Below is an illustration (a fictitious one) with three things to consider upon the death of a spouse who owns a business.

Henry and Wendy celebrated their 30th anniversary last summer with their two children and three grandchildren. At the time of her death in November 2011, Wendy owned an increasingly successful retail business. Henry has been retired for four years. Here is a breakdown of their assets at the time of Wendy’s death:

Basic reminder: The Minnesota estate tax exemption is currently $1,000,000 ($1M).  Although Wendy has over $1M at the time of her death, her estate will not pay Minnesota estate taxes if her assets pass directly to Henry or to a special trust for his benefit. This is a result of the Unlimited Marital Deduction. This Marital Deduction allows the assets of a deceased spouse to pass to the surviving spouse without paying gift or estate tax. However, Wendy’s estate will still need to file a Minnesota Estate Tax return. As Wendy’s personal representative, Henry is a bit overwhelmed with all of the decisions that he needs to make.  Here are three things that Henry should consider:

Value the business. Although appraising a business can be expensive, it is in Henry’s best interest to memorialize the value of Wendy’s business at the time of her death. The valuation should be completed by a qualified independent appraiser or tax professional because the appraisal is evidence of Henry’s new tax basis in the business.

Wendy had moved her store’s location last year and sales had doubled within the first three months of the move (she was a very savvy businesswoman). If the store’s key employee accepts the position of general manager, the store will likely continue increasing in value. In this case, Henry will certainly want a record of the November 2011 valuation as evidence of his step-up in basis. The reason is that upon selling the business, Henry’s capital gain (or loss) and any resulting capital gains tax are generally determined by subtracting the date of death valuation from the sale price. The greater his basis, the less tax would be due.  [Note: Henry may have the option to use an “alternate valuation date” for determining his basis in Wendy's property but we will save that concept for another article.]

Value Wendy’s other assets: For the same reason that Henry wants to value the business, it is in his best interest to value Wendy’s other assets, to create a record of his step-up in basis for capital gains and losses. For example, he will want to have appraisals done for their condominium and cabin. You may read more about basis and capital gains here.

Review or update his estate plan. Henry will want to update his estate plan and he may consider disclaiming some of the assets that he would inherit from Wendy. The result of a disclaimer is that the disclaimed property passes to the next beneficiary, as if the disclaiming individual predeceased the decedent. To make a qualified disclaimer, an individual must fulfill certain requirements. If the contingent beneficiaries under Wendy’s estate plan were her children, Henry’s disclaimer would result in her assets passing to the children.

Of course, Henry’s estate planning decisions, including whether to disclaim, will depend upon Henry’s age, health, lifestyle and most likely the estate planning documents that Wendy had in place at the time of her death. Additional factors include the health and well-being of their children and Henry’s overall estate planning objectives.

These are just a few of the many things to consider when a spouse passes away. Most importantly, Henry should consult with his financial, tax, and legal professionals to ensure that he follows all of the extensive rules involved with Wendy’s estate administration.

Upon the death of a business owning spouse is a post from: Epilawg

We hear about it in the news, someone famous has disinherited a family member, or even more exciting, the whole family! Sometimes we even hear from the disgruntled “non-beneficiary” with an explanation or a tell-all critique of the person who did the disinheriting. But we rarely hear about it with the perspective that Mary Beth Caschetta shared in her New York Times article, What Wasn’t Passed On.

When conversations with clients cover the topic of disinheritance, I must remain neutral and cannot share my opinion. My role is to ensure that the client’s wishes are carried out, not to instruct them on making the right decision. Yet, it is also my job to ask the right questions. So, while it is absolutely the client’s decision, I often ask about the client’s reasoning.

Sometimes the client’s intent is to share certain sentiments with the disinherited family member. Other times, the client simply wants to give assets to other people or organizations. If the client is sending a post-mortem message, I explain that the client should be clear and concise in the Will but that he or she may share more extensive explanations in a letter to be delivered after his or her death.

