Estate Planning a Necessity for Small Business Owners – Annapolis and Towson Estate Planning

Just as the small business owner must plan for their own personal estate to be passed onto the next generation, they must also plan for the future of their business. This is why you need a comprehensive estate plan that addresses both you personal life and the business, says grbj.com’s recent article “Estate planning for small businesses.” Here are the basic strategies you’ll need as a small business owner:

A will. A last will and testament allows you to name someone who will receive your assets, including your business, when you die. If you don’t have a will, you leave your heirs a series of problems, expenses and stress. In the absence of a will, everything you’ve worked to attain will be distributed depending on the laws of the state. That includes your assets and your business. It’s far better to have a will, so you make these decisions.

A Living Trust. A living trust is similar to a will, in that it allows you to name who will receive your assets when you die. However, there are certain advantages to having a trust. For one thing, a trust is a private document, and assets controlled by the trust can bypass probate. Assets controlled by a will must first go through probate, which is a public proceeding. If you’ve ever had a family member die and wonder why all those companies seemed to know that your loved one had passed, it’s because they get the information that is available to the public.

If your business is owned by a trust, the transition of ownership to your intended beneficiaries can be a much smoother process.

A financial durable power of attorney. This document lets you appoint an agent to act on your behalf, if you are incapacitated by illness or injury. This is a powerful legal document, so take the time to consider who you want to give this power to. Your agent can manage your finances, pay your bills and manage the day-to-day operations of your business.

A succession plan. Here is where many small business owners fall short in their planning. It takes a long time to create a succession plan for a business. Sometimes a buy-out agreement is part of a succession plan, or a partner in the business or key employee wishes to become the new owner. If a family member wishes to take over the business, will they inherit your entire ownership interest, or will there be a payment required? Will more than one family member take over the business? If a non-family member is going to take over the business, you’ll need an agreement documenting the obligation to purchase the business and the terms of the purchase.

If you would prefer to have the business sold upon your death, you’ll need to plan for that in advance so that family members will be able to receive the best possible price.

A buy-sell agreement. If you are not the sole owner, it’s important that you have a buy-sell agreement with your partners. This agreement requires your ownership interest to be purchased by the business or other owners, if and when a triggering event occurs, like death or disability. This document must set forth how the value of ownership interest is to be determined and how it is to be paid to your family. Without this kind of document, your ownership interest in the business will pass to your spouse or other family members. If that is not your intention, you’ll need to do prior planning.

The right type of life insurance. This is an important part of planning for the future for the small business owner. The death benefit may be needed to provide income to the family, until a business is sold, if that is the ultimate goal. If a family member takes over the business, proceeds from the life insurance policy may be needed to cover payroll or other expenses, until the business gets going under new leadership. Life insurance proceeds may also be used to buy out the other partners in the business.

Failing to plan through the use of basic estate planning and succession planning can create significant costs and stress. An experienced estate planning attorney can review the strategies and documents that are appropriate for your situation. You’ll want to ensure a smooth transition for your business and your family, as that too will be part of your legacy.

Reference: grbj.com (Grand Rapids Business Journal) (July 19, 2019) “Estate planning for small businesses”

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Elder Law Estate Planning for the Future – Annapolis and Towson Estate Planning

Seniors who are parents of adult children can make their children’s lives easier, by making the effort to button down major goals in elder law estate planning, advises Times Herald-Record in the article “Three ways for seniors to make things easier for their kids.” Those tasks are planning for disability, protecting assets from long-term care or nursing home costs and minimizing costs and stress in passing assets to the next generation. Here’s what you need to do, and how to do it.

Disability planning includes signing advance directives. These are legal documents that are created while you still have all of your mental faculties. Naming people who will make decisions on your behalf, if and when you become incapacitated, gives those you love the ability to take care of you without having to apply for guardianship or other legal proceedings. Advance directives include powers of attorney, health care powers or attorney or proxies and living wills.

Your power of attorney will make all and any legal and financial decisions on your behalf. In addition, if you use the elder law power of attorney, they are able to make unlimited gifting powers that may save about half of a single person’s assets from the cost of nursing home care. With a health care proxy, a person is named who can make medical decisions. In a living will, you have the ability to convey your wishes for end-of-life care, including resuscitation and artificial feeding.

When advance directives are in place, you spare your family the need to have a judge appoint a legal guardian to manage your affairs. That saves time, money and keeps the judiciary out of your life. Your children can act on your behalf when they need to, during what will already be a very difficult time.

