PACE - Law Presentation: Estate Planning for a Business Owner
- 1. Estate Planning for the Business Owner PACE Conference October 8, 2013 Prescott B. Pohl 602.382.6515 | ppohl@swlaw.com DENVER LAS VEGAS LOS ANGELES LOS CABOS ORANGE COUNTY PHOENIX RENO SALT LAKE CITY TUCSON
- 2. Outline of Presentation • Estate Planning 101 – Basic Goals and Documents • Estate Planning 102 – Revocable Trust Tips • Estate Planning 103 – Beneficiary Designations • Estate Planning 201 – Estate and Gift Taxes • Estate Planning 202 – Advanced Estate Planning • Summary ©2013 Snell & Wilmer L.L.P. 2
- 3. EP 101 -- Basic Goals • Allow others to make financial and health care decisions on your behalf if you are incapacitated • Provide for the disposition of your assets upon your death • Avoid probate ©2013 Snell & Wilmer L.L.P. 3
- 4. How to accomplish first goal: Allow others to make health care and financial decisions on your behalf if you are incapacitated • Health Care Power of Attorney and Living Will (referred to as an Advanced Health Care Directive in some jurisdictions) • Durable (i.e., financial) Power of Attorney (referred to as a General Power of Attorney in some jurisdictions) ©2013 Snell & Wilmer L.L.P. 4
- 5. Health Care Power of Attorney & Living Will Health Care Power of Attorney • Appoints other individuals (i.e., “agents”) to make healthcare decisions for you if you are unable to do so yourself Living Will • Primarily addresses whether you want to be kept on life support. In some jurisdictions, also addresses your wishes concerning autopsy and organ donation. ©2013 Snell & Wilmer L.L.P. 5
- 6. Durable Power of Attorney Appoint other individuals (i.e., “agents”) to make financial decisions for you if you are unable to do so yourself. ©2013 Snell & Wilmer L.L.P. 6
- 7. How to accomplish second goal: Provide for the disposition of your property upon your death • Last Will & Testament • Revocable Trust ©2013 Snell & Wilmer L.L.P. 7
- 8. Last Will & Testament • Control disposition of property held in your name at your death that does not otherwise transfer by operation of law (i.e., the probate estate) • Designate guardians for your minor children • When used with a Revocable Trust, typically transfers property not already held by your Revocable Trust to your Revocable Trust (i.e., “pour over” Will) ©2013 Snell & Wilmer L.L.P. 8
- 9. Revocable Trust – Part 1 • Created by trust agreement, which is simply a contract between three parties: settlor, trustee and beneficiary – during your life you are all three parties • In community property States, typically H and W have joint Revocable Trust • Can be changed at any time prior to your death • Private document – not filed anywhere • Invisible for purposes of federal income tax ©2013 Snell & Wilmer L.L.P. 9
- 10. Revocable Trust – Part 2 • Allows you to prevent monies from being paid to your beneficiaries at age 18 or 21 • Helps prevent need for conservatorship in event of your incapacity • Property held in Revocable Trust administered pursuant to terms of trust agreement…which leads to third basic goal of estate planning… ©2013 Snell & Wilmer L.L.P. 10
- 11. How to accomplish third goal: Avoid Probate – Part 1 What is probate? Process by which State oversees transfer of property in your name at your death that does not otherwise transfer by operation of law. Why avoid probate? Public, time-consuming, costly and burden for surviving family. How do you avoid probate? operation of law. Transfers by ©2013 Snell & Wilmer L.L.P. 11
- 12. How to accomplish third goal: Avoid Probate – Part 2 • Examples of transfers by operation of law: ◦ Property held in joint ownership with rights of survivorship (e.g., JTWRS) ◦ Property subject to a beneficiary designation (e.g., life insurance policy) ◦ Property subject to POD designation (e.g., bank account) ◦ Property held in a Revocable Trust ©2013 Snell & Wilmer L.L.P. 12
