This year is a year of "unknowns" when it comes to Estate Taxes. What is the total Gift and Estate Tax Exemption? Will there be a retroactive tax? Will assets receive a step-up in basis? What is the applicable Gift Tax rate? Under the current law, what will the Gift and Estate Tax Exemption be in the future?
Answers to these questions lie primarily with Congress, and I expect that we will have them by the end of the year. However, there is an additional twist that could cause the confusion surrounding these questions to be drawn out into next year or even later. I'm referring to the Constitutional prohibition against ex post facto laws (laws enacted after the fact to apply retroactively). While the Supreme Court has previously upheld laws imposing retroactive taxes, there are many who question whether the current Court will do so in this case.
This uncertainty leaves us in a state of flux. Most tax professionals believe that Congress will enact legislation that will be substantially similar to the estate and gift tax laws which were applicable in 2009. In other words, all assets will be eligible for stepped up basises and the individual estate tax exemption will be in the $3.5M range. Because the vast majority of estates are valued at under $7M (for couples) or $3.5M (for individuals), legislation which retroactively brings back 2009's laws would benefit most estates.
"But wait, I thought there are NO ESTATE TAXES in 2010?" How is a retroactive tax beneficial? Good question. In itself, it isn't. What is beneficial is the Estate Tax's step-sister: the unlimited step up in basis which reduces or eliminates capital gains taxes. Currently, non-spousal beneficiaries of an estate are only entitled to step up $1.3M in estate assets.
What this means is that, in an estate valued at $3.5M, containing primarily highly appreciated assets, the heirs could face significant and unexpected tax liability in the form of capital gains taxes on up to $2.2M!
In light of the current uncertainty, my best advice is to discuss your situation with your attorney, CPA, and financial advisor, and do your best to stay healthy and alive through 2010.
Monday, March 22, 2010
Thursday, December 17, 2009
Probate Basics
"Probate" is a legal process through which assets are passed, typically with at least some court supervision, to a person's heirs. With limited exceptions, Probate is necessary to pass assets which have not otherwise been legally designated to pass to named beneficiaries.
A Probate estate will usually include personal property, such as money in the bank, jewelry or a car. It can also include real property, such as the person's home.
A Will is often used to direct distribution of assets through the Probate process. Where a valid Will exists, the beneficiaries named in the Will are entitled to receive the distributions designated in the Will. Otherwise, the estate will be divided among the person's heirs under California law.
Unfortunately, the Probate process is tedious and time consuming, so having professional assistance (or at least guidance) is practically essential.
"Trust Administration" is the term used to refer to the process of administering a trust. Usually this consists of paying estate debts and distributing assets to the trust's beneficiaries. It is generally considered to be less tedious and less time consuming than formal Probate, though getting professional guidance at the outset is always a good idea.
For more general information on the Probate process, I recommend reviewing the Sacramento County Superior Court's discussion, found at http://www.saccourt.ca.gov/probate/decedent-estate.aspx.
A Probate estate will usually include personal property, such as money in the bank, jewelry or a car. It can also include real property, such as the person's home.
A Will is often used to direct distribution of assets through the Probate process. Where a valid Will exists, the beneficiaries named in the Will are entitled to receive the distributions designated in the Will. Otherwise, the estate will be divided among the person's heirs under California law.
Unfortunately, the Probate process is tedious and time consuming, so having professional assistance (or at least guidance) is practically essential.
"Trust Administration" is the term used to refer to the process of administering a trust. Usually this consists of paying estate debts and distributing assets to the trust's beneficiaries. It is generally considered to be less tedious and less time consuming than formal Probate, though getting professional guidance at the outset is always a good idea.
For more general information on the Probate process, I recommend reviewing the Sacramento County Superior Court's discussion, found at http://www.saccourt.ca.gov/probate/decedent-estate.aspx.
Tuesday, November 10, 2009
The Buy-Sell Agreement: An Essential Tool for Jointly-Owned Small Businesses
One of the most common scenarios in business is for the owners part ways. This can occur under a variety of circumstances, ranging from disagreement over the continued management and direction of the business, to incapacity or death. Due to a lack of planning, this transition is rarely smooth.
Fortunately, a contingency plan can be created in advance by using what is known as a "Buy-Sell agreement". A well-planned and well-drafted Buy-Sell agreement is an excellent tool for business owners who seek to avoid disruption of a business upon the departure of one or more of its owners.
A Buy-Sell agreement is useful regardless of the entity form being used (LLC, corporation, etc.), and can be flexibly structured to meet a business's needs.
