Do I Need An Attorney To Prepare A Simple Will?

I occasionally get asked if it is really necessary to hire an attorney to prepare simple estate planning documents.  Usually, the answer is NO, however, I find that once I start asking a few questions, most people really don't need a simple Will and they would be much better served with professional guidance.

Let me take you through some of the questions that I ask to determine whether it is worthwhile to engage legal counsel:

1) Do you have children from a previous marriage?  If so, I strongly recommend that you hire an attorney.
2) Do you minor children?  Most likely you would benefit from professional advice.
3) Are you wealthy?  If you have less than $300,000, I would say you probably would not need an attorney. Between $300,000 - $500,000 is maybe.  Between $500,000 to $2,000,000 is probably.If you have over $2,000,000, I strongly recommend that you hire an estate planning attorney with a masters in taxation.
4) Do you wish to leave money to a person with special needs child, drug/alcohol problems, going through divorce, bad with money or might otherwise require special instructions?  If so, I strongly recommend that you hire an attorney.
5)  Are you leaving money UNEQUALLY to your children or are you cutting out one of your next of kin?  If so, I strongly recommend that you  hire an attorney.
6)  Do you have concerns that your next of kin might fight over your inheritance?   If so, I strongly recommend that you hire an attorney.
7)  Do you plan to leave more than a token amount to charity?  If so, I strongly recommend that you hire an attorney with a masters in taxation.
8)  Do you plan to leave different types of assets to different people?  (For example, a business to one child, one piece of real estate to another child, and an IRA to a third child)  If so, I strongly recommend that you hire an attorney.
9)  Do you intend to leave money to a pet?  Yes - serious question for some and if you do, I recommend using an attorney.
10) Do you own any unusual items that have value (such as artwork, intellectual property, family heirlooms)?  If so, you probably wish to hire an attorney.
11) Do you own assets in more than one jurisdiction?  If so, I recommend using an attorney.
12) Are you elderly and worried that you may need to spend significant time (over 2 years) in a nursing home?  Then you should probably meet with a Medicaid attorney.
13) Where do you live?  In some states, probate is an absolute nightmare, so even with a small amount, you might wish to hire an attorney to help you avoid probate.

So what do I consider a simple situation?  Generally it is a person who has less than $300,000 of traditional assets, has responsible adult children who all get along, and the testator wishes to leave everything outright to those children in a probate friendly state.  Most others could basically save time or money with professional advice.

Pennsylvania Makes Significant Changes to Inheritance Tax Law

On July 9, 2013, Pennsylvania enacted new legislation that made significant changes to their inheritance tax law by exempting the transfer of small family owned businesses. (H.B. 465)  A qualified family-owned business is defined as a proprietorship or entity with fewer than 50 full time employees and assets less than $5,000,000 at the decedent's death.  The decedent and the decedent's family must own 100% of the business at the time of the decedent's death, be an active business (not just the management of investments or income-producing assets), and have been in existence for five years prior to the decedent's date of death.

The decedent must transfer the business to one or more qualified transferees, which include a spouse, lineal descendants, siblings, lineal descendants of a sibling, ancestors or a siblings of an ancestor.  Lineal descendants most likely includes stepdecedendants as well as adopted children. 

It is very important to note that the business must be held by the qualified transferee for seven years, or you will lose the exemption.  Accordingly, the Pennsylvania Division of Revenue will require that the transferee submit a form for each of those seven years to maintain the exemption.

This is the second time that Pennsylvania has changed its inheritance tax laws in the last two years as it most recently eliminated the tax of many family farms.  Both of these laws are designed to allow families to keep small businesses and farms without having to sell them off to pay the tax.  They are also designed to help people keep their jobs.

I will note that the law also makes dramatic changes to other tax laws, including requiring owners of out of state entities to report their Pennsylvania source income.

Estate Planning with Illiquid Assets

One of the trickiest items that we must deal with as estate planners is to help clients transfer illiquid assets.  Illiquid assets can include: retirement plans, ownership in a family business, real estate, collectibles (such as artwork, baseball cards and comic books), expensive vehicles and even animals (such as thoroughbreds and show pets).