In some situations, the client may want to communicate his or her message before death. Depending upon the client’s circumstances, an explanatory letter (along with a properly drafted will) may reduce the likelihood of a Will contest. As in Ms. Caschetta’s experience, I believe that a letter explaining the “why” of a disinheritance could clear up some confusion that remains after an individual’s death. Regardless of how you feel about disinheriting someone, read Ms. Caschetta’s story for a different view of what it is like to be disinherited.

Choosing to disinherit is a post from: Epilawg

When I heard about the scandal at Penn State, I never imagined that it would lead to an Epilawg article on estate planning.  But somehow, the topic of federal tax planning worked its way into this news story. An article on InvestmentNews.com reported that in July of 2011, Joe Paterno transferred his interest in the family home to his wife. While some individuals speculated that this was intended to protect the home from any upcoming civil law suits, InvestmentNews.com provides for Paterno’s legitimate estate planning purpose for the transfer.  My takeaway from the article is two-fold:

1.  I learned that Pennsylvania is a state that protects the home from creditors of one spouse, and

2.  I was reminded of the uncertainty we will encounter in the next year with regard to the federal estate tax.

The uncertainty in item #2 is because the current federal estate tax exemption of $5 Million is scheduled to return to $1 Million in just over one year.  Regardless of what the politicians do (or fail to do), individuals should review their estate plans and when possible, incorporate some flexibility into their legal documents.

Paterno’s transfer to wife was for estate planning purposes. is a post from: Epilawg

As reported on Forbes.com, September was World Alzheimer’s Month. It hasn’t been officially extended to October but the topic is so relevant that we should continue to consider the impact of the disease on our society. In particular, the impact of the disease on individual sufferers and their families. Here are a few relevant points from the Forbes article.

1. The rate of diagnosis for Alzheimers is on the rise.
2. The costs associated with caring for patients with the disease are overwhelming.
3. Finding effective treatments and hopefully a cure should be a priority.
4. Individuals can start preparing now by reviewing and updating their financial and estate plans.

Mental Incapacity and Estate Planning

The takeaway

World Alzheimer’s Month Extended? is a post from: Epilawg

Regardless of the size or complexity of your estate, there are no guarantees that your beneficiaries will agree with the terms of your estate planning documents. For that reason, I suggest that everyone read this article by Ashlea Ebeling on reducing the likelihood of estate litigation.

I particularly like #4 “Transfer a Business with a Contract”. If avoiding litigation is the primary goal, the recommendation to transfer a business interest prior to death is great. Expanding on Ms. Ebeling’s recommendation, here are a few things to keep in mind.  First, the tax basis of the business interest transferred may vary depending upon whether it is transferred during the owner’s life or after his or her death. Talk to a tax advisor regarding the values of each transfer.  The transfer must follow all company policies for transferring the interest. Also, any contracts effecting the transfer should be properly executed. Once a pre-death transfer is complete, review all estate planning documents to ensure that they are not in conflict with the completed transfer.

If you do not own any business interests, take note of the following:  #1 Treat Siblings Equally, #10 Spell Out Any Disinheritance, and #8 Establish that You Are of Sound Mind.  All of these points are equally important for large, medium and small estates.  As always, talk with your estate planning attorney and other advisors to ensure that your estate planning documents properly reflect your wishes.

Image: Roadsidepictures

Preventing Estate Litigation is a post from: Epilawg

I recommend that clients keep a List of Assets and Information with their Estate Planning documents.  The list should include the following items:

1. The institutions that hold your bank accounts and life insurance policies,
2. The contact information for tax and financial advisors,
3. The location of important documents (deeds, contracts, business or entity formation documents),
4. List of debts and/or receivables,
5. Any information necessary to access online accounts (photo and social media accounts, websites or blogs owned by the client), and
6. Funeral and burial information.

Having access to this information will allow a Personal Representative to locate and inventory all of a deceased person’s assets.  It will also assist family members who need to make decisions about memorial services.  Making this list is a very practical way to minimize the effort required of the fiduciaries named in estate planning documents.  This list has sensitive information and should be kept in a safe place but it should also be easy for a fiduciary to find when needed.  I recommend updating the list on an annual basis – maybe at the same time a client reviews his or her tangible personal property list.

