Tag Archive | "Estate Planning"

An Interview with Jim Duggan


After attaining a joint MBA/JD degree, attorney Jim Duggan set out with the intent of simply becoming a corporate lawyer. He was soon introduced to what he describes as, “the gaping holes in almost all closely-held business owners’ planning structures.” He realized the industry desperately needed an integrated legal solution. “My corporate clients were in need of estate planning and tax planning that factored in both their corporate and their personal circumstances. Unfortunately, most attorneys and law firms are specialty focused and therefore unable to provide adequate comprehensive services. In this manner, we are able to ensure that a client has the proper corporate structure, ownership by the appropriate estate planning devices, and succession and tax planning that meets both the business and personal objectives. For the private client, this is the only way a structure can be ‘optimized.’”

Duggan Bertsch is a transactional law firm providing integrated legal services for the private client. They focus specifically on business and corporate, trust and estates, and tax services for entrepreneurs and high net-worth clients. Duggan describes them as “unique from other law firms in the space in that we provide a multidisciplinary planning approach integrating various areas of planning, advisors, and client planning objectives.”

Duggan is married and has two children. He describes his typical weekend as a balancing act between working out, playing sports, coaching his son, and playing piano for his daughter while she practices for theater roles. At age 14, she has been acting and singing in community theaters since she was five. Musicals are her forte and she is also an accomplished violinist. Duggan finds it a real joy to watch her perform.

Having children with such different interests keeps him on his toes. In Duggan’s own childhood, both sports and music were a big part of growing up. He took piano lessons for many years as a child, but quit abruptly in the seventh grade when his basketball coach embarrassed him mid-practice by yelling, “Duggan! You gotta go early – piano lessons!” He quit piano lessons that very night, and did not play again until after high school. Duggan also enjoys being a part of all the sports his son plays. Since his son is involved in football, basketball, wrestling, golf and baseball, there is always something going on. But whether it is music or sports occupying his weekend, Duggan says a good day off is always made better when “capped by a really nice glass of scotch around a fire pit.”

He also dedicates much time to a charitable foundation called Network for Teaching Entrepreneurship (NFTE). Ten years ago Duggan was invited to be one of the founding directors. The organization provides business education and cultivates entrepreneurship for economically challenged students in an inner city public school, providing privately funded courses and teachers. Duggan finds it rewarding to be a part of the organization and likens it to the old saying that it is better to teach a man to fish than to just give him a fish to eat.

When asked what he feels are the biggest issues that he sees in the industry today, Dugan responded, “I feel one of the biggest reasons the private client receives inadequate integrated services from law firms is that law firms are unwilling to step into a broader role of responsibility for fear of liability. On the contrary, we feel our job, to be done properly, necessarily requires coordination among lawyers, accountants, insurance advisors, financial planners and other advisors in order to fully understand and accomplish a client’s objectives.” He also added that as the “proclaimed attack on the country’s ‘one-percenters’ continues, and taxes continue to go up to pay for increasing debt,” he sees private client’s needs in the asset protection and tax minimization areas increasing greatly”.

Asset Protection

In his position of comprehensive planning for closely-held businesses, Duggan says he has had “the great privilege of being able to have a seat within the family construct over a long period of time.” He says he has countless stories of clients who have celebrated the passing of their wealth to the next generation or beyond for no or low taxes, with asset bases fully preserved during a lawsuit or bankruptcy, and the “positive and successful rearing of the next generation in the family investment opportunity and broader family philanthropy.” His greatest reward comes perhaps when clients implement a “virtual family office.” “This effectively converts what is otherwise a fleeting inheritance into a perpetual and disciplined family wealth management opportunity.”

As a practitioner for the private client, Duggan says he feels it is his duty to combine asset protection as a primary planning objective with both corporate and estate planning matters. “The laws continue to improve both inside the U.S. and abroad with respect to asset protection vehicles. This is particularly important to clients who take on the enhanced risks of running their own businesses. It is important for such clients to create structures that utilize the most effective asset protection tools available under current law. Generally speaking, this is a combination of exempt assets, limited liability entities, such as limited liability companies and asset protection trusts.”

“Once upon a time, the asset protection trust solution was limited to the offshore realm, but now we have asset protection trust statutes proliferating throughout the United States. In short, I feel it is inexcusable for the high net worth client to possess a structure in which they are exposed to creditors when asset protection solutions are readily now to eliminate or minimize such exposure.”

