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Tag: estate planning

What Is the Difference Between Business Succession Planning and Estate Planning?

Business owners have a lot on their shoulders when considering the future of their businesses. Unfortunately, succession planning can feel so daunting that many successful business owners put it off longer than they should. As a result, they fail to take action or succumb to misconceptions about what should be done.

READ — Exit Planning: New Study Shows Most Colorado Business Owners Are Not Ready to Sell Their Businesses

One of the biggest misconceptions business owners face is that estate planning and business succession planning are the same. Of course, the two are different, but both are important.

Understanding Business Succession Planning

Business succession planning relates to the business itself. The strategy enables the company to continue functioning successfully after the current owners cannot run it. This strategy focuses on providing clear direction for the business itself. It creates business continuity.

Current owners can ensure ongoing faith in business leadership through proper business succession planning. They can train and prepare someone highly qualified and familiar with the business to become the new leader.

This helps prevent power struggles between middle management leaders vying for promotions and helps preserve employee faith in the company. However, these struggles can have a tangible impact on the value of a business and are a risk when a business undergoes a significant change, like the death of the current owner.

A key and often difficult conversation for many business owners—especially the owners of family businesses—is about whether the next generation is equipped to run the business and whether they’re even interested in running it.

Often, a buy-sell agreement becomes a vital component of a business succession plan. The business is sold to a new owner upon a triggering event, such as the retirement or death of the current owner.

Understanding Estate Planning When a Family Business Is Involved

Estate planning is more than just business planning. Estate planning relates to transferring all assets (business and other assets) during the business owner’s lifetime, upon incapacity, or after death.

It relates to ownership interests in a business and what is to be done with other sources of wealth such as retirement accounts, investments, interests in property, and life insurance.

Conversations about estate planning can be deeply personal, especially when a family business stands to be inherited. Some adults and children may find themselves involved with the business, while some may not. The business owner often needs to ensure that everyone inherits fairly, whether their share is a business interest or another asset.

Tax consequences are also complex and nuanced for estate plans involving businesses. Failure to plan for the payment of estate taxes can be highly detrimental to the business. It’s not uncommon for a business to be sold to pay taxes.

READ — Smart Estate Planning to Reduce Estate Tax

The Overlap Between Business Succession Planning and Estate Planning

There can be significant overlap between a person’s estate and business, especially when a family business is passed down through generations.

Business owners need to consider both a succession plan for the business and an estate plan.

Otherwise, families can become enmeshed in conflict. Emotions can run high, and so can the cost of subsequent litigation. Proper business succession planning and estate planning can preserve harmony while ensuring that a business can continue its success far into the future.

 

For more information about business and estate planning in Colorado, contact Hackstaff Snow Atkinson & Griess, LLC, at 303-534-4317 or visit our website.

Douglas R GriessJohn T SnowDoug Griess and John Snow of Hackstaff Snow Atkinson & Griess, LLC, are top Denver business attorneys and litigators with expertise spanning various industries. Specializing in business law, litigation, intellectual property, tax law, and dispute resolution, Doug Griess and John Snow offer an in-depth understanding and knowledge of general real estate and litigation rules and regulations and are a trusted resource for business owners throughout Colorado.

Steps to Consider Now Toward Estate Planning

The Census Bureau reports the average age of widowhood in the United States is only 59 years old. With this being the case, many women should be prepared financially to live another 20-30 years after the death of their spouse. Tragically, I have three clients who unexpectedly lost their husbands to a heart attack, inoperable cancer, and suicide. While this is incredibly heart-wrenching on a personal level, fortunately, they had the financial resources to keep paying the bills. Being single in your fifties is hard, but not having enough money is a hundred times worse.

Talk to your partner now, and make a comprehensive plan just in case the worst happens much sooner than expected.

Here are a few things to consider:

Personal and Organized Information

One of the best ways a couple can prepare for a life event is by creating a binder containing all personal and financial information in one place. This organizer should include social security numbers, beneficiary information, passwords, and the contact information of your professional advisors. Write down any information regarding your personal residence or vacation/rental homes.

In addition, you should include funeral and burial information, where to locate any important financial, insurance, estate, tax, and legal documents.

The best way to protect your standard of living is to buy as much term life insurance as possible.

Term Life Insurance

One of the biggest mistakes couples make is not having enough life insurance or underinsuring their spouse. The best way to protect your standard of living is to buy as much term life insurance as possible.

Term is the cheapest form of insurance and the easiest to get. Use the 4% withdrawal rule when deciding how much insurance you will need.

For example, if your spouse makes $100,000 a year, buy at least $2,000,000 worth of term life insurance. This should provide $80,000 a year of income using a 4% total return withdrawal rate. Also, buy a 30-year term policy which is the longest time frame possible; this will lock in the annual premium for the next three decades.

The earlier in life you buy the life insurance policy, the cheaper the premium. It is also easiest to get insurance before any health issues arise, and much better to buy in your 40s than in your 50s or 60s.

