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Planning and Preserving


Heilich_DaveHow Your Motivation and the Tax Laws Drive Estate Planning

You probably don’t wake up every day thinking about what your business will be like when you are gone. In the hustle and bustle of daily operations, estate planning often falls to the bottom of the list.

But it is critical to consider all of the “what ifs” life can introduce and how this will affect your business and your wealth. Estate planning is more than deciding where all the money will go. If you procrastinate planning, you have far less control over what will happen to your hard-earned assets.

“Unfortunately, it often takes a serious life event to get the ball rolling,” says David Heilich, CPA, practice leader, family wealth planning, Brown Smith Wallace LLC. Smart Business spoke with Heilich and Robin Bell, CPA, a member-in-charge with Brown Smith Wallace’s tax group, about estate planning and the tax law changes that will affect your plan.

What should people consider when they want to develop estate plans?

You need to understand what motivates you and whom you want to give your money to once you are gone. It’s not always family — children aren’t necessarily next in line to take over the business (or interested in taking it, for that matter). A business owner may want to give to charitable organizations or create a legacy by starting his or her own foundation or charitable trust. How do you want to allocate your wealth? What do you hope your successors will do with those assets — do you have specific intentions for your money? Are there any mechanisms in place to help you reach these goals?

Who is affected by estate tax? Who needs family wealth planning?

In a general sense, everyone needs to develop an estate plan including basic documents like a will, revocable living trust, durable power of attorney and health care directive. Also, keep an eye on your lifetime exclusion amount. This is the amount an individual can pass free of estate tax at death to anyone he or she chooses. In 2007 and 2008, the lifetime exclusion is $2 million for each individual. Thus, with proper basic planning you can transfer up to $4 million for married couples free of estate tax. By the time you account for a home, retirement plan and perhaps a $1 million life insurance policy, you can easily exceed the $2 million mark. Estate planning should be addressed as early as possible so business owners have flexibility and there is time for the planning to be effective. While business owners’ greatest fear may be giving up control, they can restructure the company so they retain voting stock, and then use nonvoting stock for gifting or other estate purposes. There are a variety of solutions that allow owners to maintain their roles in the business and still plan for the future.

What legal documents and tools should individuals and business owners consider?

Beyond the four basic documents mentioned previously, individuals and business owners engaging in detailed estate planning will utilize entities such as irrevocable trusts, limited partnerships and limited liability companies. In addition, there are charitable vehicles that provide opportunities. Whatever the tool, the key is to follow through with planning. The No. 1 mistake that individuals and business owners make, besides avoiding planning altogether, is to neglect funding and utilizing the tools they put in place. For instance, you can spend time and money setting up a revocable living trust, but if you do not transfer title into the trust’s name, it may not provide the tax savings you desired or distribute your assets as you had intended. For instance, a joint bank account should be titled to the name of the revocable living trust. (Rather than Joseph and Lisa Smith, ‘Joseph Smith Revocable Living Trust’ or ‘Lisa Smith Revocable Living Trust.’) This applies to bank and investment accounts, real estate deeds, stock certificates, etc.

Will the estate tax be repealed, and what should be done in the meantime?

The current lifetime exclusion is $2 million, meaning the estate tax does not apply until your assets exceed this amount. The lifetime exclusion will increase to $3.5 million in 2009, be repealed in 2010, and then return to the original $1 million in 2011, if the law remains unchanged. The experts predict that the law will be changed, with the feeling that the lifetime exclusion will not go backward. The chances that the estate tax will be repealed altogether, though, are slim. And even if it were, the income tax would likely increase, and there would still be plenty of planning needed to save income taxes, minimize liability and orchestrate business succession planning and asset distribution. The only thing to do now is to plan as if the repeal will not happen. Today, the estate tax exclusion is $2 million. Next year it is $3.5 million. Beyond that, assumptions cannot be made.

How often should individuals and business owners revisit and update their estate plans?

You ought to review your estate plan once a year with your adviser, and every time a major life event occurs — new child, grandchild, a death, marriage, divorce, etc. This also includes if you change your domicile. Laws can vary state to state. For instance, a health care directive under Missouri law may not be valid in Florida. California is a community property state and has very different laws. There is no cookie-cutter way to approach estate planning. This is why it is so important to involve an independent CPA with the appropriate expertise and skills as an adviser and member of your financial and estate planning team.

© 2008 Smart Business Network Inc. Reprinted from the June issue of Smart Business St. Louis.


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