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 non-voting 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.
ROBIN BELL, CPA, member-in-charge, tax group, and DAVID HEILICH, CPA, practice leader, family wealth planning, work with Brown Smith Wallace LLC. Reach Bell at [email protected] or (314) 983-1217. Reach Heilich at [email protected] or (314) 983-1273.