- 13. EP 101 Review: Basic Estate Planning Documents 1. 2. 3. 4. Health Care Power of Attorney / Living Will* Durable Power of Attorney* Last Will & Testament Revocable Trust Remember: These documents can be amended or revoked by you at any time before your death, except during incapacity *Different jurisdictions may employ different names ©2013 Snell & Wilmer L.L.P. 13
- 14. EP 102 -- Revocable Trust Tips • Not everything you own must be held in your Revocable Trust to avoid probate; remember other ways to transfer by operation of law • Don’t forget about your interests in your business • Mortgage on house does not prevent transfer to Revocable Trust ownership ©2013 Snell & Wilmer L.L.P. 14
- 15. EP 103 -- Beneficiary Designations • Retirement Accounts: make surviving spouse primary beneficiary and Revocable Trust contingent beneficiary • Life Insurance Policies: make Revocable Trust primary beneficiary ©2013 Snell & Wilmer L.L.P. 15
- 16. Estate Planning 201 – Estate and Gift Tax • Estate Tax: tax on your right to transfer assets at your death • Gift Tax: tax on your right to transfer assets by gift during your life ©2013 Snell & Wilmer L.L.P. 16
- 17. Estate and Gift Tax Exemptions and Rates 2013 Estate Tax Exemption Estate Tax Rate Gift Tax Exemption Gift Tax Rate $5.25 million 40% $5.25 million 40% *discuss unification and portability ©2013 Snell & Wilmer L.L.P. 17
- 18. Reporting and Paying Estate and Gift Tax • Estate Tax – IRS Form 706 • Gift Tax – IRS Form 709 ©2013 Snell & Wilmer L.L.P. 18
- 19. EP 202 – Advanced Estate Planning • Reducing exposure to estate and gift tax • Business succession planning • Asset protection planning ©2013 Snell & Wilmer L.L.P. 19
- 20. Reducing Exposure to Estate and Gift Tax • Give assets away as soon as reasonably possible • Discount asset value • $14,000 annual exclusion • Unlimited tuition and medical expenses paid directly to the service provider ©2013 Snell & Wilmer L.L.P. 20
- 21. Business Succession Planning – Part 1 • Gauge interest in succession and develop plan • Divide economic rights and voting rights • Divide core business assets from other assets • When possible make gifts in trust ©2013 Snell & Wilmer L.L.P. 21
- 22. Business Succession Planning – Part 2 • What if no interest in succession? • Prepare business for sale • Understand significance of selling assets vs. selling equity • Consider related matters including earn outs, non-compete agreements, and consulting arrangements ©2013 Snell & Wilmer L.L.P. 22
- 23. Business Succession Planning – Part 3 • Possible approach: recapitalize company into voting and non-voting and/or supervoting, and begin transferring non-voting to trusts • Over time transfer remaining interests • What’s accomplished: retain control while transferring wealth and training next generation ©2013 Snell & Wilmer L.L.P. 23
- 24. Asset Protection Planning – Part 1 • Basics – make assets exempt from or unattractive to future creditors’ claims • Homestead exemption important in certain states • IRAs typically exempt • Life insurance often exempt ©2013 Snell & Wilmer L.L.P. 24
- 25. Asset Protection Planning – Part 2 • Trusts typically offer best protection for non-exempt assets • Superiority of third-party settled trusts • Self-settled spendthrift domestic vs. offshore trusts: ©2013 Snell & Wilmer L.L.P. 25
- 26. Summary • Have basic estate planning documents in place and review periodically • Transfer property to Revocable Trust now – e.g., your partnership interest and your house(s) • If estate and gift tax exposure a concern, begin planning process • Develop plan for business succession • Remember that good estate planning addresses many overlapping considerations including distribution of assets upon death, minimizing taxes, business succession and protecting assets ©2013 Snell & Wilmer L.L.P. 26