Most Buy-Sell agreements restrict the sale of an owner's business interest to an outsider. In a "cross-purchase" arrangement, the remaining business owners may be required to purchase the departing owner's interest for a fixed price, or for a price to be determined based on an appraisal or stated valuation formula. Purchase payments may be made in one lump sum, or may be structured over time.
As an alternative to a mandatory purchase arrangement, business owners may choose to utilize either a purchase option or a right of first refusal. A purchase (or "buy-out") option gives the remaining owners the option to purchase the departing owner's interest for a predetermined sum. A right of first refusal, on the other hand, gives the remaining owners the right to beat any third party's purchase offer.
A "stock redemption agreement" (also known as an "entity-purchase agreement") is another common form of a Buy-Sell agreement. In this type of agreement, the entity itself purchases the ownership interest of the departing owner. This type of Buy-Sell agreement is well suited for businesses with many owners.
Regardless of whether a cross-purchase, entity-purchase, or a hybrid of the two is used, cash will invariably be needed to purchase the departing owner's interest. Life insurance is commonly used for this purpose, but for obvious reasons is only available in the event of the death of an owner.
When using a stock redemption agreement, a business may choose to fund the buy-out with accumulated earnings and corporate profits. If this type of arrangement is utilized, care should be taken to avoid any unecessary and unexpected tax consequences.
Ultimately, business relationships really are much like romantic relationships. They require a lot of skill and a lot of effort to succeed. Even if the owners are on the best of terms, an unexpected death can really leave a business in a lurch. In the absense of a Buy-Sell agreement, the decedent's estate (i.e. spouse or children) will take over his or her ownership interest. Generally, the decedent's heirs lack the skills or the temper necessary to competently assume the decededent's ownership responsibilities. By using a Buy-Sell agreement, existing owners can effectively maintain valuable control over who they will be doing business with in the future. Of course, the Buy-Sell agreement also works to the benefit of the decedent's heirs, in that they will receive the purchase monies due upon the transfer of the decedent's ownership interest.
These are just a few of the many reasons I strongly encourage anyone who owns a business with others to consider the use of a Buy-Sell agreement. If you would like more information related to Buy-Sell agreements or other small business issues, please feel free to contact us.
Fortunately, a contingency plan can be created in advance by using what is known as a "Buy-Sell agreement". A well-planned and well-drafted Buy-Sell agreement is an excellent tool for business owners who seek to avoid disruption of a business upon the departure of one or more of its owners.
A Buy-Sell agreement is useful regardless of the entity form being used (LLC, corporation, etc.), and can be flexibly structured to meet a business's needs.
Most Buy-Sell agreements restrict the sale of an owner's business interest to an outsider. In a "cross-purchase" arrangement, the remaining business owners may be required to purchase the departing owner's interest for a fixed price, or for a price to be determined based on an appraisal or stated valuation formula. Purchase payments may be made in one lump sum, or may be structured over time.
As an alternative to a mandatory purchase arrangement, business owners may choose to utilize either a purchase option or a right of first refusal. A purchase (or "buy-out") option gives the remaining owners the option to purchase the departing owner's interest for a predetermined sum. A right of first refusal, on the other hand, gives the remaining owners the right to beat any third party's purchase offer.
A "stock redemption agreement" (also known as an "entity-purchase agreement") is another common form of a Buy-Sell agreement. In this type of agreement, the entity itself purchases the ownership interest of the departing owner. This type of Buy-Sell agreement is well suited for businesses with many owners.
Regardless of whether a cross-purchase, entity-purchase, or a hybrid of the two is used, cash will invariably be needed to purchase the departing owner's interest. Life insurance is commonly used for this purpose, but for obvious reasons is only available in the event of the death of an owner.
When using a stock redemption agreement, a business may choose to fund the buy-out with accumulated earnings and corporate profits. If this type of arrangement is utilized, care should be taken to avoid any unecessary and unexpected tax consequences.
Ultimately, business relationships really are much like romantic relationships. They require a lot of skill and a lot of effort to succeed. Even if the owners are on the best of terms, an unexpected death can really leave a business in a lurch. In the absense of a Buy-Sell agreement, the decedent's estate (i.e. spouse or children) will take over his or her ownership interest. Generally, the decedent's heirs lack the skills or the temper necessary to competently assume the decededent's ownership responsibilities. By using a Buy-Sell agreement, existing owners can effectively maintain valuable control over who they will be doing business with in the future. Of course, the Buy-Sell agreement also works to the benefit of the decedent's heirs, in that they will receive the purchase monies due upon the transfer of the decedent's ownership interest.
These are just a few of the many reasons I strongly encourage anyone who owns a business with others to consider the use of a Buy-Sell agreement. If you would like more information related to Buy-Sell agreements or other small business issues, please feel free to contact us.
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