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Thursday, August 16, 2012

Leaving Behind or Gifting Your Assets Does Not Mean Losing Control

A recent article in the Wall Street Journal by Laura Sanders (link below) explored the many ways in which you can provide for your loved ones and still ensure that the assets you have left are used in a productive manner after your gone.  In fact, there is a great deal of leeway for individuals who wish to provide conditions on the distribution and release of not only the inheritance that they leave behind, but also gifts they may wish to make now. 

As Ms. Sanders explains in her article, what you give away and how is especially relevant because of the unusual, and likely short-lived, current estate and gift tax exemptions which allow a taxpayer to transfer up to $5.12 million tax-free, either at death or through lifetime gifts. Because the current exemptions are set to expire in January 2013, you should consider making gifts before the end of the year. 

While making gifts now means giving up control of a portion of your assets, you can structure the terms of your estate plan to restrict distributions until the achievement of a certain goal or landmark event.  You can also use your assets as future incentives to encourage your children or grandchildren to complete higher education or become entrepreneurs.  When designing your estate plan, you may also want to include a popular provision provided in many states, including Alaska, prohibiting your beneficiaries from contesting the validity of your estate plan or else risk losing their inheritance. 

To read the article in its entirety, see Laura Sanders, How to Control Your Heirs From the Grave, Wall Street Journal, Aug. 10, 2012.


Tuesday, August 14, 2012

Buy-Sell Agreements and Your Business

If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenup. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.

With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.

A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily.  Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?

When drafting a buy-sell agreement, business owners should be prepared to consider the following issues:

  • Triggering Events - What events trigger the provisions of the agreement?  These normally include death, disability, bankruptcy, divorce and retirement.
     
  • Business Valuation - How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula.  The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event. 
     
  • Funding - How will the departing owner be paid?  Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners.  With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares. Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”).   The agreement may also authorize the company to use it’s cash reserves to buy-out the departing owners.  

If you are a business owner and share ownership interest in your company, Foley & Foley can assist you in crafting this essential document to preserve the value of your contribution to the company.  For more information on the necessity of buy-sell agreements, see this recent article in Forbes by Robert W. Wood:  "In Business? Get A Buy-Sell Agreement!"


Thursday, July 12, 2012

Considering the Heirs

In his recent article in the New York Times, Paul Sullivan writes about the current tax break that allows individuals to give up to $5.12 million to their heirs tax-free.  The fate of this current break, set to expire in nearly five months at the end of 2012, may not be determined until after the November election.  In the meantime, individuals have a "once-in-a-lifetime opportunity" to transfer their assets in trust to their children and other loved ones without leaving them a hefty tax bill.  As Paul writes, the issue for some is giving up control and trusting they have enough liquid assets to live on should their financial circumstances change:

Now, some of the wealthy are faced with a choice that seems designed by a behavioral economist to test rational decision-making: Do they give their heirs the full amount of the exemption, happy that the money will help the heirs now and reduce their eventual estate tax bill? Or do they give less, or none at all, for fear that they could be left with not enough to live on?

One option for individuals worried about retaining their liquid assets is to put real estate or shares in a private business into a trust.  While no one can predict with certainty what the estate laws will look like in January, one thing is clear:  You should sit down with an estate planning attorney to assess your concerns and consider taking advantage of this opportunity soon, before the law expires.  

Check out Paul's entire article here.

 

 


Wednesday, June 13, 2012

Common Estate Planning Myths

Estate planning is a powerful tool that among other things, enables you to direct exactly how your assets will be handled upon your death or disability. A well-crafted estate plan will ensure you and your family avoid the hassles of guardianship, conservatorship, probate or unpleasant estate tax surprises. Unfortunately, many individuals have fallen victim to several persistent myths and misconceptions about estate planning and what happens if you die or become incapacitated.

Some of these misconceptions about living trusts and wills cause people to postpone their estate planning – often until it is too late.

Myth: I’m not rich so I don’t need estate planning.
Fact: Estate planning is not just for the wealthy, and provides many benefits regardless of your income or assets. For example, a good estate plan includes provisions for caring for a minor or disabled child, caring for a surviving spouse, caring for pets, transferring ownership of property or business interests according to your wishes, tax savings, and probate avoidance.

Myth: I’m too young to create an estate plan.
Fact: None of us know exactly what the future holds. Even if you have no assets and no family to support, you should have a power of attorney and health care directive in place, in case you ever become disabled or incapacitated.

Myth: Owning property in joint tenancy is an easier, more affordable way to avoid probate than placing it in a revocable living trust.
Fact: In Alaska, only a husband and wife can jointly own property with a right of survivorship.  Holding title to real property with someone other than your spouse results in a tenancy in common.  Tenants in common have no right of survivorship, meaning that if one tenant in common dies, that tenant's interest in the property will be part of his or her probate estate and pass to their heirs and devisees either by will or intestate succession. 