What the Future Holds

Duggan says he doesn’t really see anything material on the legislative horizon that would increase or decrease the motivation to do proper planning. “We just went through a massive overhaul of the estate tax regime. It is always in question for political purposes, but in reality, we may be set with our laws on the income tax side, so we aren’t looking at adverse tax legislation anytime soon. I think the situation is the laws are aggressive enough that it makes people want to plan.”

For clients involved with international transactions or investments, the landscape has changed dramatically in recent years and Duggan expects it to continue to change dramatically in the foreseeable future. “New legislation continues to be introduced and regulations refined to ensure that all international activity and assets are fully disclosed to the government.”

Finally, Duggan says the days of operating offshore without reporting are behind us. “For those considering entering into international structures or relationships, or those who have such structures to maintain, international compliance is a top priority moving forward.” Failure to do so, Duggan noted, can lead to criminal sanctions without hesitation.

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Taming the Planning B.E.A.S.T. Part V – Tax Minimization


In this, the final installment of the “Taming the B.E.A.S.T.” series, we at last hit on the topic that is on the mind of all agent entrepreneurs – Tax Minimization. The “T” in our planning BEAST has two components: estate tax and income tax minimization. Each is critical to consider and will be surveyed below.

I. Estate Tax Minimization
Few object more to estate taxes than the entrepreneur. When one has accumulated wealth through taking on great risk and responsibility in a private business, and paid income taxes all along the way, it is hard to give up approximately half that wealth at the time of death in the form of state and federal estate taxes. So, while each agent strives to build the value of the business over a lifetime, they often fail to realize that they are building it in part for the benefit of the government.

When confronted with a taxable estate, an individual generally has 3 options in planning for the corresponding estate taxes: 1) pay them; 2) reduce them; and 3) avoid them. The optimal strategy will depend on the nature of the assets, as well as the objectives of the client.

Paying the Estate Tax
As difficult or undesirable as it may be to conceive, some people actually have to plan in a manner that simply provides for the full payment of estate taxes at death. This is a common strategy for those with highly illiquid estates that are to be retained, those with no available or intended heirs, or those who are simply unwilling to part with assets prior to death. Given that the typical agent has a fairly illiquid business, this is a key discussion point for planning.

The two methods to pay the estate tax are either a) use one’s own assets or b) use insurance. For those agents who have been able to harvest profits and invest away from the business in cash and marketable securities, paying the estate tax associated with the business and other illiquid assets (i.e., real estate) with one’s own assets is a viable option given their liquidity. However, in the case where the entrepreneur constantly plows profits back into the business, or invests in other illiquid assets, then another source of liquidity at the time of death must be found. The answer – insurance.

Life insurance is the most common solution, as the death proceeds provide the instant liquidity needed to pay any applicable taxes. In general, the agent simply needs to maintain insurance with death benefit at least equal to 50% of the value of the business and other illiquid assets in the estate. And of critical importance: the insurance should not be owned by the agent themself; rather, it should be owned by an irrevocable insurance trust (or family limited liability company) in order to keep the proceeds out of the estate as well.

Reduce the Estate Tax
Most agent entrepreneurs object to paying any estate tax, let alone using a solution to pay all possible estate taxes. Therefore, the next strategy to explore is estate tax reduction. Logically, in order to reduce estate taxes, one must reduce the value of the estate. Such reduction in value is achieved through a) the gifting of assets to the next generation; b) application of valuation discounts; or c) preventing future growth by the creation of asset freezes.

First, the direct gifting of assets can take many forms and is very effective. Essentially, one is reducing the size of the estate by giving assets away to others. The benefit to gifting during one’s lifetime is that not only is the asset value removed from the estate, but so too is all the appreciation that occurs after the date of gift. This allows a taxpayer to ultimately give away more than the available estate and gift tax exemption amount (currently $5.25M per taxpayer).

The direct gifting of assets is generally achieved through one of the following methods:

  • Formalized Gifting Programs – Using the annual and/or lifetime exclusions.
  • Qualified Tuition Expenses – Paying tuition directly to an institution for others.
  • Qualified Medical Expenses – Paying medical bills directly to an institution for others.
  • 529 College Saving Plans – 5-year front-loading = $70,000 tax-free, currently.
  • UGMAs/UTMAs – Making contributions to a minor’s custodial account.
  • Crummey Trusts/2503(c) Gift Trusts – Using gift trusts to receive the gifts for others.

In each of the foregoing strategies, the donor is parting with the assets and giving up control. Oftentimes, to maintain control and make a more indirect gift, we utilize family limited liability companies; the assets are owned by the LLC, and it is only the ownership interests in the LLC that are gifted. The donor typically retains some form of control and access to the assets as a manager of the LLC. In either case, the economic value of the wealth is being transferred, thereby reducing the size of the estate.