Goal number two is protecting assets from the cost of long-term care. Losing the family home and retirement savings to unexpected nursing costs is devasting and may be avoided with the right planning. The first and best option is to purchase long-term care insurance. If you don’t have or can’t obtain a policy, the next best is the Medicaid Asset Protection Trust (MAPT) that is used to protect assets in the trust from nursing home costs, after the assets have been in the trust for five years.

The third thing that will make your adult children’s lives easier, is to have a will. This lets you leave assets to the family as you want, with the least amount of court costs, legal fees, taxes and family battles over inheritances. Work with an experienced estate planning attorney to have a will created.  If your attorney advises it, you can also consider having trusts created, so your assets can be placed into the trusts and avoid probate, which is a public process. A trust can be easier for children, because estates settle more quickly.

Think of estate planning as part of your legacy of taking care of your family, ensuring that your hard-earned assets are passed to the next generation. You can’t avoid your own death, or that of your spouse, but you can prepare so those you love are helped by thoughtful and proper planning.

Reference: Times Herald-Record (July 13, 2019) “Three ways for seniors to make things easier for their kids”

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Can a trust be homeless? – Annapolis and Towson Estate Planning

Due to recent case law, it is possible for a trust to not be taxed for state income tax purposes due to the different laws in different states.  Between the different characters surrounding a trust, the grantor/settlor, the Trustee, and the beneficiaries, a trust may not be required to pay state income tax depending on the laws of each state in which the characters reside.  Whether a trust is discretionary, revocable, or irrevocable can also affect where a trust is taxed.  This does not begin to cover the complexities of the concept of a “homeless trust.”  Read more here.

Reference: Considerable (July 10, 2019) “How to assign power of attorney without sparking a family feud”

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When Is the Best Time to Disinherit a Child? – Annapolis and Towson Estate Planning

This may sound like something out of a Dickens novel, but sadly, it is someone’s real life. A woman is mourning the loss of her mother. She is the trustee and only beneficiary of her mother’s trust, as explained in the article “It’s never too early to disinherit children” appearing in the Santa Cruz Sentinel. After disappearing for decades, her sister visited with the mother a few times a year toward the end of the mother’s life. Now the sister has retained an attorney to challenge the trust, accusing the woman of elder abuse and stating that the mother was insane.

What can this sister expect?

The goal of the formerly absent sister is to get the trust thrown out so that the estate will pass equally between the two sisters. She can accomplish this if she is able to invalidate the trust and invalidate any prior wills the mother may have signed disinheriting one sister and leaving everything to the other sister.

She may not have a case with a lot of merit, but it is going to cost a lot to defend the estate plan. She may be hoping for a quick payoff.

Whether the case is successful may depend upon the circumstances surrounding the creation of the trust. In the best case, the mother would have gone to see the attorney by herself and created the trust with zero involvement of the sister who is the trustee. Even better would be if the trustee sister didn’t know a thing about the trust or the estate plan, until after it was completed.

Here’s the concern: if the mother created the trust only after she became dependent on the more involved sister and if that sister selected the attorney, made the appointment and had a conversation with the attorney about how awful the other sister was, then it will be hard to prove that the trust was set up purely on the mother’s wishes.

It’s an odd lesson, but in truth, it’s never too early to take steps to disinherit children. If someone knows that they are going to create an estate plan that is going to make one or more people very unhappy, the sooner they document these wishes, the better. It should be done while the person is still living independently and does not require a lot of help from any family member.

Keeping the people who will benefit from the disinheritance out of the creation of the estate plan is best, since it further removes them from involvement and is better when they are accused of being manipulative.

The best tactic is to create an estate plan with the help of an experienced estate planning attorney who can serve as a neutral and unbiased witness and can testify to the fact that the person knew what they were doing when the estate plan was created.

Reference: Santa Cruz Sentinel (June 2, 2019) “It’s never too early to disinherit children”

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Protecting Your Family’s Inheritance – Annapolis and Towson Estate Planning

The name sounds like you might be trying to keep children and grandchildren from being irresponsible with the assets you’ve amassed through a lifetime’s work, but irrevocable trusts offer a flexible solution. They are also helpful in cases of divorce, substance abuse and other situations, reports The Chattanoogan in an article titled “Keeping Your Family from Losing Its Inheritance.”

