Author Archive for angela@kolbeco.net – Page 2

IMPLEMENTING A CAFETERIA PLAN IN YOUR BUSINESS

Internal Revenue Code 125 allows an employer to implement an employee benefit plan, which allows employees to select the benefit programs they prefer.

The plan offers two or more options and the employee chooses the option most appropriate for him or her from the “menu” of benefits available. It’s sort of like ordering lunch from the local deli – which is why the plan is referred to as a “cafeteria plan”!

Cafeteria plans, along with 401(k)s, are among the most popular employee benefit plans of the past decade. The tax benefits to the employer and employees far exceed the minimal required government reporting.

Cafeteria Plan Benefit Options

In general, the IRS allows the following benefits to be present in a Section 125 plan:

  • Group-term life insurance (up to $50,000; amounts above that level of death benefit may be subject to Social Security and Medicare taxation)
  • Accident and health plans
  • Long- and short-term disability benefits
  • Flexible spending accounts to save for health, medical, and childcare expenses
  • CODA [401(k) plans]
  • Dependent group life, accident, and health insurance coverages
  • Vacation

Employee Tax Aspects

The plan essentially allows expenses that normally would be paid by the employee on an after-tax basis to be paid via salary reductions on a pretax basis. This allocated income will not be subjected to FICA or income taxes. The result is that taxable dollars have been converted to nontaxable dollars – thereby increasing the employee’s take-home pay.

Employer Tax Aspects

Generally, employer contributions to a plan are income tax deductible. In addition, contributions on behalf of the employees, if such contributions are not included in the employee’s income, are not subject to FICA (Social Security) or FUTA (Federal Unemployment Tax Act). This can result in significant savings to the company’s bottom line.

The employer must file an annual information return (IRS Form 5500) stating plan participation, cost and business type.

Use-It-or-Lose-It

An important point for the employee to remember is that there can be no claim of any unused benefits or contributions from one plan year to the next. This is known as the “use it or lose it” rule.

Many employees steer clear of these plans because of this rule. You have to decide up front how much to put in the plan and if you don’t spend it all within a year, you forfeit the leftover amount.

Sounds risky – at least until you consider that the tax breaks are so powerful that even if you wind up forfeiting 20% of what you put into a plan, you’ll still come out ahead.

For example, let’s say you set aside $5,000 for

medical expenses in 2007 and wind up spending just $4,000. At face value, you’ve lost $1,000. But consider: If you’re in the 25% federal tax bracket and face a 5% state income tax as well as the 7.65% Social Security and Medicare tax, the $5,000 you put in the plan will save you more than $1,800 in taxes, leaving you $800 ahead. Put another way, you’d have to earn almost $6,300 to have $4,000 left over to pay those bills. Even if you forfeit $1,000, you still come out ahead. That’s why it’s wise to be aggressive in using flexible spending accounts.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

PROTECTING AGAINST THE LOSS OF KEY EMPLOYEE

The vast majority of small-business owners accept the wisdom of insuring the firm against the loss of its property values. We take care to insure the physical assets against fire, tornados and other disasters. Yet, protection from the loss a key executive may be far more important.

First, the probability of losing a key employee is far greater than a loss due to fire. It has been estimated that the chances of death of a key executive is 14 times greater at age 45, 17 times greater at age 50, and 23 times greater at age 55 than a loss caused by fire. Further, about one out of every three individuals dies in the working period of life with a consequent loss to his or her business.

Second, the loss due to a fire is temporary. Plants and factories can be rebuilt. Inventory can be replaced. The new building is likely to be more useful and valuable than the old one. On the other hand, a new hire may need several months or even years to become as productive as her or his predecessor. In fact, the deceased employee may prove impossible to replace.

Who Is Key?

Every corporation has at least one key executive or an employee who makes a substantial contribution to the operation, profitability and success of the business. Any individual who has critical intellectual information, sales relationships, bank relationships, product knowledge, and/or industry contacts that may adversely affect profits in the event of their absence, may be considered key.

The Role of Key Person Life Insurance

Although life insurance cannot ever fully replace the value of a key employee, it can indemnify the business for the financial setbacks that can occur. Life insurance can provide the business with needed funds to keep the business running, to assure creditors that their loans will be repaid, to assure customers that business will continue operations, to cover the special expenses of finding, hiring, and training a replacement.

How This Strategy Works

There is no particular form of agreement or special contract needed by the business to obtain key employee insurance on an executive or owner. However, the board of directors should authorize the maintenance and payment of the policy.