Valuation Discounts & Asset Freezes
The estate tax one pays is tied directly to the value of the assets reported on the tax return. Therefore, the lower the value of the assets, the lower the estate tax. Many people overlook that the assets they are valuing can be reduced significantly just by applying certain allowable valuation discounts.

Whether dealing with the agent’s business or properly structured family LLC, the interests in these types of entities can generally benefit from two types of discounts: a) lack of marketability; and b) lack of control. While other types of discounts may apply, these are the most common and most effective. And although the facts will vary in any given case, the range of acceptable discounts is usually 20-40% depending on the nature of the assets. For example, a 30% discount would reduce a $2M asset to a reported value of $1.4M, thereby reducing the size of the gift by $600K.

Valuation discounts apply equally during lifetime as at death. That is, gifts of the business or family LLC interests during one’s lifetime, or the same gifts provided in a will or trust at death, are entitled to the same reduction in value. In either case, a formal appraisal by a valuation expert must be obtained and submitted to the IRS.

Another strategy for reducing one’s estate is to cap the value of the estate by transferring all future appreciation to the next generation. Such structures are known as “freeze” techniques in which the assets are frozen at the current value, so the estate exposure is known. All increases in value after the date of the freeze are outside the estate.

The most common asset freeze techniques are:

  • Straight Sale – An asset is sold directly to next generation. The amount of the proceeds is the frozen amount.
  • Grantor Retained Annuity Trust – An asset is gifted to a trust in which the grantor generally receives an annuity interest equal to the value of the gifted asset.
  • Sale to Defective Trust – An asset is “sold” to a trust, which provides installment payments back to the seller. The trust is structured to be taxable to the seller for income tax purposes, so no capital gains tax is owed.
  • Qualified Personal Residence Trust – A residence or vacation home is gifted to a trust for the benefit of the next generation, and the senior generation retains the right to live in the house for a prescribed period of time rent-free.

In each of the above techniques, consider a combination approach in which the asset values are first squeezed down through valuation discounts and then transferred via the freeze technique. This combined approach is a “squeeze and freeze.”

Perhaps the best way to avoid inclusion of an asset in one’s estate is to never actually own the asset. Diverting original acquisition opportunities of business interests, real estate, competitive enterprises, and speculative securities to the next generation in the first place will remove the asset and all future appreciation from the estate. At some point, those with taxable estates need to realize enough is enough, and start building bigger estates for those downstream.

II. Income Tax Minimization
Of course, each year the agent entrepreneur is reminded of high income tax rates and the annual loss of wealth that results. Income taxes can be minimized, but the agent and his or her advisors need to be proactive in doing so. General strategies for income tax minimization include:

Maximizing Business Deductions – As a business owner, each agent benefits from a whole set of business expenses that he or she is entitled to deduct. Most leave dollars on the table by failing to maximizing the business deductions permitted under Section 162 of the Code. Some business expenses can indeed provide personal benefit as well – and you’d rather pay for such items with pre-tax rather than post-tax dollars. Maximizing business deductions, of course, results in lower taxable income on the individual return. Agents should consult a tax adviser each year to review expenses, to ensure material items are not being overlooked.

Maximizing Personal Deductions – Each individual taxpayer is also entitled to certain annual deductions or exemptions under the Code. So, in addition to the corporate deductions, agents should maximize individual deductions such as personal and dependent exemptions, charitable contributions and tax-deductible investments (e.g., oil & gas, agribusiness, tax credits, etc.).

Shifting Income to Lower Tax Brackets – Once the agent understands that the wealth proposition is more of a family wealth proposition as opposed to an individual one, then that focus should turn toward income tax planning as well. The goal is to minimize the overall family income tax burden. One simple way to do so is to allocate income – through salary, profits or certain benefits – to those family members in lower tax brackets. Although passive income may be subject to the “kiddie” tax, and taxed at the parent’s rate where applicable, earned income is not. Careful analysis of all family tax rates should be considered to ensure the greatest efficiency.

Establish a Tax-Free Earnings Environment – Instead of trying to find deductions and juggle multiple tax rates, it is sometimes easier to simply establish a tax-free earnings environment altogether. Retirement assets, portfolio investments and even businesses can be often be placed in a tax-free vehicle so that there is no ongoing tax drag on the annual income. Examples include ERISA plans for retirement, high cash value insurance policies for portfolios and corporations owned by Employee Stock Ownership Plans.

