Attorney, Daniel H. Alexander has over 20 years of experience in Estate Planning, Probate and Business Planning.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
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You've spent a lifetime building your business. Take a moment to make sure that your hard work will survive the death of you or one of your partners.
As the owner of a closely held business, much of your wealth is probably tied up in the business. While returning earned income back into the business helps finance growth, it can cause severe liquidity problems for your estate when you die. After paying probate and estate taxes, your estate and surviving family members also may encounter liabilities that become payable upon your death. They may also face the potential of decreased business earnings, due to your absence.
There are ways to overcome these liquidity problems. Business-oriented planning tools can help reduce estate taxes and make the best use of the cash available. The most common business estate-planning tools are living trusts, buy-sell agreements, Section 303 stock redemptions, Section 6166 estate tax deferrals and the qualified family-owned business exclusion. Business-owned life insurance can be used to fund each of these planning methods.
Probate fees and Federal Estate Taxes alone can cause a business to go under after the death of the partner or parent who owned it. As stated above, much of your wealth is probably tied up in the business. For probate matters, the entire value of the estate is considered and then taxes, fees and costs are determined accordingly. So, if you only have a will and your personal and business assets are worth, say $2,000,000.00, then without a trust, the probate fees would be approximately $100,000.00 – ouch.
However, with an A-B family trust for a husband and wife in the above situation, the probate fees and the Federal Estate Tax would have been $0.00. That is right, nada
Buy-sell agreements can establish the value of your business for estate-tax purposes and improve your estate's liquidity by assuring a ready market for your business upon your death. These agreements also protect business partners from sharing ownership with a deceased stockholder's family.
There are two main forms of buy-sell agreements: cross-purchase and stock redemption. In an insurance-funded cross-purchase arrangement, each business owner buys an insurance policy on the other, naming themselves as beneficiary. At the death of one of the owners, the surviving owner receives tax-free insurance proceeds to use in purchasing the deceased owner's stock from his or her estate.
In an insurance-funded stock-redemption arrangement, the corporation purchases the stock of a deceased shareholder. Here the business is the owner and beneficiary of life insurance policies on each shareholder. A partnership looking for a business continuation plan may use a similar arrangement called an entity purchase.
Section 303 redemptions
Section 303 of the Internal Revenue Code gives your estate a one-time opportunity to remove cash or other property from your business, at little or no tax cost, through a partial redemption of your stock. This can provide the liquidity your survivors need to pay funeral costs, estate and administrative expenses, and state and federal death taxes.
To be eligible for a Section 303 redemption, the stock value must exceed 35 percent of your estate. The maximum amount that can be paid under such a plan equals the total amount of the federal estate tax, state death taxes, funeral and administrative expenses. Corporate-owned life insurance can be used to fund the redemption. Under this arrangement, your business purchases an insurance policy on your life and at your death uses the tax-free proceeds to buy enough stock from your estate to cover death expenses and taxes.
An estate tax burden can force the liquidation of a closely held business. Internal Revenue Code Section 6166 was designed to prevent this liquidation. If the business interest constitutes more than 35 percent of your adjusted gross estate, under Section 6166 the executor may elect to pay the estate tax attributable to the value of the business in 10 annual installments, beginning no later than five years after the date of your death.
There are a number of requirements you'd have to meet to be eligible for the Section 6166 extension. If your estate qualifies, life insurance offers an economical way to pay these installments.
Qualified family-owned business exclusion
If your business qualifies as "family owned," you may be able to exclude part of it from estate taxation. Your business qualifies as family owned if the business comprises more than 50 percent of your total estate and you pass the estate on to a "qualified heir." A qualified heir is generally defined as a spouse, child, grandchild or other descendent. Your heirs, however, should realize that they have to hang onto the business for at least 10 years following such an estate transfer. If they don't, they may have to pay the full estate taxes that were avoided. Life insurance can provide your heirs with the cash necessary to pay estate taxes whether or not you qualify for this exclusion.
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I'm always asked, and always curious, about celebrity Estate Planning. Can they really screw-up their Estate Plan's as much as their lives.
As I discuss in other articles, Revocable Living Trusts are the preferred Estate Planning vehicle for me and my clients. They are usually private and generally can be easily managed. One way I thought we all could all learn about good and bad Estate Planning is to take a look at Estate Planning, or lack there of, by celebrities. This post is about Farrah Fawcett who recently passed.
Farrah Fawcett had a living trust that should have been kept private, but "someone" leaked it to the press and so now we get a chance to look in to her life. It has been posted online courtsey of radaronline.com at the following link:www.radaronline.com/sites/default/files/FarrahFawcettWillREVISED.pdf.
I was surprised to find out that long time boyfriend Ryan O’Neal was left out of the trust, yet Fawcett’s ex-boyfriend, Gregory Lawrence Lott, received $100,000. It appear that the majority of her personal property went to her nephew, along with an additional $500,000 and her father received $500,000 in a special trust for his life time to be used for his welfare.
Her only son, Redmond, received $4.5 million, which is to be held in trust for his life, with the interest on the trust to be distributed to him at least 4 times a year (or more often) and the principal to be used only for his "health". Just for health? Well Farrah must have thought he will need a lot of rehab. Keep in mind the interest alone on $4.5 million, say at 8% a year, is $360,000 or $30,000 a month. The problem here is that Farrah's trustee is required to distribute the interest to Redmond, so he can do whatever he wants with it, which may be against his best interest, especially when you look at his track record. If Farrah were my client I would have suggested more control over the interest and perhaps a broader ability to use the principal for Redmond, say for his health, education and welfare.
Farrah's artwork was left to the University of Texas and her charitable foundation (The Farrah Fawcett Foundation) is basically received the remainder of her estate, including the amount of principal left after the death of her father and her son Redmond. Her estate was apparently worth an estimated $50 million and is to be managed by her trustee, who was her business manager and producer, Richard Francis.