The applicant is the company. The application is signed by an officer of the business other than the insured party. Generally, the premiums will be paid by the business on an after-tax basis and are not deductible as a business expense. The business will be designated as the beneficiary and the insurance proceeds received upon the death of a key executive are not subject to federal income tax.

Replacing a key person may be difficult, but the proceeds from the life insurance policy can help ensure a smooth transition following their passing. With key person life insurance, that’s one more risk that small-business owners can worry a little less about.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

CHOOSING THE RIGHT BUSINESS ENTITY

Choosing the form of entity under which a business will operate is one of the first, and often the most important, decisions a business owner will make. Although the legal details underlying each entity type are inherently complex, exploring three major variables may help you determine which option is right for you: business control, owner liability, and tax implications.

The major business alternatives today include:

  • Sole Proprietorship
  • Partnership
  • C-Corporation
  • S-corporation
  • Limited Liability Company

The following comparison illustrates the most dramatic differences, and similarities, between several entity alternatives.

Sole Proprietorship. As its name implies, a sole proprietorship has a single owner, and is perhaps the most simplistic of all entity types. The main benefits of the sole proprietorship include its ease of implementation and lack of regulatory requirements. In addition, the sole proprietorship allows complete business control to a single business owner (proprietor). Under a sole proprietorship, the business owner is required to file a Schedule C (profit or loss from a business or profession) with their personal income tax filing. The proprietor personally assumes all liability and business risk, which can often be “transferred” through the purchase of liability insurance.

Partnership. The main difference between the sole proprietorship and the partnership is the number of business owners. Although quite easy to establish, it is a good idea to begin a partnership with a formal arrangement known as the partnership agreement. The partnership agreement sets forth the intent of the business owners in the event of a wide variety of business events such as the sale of the entire business, the sale of a single individual’s holdings or the disposition of ownership in the event of the death of a partner.

Like the sole proprietorship, the partnership represents a “flow-through entity” where both cash flows and tax liabilities flow through to the business owners. The partnership provides its owners minimal protection from business risk.

C-corporation. Though often costly and time-consuming to establish and maintain, the C-corporation provides the greatest amount of liability and business risk protection to the business owner(s). Strict governmental regulations outline company structure, reporting, and disclosure requirements.

Corporations have unlimited lives with ownership rights passing to designated heirs upon the death of an owner. The corporate entity also has a great deal of income tax flexibility and can offer the broadest array of tax deductible benefits, but may also trigger “double taxation” of some corporate profits as they are taxed at the corporate level as profits and again, potentially, at the individual level as taxable dividends are paid to shareholders.

S-Corporation. The “S Corp” functions as something of a hybrid, assuming many of the best features of several other entity types. The S Corporation is a legal entity that offers owners the benefits of greatly limited liability, while allowing company profits or losses to flow directly through to the business owners for income tax purposes, thus avoiding potential double taxation. The legal requirements and costs associated with starting an S Corporation are modest, as are the regulatory requirements. There are limitations on the number of owners within an S Corporation, and a C Corporation may not be an owner.

Limited Liability Company. Like the S Corporation, the Limited Liability Company (LLC) combines many of the benefits of other entity types. In contrast to the proprietorship and partnership, the LLC provides its owners (or members) with limited liability for the debt and business risk associated with ownership. The LLC also avoids the “double taxation” of the corporation by functioning as a “flow-through entity” for income tax purposes.

Selecting a business entity can be a complex decision with long-term effects on the ownership, owner liability and taxation of a business. Once you have prepared a business plan and evaluated your business ownership goals, consider seeking the advice of trusted financial professionals and advisors in finalizing your final selection of business entity.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

DETERMINING THE TAX

The next step is to understand some estate tax basics. First, you need to get an idea of what your estate is worth and whether you need to worry about estate taxes, both under today’s rates and as exemptions increase under the Economic Growth and Tax Relief Reconciliation Act of 2001.

How Much Is Your Estate Worth?

The first step is to add up all of your assets. Use Chart 1, and include cash, stocks and bonds, notes and mortgages, annuities, retirement benefits, your personal residence, other real estate, partnership interests, automobiles, artwork, jewelry, and collectibles. If you are married, also include your spouse’s assets.

If you own an insurance policy at the time of your death, the proceeds on that policy usually will be includable in your estate. Remember: That’s proceeds. Your $1 million term insurance policy that isn’t worth much while you’re alive is suddenly worth $1 million on your death. If your estate is large enough, a significant share of those proceeds may go to the government as taxes, not to your chosen beneficiaries, though the estate tax impact will decrease gradually under EGTRRA.