There are variations and combinations of the foregoing to consider as well. For example, a captive insurance company is an insurance company established by the agent to principally insure risks of his or her entity(ies). While the goal is to increase profit through positive underwriting, a properly formed captive can also provide significant tax benefits. First, the premiums written from the entity(ies) are deductible, reducing the taxable income. Second, with a specific 831(b) captive, the first $1.2M of premium to the captive can be received tax-free. Third, distributions from the entity are currently taxed at lower qualified dividend rates as opposed to ordinary income. And fourth, if the entity is established with a family trust as the owner, the entity can be set up completely outside the agent’s estate.

Combining various tax strategies has to be carefully pursued with experienced counsel, but the results can be compelling if done correctly. Obviously, agents should seek experienced counsel when engaging in tax minimization planning as faulty planning can have disastrous results.

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Taming the B.E.A.S.T. Part 4 – Succession Planning


The daily demands on agents are varied and many, requiring flexibility and resiliency with an ever-changing focus. As a result, the typical agent wears many hats and is spread quite thin while pursuing his or her business. Given this circumstance, most find themselves caught up in the fire drill of the day, with little opportunity to pull away and give planning for the future its proper due.

Unfortunately, failing to plan for the succession of the business, or the wealth it has helped to generate, can lead to overnight ruin of the asset base that the agent worked so hard to create. In this, the fourth installment of the “Taming the B.E.A.S.T.” series, we will address the all-important “S” – Succession Planning.

The fundamental goal of succession planning, not surprisingly, is to ensure that the agent’s business and wealth are properly succeeded upon death or disability. This requires placing the business or assets in the best structures with the best-suited individuals. The problem with failing to address this in advance is that the courts or state statutes will then inevitably control, rarely resulting in the same choices the agent would have made. In order to prevent loss as a result of failed succession planning, agents must take proactive planning steps with respect to both the business as well as personal wealth.

Business Succession Planning
Since the business typically comprises the bulk of an agent’s estate, and is the asset that impacts the most people, it must be planned with extra care in determining the optimal succession structure. Items to consider include:

1. Corporate Contingency Plan. Very few companies create a formal corporate contingency plan, but all companies would benefit from having one. The point to the contingency plan is to establish who has authority, and what steps should be taken in the event that certain key employees or owners are no longer available or able to act in their respective capacities. Whether due to death, disability or otherwise, an individual may suddenly not be able to perform his or her duties for the enterprise. If this is the agent, then the impact is, of course, most devastating. To ensure that the business has the least adverse impact, the agent should clearly lay out in a formal written document exactly what happens and who steps in with authority upon any such contingency. This contingency plan should be approved in the minutes and inserted into the corporate record book to ensure its enforcement. Since each business and its personnel are unique, each contingency plan is similarly unique and should be crafted to address the unique facts.

2. Successor Directors Stated in Annual Minutes. An oversight of many entrepreneurial businesses is the failure to have, at a minimum, unanimous written consent minutes approving the actions for the year and appointing directors, officers, managers, etc. And for those that do create minutes, they only apply the statements to the current individuals for the current year. A good set of comprehensive annual minutes can also be used to set forth the key successors to the positions of authority for avoidance of doubt. For example, after the resolution appointing an individual as director, it can also appoint the successor director in the event of death, disability, etc. This ensures a seamless transition without dispute. Moreover, these minutes are revisited every year, so the best-suited successor can be changed as the appropriate individuals change. The minutes are thereafter placed into the corporate record book.

3. Limited Power of Attorney for Business Matters. Powers of Attorney for Property and Health Care are routinely used in estate planning, but the agent entrepreneur may need something more – a Limited Power of Attorney for Business Decisions. This is a specific power of attorney that grants an individual authority with respect to the voting or control of a particular business in the event of the agent’s disability. This ensures that the most suitable business-minded individual steps into the role so that the business is run as intended. Oftentimes, the individual selected for the basic power of attorney for property (usually a spouse) is not the best candidate to step up and control the business or its shares.

4. Shareholder Agreement. As discussed in the first installment of the Taming the B.E.A.S.T. series, agents should have a fully documented shareholder agreement with buy-sell provisions. This agreement provides for the clear succession, pricing and buyout terms for the interests; in addition, the shareholder agreement can provide for voting controls, management succession and other contingencies. The more comprehensive the shareholder agreement, the greater the certainty upon a given succession contingency.

Personal Wealth Succession Planning
In addition to business succession, the ultimate succession of the agent’s accumulated wealth (or liquidation proceeds of the business) must be addressed in the planning documents. With its obvious direct impact on the family, personal wealth succession planning must be carefully thought through to maximize the longevity of the wealth, as well as the positive impact it can have on descendants. A poor succession plan in this regard can lead to evaporating wealth, negative impact for the individuals and family discord.

