Download - PACE - Law Presentation: Estate Planning for a Business Owner

D E N V E R L A S V E G A S L O S A N G E L E S L O S C A B O S O R A N G E C O U N T Y P H O E N I X RENO S A L T L A K E C I T Y T U C S O N

Estate Planning for the Business Owner

PACE Conference

October 8, 2013

Prescott B. Pohl602.382.6515 | [email protected]

©2013 Snell & Wilmer L.L.P.

Outline of PresentationOutline of Presentation

• Estate Planning 101 – Basic Goals and Documents

• Estate Planning 102 – Revocable Trust Tips

• Estate Planning 103 – Beneficiary Designations

• Estate Planning 201 – Estate and Gift Taxes

• Estate Planning 202 – Advanced Estate Planning

• Summary

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EP 101 -- Basic GoalsEP 101 -- Basic Goals

• Allow others to make financial and health care decisions on your behalf if you are incapacitated

• Provide for the disposition of your assets upon your death

• Avoid probate

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How to accomplish first goal:How to accomplish first goal: Allow others to make health care and financial decisions on Allow others to make health care and financial decisions on your behalf if you are incapacitatedyour behalf if you are incapacitated

• Health Care Power of Attorney and Living Will

(referred to as an Advanced Health Care Directive in some jurisdictions)

• Durable (i.e., financial) Power of Attorney

(referred to as a General Power of Attorney in some jurisdictions)

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Health Care Power of Attorney Health Care Power of Attorney & Living Will& Living Will

Health Care Power of Attorney• Appoints other individuals (i.e., “agents”) to make

healthcare decisions for you if you are unable to do so yourself

Living Will• Primarily addresses whether you want to be kept on

life support. In some jurisdictions, also addresses your wishes concerning autopsy and organ donation.

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Durable Power of AttorneyDurable Power of Attorney

Appoint other individuals (i.e., “agents”) to make financial decisions for you if you are unable to do so yourself.

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How to accomplish second goal:How to accomplish second goal:Provide for the disposition of your property upon Provide for the disposition of your property upon

your deathyour death

• Last Will & Testament

• Revocable Trust

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Last Will & TestamentLast Will & Testament

• Control disposition of property held in your name at your death that does not otherwise transfer by operation of law (i.e., the probate estate)

• Designate guardians for your minor children

• When used with a Revocable Trust, typically transfers property not already held by your Revocable Trust to your Revocable Trust (i.e., “pour over” Will)

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Revocable Trust – Part 1Revocable Trust – Part 1

• Created by trust agreement, which is simply a contract between three parties: settlor, trustee and beneficiary – during your life you are all three parties

• In community property States, typically H and W have joint Revocable Trust

• Can be changed at any time prior to your death

• Private document – not filed anywhere

• Invisible for purposes of federal income tax

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Revocable Trust – Part 2Revocable Trust – Part 2

• Allows you to prevent monies from being paid to your beneficiaries at age 18 or 21

• Helps prevent need for conservatorship in event of your incapacity

• Property held in Revocable Trust administered pursuant to terms of trust agreement…which leads to third basic goal of estate planning…

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How to accomplish third goal:How to accomplish third goal:

Avoid Probate – Part 1Avoid Probate – Part 1

What is probate? Process by which State oversees transfer of property in your name at your death that does not otherwise transfer by operation of law.

Why avoid probate? Public, time-consuming, costly and burden for surviving family.

How do you avoid probate? Transfers by operation of law.

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How to accomplish third goal:How to accomplish third goal:

Avoid Probate – Part 2Avoid Probate – Part 2

• Examples of transfers by operation of law:

◦ Property held in joint ownership with rights of survivorship (e.g., JTWRS)

◦ Property subject to a beneficiary designation (e.g., life insurance policy)

◦ Property subject to POD designation (e.g., bank account)

◦ Property held in a Revocable Trust

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EP 101 Review: Basic Estate EP 101 Review: Basic Estate Planning DocumentsPlanning Documents

1. Health Care Power of Attorney / Living Will*

2. Durable Power of Attorney*

3. Last Will & Testament

4. Revocable Trust

Remember: These documents can be amended or revoked by

you at any time before your death, except during incapacity

*Different jurisdictions may employ different names

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EP 102 -- Revocable Trust TipsEP 102 -- Revocable Trust Tips

• Not everything you own must be held in your Revocable Trust to avoid probate; remember other ways to transfer by operation of law

• Don’t forget about your ownership interests in your business

• Mortgage on house does not prevent transfer to Revocable Trust

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EP 103 -- Beneficiary DesignationsEP 103 -- Beneficiary Designations

• Retirement Accounts: make surviving spouse primary beneficiary and Revocable Trust contingent beneficiary

• Life Insurance Policies: make Revocable Trust primary beneficiary

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Estate Planning 201 – Estate and Gift Estate Planning 201 – Estate and Gift TaxTax

• Estate Tax: tax on your right to transfer assets at your death

• Gift Tax: tax on your right to transfer assets by gift during your life

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Estate and Gift Tax Exemptions and Estate and Gift Tax Exemptions and RatesRates

2013

Estate Tax Exemption $5.25 million

Estate Tax Rate 40%

Gift Tax Exemption $5.25 million

Gift Tax Rate 40%

*discuss unification and portability17


Reporting and Paying Estate and Gift Reporting and Paying Estate and Gift TaxTax

• Estate Tax – IRS Form 706

• Gift Tax – IRS Form 709

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EP 202 – Advanced Estate PlanningEP 202 – Advanced Estate Planning

• Reducing exposure to estate and gift tax

• Business succession planning

• Asset protection planning

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Reducing Exposure to Estate and Reducing Exposure to Estate and Gift TaxGift Tax

• Give assets away as soon as reasonably possible

• Discount asset value

• $14,000 annual exclusion

• Unlimited tuition and medical expenses paid directly to the service provider

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Business Succession Planning – Business Succession Planning – Part 1Part 1

• Gauge interest in succession and develop plan

• Divide economic rights and voting rights

• Divide core business assets from other assets

• When possible make gifts in trust

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• What if no interest in succession?

• Prepare business for sale

• Understand significance of selling assets vs. selling equity

• Consider related matters including earn outs, non-compete agreements, and consulting arrangements

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• Possible approach: recapitalize company into voting and non-voting and/or super-voting, and begin transferring non-voting to trusts

• Over time transfer remaining interests

• What’s accomplished: retain control while transferring wealth and training next generation

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Asset Protection Planning – Part 1Asset Protection Planning – Part 1

• Basics – make assets exempt from or unattractive to future creditors’ claims

• Homestead exemption important in certain states

• IRAs typically exempt

• Life insurance often exempt

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Asset Protection Planning – Part 2Asset Protection Planning – Part 2

• Trusts typically offer best protection for non-exempt assets

• Superiority of third-party settled trusts

• Self-settled spendthrift trusts: domestic vs. offshore

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SummarySummary

• Have basic estate planning documents in place and review periodically

• Transfer property to Revocable Trust now – e.g., your partnership interest and your house(s)

• If estate and gift tax exposure a concern, begin planning process

• Develop plan for business succession

• Remember that good estate planning addresses many overlapping considerations including distribution of assets upon death, minimizing taxes, business succession and protecting assets

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Download - PACE - Law Presentation: Estate Planning for a Business Owner

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