Myth: Keeping property out of probate saves money on federal estate taxes.
Fact: Probate, and probate avoidance, are governed by state law and address how property passes upon your death; they have nothing to do with federal estate taxes, which are set forth in the Internal Revenue Code. Estate planning can reduce estate taxes, but that has nothing to do with a discussion regarding probate avoidance.

Myth: With a living trust, a surviving spouse need not take any action after the other spouse’s death.
Fact: Failure to adhere to the proper legal formalities following a death could result in significant administrative and tax implications. While a properly drafted and funded living trust will avoid probate, there are still some tasks that have to be performed such as filing documents, sending notices and transferring assets.  

Which myths have you heard? Which ones have you believed? 

 

 


Wednesday, May 30, 2012

Family Business: Preserving Your Legacy for Generations to Come

Are you a business owner? If so, you need to consider the following truth: Someday you will exit your business.  For most closely-held business owners, this reality is hard to imagine, but without taking time to plan for the inevitable, you will not be able to ensure that your business and the wealth that you have created are protected and pass smoothly to future generations.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Foley & Foley can help business owners develop a sound exit planning roadmap and assist in the preparation of strategies and business organizational requirements to help assure a smooth business transition from one generation to the next.  Below are some steps you should consider taking as part of your business succession plan. 

  • Meet with an estate planning attorney at Foley & Foley to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
  • As part of the estate planning process, communicate with your family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan with your attorney to transfer ownership and control to the younger generation. 
  • Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
  • Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
  • Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
  • Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
  • Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.

You have worked very hard over your lifetime to build your business, but you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.  If you want to better understand how we can assist your business make this transition, contact us today for an initial business planning consultation.
 

 

 


Monday, May 14, 2012

5 Events Which May Require a Change in Your Estate Plan

Creating an estate plan is not a one-time event. You should review your estate plan periodically, to ensure it is up to date, and make necessary changes if your personal situation, or that of the people you wish to receive and administer your estate, has changed. There are a number of life-changing events that require your estate plan to be revised, including:

1)  Change in Marital Status: If you have recently been married or divorced, it is imperative that you review and modify your estate plan. With a new marriage, you must determine which assets you want to pass to your new spouse or step-children, and how that may relate to the beneficiary interest of your own children. Following a divorce it is a good practice to revise your estate plan to formally remove the ex-spouse as an heir. While you’re at it, you should also review the beneficiaries listed on any life insurance policies, pensions, or retirement accounts to ensure they are consistent with your estate plan. Estate planning is complicated when there are children from multiple marriages.  If one of your beneficiaries experiences a change in marital status, that may also trigger a need to revise your estate plan. 

2)  Births: Upon the birth of a new child, parents should amend their estate plans immediately, to include in their wills the names of the guardians who will care for their child if both parents die.  In addition, parents and grandparents alike may wish to modify the distribution of assets provided in their estate plans, to include the new addition to the family.

3)  Deaths or Incapacitation:  If any of the named beneficiaries, personal representatives, trustees, or guardians for your children, pass away or become incapacitated, your estate plan should be revised accordingly.

4)  Change in Assets: Your estate plan may need to be changed if the value of your assets has significantly increased or decreased, or if you dispose of an asset.  You may want to modify the distribution of other assets in your estate to account for the changed value or disposition of the asset.  In addition, changes in the estate and gift tax laws can occur at any time.  The current estate tax exemption of $5.12 million is set to expire the end of 2012.  Changes in the size of your estate or in the estate and gift tax laws could make some tax planning strategies advantageous to you and your heirs and devisees.

5)  Change in Employment:  A change in the amount and/or source of income means your estate plan should be examined to see if any changes must be made.  Retirement or changing jobs could also entail moving to another state, and possibly subjecting your estate to the laws of that state when you die.  If the change in income modifies your investing, saving or spending habits, it may be time to review your estate plan to make sure the distribution to your heirs and devisees will be as you intended.

Changes can cause the best estate plans to become obsolete over time. At Foley & Foley, we are here to help ensure that your estate plan is always current and will work the way that you intend by offering regular updating and maintenance of your plan through our Generations Program.   

 

 


Thursday, January 5, 2012

Welcome!

Welcome to our new website which was launched on Jan. 5, 2012.  The design and content of the website have been developed after a great deal of thought and effort. We hope that you find the website helpful and informative. 

Coincidentally it has been exactly 25 years since our law firm was founded.  The Law Office of Susan Behlke Foley opened for business on January 7, 1987.  The Law Office of Richard H. Foley opened in September of 1987.  The company was formally incorporated as Foley & Foley, P.C. in 1988.  We are proud to be celebrating our silver anniversary in 2012.

If you are looking for more information about probate, we maintain an informational website called probatealaska.com, that provides comprehensive guidance about the probate process in Alaska in language that you can understand.  Probatealaska.com was launched in December 2011.

 

Richard Foley


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