A responsible wealth succession plan should incorporate the following:

1. Transition Plan for Next Generation(s) & Spouse. As the typical agent is in control of the family wealth and financial picture, this can leave a gaping hole upon in the event of death or disability. Agents should contemplate their absence or inability for whatever reason, and develop a family wealth transition plan. They should identify the best family members or advisors to succeed them in and outline their intentions for the wealth distribution. This documentation can take the form of a formal will or trust, but can also be an informal document or understanding between the agent and their family. The critical point is to have a plan that the descendants and spouse can follow. Without a plan to provide a measure of certainty and guidance, the wealth will typically suffer.

2. The FLLC as “Virtual Family Office.” Wealth succession planning is really about wealth preservation. To ensure the permanence around one’s wealth as well as a true business discipline for its long-term management, perhaps the best vehicle to implement is a family limited liability company (”FLLC”). Rather than simply handing out assets upon death, an agent would transfer interests in the FLLC, which in turn owns the assets. Descendants can’t squander an LLC interest like they can cash; they are given a share of the family fund and can utilize the profit distributions as they see fit, while keeping the principal intact. This creates a business-based wealth management platform that helps to institutionalize the family wealth opportunity. We refer to this as a “Virtual Family Office” when the structure is used for this purpose, and the critical professional functions are outsourced to advisors. The Virtual Family Office structure elevates the respect and responsibility toward the management of the wealth and creates a more thoughtful succession plan.

3. Family Governance and Management Designation. Whether one implements an FLLC, Virtual Family Office, or just a trust for descendants, agents should consider creating formal family wealth governance documents. With an FLLC, this is fairly easy to accomplish, as it is a business entity with an Operating Agreement and annual minutes that can lay out the formal wealth plan, as well as designate those individuals who are best-suited to serve as managers through time. The managers selected may be family members only, outside advisors only, or a combination of the two. The roles played can vary based on the amount of assets, type of assets or nature of activity. Establishing a mission, family bylaws, or similar governance documents places the wealth in higher regard than a simple inheritance, and better equips any descendants to be able successors and stewards of the wealth.

4. Change in Investment Philosophy. Agent entrepreneurs are a different breed, generally willing to take on more risk than their counterparts. One of the key transitions in personal wealth succession planning is to ensure the overall investment philosophy transitions accordingly. The type of investment portfolio that the agent is willing to assemble is often quite different than what he or she would want for a surviving spouse, or for descendants in the long run. It is important to draft a clear investment statement that contemplates the changing times – what the investment philosophy is during lifetime, during the surviving spouse’s lifetime, and thereafter. This type of statement can be self-created, or prepared in collaboration with an investment advisor. In either case, it lets the family know how the wealth will be managed through time.

It is the agent entrepreneur’s overriding objective to build a successful business through his or her efforts. To prevent the dissipation of both the business and the wealth it has helped to create, agents must proactively provide for their proper succession. And while the topic of one’s demise is not the most joyful to contemplate, spending a little time now on the matter can prevent great strife for the family down the road.

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Taming the B.E.A.S.T. Part 2 – Estate Planning


In this second installment of our business continuity planning series, Taming the B.E.A.S.T., we turn our focus to the “E” in “B.E.A.S.T.”, which stands for Estate Planning. What makes estate planning so critical for the agent entrepreneur is that – if you have not figured it out yet – the agent entrepreneur’s business usually is the estate.

While we may not have any control over the timing of our ultimate days, we can act today to control the ultimate impact of our death on the disposition of our estate, and ease the administrative difficulties for descendants. With a few carefully worded documents, the agent entrepreneur can ensure that his or her estate plan accomplishes the following objectives:

1) Ensure privacy through the avoidance of probate;
2) Establish a cost-effective and expedited estate administration,
3) Provide for a proper, customized disposition of business and assets;
4) Maximize estate value;
5) Minimize estate tax;
6) Protect distributed estate assets from claims of a beneficiary’s creditors;
7) Designate preferred agents to act on one’s behalf if incapacitated prior to death;
8) Ensure provision of, or withholding of, life-sustaining treatment; and
9) Appoint best-suited guardians for minor children.

Estate planning starts with establishing a core plan. While it may differ per person, the typical core plan for the agent entrepreneur will include the following documents: Revocable Living Trust, Pour-Over Will, Power of Attorney for Property, Power of Attorney for Health Care, Limited Power of Attorney for Business Decisions and a Living Will.