Illiquid assets are tricky to plan with because they almost always have huge built-in gains, sometimes multiple people want the same asset, the asset must often be sold to pay for taxes and they usually require special maintenance or care.  A client can face additional complications when most of a client's wealth is tied up in a single asset and the client wants to benefit multiple heirs. 

  

Each family requires a custom solution, but often the solution can be found in tried an true estate planning techniques, such as a life insurance trust (so that you can give the illiquid asset to one heirs and cash to another heir), a buy-sell agreement (for a family business), a pet trust (to deal with a beloved family pet), promissory notes and even charitable trusts.

While we can not help you decide which of your heirs should receive your assets, a good estate planning attorney can help you make sure that they pass in a practical and tax efficient manner.  

Japanese Inheritance Tax vs. US Estate Tax (2011 Update)

BRIEF OVERVIEW OF
JAPANESE INHERITANCE AND GIFT TAXES
vs.
AMERICAN ESTATE AND GIFT TAXES

(2011 Update)

NOTE: This information has been updated. The new post can be found at: http://willstrustsestates.blogspot.com/2014/08/japanese-inheritance-tax-vs-us-estate.html

I. Estate Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on Worldwide property (credit for taxes paid to foreign countries)
b. Exemption of $5,000,000 in 2011 and 2012 (theoretically back to $1,000,000 in 2013 if no change to Federal Estate Tax). For married couples, the exemption amount is $10,000,000 as a result of portability.
c. Tax of 35% on amount over $5,000,000
d. Unlimited Marital Deduction for Surviving Spouse if Surviving Spouse is a citizen

2. Non-Citizens/Non-Permanent Residents

a. Tax only on Real Property and business interests in the United States (Cash in foreign banks and foreign stocks are not taxed)
b. Exemption of $13,000
c. Tax of between 18%-35% on amount over $13,000
d. Unlimited Marital deduction if Surviving Spouse a citizen

B. Japan (Actually an Inheritance tax, not an estate tax)

1. Japanese Citizens and Permanent Residents

a. Exemption of ¥50,000,000 + (¥10,000,000 for each statutory heir); Possible additional exemption for insurance money, retirement savings, and money left to handicapped individuals
b. Additional exemption for life insurance received of ¥5,000,000 multiplied by the number of statutory heirs
c. Tax between 10%-50% for statutory heirs; Tax between 30% to 70% for everyone other else (except charities);
d. For property outside of Japan, a beneficiary that acquires property will be subject to Japanese inheritance tax if the beneficiary is a Japanese national and the beneficiary was domiciled in Japan at any time during the five years preceding the receipt of the inheritance.
e. A surviving spouse is entitled to a tax deduction. This is a complex formula based upon who is living at the time of the Decedent's death and where the money goes. Generally, a surviving spouse can deduct about 1/2 to 2/3 of the tax.

2. Non-Citizens/Non-Permanent Residents

a. If beneficiary is not Japanese and not living in Japan and property is not in Japan, appears Country where property located will tax such property.
b. If there is a tax, it appears a surviving spouse is entitled to the same marital tax deduction as for Japanese citizens.

II. Gift Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on all gift transfers of Worldwide property
b. Annual exemption of $13,000 per person/per donee (unlimited gifts for donees if different donors)
c. An annual gift to a non-citizen, permanent resident spouse, of $136,000 is available.
d. Lifetime exemption of $5,000,000 (for years 2011 and 2012)
e. Gifts may be split with spouse
f. Tax rate of 35% if lifetime gifts exceed $5,000,000

2. Non-Citizens/Non-Permanent Residents

a. Tax on all gift transfers of US Property (including Cash and Stocks in US companies)
b. Annual exemption of $13,000 per person/per donee (unlimited gifts for donees if different donors)
c. No Lifetime exemption
d. Gifts may be split with spouse
e. Tax rate of 18%-35% if lifetime gifts exceed $13,000

B. Japan (Rates between 10%-50%)

1. Citizens and Permanent Residents of Japan

a. Annual exemption of ¥1,100,000 for each beneficiary (beneficiary taxed after this)
b. One time spouse exemption of ¥20,000,000
c. For property outside of Japan, a donee that acquires property will be subject to Japanese gift tax if the donee is a Japanese national and the donee was domiciled in Japan at any time during the five years preceding the receipt of the gift.