Will and Trusts

Everybody should have a will, which is a road map as to who receives your assets and when, upon your passing. If you have a will, it is also a good idea to set up a revocable living trust to avoid probate. The probate process typically takes a long time, is expensive, and makes your will public record. Irrevocable trusts happen after you die, which move your assets out of your estate and provide creditor protection. Trusts are particularly useful if you are in a second or third marriage and have a blended family. You can specify in a trust which assets you wish to leave to your children apart from your current spouse, who may not be their birth parent.

Get to know the team of experts you work with now, to help guide you through what could be one of the most stressful times of your life.

Team of Professional Advisors

If your spouse handles the family’s finances, then you need to get to know his or her team of advisors. These experts would most likely include an investment advisor, life and property insurance agent, personal banker, mortgage broker, and the executor of your will(s). Make an appointment to meet via Zoom or even better, in person. Establish a relationship so there is a rapport of trust and comfort. You will be glad you did so when you need it most.

If your spouse suddenly passes away, you do not get a second chance to buy life insurance or redo your financial picture, so it is best to be prepared well ahead of time. This means you should have all personal and financial information recorded in an easy-to-find location, and enough life insurance to cover living expenses. Write a will and set up a trust. Get to know the team of experts you work with now, to help guide you through what could be one of the most stressful times of your life. The rule of thumb is, to avoid making any major decisions for at least a year to 18 months because of the trauma from the grief associated with losing a spouse.

The less you must worry about by being organized and in the loop now, the better, especially if your partner handled all of your finances in the first place.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

 

Important Disclosure:
Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

Smart estate planning to reduce estate tax

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Federal and state estate and inheritance tax can consume a significant portion of your estate after your death. The good news is that with an experienced attorney and proper estate planning, you can find ways to lower these types of taxes and help increase your financial legacy.  

Estate Taxes: The Basics 

It is essential to note that inheritance tax and estate tax are not the same, though both should be considered in estate planning. The main difference is that estate tax is paid out of the deceased’s estate while inheritance taxes are paid out of the beneficiary’s pocket. There is a federal estate tax, but not a federal inheritance tax. Depending on your estate value and in which state you reside, it is possible that one, both, or neither could be a factor when someone dies. 

After someone’s death, federal estate taxes start at 18 and top out at 40 percent for estates valued at $1 million or more over the estate tax exemption. Federal estate taxes only apply to individuals with estates valued at over $11.7 million (the current estate tax exemption amount), or $23.4 million for married couples in 2021. Assets that spouses inherit are not subject to federal estate tax. Colorado does not have any state-specific estate or inheritance taxes, although other states do. Tax rates are different from one state to the next and apply at much lower values than the federal exemption.  

Strategies for Reducing Tax Liability  

There are several strategies available that can help reduce estate and inheritance tax liability. Rather than simply accepting that your estate could be taxed and your beneficiaries might owe an inheritance tax in some states, you can consider taking a more proactive approach using the following strategies.  

Gifting 

You have the option of giving away your assets while you are still alive. This applies to more than tangible assets; you can give away other assets such as stocks. For 2021 the annual gift tax exclusion is $15,000 for individuals or $30,000 for a married couple filing a joint return to any person in a calendar year without having to file a federal gift tax return. If your gift remains within these limits, it does not count toward your lifetime exemption amount. There is no limit to the number of people you can give gifts to within one year; you could give the full amount to as many individuals as you wish.  

Charitable Donations 

You can also reduce or bypass the estate tax by transferring part of your wealth to a charity through a trust. Two types of charitable trusts are available: charitable lead trusts (CLTs) and charitable remainder trusts (CRTs). 

With a CLT, some of the assets in your trust will get passed on to a tax-exempt charity. You can decrease the value of your estate and get an extra tax break by donating to charity. Upon your death or after a set time period, whatever is left in the trust will go to your beneficiaries. 

Alternatively, you can use a CRT to transfer stock or other appreciating assets to an irrevocable trust. Throughout your lifetime, you can make money through that asset. When you die, your investment income will be donated to charity. In the process, you have the benefit of avoiding the capital gains tax and lowering your estate tax burden. You will also receive a tax deduction. 

Set Up a Trust 

A trust lets you give assets to beneficiaries after your death without having to go through probate court. Unlike wills, trusts generally avoid state probate requirements and its expenses. This way, your beneficiaries are not on the hook for the added cost of probate court.  A revocable trust allows you to move your assets in or out of your trust during your lifetime as necessary. On the other hand, an irrevocable trust generally moves the assets outside of your estate for the benefit of a beneficiary and therefore does not provide you the ability to move those assets in or out before your death. The appreciation of such assets is therefore not included in your estate value when you die. After death, the property remains in the trust and is managed according to the trust document, including the option of being distributed to the designated beneficiaries of the trust.  

Your Estate Plan 

If you do not already have an estate plan, now is the time to draft one. Estate tax law is regularly changing as the exemption amounts are increased or decreased, or the applicable tax is modified. The current administration has proposed various significant changes to the estate tax laws. Begin the process by hiring an estate planning attorney and taking an inventory of your assets, both tangible and intangible. Your attorney can evaluate your assets and explain your options. 

