Much of the attention surrounding the current financial crisis has focused on the implications for large businesses. Less emphasis has been placed on the impact that the turmoil has been having on family-owned enterprises.
Almost one in five small business owners is expressing concern about going out of business as a result of the economic climate, according to a survey conducted by the small business arm of American Express (American Express OPEN). It adds another entry to the list of enormous, ongoing challenges in operating a successful company.

The question to answer
For business owners who are approaching retirement, perhaps just as difficult a challenge is establishing a solid succession plan that will provide smoothly and effectively for the continuation of the business beyond the participation of its founders. The Small Business Administration estimates that only one-third of family -owned businesses will survive the transition from the first to the second generation. It looks even grimmer farther down the road: Other research suggests that only 12% of family -owned businesses stay viable into the third generation, and only 3% are alive at the fourth-generation level and beyond.
If you own a family business, as you plan to turn over the reins, the question to ask is: How can you transfer the business to your heirs; preserve the generation of income from the assets and provide liquidity, all with the least amount of tax erosion?

Elements of a succession plan
Many threads weave their way into the tapestry of a family business in transition. Specifically, you will need to:
• Determine the best form of operation for your particular business after you leave, whether it be a C Corp., S Corp, LLC, LLP or trust, considering all the tax and nontax issues;
• Divide the business fairly among your children, grandchildren and others who work in the business and those who do not;
• Review the business agreements among all owners (including nonfamily partners) that provide for buyout/cross-purchase of your interest at your death;
• Ensure that the valuation method for buyout purposes will be respected for estate tax purposes; and
• Draft documents (including wills, powers of attorney, trust agreements) that will give you the assurance that your plan will be carried out properly.

A family business is more than just an asset
As a business owner hands over the reins, it’s not just the monetary issues that need to be addressed. The transition of a business may have underlying emotional components as well. Your business may stand as a symbol of a lifetime of achievement, both from a professional and personal perspective, evoking a strong feeling of pride and a strong desire to protect your legacy, even if you may be forced to make difficult decisions.
Your offspring may view the transfer of the business from two perspectives—as an heir automatically entitled to a share of the business, or as someone whose talent and hard work has been instrumental in the success of the enterprise. An equal division of ownership, then, probably won’t be welcomed by offspring who have contributed to the success of the business. Any other division may be viewed as inequitable by those who weren’t involved in the operation of the business. In other words, there may be treacherous waters to navigate in order to avoid disharmony in the family.
First, keep everyone in the family informed, whether they are involved in the day-to-day operation of the business or not. It’s better to know about any hostilities upfront. In fact, springing the plans after everything is in place may well contribute to discord. An open discussion may help reveal reactions that may be addressed ahead of time.
Second, include the professionals—lawyers, accountants, insurance officers and trust officers—at the earliest stages of the process. They can provide useful planning insights.
Third, don’t wait too long. Many professionals suggest putting a plan in place at least five years in advance of the time that you take that final walk through the door.
Finally, if the current economic environment has had an impact on your business, your succession plan is likely to reflect that fact. As the economy recovers, and your business improves, be ready to revisit what you have set in place to see if changes might be necessary.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Incapacity can befall anyone at any time. For the healthy, it may be the result of a sudden illness or injury. For older people, the onset of incapacity may be slower, the progression of an illness such as Alzheimer’s disease or just part of the normal aging process.
The best way to protect your family and assets in the event that disability strikes is to take the necessary steps when there is no doubt that you are fully capable of acting on your own behalf.

The durable power of attorney option
A durable power of attorney is a legal document that allows you to give someone the authority to act for you. Unlike a general power of attorney, a durable is not revoked automatically if you become mentally incapacitated. It will survive until your death.
The authority that you grant the individual named in the durable power can as broad or as narrow as you wish. And the power may be revoked for any reason prior to your incapacity, or in the event that your incapacity proves to be temporary. Regular updating of the power is recommended. Some third parties may reject it if it is more than a few years old.
There are two types of durable powers. Each has its own pros and cons.
The power holder in a “springing power” can act for you only when you become incapacitated. Therefore, the document must spell out in detail exactly how your incapacity will be determined and by whom. If there is any dispute, the power may not become effective. In addition, in a transaction, anyone who is asked to rely on the power may want proof that you have, in fact, become incapacitated.
On the other hand, a “nonspringing” power becomes effective upon its creation. It avoids the problem of having to prove incapacity. It does, however, grant the power holder the authority to act for you even when you are not incapacitated, raising the possibility for unauthorized use of the power.