If we are lucky, we are able to leave a generous inheritance for our children. However, that doesn’t necessarily mean we should give them easy access to all or some of the assets. Some people, particularly younger adults who haven’t yet developed money management skills, or others with problems like a troubled marriage or a special needs family member, aren’t ready or able to handle an inheritance.

In some cases, like when there is a substance abuse problem, handing over a large sum of money at once could have disastrous results.

Many people are not educated or experienced enough to handle a large sum of money. Consider the stories about lottery winners who end up filing for bankruptcy. Without experience, knowledge or good advisors, a large inheritance can disappear quickly.

An irrevocable trust provides protection. A trustee is given the authority to control how funds are used, when they are given to beneficiaries and when they are not. Depending on how the trust is created, the trustee can have as much control over distributions as is necessary.

An irrevocable trust also protects assets from creditors. This is because the assets are owned by the trust and not by the beneficiary. An irrevocable trust can also protect the funds from divorces, lawsuits and bankruptcies, as well as manipulative family members and friends.

Once the money leaves the trust and is disbursed to the beneficiary, that money becomes available to creditors, just as any other asset owned by the person. However, there is a remedy for that, if things go bad.  Instead of distributing funds directly to the beneficiary, the trustee can pay bills directly. That can include payments to a school, a mortgage company, medical bills or any other costs.

The trustee and not the beneficiary, is in control of the assets and their distributions.

The person establishing the trust (the “grantor”) determines how much power to give to the trustee. The grantor determines whether the trustee is to distribute funds on a regular basis, or whether the trustee is to use their discretion, as to when and how much to give to the beneficiary.

Here’s an example. If you’ve given full control of the trust to the trustee, and the trustee decides that some of the money should go to pay a child’s college tuition, the trustee can send a check every semester directly to the college. The trustee, if the trust is written this way, can also put conditions on the college tuition payments, mandating that a certain grade level be maintained or that the student must graduate by a certain date.

Appointing the trustee is a critical piece of the success of any trust. If no family members are suitable, then a corporate trustee can be hired to manage the trust. Speak with a qualified estate planning attorney, to learn if an irrevocable trust is a good idea for your situation and also to determine whether or not a family member should be named the trustee.

Reference: The Chattanoogan (July 5, 23019) “Keeping Your Family from Losing Its Inheritance.”

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What Do I Need to Know About Long-Term Care Insurance? – Annapolis and Towson Estate Planning

Long-term care policies are available from insurance companies. Federal employees can also obtain them through the federal FLTCIP program. LTC (long-term care) policies offer a wide variety of features.

Some policies may pay for care not only in a nursing home but also in an assisted living facility or at the home of the person who requires care.

Policies may also include cost-of-living adjustments, which will increase future benefit payments.

Some companies also offer LTC policies that cover both spouses at a discounted rate, rather than having to purchase two separate policies.

Fed Week’s recent article, “Selecting among Long-Term Care Options to Hold Down Costs,” explains that there also are life insurance policies that double as LTC insurance.

Therefore, if these policies cover long-term care expenses; the policy’s death benefit will be reduced.

However, if long-term care is not needed, the insured individual’s beneficiary eventually can receive the full death benefit.

Remember also that the ongoing premiums will be lower, compared with policies bought when a person is older.

When you’re shopping for LTC insurance, there are some tactics that can reduce your policy cost. Here are just a few:

  • Reduce benefits. A policy that pays benefits as long as you need long-term care can be very expensive. However, a policy with a five-year maximum payout will be less expensive. There are not many people who will need more than five years of long-term care.
  • Wait longer. You can reduce costs, by extending the period before you collect benefits. A policy with a 90-day waiting period will be less expensive than an LTC policy with a 20-day wait. Of course, this is only a bargain, if you can afford to pay for 90 days from your own resources.
  • Avoid automatic inflation increases. A policy that increases your benefit each year from $100 a day to $105 to $110, etc., will be very costly. You can go with a “future purchase option.” This will let you to buy more coverage, if you need it, even if your health has declined.

Reference: Fed Week (June 27, 2019) “Selecting among Long-Term Care Options to Hold Down Costs”

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What Do I Need to Know About My Own Funeral Arrangements? – Annapolis and Towson Estate Planning

You’ve heard about death and taxes. While having a plan for your death may not be a big priority, creating a plan for your family when you pass is something everyone should do.

WHNT’s recent article, “How to plan for life after death,” says the first step is having that conversation with someone you trust. It may be a close friend, a family member or an attorney.

Next, think about some important considerations like what you want in terms of a funeral service, burial or cremation, if you want life insurance to pay your last expenses and how your estate should be handled.