The Revocable Living Trust
When one embarks on the task of creating an estate plan, the common statement made is that he or she needs to “do a will.” While this may be appropriate and true in some cases, it is usually not appropriate for agent entrepreneurs or high net worth clients. It remains unknown by many that there are actually two options when preparing a document to provide for the disposition of assets at one’s death: 1) a Will, or 2) a Revocable Living Trust. These two documents accomplish the exact same thing with respect to asset disposition and tax planning, but with one fundamental difference – the revocable living trust avoids probate!

If an individual dies with a will in place, or with no estate planning documents at all, then that individual’s estate must be administered through the probate courts. Probate is a formal judicial process in which a judge oversees the administration of the estate while working with the executor (who is appointed by the deceased party or by the court if not otherwise provided.)

Because it is a formal legal process involving a separate court system, estate administration through the probate court can be very expensive and involves mandated time frames, such as a notice period for creditors to sue, which results in unavoidable delays. In addition, and perhaps most importantly, probate is a public process. This means the court records, the assets, the amounts received by beneficiaries and all other personal probate estate information are available for anyone to see. This is the key problem with using wills for the agent entrepreneur or high net worth client. Most value their privacy, and want to ensure that their estates are administered in a confidential manner. The revocable living trust, as opposed to the will, is the document you should use to avoid probate and protect your privacy at death. It also makes for a simpler, more expedited and less costly administration for your survivors to handle.

In addition to using the revocable living trust, you may benefit from investing in certain assets, or titling assets in a specific way, which will inherently avoid probate. Assets with beneficiary designations — such as IRAs, 401(k) plans, life insurance and annuities — automatically avoid probate since the contract provides for a beneficiary and is administered by a third party at death. Also, by titling assets “jointly, with rights of survivorship,” the decedent can co-own property with another person, and at death, the asset automatically passes to the surviving co-owner per its joint ownership terms. This can be used for bank accounts, personal property and real property.

Given that agent entrepreneurs either have complexity to their estates, or significant value, or both, the goal to maintain privacy is paramount.

The Pour-Over Will
Although the revocable living trust should serve as the primary dispositive estate planning document, the core plan still requires a will in some form. When the revocable living trust is used, it should be coupled with what is known as a “Pour-Over Will.”

A pour-over will is a short-form, simple will that basically accomplishes two things: 1) it appoints guardians for your minor children, and 2) it transfers any assets that remain titled in your individual name (as opposed to the trust) into the revocable living trust at death for ultimate administration.

It is important to carefully appoint guardians for your children and have a few successors in your document. If guardians are not named by you, with whatever preferences or conditions you may dictate, then the state will get involved and the court will simply appoint a guardian in its discretion. The outcome is usually different than what you would otherwise dictate.

Next, although the goal is to fully fund the revocable living trust during your lifetime by transferring title of all assets into it, people usually die with some assets still in their individual name. It is these assets that are simply “poured” into the revocable living trust at the time of death. Many states have “small estate exemptions” that allow you to avoid probate if the probate assets are minimal. This amount varies from state to state, but is commonly between $50,000 and $100,000. Therefore, if a person fails to fully fund the revocable living trust, then the hope is that any individually titled assets have a value less than the state’s small estate exemption amount.

Powers of Attorney – Property and Health Care
While much focus is understandably on planning in the event of death, the truth is we are all more likely to be disabled than die at any given moment. The role of a Power of Attorney is to appoint an agent who is authorized to make decisions and act on your behalf in the event of your mental incapacity.

Logically, the law has separated your world into two parts for this purpose – property/financial decisions on the one hand, and health care on the other. Therefore, your core plan should also have a power of attorney for property and a power of attorney for health. Since these are two very different areas of knowledge and experience, the agents you should appoint in one may be very different from the agents you should appoint in another.

As with guardians, if you fail to properly appoint your property or health care agents in documents while you have the capacity to do so, then the court will decide for you. This is the outcome you want to avoid.

One of the biggest oversights I see in the estate planning documents for the agent entrepreneur is the failure to include perhaps the most important power of attorney document – the Limited Power of Attorney for Business Decisions.

In most business settings, the most suitable person to help the business continue to prosper in the event of the agent entrepreneur’s incapacity is not the person he or she appoints as the agent to have authority over personal bank and investment accounts. While a spouse may be appropriate for general personal financial decisions, most business owners would not turn to the spouse to effectively manage the business to maintain its viability and value. Moreover, in many cases where there are multiple business owners, the owners have very expressly stated or provided in the documentation that there is no intent to work with spouses.