The revocable living trust option
A revocable living trust can accomplish everything that a durable power of attorney does, and offers its own unique advantages.
A trust agreement delineates what assets are to be placed in the trust and who serves as the trustee and invests the trust’s assets. You also name the beneficiaries of the trust, specifically, who is to receive the income from the trust now and who is to receive the trust’s assets when the trust ends.
You may serve initially as trustee of the trust as long as you name either a successor trustee to serve should you become incapacitated or a cotrustee who will be authorized to act alone upon your incapacity. Or, if you choose, you can name someone other than yourself to serve as trustee from the outset. Here are some of the key benefits of a living trust:
• Unlike a durable power of attorney, a third party cannot challenge the trustee’s authority to act for you.
• If you choose a corporate trustee, your investment assets will be managed by professionals.
• The trust agreement is a flexible document. It’s relatively easy to alter, amend or revoke it at any time.
• The trust can be integrated into your estate plan so that, after your death, the assets will avoid the probate process and be shielded from public scrutiny.
Perhaps the most comprehensive strategy is to create both a durable power and a revocable living trust. The durable power can control assets that may have been left out of the trust inadvertently and may be used for financial decisions unrelated to the trust.

The essential element of trust
The individual that you authorize to act for you in the durable power and the trustee of your trust will have absolute control over your finances. In turn, you must have absolute trust in them.
In a late 2007 article (“How to Ensure Relatives Don’t Rip You Off”), Rachel Emma Silverman and Ashby Jones examined some of the risks inherent in durable powers. They interviewed several attorneys who specialize in elder law about what safeguards might be put in place to avoid potentially calamitous results. Among their recommendations:
• Financial reporting. Put a provision in the durable power that family members, an attorney or accountant be provided with regular accounting statements.
• Name multiple power holders. Create a system of checks and balances by giving authority to two people instead of one. (There’s some inconvenience attached to this protection: In most transactions, signatures of both power holders will be required.)
• Limit the power to make gifts. Making questionable or fraudulent gifts is a common form of abuse. The durable power should spell out clearly when the power holder has the authority to make gifts.
• Create a revocable living trust. When a trustworthy individual is unavailable, establishing a trust and naming a corporate trustee provides a good solution.

Medical care directives
The individual that you have designated in your power of attorney and the trustee of a living trust have the authority to make financial decisions only. There is another side of the coin.
For medical care decisions you will need to execute either a living will or a durable power of attorney for health care. (The general term is medical care directives.) A living will is limited in its scope. It lets you express your wishes regarding your care should you be in a terminal condition and, generally, deals with questions as to whether and what life-sustaining treatments should be undertaken. A power of attorney for health care is much like a durable power of attorney: You delegate someone to make the decisions for you based upon guidance that you have set down in the document.
Whatever your wishes are with regard to what treatments and procedures should (or should not) be withheld, it’s important to make your wishes known to your family members and your physician(s) and to put your wishes in writing.

Rely upon your advisors
Your failure to plan for possible incapacity can exact an emotional toll on family members. It may lead also to the need for formal court proceedings in order to appoint a guardian for decisions best made in private (with the attendant expenses and potential delays).
When you seek legal guidance, consider consulting someone who is knowledgeable and experienced about the laws of the state in which the documents are executed. You may want to include your tax and financial advisors as well.
If you are considering a trust, we would be glad to serve on your team. Please feel free to call on us at any time. We would be glad to explain the advantages of choosing us to serve as the cotrustee or successor trustee of your revocable living trust.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

When William joined his employer’s saving and investment plan (SIP), he signed a beneficiary designation to identify the person to receive the account balance, if any, at his death. He named his wife, Liv, the approach most people ordinarily would take. William was free to change or revoke the beneficiary designation at any time, and if no one were designated, the funds would pass to his estate.
William and Liv later divorced. In the divorce decree, Liv abandoned any interest that she had in this account. However, when William went through his beneficiary designation forms at his company after the divorce, he never ordered Liv’s name removed from this account. Whether this was intentional or an oversight is unknown. However it happened, at William’s later death the plan paid the account balance to Liv, in accordance with the form in its files. The executor of the estate (William’s daughter) filed suit, arguing that under the divorce decree the money should have gone to the estate.
The case made it all the way to the U.S Supreme Court. That Court ruled that the plan was not required to honor the divorce decree, because it was not in the form of a Qualified Domestic Relations Order (QDRO), the approach authorized by law for dividing pension rights in divorce. A QDRO formally brings the matter to the attention of the plan trustees. A pension or savings plan is not required to conduct an independent investigation or look to external circumstances in order to decide where the money should go. Here, the plan was required to follow William’s instructions.