How the Estate Tax System Works

Here’s a simplified way to compute your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death — such transfers are deductions for your estate. Then if you are married and your spouse is a U.S. citizen, subtract any assets you will pass to him or her. Those assets qualify for the marital deduction and avoid estate taxes until the surviving spouse dies. The net number represents your taxable estate.

You can pass up to the exemption amount during your life or at death free of gift and estate taxes.

If your taxable estate is equal to or less than the exemption and you haven’t already used any of the exemption on lifetime gifts, no federal estate tax will be due when you die. But if your estate exceeds this amount, it will be subject to estate tax.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

TIPS FOR REDUCING ESTATE TAXES

Here’s a look at some of the most important estate planning tools and how you can use them to minimize taxes and maximize your estate’s value as the tax rules change over the decade. You’ll learn how these estate planning techniques can help you achieve specific financial goals. You will also see why it will be helpful to seek professional financial, tax and legal advice about ways to use these techniques effectively. Please let us know if you have any questions about how they might apply to your situation.

The Marital Deduction

The marital deduction is one of the most powerful estate planning tools available to you. Any assets passing to a surviving spouse pass tax-free at the time the first spouse dies, as long as the surviving spouse is a U.S. citizen. Therefore, if you and your spouse are willing to pass all your assets to the survivor, no federal estate tax will be due on the first spouse’s death – even before the estate tax is scheduled to be repealed completely in 2010.

This doesn’t solve your estate tax problem, however. First, if the surviving spouse does not remarry, that spouse will not be able to take advantage of the marital deduction when he or she dies. Thus, the assets transferred from the first spouse could be subject to tax in the survivor’s estate, depending on when the surviving spouse dies. Second, from a personal perspective, you may not want your spouse to pass all assets to a second spouse even if it would save estate taxes.

How to Preserve Both Exemptions

Since assets in an estate equal to the exemption amount are exempt from estate taxes, a married couple can use their exemptions to avoid tax on up to double the exemption amount. And this amount will gradually increase until it reaches $7 million in 2009 — the year before the estate tax repeal. An effective way to maximize the advantages of the exemption is to use a credit shelter trust, sometimes referred to as a bypass trust.

Let’s look at an example: Mr. and Mrs. Jones have a combined estate of $4 million. At Mr. Jones’ death in 2006, all of his assets pass to Mrs. Jones tax-free because of the marital deduction. Mr. Jones’ taxable estate is zero. Shortly thereafter, and still in 2006, Mrs. Jones dies, leaving a $4 million estate. The first $2 million is exempt from estate tax (in 2006), but the remaining $2 million is subject to taxation, leaving the Jones’ survivors with far less.

The problem? Mr. and Mrs. Jones took advantage of the exemption in only one estate.

Let’s look at an alternative: Mr. Jones’ will provides that assets equal to the exemption go into a separate trust on his death. This “credit shelter trust” provides income to Mrs. Jones during her lifetime. She also can receive principal payments if she needs them to maintain her lifestyle. Because of the trust language, Mr. Jones may allocate his $1.5 million exemption amount to the trust to protect it from estate taxes. If there were remaining assets (assets over $2 million), they would pass directly to Mrs. Jones.

Because the $2 million trust is not included in Mrs. Jones’ estate, her estate drops from $4 million to $2 million. Thus, no tax is due on her estate because it does not exceed the exemption amount. By using the credit shelter trust in Mr. Jones’ estate, the Joneses save hundreds of thousands of dollars in federal estate taxes.

The Joneses do give up something for this tax advantage. Mrs. Jones doesn’t have unlimited access to the funds in the credit shelter trust because if she did, the trust would be includable in her estate. Still, Mr. Jones can give her all of the trust income and any principal she needs to maintain her lifestyle. However, the outcome would be quite different if both spouses didn’t hold enough assets in their own names.

Control Assets with a QTIP Trust

A common estate planning concern is that assets left to a spouse will eventually be distributed in a manner against the original owner’s wishes. For instance, you may want stock in your business to pass only to the child active in the business, but your spouse may feel it should be distributed to all the children. Or you may want to ensure that after your spouse’s death the assets will go to your children from a prior marriage.