Therefore, in order to specifically protect the business, the agent entrepreneur should create a special form of power of attorney, called the limited power of attorney for business decisions. This document specifically references the business, the individuals to be appointed, and the scope of the decision-making. This is the best approach to protect the golden goose.

Living Will
There have been multiple widely publicized instances in which an individual has been put on life support and the courts have been involved to try to settle the dispute between warring family members. The debate is whether to keep someone alive who has no quality of life where death would be imminent but for the life support, or to allow the individual to die naturally and avoid unnecessary or undesirable depletion of estate assets. The Living Will is your opportunity to state your life-sustaining treatment desires very clearly up front so there are no questions or court involvement when the time comes.

Other Benefits of the Core Plan
Properly crafted, the estate planning documentation of the core plan should provide a variety of other benefits that are meaningful to the individual and the family:

• Keep the State out of your affairs. If you die without a will, your state will direct the disposition of your assets per its statute and the court discretion. If you don’t appoint guardians or powers of attorney, your state will do so for you at the time. You do not want state intrusion into your affairs, and you want to ensure that all matters are handled pursuant to your specific desires only, then you need to be responsible and create your documents in advance.

• Protected, customized distribution of wealth. You are able to create customized distribution standards that match your personal philosophies of wealth. You can break free from the “forms” and accomplish your objectives by disposing assets to descendants at the times, in such amounts and under such conditions as you wish. Also, to ensure that your wealth never ends up in the hands of creditors or ex-spouses of your descendants, you can ensure that all distributions are done “in trust” with asset protection features. You can effect pre- and post-nuptial planning for your descendants without their involvement.

• Maximize value. By providing for certainty, a smooth transition, a cost-minimized administration, and the best-suited individuals to manage your business affairs, you will maximize the value of your estate to be passed on.

• Minimize taxation. The structure of the documents can also be used to minimize estate and generation skipping taxes. We can create “pots” within the documents that isolate tax exemptions for federal estate tax, state estate tax and multi-generational giving. The goal, of course, is to make your estate plan as tax-efficient as possible.

In the last 20 years, estate planning has seen a new insertion into the core planning discussion – Asset Protection. It is useless to plan for the ultimate disposition of one’s wealth, or create structures to avoid estate tax, if one’s wealth has been lost prior to death as a result of a lawsuit. Therefore, the optimal estate plan necessarily involves structuring one’s assets in a way that they are insulated from, and not exposed to, creditors. Asset protection is the “A” in the planning “B.E.A.S.T.” – and it will be discussed in the next installment.

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Taming the Planning B.E.A.S.T. Part 1 – Buy-Sell Planning


The B.E.A.S.T. is always lurking — will you be its next victim?

As agents maintain a primary focus on running a successful business, proactive planning understandably gives way to the demands of the day. Unfortunately, the failure to proactively plan can have catastrophic consequences. Making a solid business continuity plan is key to the long-term success of any agency — this includes planning for events such as retirement of the principal owner, selling the business, or for any number of unplanned events that could crop up. There are different types of planning to address multiple scenarios:

Buy-Sell Planning — An absence of thoughtful buy-sell planning can lead to loss of value, litigation and failed transition for your business interests upon a wide range of trigger events.

Estate Planning — An improper estate plan can lead to public disclosure of private information, faulty disposition of assets, tax inefficiency and creditor exposure.

Asset Protection — All that you have worked for can be lost in a lawsuit if your business and personal asset structures are not properly insulated from creditors.

Succession Planning — Failing to establish the best-suited individual(s) to succeed you for both the business and your personal wealth usually leads to material dissipation of each after your death or disability.

Tax Minimization — Tax-inefficiency can lead to income and estate tax burdens in excess of 50%; maximize what you keep.

Each area is important in its own right, as the failure to properly address any one of the foregoing elements can lead to unexpected loss, if not ruin. This article will serve as the first of five installments in which each component will be reviewed for your benefit. Not surprisingly, we start with “B”….

Buy-Sell Planning
Above all, the goal of buy-sell planning is certainty. You have the ability to prescribe the rights and obligations of the owner(s) of a business as well as the terms upon which the ownership interests may pass. Uncertainty can lead to impasse, litigation, lack of leverage in negotiation and lost enterprise value.

You may create a separate Buy-Sell Agreement (BSA), or insert buy-sell planning provisions into broader shareholder agreements, operating agreements, partnership and joint venture agreements and bylaws. Your circumstances will dictate which is the best path for you to take. Aside from certainty, reasons for a BSA include:

1. Restricting certain transfers. The entrepreneurial venture is usually a small business enterprise, as well as a privately held entity. Consequently, restrictions on transfer are often necessary to protect the company and your objectives. For example, a transfer could be prohibited and declared void in all respects if it is made to a transferee that: a) would violate an entity’s existing S corporation election, b) is not your descendant, or c) is not consented to by a stated voting percentage, including unanimous. This type of provision ensures the ownership interests never end up in the wrong hands, as defined by you.