The National Institute on Aging has created a comprehensive list of considerations for those who are facing end of life decisions. It’s also a great resource for caretakers.

This planning will may make the process easier for those you leave behind, especially if you work with an experienced estate planning attorney.

There are also some fundamental decisions that can also ease the financial burden on your loved ones.

The average North American traditional funeral costs between $7,000 and $10,000. This price range includes the services at the funeral home, burial in a cemetery and the installation of a headstone at the cemetery.

The National Funeral Directors Association reports that the median cost to move the remains of a loved one to a funeral home in the U.S. is $325. Embalming can run about $725, and the average cost of a vault in the United States is $1,395, as of 2017.

According to the 2018 NFDA Cremation & Burial Report, the 2018 cremation rate is estimated to be 53.5%, and the burial rate is projected to be 40.5%.

Forbes says that roughly 42% of people opt to be cremated because of the costs involved with a standard funeral in the United States.

Reference: WHNT (June 30, 2019) “How to plan for life after death”

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Who Should Be the Agent of My Power of Attorney? – Annapolis and Towson Estate Planning

It’s important to understand what a power of attorney is, how it factors into estate planning, and how sibling roles can differ and be shared at the same time.

Considerable’s recent article, “How to assign power of attorney without sparking a family feud,” gives us some idea how the power of attorney can work within a family and among siblings.

A power of attorney or POA is a legal document that allows one person to act on behalf of another, usually when that person is unable to make decisions for themselves for reasons of ill health.

Many people confuse a power of attorney role with the executor of the estate. Power of attorney authority is only in effect while the person who has granted the authority is alive. Once that person dies, the executor of the estate then assumes responsibility of seeing the estate through the probate process. They’re two very different roles, but they can be held by the same person.

There are different types of power of attorney, too. The most frequently used are the general power of attorney and the medical power of attorney. The general power of attorney is for management of financial, business, or private affairs. If a parent grants power of attorney to one of their kids, he or she has the sole authority to act on behalf of the parent.

The other siblings have to abide by the inherent authority of the sibling with the power of attorney to make decisions for the parent related to their business affairs.

It’s also important to understand that the power of attorney is a fiduciary obligation. This means the person who holds it must act in the best interests of the parent rather than their own. He or she must also comply with rules. Nonetheless, things can get sticky if there isn’t proper confidence among siblings or transparency when major decisions are being made.

There’s also the option of signing a joint power of attorney so that two siblings share the responsibility. This may decrease the potential for jealousy and mistrust within the family. However, it can also lengthen and complicate decision-making. There’s the possibility that the siblings simply can’t agree on an issue. As a result, an important decision remains stuck in neutral indefinitely.

Whether one or more are entrusted with power of attorney, communication and transparency are the key factors in avoiding painful situations in the family.

You can also name an independent agent. This may provide more flexibility to help the parent manage his or her affairs.

Reference: Considerable (July 10, 2019) “How to assign power of attorney without sparking a family feud”

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What is Portability and How Does It Impact Estate Planning? – Annapolis and Towson Estate Planning

Let’s address the elephant in the room: the word “estate” in planning doesn’t have anything to do with the size of your home. It simply refers to a person’s assets: their home, bank accounts, a second home, investment accounts, cars, etc.

The federal estate tax, says The Times Herald in the article “Federal estate tax and portability considerations,” impacts very few people today, as a person would have to have assets that total more than $11.4 million (or $22.8 for a couple) before they have to worry about the federal estate tax.

Individuals and couples with significant assets are advised to have an estate plan created by an estate planning attorney with experience working with people with large assets.  There are numerous tools used to minimize the federal tax liability.

However, when one spouse dies, it is generally recommended that the surviving spouse file a Federal Estate Tax return for reasons of portability. That is because when the first spouse dies, they use a portion of the Federal Estate Tax exemption, but there’s usually a portion available for the surviving spouse.

If IRS Form 706 is filed in a timely manner, the surviving spouse can “port over” or protect the remaining amount of Federal Estate Tax exemption that the deceased spouse has not used. This return needs to be filed within nine months of the date of death, although the surviving spouse can obtain an extension.

No tax will be owed, since the return is filed merely for reporting purposes. The assets in the entire estate must be reported, including everything the person owned. That may be cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets. It should be noted that this will likely include probate as well as non-probate property. Appraisals and significant documentation are not usually required on a return just for portability purposes.