You can avoid such concerns by structuring your estate plan so your assets pass into a qualified terminable interest property (QTIP) trust. The QTIP trust allows you to provide your surviving spouse with income from the trust for the remainder of his or her lifetime. You also can provide your spouse with as little or as much access to the trust’s principal as you choose. On your spouse’s death, the remaining QTIP trust assets pass as the trust indicates.

Thus, you can provide support for your spouse during his or her lifetime but retain control of the estate after your spouse’s death. Because of the marital deduction, no estate taxes are paid on your death. But if your spouse dies while the estate tax is in effect, the entire value of the QTIP trust will be subject to estate tax

Of course, as with all estate planning strategies, these trusts are complex. Consider enlisting the advice of a qualified estate planning professional before proceeding further.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

THE ROLE OF LIFE INSURANCE IN AN ESTATE PLAN

Life insurance can play an important role in your estate plan. It is often necessary to support your family after your death or to provide liquidity. Not only do you need to determine the type and amount of coverage you need, but also who should own insurance on your life to best meet your estate planning goals.

Avoid Liquidity Problems

Estates are often cash poor, and your estate may be composed primarily of illiquid assets such as closely held business interests, real estate or collectibles. If your heirs need cash to pay estate taxes or to support themselves, these assets can be hard to sell. For that matter, you may not want these assets sold. Insurance can be the best solution for liquidity problems.

Even if your estate is of substantial value, you may want to purchase insurance simply to avoid the unnecessary sale of assets to pay expenses or taxes. Sometimes second-to-die insurance makes the most sense. Of course, your situation is unique, so please get professional advice before purchasing life insurance.

Choose the Best Owner

If you own life insurance policies at your death and you die while the estate tax is in effect, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds. The way around this problem? Don’t own the policies when you die. But don’t automatically rule out your ownership either.

Determining who should own insurance on your life is a complex task because there are many possible owners: you or your spouse, your children, your business, an irrevocable life insurance trust (ILIT), a family limited partnership (FLP) or limited liability company (LLC). Generally, to reap maximum tax benefits, you must sacrifice some control and flexibility as well as some ease and cost of administration.

To choose the best owner, you must consider why you want the insurance: to replace income, to provide liquidity, or to transfer wealth to your heirs. You must also determine the importance to you of tax implications, control, flexibility, and ease and cost of administration. Let’s take a closer look at each type of owner:

  • You or your spouse. Ownership by you or your spouse generally works best when your combined assets, including insurance, do not place either of your estates into a taxable situation. There are several non-tax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback to ownership by you or your spouse is that on the death of the surviving spouse (assuming the proceeds were initially paid to the spouse), the insurance proceeds could be subject to federal estate taxes, depending on when the surviving spouse dies.
  • Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds are not subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax free. There also are disadvantages. The policy proceeds are paid to your children outright. This may not be in accordance with your general estate plan objectives and may be especially problematic if a child is not financially responsible or has creditor problems.
  • Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the company under a split-dollar arrangement. But if you are the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the company, the proceeds could be included in your estate for estate tax purposes.

An ILIT. A properly structured ILIT could save you estate taxes on any insurance proceeds. Thus, a $2 million life insurance policy owned by an ILIT could reduce your estate taxes by hundreds of thousands of dollars in 2006. How does this work? The trust owns the policies and pays the premiums. When you die, the proceeds pass into the trust and are not included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries. ILITs have some inherent disadvantages as well, foremost among them that you lose control over the insurance policy after the ILIT has been set up.

Planning Tip:

CONSIDER SECOND-TO-DIE LIFE INSURANCE

Second-to-die life insurance can be a useful tool for providing liquidity to pay estate taxes. This type of policy pays off when the surviving spouse dies. Because a properly structured estate plan can defer all estate taxes on the first spouse’s death, some families find they don’t need any life insurance then. But significant estate taxes may be due on the second spouse’s death, and a second-to-die policy can be the perfect vehicle for offsetting the taxes. It also has other advantages over insurance on a single life. First, premiums and estate administrative costs are lower. Second, uninsurable parties can be covered. But a second-to-die policy might not fit in your current irrevocable life insurance trust (ILIT), which is probably designed for a single life policy. Make sure the proceeds are not taxed in either your estate or your spouse’s by setting up a new ILIT as policy owner and beneficiary.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

KEEP IT ALL IN THE FAMILY WITH FLPS

The Family Limited Partnership, or FLP – pronounced “flip” – is designed to reduce the value of your estate for estate tax purposes while allowing you to maintain full control of the investments and assets inside the partnership.