Any time something changes within your family, such as a divorce, the death of a spouse, or the birth of a new grandchild, review your estate plan. It is crucial to ensure your estate reflects your wishes, especially after any of these changes. 

As estate and tax laws, as well as your desires, might shift, it is imperative to review your estate plan regularly. You want to ensure that you take advantage of all the possible ways to reduce estate and inheritance taxes. 

Hire an Estate Planning Attorney 

Estate planning and tax laws are both complex and ever-changing. Even still, you want to do everything you can to make your passing easier on your family and beneficiaries. It is recommended to work with an experienced estate planning attorney to find the best options for your situation. They can make sure you have all your bases covered and that your estate plan is drafted with current tax regulations in mind. If you need to make changes to your estate plan, they can also assist you with making the changes legally acceptable.

Doug Griess and John Snow of Hackstaff & Snow, LLC, are top Denver business attorneys with expertise spanning various industries. Specializing in business law, litigation, intellectual property, tax law, and dispute resolution, John Snow and Doug Griess offer an in-depth understanding and knowledge of general corporate rules and regulations and are a trusted resource for business owners throughout Colorado. 

Estate Planning Essentials

When it comes to financial decision-making, it can be easy to bookmark estate planning as something to tackle later on in life. The reality is, estate planning is critical to consider now, while preparing for the future. At its core, estate planning is about ensuring that you can leave your financial legacy to whom you want, when and how you want to.

Below is guide for those just getting started with estate planning, as well as considerations for those who have a plan in place to review before this year is over.

Creating a plan? Here’s how to get started

An estate plan typically includes the following: a will or trust; beneficiary designation forms; durable powers of attorney for financial and health care; a living will; and a letter of intent. As you consider next steps for each of these items, you’ll want to work with the appropriate experts (attorney, financial advisor, CPA) to make the decisions that best align with your values and personal and financial goals.

A primary goal of estate planning is to protect your assets, loved ones and charitable legacy. To ensure your wishes are followed in the event of your death or illness, it’s important to thoroughly document your requests. This includes:

  • Detailing provisions for any dependents (guardians, special care, distribution of assets)
  • Ensuring the titles of material assets (cars, property) are named properly
  • Designating beneficiaries for your life insurance policies, retirement accounts and other assets.

You’ll also want to ensure you have the following: an updated will disposing of your assets, a living will that reflects your end-of-life wishes and powers of attorney designated for both healthcare and financial matters.

In addition to protecting your assets, consider whether you’re looking to create a legacy of giving after you’re gone. If so, you can plan to include your favorite charity in your will or trust. You could even add them as a beneficiary to a life insurance policy or retirement account.

Have a plan in place? Here’s what to prepare before year-end

For those who already have an estate plan in place, it’s important to be aware of – and prepare for – upcoming changes that could be on the horizon with the new political administration. Keep the following in mind as you continue to plan through the end of the year.

Estate tax exemptions: With the change in administration, estate and gift tax exemptions could be reduced. Yet this year, you’ll want to take advantage of your estate and gift tax exemptions to the fullest, given the possibility they could decline. One tool to look into here is the Spousal Lifetime Access Trust (SLAT). This will allow you to use your gift tax exemption, while simultaneously creating a trust for your spouse and any children or grandchildren.

Tax diversification strategy: Create a plan for next year in anticipation of potential changes in tax rates and legislation. This includes bracket management as well as gain and loss harvesting, which you should plan to assess with your financial advisor or CPA. This review will help inform important decisions you can make, including whether Roth conversions or other strategies are right for you to mitigate the possible impact of new policies on your retirement planning.

Deduction timing: While the previous recommendation was to accelerate deductions and defer income, the new rule is about timing deductions. You’ll want to consider timing related to deducting medical expenses, property taxes, charitable contributions and any casualty or theft-related losses.

Donor-advised funds: On the charitable side, consider taking owned stocks and putting them into donor-advised funds (managed by a community foundation or third-party administrator). Over time, you can distribute these funds to the charities you’ve identified as important to you. With this decision, you receive a deduction when you put property into the donor-advised fund subject to income limits, versus when you make the gift to charity. This will allow you to more strategically time your charitable gifts.

Regardless of where you’re at in the estate planning process, now is an important time to evaluate the decisions that best fit your lifestyle and goals. Up-to-date estate decisions as part of a comprehensive financial plan will help to better prepare you and your family for the impact of any unexpected events, and empower you to approach your financial decisions with greater confidence moving forward.

Scott G Sparks uses Sparks Financial as a marketing name for doing business as representatives of Northwestern Mutual. Sparks Financial is not a registered investment adviser, broker-dealer, insurance agency or federal savings bank. Northwestern Mutual is the marketing name for The Northwestern Mutual Life insurance Company, Milwaukee, WI (NM) and its subsidiaries. Scott Sparks provides investment advisory services as an Advisor of Northwestern Mutual Wealth Management Company, Milwaukee, WI, a subsidiary of NM and federal savings bank. Scott Sparks provides investment brokerage services as a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS), a subsidiary of NM, registered investment adviser, broker-dealer, and member FINRA and SIPC. Scott Sparks is an Insurance Agent of NM. CA License 0C96547