which will provide you with a deeper insight into care levels. Participation sends a strong message to your child and the facility.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Revising Estate Strategy Assumptions

When the rules of the game change, tactics should follow in response to the new landscape. While estate tax exemptions have ridden an uncertain roller coaster in recent years, the rules appear to be stabilizing, prompting many to reconsider conventional estate strategies.¹

A few years ago, Congress raised the estate and gift tax exemption to $5 million per person, adjusted for the rate of inflation, and set the top rate at 40%. In 2016, the estate exemption is $5.45 million.²

This exemption increase means that potentially hundreds of thousands of additional American households may be able to pass on their assets free of estate taxes. It also means that individuals may want to revisit their current approach to estate management.

Changes in Gift Strategies

One of the objectives of gifting assets is to manage taxation on an estate’s future growth. However, this strategy comes at the cost of losing the tax advantage of the step-up in cost basis attached to inherited assets. Since more assets are excluded from the estate tax, the need to gift assets for tax purposes may no longer be necessary.

For many estates, there may now be no reason to gift assets during a lifetime, unless there is a present need with a family member.

Joint Ownership of Assets

An individual may want to consider re-titling assets to joint ownership with a spouse to take advantage of the step-up when the first spouse dies, which may save capital gains taxes when the asset is subsequently sold by the surviving spouse.

Rethinking Trust Strategies

Spouses no longer need to create or maintain a trust in order to take full advantage of both spousal exemptions, since the surviving spouse is now able to claim the deceased spouse’s exemption. Indeed, previously established trusts may actually raise tax bills by missing out on the step-up.³

Creating an estate strategy is complex and should be done with the assistance of a tax or legal professional. Suffice it to say that these recent changes represent a good reason to revisit your existing approach to estate management.

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. Internal Revenue Service, 2016
  3. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.