2. Creating a class of “permitted transferees.” While restrictions may be necessary, it may also be desirable to create a class of potential transferees who may receive ownership interests without any prohibitions. Generally, this class of “permitted transferees” may include existing owners, your descendants, an estate planning trust for your benefit, any entity controlled by you and perhaps key employees.

3. Clarifying the appropriate “trigger events.” At the core of the BSA are the various trigger events upon which the buy-sell provisions take effect. Most commonly, the BSA will deal with the contingency of the current owner’s death. The BSA creates a binding obligation for the estate of the deceased owner to sell, and the prospective purchaser to buy, the ownership interests of the deceased owner.

And while planning for death is the most common driver to the BSA, there are a variety of triggers of equal, if not even greater, importance. They include:

• Disability
• Voluntary transfer
• Involuntary transfer
• Retirement
• Resignation (before a specified retirement age)
• Attainment of stated return or economic threshold
• Divorce
• Bankruptcy
• Loss of professional license
• Termination
• Dispute
• Passage of a stated period of time
• Conviction of a crime
• And anything else that fits your circumstance

Each of the foregoing should be considered and discussed in detail to determine how best each contingency should be handled. The BSA is necessary not only to identify each trigger, but also to outline the purchase right/obligation at the time. It is likely that the various triggers will actually be treated differently.

4. Providing a guaranteed market for ownership interests. Given that your entrepreneurial enterprise is almost certainly a private company, you are illiquid. You are in a different position than a public company, in that you have a very limited pool of potential purchasers. The BSA allows you to overcome your illiquidity obstacle by identifying the class of purchasers and contracting in advance for the ultimate purchase of shares upon the specific trigger. The BSA, in effect, provides a self-created exit strategy.

5. Establishing the optimal valuation method. As a private company, it can also be difficult to readily value your business. The BSA allows you to pre-determine the valuation methods to be applied at the time of purchase. Multiple methods can be used:

a) Agreed Value — an amount that is stated in the BSA and adjusted annually thereafter in the company record book;

b) Agreed Formula — this can be an industry norm or customize formula to be applied at the time;

c) Appraised Value — using one or more third party appraisers to independently value the business using their professional valuation approaches;

d) Insurance Proceeds — this method simply pegs the value of the interest to the amount of insurance proceeds received upon the death or disability of the owner; and,

e) Any combination of the above — you can combine the approaches using a “greater than” or “less than” standard. An example would be to purchase shares upon the death of the owner for an amount equal to the greater of the insurance proceeds received or the agreed formula value.

6. Establishing the ultimate purchase price and payment terms. Establishing the price is not necessarily the same as the valuation exercise. While the price may equal the valuation, it can also be adjusted from the valuation derived, depending on the nature of the departure. For example, a discount could be further applied in the event of a “bad” trigger (e.g., divorce or criminal conviction), or a premium applied in the event of a “good” trigger (retirement after many years). Also, the payment terms can be altered based on the nature of the trigger. A “bad” trigger may be paid out over a long period of time, with little money down, and a low interest rate, while a “good” trigger may be paid out over a shorter period of time, with significant money down and a high interest rate.

7. Assisting with tax planning. The BSA can be structured generally as a “redemption” in which the company buys back the interests, or a “cross-purchase” in which the other owners or successors buy the interests directly. For tax planning purposes, the cross-purchase method is favored as it gives the purchaser a “step-up” in basis on the received ownership interests. With a redemption, the company makes the purchase; the remaining owner(s) have an increase in the value of their respective interests, but no increase in basis since they did not pay anything. As a result, upon subsequent sale to a third party, the taxes will be greater after a redemption and less after a cross-purchase. The BSA can also be structured to have the best of all worlds by giving both the company and the other owners the option/obligation to make the purchase.

8.Avoiding litigation. Litigation arises when two or more parties have a dispute that they are unable to resolve without resorting to the courts. By providing the clear rights and obligations in advance of any trigger, you are able to provide a blueprint as to what the outcome must be, thereby avoiding costly litigation. Your family and successors will indeed thank you for this.

Although it may not be easy contemplate all the triggers that may apply to your entrepreneurial venture, a little effort now can provide certainty, avoid heartache and maximize your purchase price down the road.

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