2. Non-Citizens/Non-Permanent Residents

a. Annual exemption of ¥1,100,000 for each beneficiary(unclear – enforcement is almost impossible)

III. Generation Skipping Taxes (Taxes on gifts or bequests to grandchildren)

A. America

1. Exemption of $5,000,000 in 2011 and 2012 (theoretically a return to a $1,000,000 exemption in 2013, but indexed for inflation)
2. Tax of 35% on rest

B. Japan

1. None

For more information on Japanese taxes, the Japanese government has a nice website in English with some helpful facts. This is a link directly to the inheritance tax information:
http://www.mof.go.jp/english/tax_policy/publication/taxes2010e/taxes2010e_d.pdf
It is worthwhile reading the Japanese publication if you have business interests in Japan or if one of other special circumstances (like a handicapped heir) as there are many credits available.

Business Organization and Succession Planning

In 2007, I wrote about the importance of business succession planning. Nothing has changed. Having a clear plan as to how to transfer the ownership of a business is crucial. However, merely transferring your interest in a business to your next of kin is only part of the equation. A good business succession lawyer will also try to make sure that you are comfortable with who will actually run your business when you no longer capable of doing so. If you are not really sure whether any of your family members can run the business, and you have not been mentoring someone to take the reins from you, it is probably a good idea to meet with a business consultant.

Tom Reinhard of the Juncture Group suggests that owners should document and make flow charts for key business processes and develop position descriptions for key employees. If a key person dies or suddenly becomes ill, this information can be vital to the continuity of a business. Tom also notes that by going through this process, owners and managers often find ways to improve their business.

Tom specifically recommends:

1. Document organizational roles and responsibilities along with a chart of organizational reporting relationships. Writing clear descriptions of each employees roles and responsibilities, has a side benefit besides making a new employee’s job clear. It can also help uncover when employees are duplicating their efforts or when there are gaps in responsibilities. These descriptions can be very helpful in searching for and identifying suitable candidates to fill vacant job positions.

2. Developing base line documentation of core business processes. After members of your staff describe the tasks for which they are responsible and write down the details of how they accomplish their duties, these written descriptions can be improved though the development of work flow diagrams and flow charts. The process descriptions and charts often reveal opportunities to improve the quality and efficiency of the business. It is also a great way for a new senior executive to obtain a quick understanding of how the business runs.

3. Engage the key members of the organization in periodic review and update of the aforementioned documents to adjust for changes and process improvements. Getting your staff involved in maintaining process documentation is a great way to involve them in improving the efficiency and productivity of the business.

There are many things that are out of your control as a business owner. However, by working with a business succession attorney and a business consultant you can better ensure your enterprise continues to move forward if tragedy hits.

Thomas Reinhard and the Juncture Group may be contacted at 609-799-3386. For more information about Tom, please see: http://www.bni-tigers.com/tom_reinhard.htm

New Jersey Estate Administration Update

I just got back from an interesting lecture sponsored by the Mercer County Estate Planning Council. The keynote speaker was a representative from the New Jersey Department of Inheritance and Estate Taxation. Unfortunately I can't remember his name, but he mentioned a few things that I thought were important enough to highlight and share.

It turns out that approximately 50% of all estate and inheritance returns that get filed are audited. They are especially aggressive in auditing returns in which the decedent owned a business, if there are valuation discounts claimed, if a compromise tax is made, or if the numbers just don't add up. (Note: For more on the compromise tax, please see: Beware the compromise tax.)

The other noteworthy item the representative mentioned that they are more aggressively going after estates where no tax return is filed. They receive information about taxable estates from insurance companies who pay out death benefits and from the Surrogate when wills are probated.

Business Succession Planning

Some of you may have seen these scary statistics:

According to the U.S. Small Business Administration, 90 percent of the 21 million small businesses in the U.S. are family-owned, but less than one-third of family-run companies succeed into the second generation, while only half of that make it to the third. Most often, the lack of a proper succession planning is to blame.