FLPs are established much like traditional limited partnerships. There are two parties involved: the general partners, who control the trust, and limited partners who have a share in the profits (but no control). The general partners (often, you and/or a spouse) design the partnership to give limited partnership shares to family members. General partners control the operations of the FLP and make day-to-day investment decisions. They can also receive a percentage of the FLP’s income in the form of a management fee.

Limited partners (your heirs) have an ownership interest in the FLP, but they have very limited control. They share in the income generated by the FLP, depending on how many shares they own. When the FLP is dissolved, a proportionate amount of FLP property will pass to each limited partner.

Setting Up a FLP

FLPs have come under increased IRS scrutiny in recent years, so you should work with a reputable estate planning attorney. With the attorney’s assistance, you can place your assets within the FLP using your estate tax credit. For instance, a husband and wife can each transfer up to $2,000,000 ($4 million total) into the FLP and allocate those assets to the limited partnership side. They can then place a smaller amount (e.g. $12,000) in the FLP for the general partnership side. There are usually no taxes incurred when funding a FLP with your assets.

In the beginning, you and your spouse own both General Partner and Limited Partner shares. Over time, you gift to your heirs Limited Partner shares using your annual $12,000 gift exclusion. Don’t worry about giving away too much of the shares. Based on current tax law, the General Partners may own as little as 1% of the FLP’s assets and still retain control. That means you can still buy and sell assets, dispose of property, and declare any distributions of FLP shares.

Leverage Your Estate Tax Credit

FLPs allow you to pass on more than the maximum $2 million (in 2006; $4 million per couple) Unified Estate Tax Credit. A gift of $2 million in limited partnership assets often may appraised at a substantially lower dollar amount. That’s because there is no “market” for LP shares – they lack control and cannot be sold to others. This lower appraisal is called “discounting” the value of LP shares. Avoid discounting the shares too aggressively, however – the IRS could take exception and invalidate your FLP.

Protection Against Creditors

Because of their lack of control, LP shares are most undesirable to creditors. Creditors will find it difficult to seize limited partner shares, since they are not publicly traded.

Creditors also don’t want to pay tax on income they don’t receive. If the partnership has earned income, but the general partner does not declare a distribution, each general and limited partner is required to report a proportionate share of the earned income on his or her personal tax return, without actually receiving any dollars with which to pay the tax.

Two More Advantages of FLPs

FLPs are considered an “intangible asset” – most likely, only the state of your domicile will be able to impose any inheritance tax on Partnership units. This is ideal for real estate investors owners who own property in several states.

FLPs can provide additional retirement income – as mentioned previously, FLPs can provide general partners with management fees. This fee reflects the work you do as the general partner to maintain the FLP as a working business, and is considered earned income.

Family Limited Partnerships involve significant costs and risks involved, and are not ideal for highly appreciated assets. FLPs must also be drafted by an experienced estate planning attorney, and have a tangible business intent. For this reason, we strongly urge you to consult with a professional with specific expertise in this area.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

SPECIAL STRATEGIES FOR FAMILY-OWNED BUSINESSES

Few people have more estate-planning issues to deal with than the family-business owner. The business may be the most valuable asset in the owner’s estate. Yet, two out of three family-owned businesses don’t survive the second generation. If you are a business owner, you should address the following concerns as you plan your estate:

Who will take over the business when you die? Owners often neglect to develop a management succession plan. It is vital to the survival of the business that a successor, whether within the family or out, be ready to take over the reins.

Who should inherit your business? Splitting this asset equally among your children may not be a good idea. For those active in the business, inheriting the stock may be critical to their future motivation. To those not involved in the business, the stock may not seem as valuable. Perhaps your entire family feels entitled to equal shares in the business. Resolve this issue now to avoid discord and possible disaster later.

How will the IRS value your company? Because family-owned businesses are not publicly traded, determining the exact value of the business is difficult without a professional valuation. The value placed on the business for estate tax purposes is often determined only after a long battle with the IRS. Plan ahead and ensure your estate has enough liquidity to pay estate taxes and support your heirs.