Photo by Yortw on Flickr

Make list, update often is a post from: Epilawg

Similar to transferring a home, cabin, or other piece of real property into a revocable trust, individuals who have inherited or purchased farmland in Minnesota may want to transfer their farmland into a revocable trust.  The reasons vary depending upon the situation, however, the major reason for transferring farmland into a trust is for estate planning purposes.

As discussed in previous posts, revocable trust have numerous benefits.  Such benefits include avoiding the probate process, planning for incapacity, and managing the transfer of assets.  But Minnesotans who own farmland and want to transfer the land into a trust should be aware of the Minnesota Corporate Farm Act (Mn Stat. 500.24).  The reason: A trust that owns farmland in Minnesota is must register with the Minnesota Department of Agriculture by completing the Minnesota Corporate Farm Application.  More importantly, violation of the statute can result in a $500.00 fine and a gross misdemeanor.

A little history.

The purpose of the Minnesota Corporate Farm Act is, “to encourage and protect the family farm as a basic economic unit, to insure it as the most socially desirable mode of agricultural production, and to enhance and promote the stability and well-being of rural society in Minnesota and the nuclear family.”  Although transferring property into a trust may not be contrary to the purpose of the statute, trustees should carefully review the statute to ensure that they are in compliance.

Trusts can be exempt (sort of)

There are exceptions and exemptions available for certain types of entities.  One such exemption is the de minimis exemption.  The statute provides the de minimis exemption

“any corporation, pension or investment fund, limited liability company, or limited partnership that directly or indirectly owns, acquires, or otherwise obtains any interest in 40 acres or less of agricultural land and annually receives less than $150 per acre in gross revenue from rental or agricultural production.”

Notice that the statute does NOT include the trust as an entity eligible for the de minimis exemption.  That being said, the Department of Agriculture has a history of allowing trusts to use this exemption.  The list of Commissioner’s Exemptions indicates that farmland that has been transferred into a trust for estate planning purposes may qualify as exempt.  Even if the Commissioner grants this exemption, the trustees must still file an annual report.  If you own farmland in Minnesota, or if you think that the Corporate Farm Act may apply to you, seek advice from your real property or estate planning attorney.

This article is for informational purposes only and should not be used as legal advice. 

Photo: http://mn2020hindsight.org/view/land-values-moderate-reflect-market-sense

Resources:

• Mn Stat 500.24 – https://www.revisor.mn.gov/statutes/?id=500.24
• Minnesota House of Representatives website – http://www.house.leg.state.mn.us/hrd/pubs/ss/sscorpfarm.htm
• Minnesota Department of Agriculture Corporate Farm Report – http://www.mda.state.mn.us/licensing/licensetypes/corpfarmreport.aspx

Trusts and Minnesota Farmland is a post from: Epilawg

Revocable trusts have many benefits.  They typically allow for a smooth transition of assets when an individual dies, they can avoid the probate process, and they may incorporate transfer tax planning techniques such as disclaimers, QTIP trusts, and GST provisions (to name a few).  While these benefits are great, the unsung heroes of the revocable trust just might be the incapacity provisions.  These provisions are guidelines and standards for what to do when the settlor is incapacitated.

The increasing rates of dementia and Alzheimer disease coupled with the fact that people are living longer presents issues with regard to elderly individuals’ financial independence.  In many instances, elderly individuals are searching for a way to delegate the management of their finances yet still maintain ownership of their assets.  Revocable trusts are an excellent means to achieving such delegation.  The settlor may act as trustee and manage their assets for as long as they are able, and if he or she is deemed incapacitated, a successor trustee will step in to assist.