Proper business succession planning is particularly vital in the Northeast where taxes are so high.

Let's assume that an unmarried NJ decedent (Jane) has a company worth $5,000,000 at the time of her death. Without looking at Jane's other assets, I can tell you that her heirs have a potential federal estate tax liability of close to $1,350,000 plus a NJ Estate Tax liability of almost $400,000 for a total tax liability of close to $1,750,000. If she had no issue or parents living, this would also be subject to a $750,000 New Jersey inheritance tax. These taxes could decimate a small company at a time when the key person involved is not around.

The benefits of proper planning are countless.At a minimum, proper strategy will help you minimize taxes, maximize control and provide a clear path for continuity of the business. Planning an exit strategy is important as soon as you go into a business. This includes planning for death, divorce or a sale upon retirement.

Some popular planning techniques include:

1. Setting up an entity structure (LLC, C Corporation, S Corporation, Partnerships, etc.);
2. Purchasing Life Insurance (combined with Buy-Sell Agreements);
3. Creating agreements limiting control of potential takers to the business;
4. The use of promissory notes;
5. Selling or gifting ownership in the business to family members; and
6. Selling or gifting ownership in the business to other entities or trusts that will benefit family members.

Valuation Discounts

One of the most important aspects of proper planning is gaining the ability to maximize the amount that you can pass down to your heirs through the use of Valuation Discounts.

When a person has a small business, it is often difficult to sell. The IRS recognizes this lack of marketability. Additionally, as many small business owners get on in years, they are not as involved in running the business. The IRS also recognizes this lack of control.

It is not uncommon to have restrictive agreements in place that will allow an owner to pass on his or her interest with a one-third discount for lack of marketability PLUS another one-third discount for lack of control. Discounts are very specific to each business and a proper appraisal is a MUST.

So how does it work?

Let's go back to our example above. Let's assume that Jane has one child, Dave, who is 35 years old and has shown some interest in the business. Ten years ago, Jane sets up an entity, let's say an LLC, with a restrictive operating agreement. As a result, the appraisal comes back and states that there is a 1/3 discount for lack of marketability. Jane can transfer Dave $1,012,000 of this company without any out of pocket gift tax consequences. Without the appraisal, this would result in a transfer of 20% of the company. With the appraisal, Jane could transfer as much as $1,518,000 of the LLC (a little over 30%) without gift taxes. Additionally, Dave could buy another 20% of the company with a promissory note at the lowest rate available for tax purposes. Let's say a ten year note of $666,666 at 6% interest. Finally, Jane is in good health, so for the next 10 years she uses her annual exclusion amount to gift Dave another $12,000 worth of the company annually. (Since annual appraisals would be expensive, let's assume we don't discount this.)

The result is that upon Jane's death 10 years later, her 100% interest in the company, which started at $5,000,000 company, has been reduced as follows:
1) Through the lifetime gift to Dave, her interest is reduced to a 70% interest, worth $3,500,000;
2) Through the promissory note, her interest is reduced just under 50%, with a value of just under $2,500,000.
3) Through the annual gifting, her interest in the business is reduced to $2,380,000.

Upon Jane's death her $2,380,000 interest will receive a 1/3 discount for lack of marketability and another 1/3 discount for lack of control. This will result in a tax valuation of approximately $1,060,000. After we add back in the $666,666 that she received for the 20 interest plus another $220,000 for interest payments, she will pass with a taxable estate of about $1,950,000.

Accordingly, upon Jane's death, her estate will not be subject to any federal estate tax liability. Additionally, the NJ Estate tax liability will be reduced to $96,000. This is a tax savings of over $1,600,000 - which far outweighs the costs involved in such preparation.

Obviously, there are many different ways to structure this type of transaction, but they are usually based upon the same methodology. The numbers and techniques involved will depend upon the individual needs of the client. For example, if Dave were not responsible or had no interest in running the business, Jane could give him his shares in trust. If Jane had a business partner, this structure could be done for each partner and combined with a buy-sell agreement funded by life insurance.