The law currently provides two types of tax relief for business owners:

  1. Section 303 redemptions – your company can buy back stock from your estate without the risk of the distribution being treated as a dividend for income tax purposes. Such a distribution must, in general, not exceed the estate taxes, funeral and administration expenses of the estate. One caveat: The value of your holdings must exceed 35% of the value of your adjusted gross estate. If the redemption qualifies under Section 303, this is an excellent way to pay estate taxes.
  2. Estate tax deferral – normally, your estate taxes are due within nine months of your death. But if closely held business interests exceed 35% of your adjusted gross estate, the estate may qualify for a deferral of tax payments. No payment other than interest is due until five years after the normal due date for taxes owed on the value of the business. The tax related to the closely held business interest then can be paid over 10 equal annual installments. Thus, a portion of your tax can be deferred for as long as 14 years from the original due date. Interest will be charged on the deferred payments.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

GIFTING STOCK

One key to reducing estate taxes is to limit the amount of appreciation in your estate. We talked earlier about giving away assets today so that the future appreciation on those assets will be outside of your taxable estate. There may be no better gift than your company stock – it could be the most rapidly appreciating asset you own.

For example, assume your business is worth $500,000 today, but is likely to be worth $1 million in three years. By giving away the stock today, you will keep the future appreciation of $500,000 out of your taxable estate.

A flexible strategy for the business owner was reinstated in late 1990 when Congress retroactively repealed the estate freeze provisions that became law in 1987. Before 1987, business owners commonly recapitalized their businesses, retained preferred stock interests and gave some or all of the common stock to their beneficiaries. This way, they retained control of their companies and froze the value of their stock for estate tax purposes. All future appreciation affected only the common shares, not the owners’ preferred stock.

Congress saw the loophole and created Section 2036(c) in an attempt to prevent future estate freezes. The section had been under constant attack since its creation and was finally repealed retroactively in 1990. In its place, Congress passed legislation that once again permits estate freezes, but only if certain requirements are met.

Gifting family business stock can be a very effective estate tax saving strategy. Beware of some of the problems involved, however. The gift’s value determines both the gift and estate tax ramifications. The IRS may challenge the value you place on the gift and try to increase it substantially. Seek professional assistance before attempting to transfer portions of your business to family members.

A recent law change requires the IRS to make any challenges to a gift tax return within the normal three-year statute of limitations, even though no tax is payable with the return.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

STRATEGIES FOR SPECIAL SITUATIONS

Standard estate planning strategies don’t fit every situation. Single people, unmarried couples, noncitizen spouses, individuals planning a second marriage, and grandparents are among those who might benefit from less common techniques. In this section, we look at several special situations and estate planning ideas that may apply to them.

Singles – the potential repeal of the estate tax is especially helpful to this group because it eliminates the disadvantage of not having the unlimited marital deduction, which allows a spouse to leave assets to a surviving spouse’s estate tax free. But a will or a living trust can ensure that your loved ones receive your legacy in the manner you desire. In addition, with the use of trusts, you can provide financial management assistance to your heirs who are not prepared for this responsibility.

Second Marriages – estate planning for the second marriage can be complicated, especially when children from a prior marriage are involved. Finding the right planning technique for your situation can not only ease family tensions but also help you pass more assets to the children at a lower tax cost.

A Qualified Terminal Interest Property (QTIP) marital trust can maximize estate tax deferral while benefiting the surviving spouse for his or her lifetime and the children after the spouse’s death. Combining a QTIP with life insurance benefiting the children or creatively using joint gifts or GST tax exemptions can further leverage your gifting ability.

A prenuptial agreement can also help you achieve your estate planning goals. But any of these strategies must be tailored to your particular situation, and the help of qualified financial, tax and legal advisors is essential.

Unmarried Couples – because unmarried couples are not automatically granted rights by law, they need to create a legal relationship with a domestic partnership agreement. Such a contract can solidify the couple’s handling of estate planning issues. In addition, without the benefit of the marital deduction, unmarried couples face a potentially overwhelming estate tax burden as long as the estate tax is in effect.

There are solutions, however. One partner can reduce his or her estate and ultimate tax burden through a traditional annual gifting program or by creating an irrevocable life insurance trust or a charitable remainder trust benefiting the other partner. Again, these strategies are complex and require the advice of financial, tax and legal professionals.

Noncitizen Spouses – the marital deduction differs for a surviving spouse who is a non-U.S. citizen. The government is concerned that on your death, your spouse could take the marital bequest tax-free and then leave U.S. jurisdiction without the property ever being taxed.

Thus, the marital deduction is allowed only if the assets are transferred to a qualified domestic trust (QDOT) that meets special requirements. The impact of the marital deduction is dramatically different because any principal distributions from a QDOT to the noncitizen spouse and assets remaining in the QDOT at his or her death will be taxed as if they were in the citizen spouse’s estate. Also note that the gift tax marital deduction is limited to a set amount annually.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.