Trust vs. Joint Tenancy

It is common for elderly individuals to name an adult child as joint bank account holder.  However, as explained in a recent New Old Age article, joint tenancy is not ideal for a multitude of reasons.  At the top of the list is this: the creditors of a joint tenant can make claims against and seek payment from all of the assets in the jointly held account.  A revocable trust is far superior at avoiding this issue because assets transferred into a trust are not available to creditors of the elderly parent’s adult child.  [NOTE: This does not apply to fraudulent transfers for the purpose of avoiding creditor claims, assets that are subject to a personal guarantee made by the settlor trustee, or assets pledge under any other contractual obligation].

Trust vs. Convenience Account

An alternative to joint tenancy, the “convenience account without rights of survivorship” as described in the New Old Age article, is better than creating an account in joint tenancy.  With a convenience account, the assets are owned solely by the elderly individual, but another person is named to make deposits and transfers.  Although they are convenient, revocable trusts have a leg up on the convenience account.  The reason: they allow an individual to plan for a multitude of scenarios.

For example, the revocable trust document may outline who will become successor trustee and under what conditions that individual can name additional trustees, co-trustees, or corporate trustees.  In addition, the trust document defines incapacity, so an individual can predetermine the conditions for which he or she may be deemed unable to act as trustee.  The trust will name beneficiaries so that there is no confusion over who owns an asset.  And last but not least, the successor trustees have a fiduciary duty of loyalty to the settlor and any other beneficiaries of the trust.

Conclusion

Thoughtfully preparing for incapacity with a revocable trust can avoid family conflict by clearly naming and instructing the trustees.  It can also reduce the opportunity for impropriety on the part of whomever is assisting the elderly individual with their finances.  Although a revocable trust is not appropriate for everyone, it should be considered by individuals concerned with incapacity and the issues surrounding the delegation of financial responsibilities.

As always, confer with your estate planning attorney, tax advisor, and financial planner to determine the best planning tools for you.

Trusts and Incapacity is a post from: Epilawg

One consistent goal of estate planning clients who have children is to ensure financial stability for their children in the event that both parents die. These same parents often recognize that their children may not be mature enough to manage assets in a responsible way. To address this issue, trusts are created to ensure that someone who is financially savvy will manage the assets and make distributions to the children. The trust may even continue well into the adulthood of those children beneficiaries. In the process of the trust administration, many clients hope that the trustee will teach the children some financial responsibility.

Taking this concern about their children’s maturity level one step further, parents may want to consider whether their children will grow up to be charitably inclined.  This Wall Street Journal article, Teaching Charity to Young People by Veronica Dagher, discusses a few methods for teaching charity to children.  The theme of this article is that parents should lead by example and include children in their current philanthropic activities.

However, philanthropic education can continue even after a parent dies.  For example, donor advised funds or family foundations can be created to continue a giving tradition by setting up a fund from which children can direct gifts.  These options are not limited to wealthy families.  Although family foundations are quite complex and expensive to maintain, donor advised funds and charitable trusts are less expensive to create and administer.  Non-profits and community foundations have plenty of resources for individuals interested in charitable giving.  Most importantly, if parents feel strongly about raising children who give back to their communities, and they want the family giving tradition to continue after they are no longer living, it is essential to discuss this additional goal and the available giving options with an estate planning attorney.

Photo of Jack’s Lemonade from C’volution blog archives.

Raising Young Philanthropists is a post from: Epilawg

No, this is not about purchasing life insurance or finding the best policy. We leave that to the insurance experts. This article is a simple reminder to keep your policy information with the rest of your estate planning documents. The reason: You want your personal representative or your trustee to know about your policies after you have passed away. This will ensure that the life insurance company is notified of your death so that your beneficiaries can receive distributions.  I found interesting information about what happens to unclaimed policy benefits in Paul Sullivan‘s nytimes.com article, Tracking Down and Collecting Unclaimed Life Insurance Policies.

In addition to having your life insurance policy information with your estate planning documents, it is recommended to keep a list of your advisors and accounts so that all of your assets can be distributed efficiently and properly. Take a few minutes this weekend to find your estate planning documents and make sure that all of the necessary information is accessible to those who will someday need it.

Where have all the life insurance policies gone? is a post from: Epilawg