The better approach

William could have prevented this result by revoking his beneficiary designation. If he had, the money would have passed to his estate. Or he could have named his daughter the beneficiary, as he did with his pension and retirement plan. But because the SIP had a separate beneficiary designation, it had to be taken care of independently.
The implication of the Court’s decision is not as narrow as one might first suppose. Other assets (life insurance, bank and brokerage accounts, and IRAs, for example) can be governed by beneficiary designations. Other life events (marriage, birth or death in the family) can affect how one wants property distributed. Regularly reviewing your beneficiary designations along with your will should help to prevent unintended consequences.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

How much time passes from the day that a will is signed to the day that it takes effect? Typically, many years. Years in which asset values can change substantially. Years in which some family members are born, and others die. The passage of time can alter family circumstances and resources dramatically, so that a regular will review becomes as important as a regular medical checkup. What’s more, the estate tax law is subject to sudden change so that wills often become less than optimal for tax purposes.
What happens when the review isn’t done, and a will proves inadequate? Happily, through a process called post mortem estate planning, an experienced executor can provide a remedy. In particular, the executor may be able to recommend the careful use of disclaimers so as effec¬tively to amend the estate plan to save taxes, or to meet the needs of the beneficiaries better.
A disclaimer is simply the refusal to accept a gift or bequest. For example, say John leaves his entire estate to his wife, Mary, but after his death Mary believes that a portion of the estate should pass to their children. If Mary disclaims a portion of her interest, the amounts disclaimed will pass under other will provisions or under the laws of intestacy (the state laws that apply in the absence of a will). To the ordinary person, this looks like a gift from Mary to the children out of her inheritance. But if the disclaimer is handled properly, the tax law treats the transfer to the children as coming from John, through the estate, not from Mary. The difference is more than semantics—it eliminates the gift tax on the disclaimer.

Saving taxes
Disclaimers can fine-tune an estate plan after all relevant facts are known, and they can bail out an estate plan that proves to be tax inefficient. The motive for the disclaimer is not important. Here are a few situations, culled from IRS Private Letter Rulings, where disclaimers have improved an estate plan:
• A larger marital deduction was created for an estate plan drafted before the advent of the unlimited marital deduction in 1982.
• The marital deduction was reduced to ensure full use of estate tax credits, reducing estate taxes at the death of the surviving spouse.
• A marital trust with general power of appointment was converted to a Qualified Terminable Interest Property (QTIP) trust to save generation-skipping transfer taxes.
• A defective charitable remainder trust was made a “reformable interest” eligible for the estate tax charitable deduction.
• A surviving spouse was made the sole beneficiary of an IRA, permitting the spouse to treat the IRA as her own and extend the life of the IRA.
• A direct bequest to grandchildren, which is subject to the generation-skipping transfer tax, was reduced or increased to an amount equal to the exemption from that tax.

Looking forward
Given the knowledge that the possibility of a disclaimer will be available, it is possible to develop the estate plan contemplating—even inviting—the use of this estate planning tool.
For example, a beneficiary might be given the option to disclaim a portion of his or her inheritance in order to let the amount pass to a designated charity. This will produce an estate tax deduction that can be more valuable than an income tax deduction for the same charitable gift.
Similarly, a surviving spouse may be given the option to disclaim so as to permit optimal funding of a family trust. Such a trust will bypass the surviving spouse’s estate, reducing overall estate taxes for the family. The surviving spouse may even be a beneficiary of the family trust without impairing this strategy. This approach is especially valuable when qualified retirement plan assets or an IRA will make up a substantial part of the estate.

Joint property
What if property is owned jointly, with rights of survivorship? Here the tax rules become more difficult. One cannot disclaim what one already owns in order to dodge the gift tax; that much is certain. But it may be possible to disclaim the survivorship interest, depending upon the state law governing the creation of joint interests. Additionally, different rules may apply to surviving spouses than those that apply to other joint tenants.
Estate planners commonly recommend against excessive use of jointly owned property in the estate plan. The potential loss of post mortem flexibility is one reason for that recommendation.

Formal requirements
Disclaimers are not tools for amateurs. Among the requirements for a tax-qualified disclaimer:
• the disclaimer must be in writing;
• it must be made within nine months of the transfer;
• the disclaimant must not have accepted any benefits (such as an income distribution) from the disclaimed property;
• the disclaimant must not direct the disposition of the disclaimed property; and
• the disclaimant must have no benefit from the disclaimed property after the disclaimer, unless the disclaimant is the surviving spouse.

A lot to think about? To sort through these requirements and identify the opportunities that disclaimers represent calls for the assistance of an experienced estate planning attorney or professionals in estate settlement such as us. Speak with your professional advisors to explore how this planning technique may be useful in your situation.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.