Why does a return need to be filed to claim the unused exemption, if no taxes are going to be paid? For one thing, the law may change and if the Federal Estate Tax exemption amount is reduced in the future, the surviving spouse will have protected their additional exemption amounts for his or her heirs. If the surviving spouse remarries and acquires significant assets, they will need proof of their exemption. The surviving spouse might own land or other property that increases dramatically in value. Or, the surviving spouse may inherit a large amount of assets.

Completing an IRS Form 706 for portability is not a complex task, but it should be done in conjunction with settling the estate, which should be done with the help of an estate planning attorney to be sure any tax issues are dealt with properly. In addition, when one spouse has passed, it is time for the surviving spouse to review their estate plan to make any necessary changes.

Reference: The Times Herald (July 7, 2019) “Federal estate tax and portability considerations”

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Does Your Estate Plan Include Your Pets? – Annapolis and Towson Estate Planning

Estate planning helps to create a strategy for managing assets while we are living and their distribution when we pass away. That includes determining what happens to our tangible property as well as financial investments, retirement accounts, etc. An estate plan can also be used to protect the well-being of our beloved companion animals, says The Balance in the article “Estate Planning for Fido: How to Set Up a Pet Trust.”

Pet trusts were once thought of as something only for extremely wealthy or eccentric individuals, but today many ‘regular’ people use pet trusts to ensure that if they die before their pets, their pets will have a secure future.

Every state and the District of Columbia, except for Washington, now has laws governing the creation and use of pet trusts. Knowing how they work and what they can and cannot do will be helpful if you are considering having a pet trust made as part of your estate plan.

When you set up a trust, you are the “grantor.” You have the authority as creator of the trust to direct how you want the assets in the trust to be managed, for yourself and any beneficiaries of the trust. The same principal holds true for pet trusts. You set up the trust and name a trustee. The trustee oversees the money and any other assets placed in the trust for the pet’s benefit. Those funds are to be used to pay for the pet’s care and related expenses. These expenses can include:

  • Regular care by a veterinarian,
  • Emergency veterinarian care,
  • Grooming, and
  • Feeding and boarding costs.

A pet trust can also be used to provide directions for end of life care and treatment for pets, as well as burial or cremation arrangements you may want for your pet.

In most instances, the pet trust, once established, remains in place for the entire life span of the pet. Some states, however, place a time limit on how long a pet trust can continue. For animals with very long lives, like certain birds or horses, you’ll want to be sure the pet trust will be created to last for the entire life span of your pet. In several states, the limit is 21 years.

An estate planning attorney who has experience with pet trusts will know the laws of your state, so you’ll be able to create a pet trust for your pet.

Creating a pet trust is like creating any other type of trust. An estate planning attorney can help with drafting the documents, helping you select a trustee, and if you’re worried about your pet outliving the first trustee, naming any successor trustees.

Here are some things to consider when setting up your pet’s trust:

  • What’s your pet’s current standard of living and care?
  • What kind of care do you expect the pet’s new caregiver to offer?
  • Who do you want to be the pet’s caregiver, and who should be the successor caregivers?
  • How often should the caregiver report on the pet’s status to the trustee?
  • How long you expect the pet to live?
  • How likely your pet is to develop a serious illness?
  • How much money do you think your pet’s caregiver will need to cover all pet-related expenses?
  • What should happen to the money, if any remains in the pet trust, after the pet passes away?

The last item is important if you don’t want any funds to disappear. You might want to have the money split up to your beneficiaries to your will, or you may want to have it donated to charity. The pet trust needs to include a contingency plan for these scenarios.

Another point: think about when you want the pet trust to go into effect. You may not expect to become incapacitated, but these things do happen. Your pet trust can be designed to become effective if you become incapacitated.

Make sure the pet trust clearly identifies your pet so no one can abuse its terms and access trust funds fraudulently. One way to do this is to have your pet microchipped and record the chip number in the pet document. Also include photos of your pet and a physical description.

Be as specific as necessary when creating the document. If there are certain types of foods that you use, list them. If there are regular routines that your pet is comfortable with and that you’d like the caregiver to continue, then detail them. The more information you can provide, the more likely it will be that your pet will continue to live as they did when you were taking care of them.

Finally, make sure that your estate planning attorney, the trustee, and the pet’s designated caregiver all have a copy of your pet trust, so they are certain to follow your wishes.

Reference: The Balance (March 27, 2019) “Estate Planning for Fido: How to Set Up a Pet Trust”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys