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Find Out About the Benefits of a Family Limited Partnership

Bigstock-Extended-Family-Outside-Modern-13915094“Family limited partnerships (and similar entities), while useful in an estate planning strategy for high-net-worth clients, are often hotly contested by the IRS for their ability to transfer wealth within a family and minimize transfer taxes in the process.”

Family limited partnerships establish a business entity to hold assets that would otherwise be subject to transfer taxation. These can be an excellent vehicle for minimizing transfer taxes, says ThinkAdvisor in its recent article, “Estate Planning: The Family Limited Partnership Strategy.” It discusses the recent Purdue decision in U.S. Tax Court. That case held that when a family business entity is formed for legitimate non-tax reasons and managed appropriately, the transfer taxes can be minimized—despite the fact that minimizing these taxes was a component in creating the entity.

The Purdues had five children and several grandchildren and great-grandchildren. Their estate was worth about $28 million, much more than the current $5.49 million per person estate tax exemption amount. The couple funded a Purdue Family LLC with about $22 million in marketable securities and other assets and, at the same time, created a trust to benefit the Purdue’s descendants and spouses. The trust was funded with interests in the LLC in proportion to the gift tax annual exclusion each year. Each beneficiary could withdraw up to the gift tax annual exclusion amount or a per capita share of the assets transferred each year. The LLC’s operating agreement spelled out some non-tax reasons for creating the LLC, such as

  1. Avoiding fractionalizing ownership;
  2. Retaining assets within the extended family;
  3. Protecting assets from future unknown creditors; and
  4. Providing flexibility in managing the assets that wouldn’t be available in other entities.

When Mr. Purdue died, he created a bypass trust, a qualified terminable interest property (QTIP) trust and a GST-exempt trust—each of which owned a portion of the LLC. Mrs. Purdue and her husband had retained the right to income and distributions from the LLC assets, although the decedent had approximately $3.25 million outside of the LLC and trusts. After the decedent’s death, the IRS attempted to collect more than $4 million in estate taxes and challenged the LLC structure. Trust beneficiaries and the QTIP trust loaned the estate funds to pay the estate tax. The estate attempted to deduct interest paid on the loan, but the IRS challenged this.

Tax Code § 2036 stipulates that property transferred to a trust, in which a decedent holds an ownership interest, will be included in his or her gross estate, except when that property is transferred for adequate consideration. The estate was also required to show that there were valid non-tax reasons for creating the family LLC. The IRS said the LLC was created primarily to transfer wealth to the next generation and avoid taxes. But the Tax Court disagreed. It found the seven non-tax reasons for forming the LLC to be compelling: (1) relieving the decedent of having to manage the investments; (2) consolidating investments with a single advisor to reduce volatility under a written investment plan; (3) educating the children to jointly manage an investment company; (4) avoiding repetitive asset transfers among multiple generations; (5) creating common ownership of assets for efficient management and meeting minimum investment requirements; (6) providing voting and dispute resolution rules and transfer restrictions; and (7) providing the children with a minimum annual cash flow.

Reference: ThinkAdvisor (March 14, 2017) “Estate Planning: The Family Limited Partnership Strategy”

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Why the Rush to Collect Medicaid?

Happy-old-coupleEven if you are eligible, don't rush into applying for coverage. Kiplinger's article, "What You Need to Know About Applying for Medicaid," discusses five scenarios for you to consider in your planning.
Remember that your income and assets have to be at a very low level to qualify for Medicaid. This program isn't a right or an entitlement—even if your tax dollars paid for it. Medicaid provides assistance for ongoing living needs and services provided by home care or, in advanced cases, at a nursing facility.
Medicaid compliance requires an individual to relinquish either income and assets or control over the income and assets. But many Americans are in their sixties or seventies, in good health, with plenty of assets. These folks aren't ready to part with their income and assets—or control over them—as many still have healthy, active years ahead of them.
In many instances, becoming Medicaid compliant is based on a recent crisis that adult children have experienced caring for their own parent's age-related issues—such as dementia, Parkinson's disease, or Alzheimer's. Many of these Baby Boomers don't want their own children to suffer the emotional turmoil and financial commitments they've had to handle. Instead of rushing into any decisions unnecessarily, here are some scenarios to think about with Medicaid planning:
· Younger than Age 70 and Healthy. Don't commit yourself to transferring assets for at least another decade. You can place your real estate and certain businesses in Medicaid-compliant trusts and use non-retirement assets for discretionary expenses.
· Younger than Age 70 and Not Healthy. There's some time to plan, but due to five-year "look back" constraints for asset transfers, a comprehensive understanding of Medicaid is critical.
· High Income, But Low Assets. Large amounts of either assets or income can make a person ineligible for Medicaid. But while assets can be transferred to another family member, income is harder to transfer, and the amount of retirement income we receive is not easy to control. Younger pensioners with large monthly incomes should talk to a qualified Medicaid attorney about ways to convert large incomes to assets that can be transferred to other individuals.
· Disabled Minor Children. Medicaid planning for a disabled minor child should start prior to the child attaining the age of 18. Courts grant guardianships more easily over people who have never had mental competency than those who have had it and lost it, and will look at the future guardian's ability to apply for Medicaid. Benefits may be easier to obtain in these situations.
· No Spouse and No Children. You may think about not pursuing Medicaid planning unless you feel you need to preserve your extended family's wealth. Medicaid may pay additional health care costs that Medicare doesn't, but the personal care Medicaid provides may be less than what out-of-pocket care providers can offer. These people should use their assets for their own benefit wisely and save Medicaid for when those assets are depleted.
Learning about Medicaid can be done any time, but once steps have been taken to apply for Medicaid, you might not be able to undo your efforts. Don't be in a hurry to give up your financial freedom.
Reference: Kiplinger (April 15, 2016) "What You Need to Know About Applying for Medicaid"

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Succession Planning for your Family-Owned Business

Bigstock-Couple-running-bookshop-13904324You've built and own a successful business. But the Smart Business article, "Five things you should know about estate planning for a family-owned business," asks if you've taken the necessary steps to sustain it. Your family, managers, and stakeholders need to have a firm grasp of your succession plan. Here are some pointers to help you with that planning:
Identify and prepare your successors. Smaller businesses may need someone to oversee a sale or liquidation. Communication with and buy-in by your team is critical. The group should have a clear understanding of your goals, what's intended and how to achieve it, way before the time comes.
Look at your liquidity needs. Business owners are often highly illiquid because of business value compared to other assets. Liquidity in your estate is important to provide for your family and replace your earnings. If estate tax is owed, your estate will need liquidity to pay those taxes or else face a forced sale of the business. Life insurance may be a good solution, with the structuring of life insurance policies through irrevocable trusts. The business itself could have a policy on you to help pay down debt, provide working capital, or replace your on-going contributions.
Structure company ownership to separate control from value. If you own a controlling interest in the company, issuing voting and non-voting stock (or managing and non-managing interests in a partnership or LLC) gives a lot of flexibility for your estate. One person or group can run the business and legally control it by owning the voting stock, and another group still can receive the economic benefits of ownership through non-voting stock without being involved in business operations. Having a trust to own both voting and non-voting stock is frequently better than outright ownership.
Reduce your estate tax liability. Federal estate tax of 40% applies to estates over $5.45 million and $10.9 million for married couples. Consider decreasing that liability with some wealth-transfer planning. An owner of a profitable, cash-flowing business could transfer wealth out of the owner's taxable estate and into trusts for family at little to no gift tax costs through installment sales of stock to irrevocable "defective" grantor trusts (IDGTs) and funding grantor retained annuity trusts (GRATs.). These reduce the need to purchase life insurance or set aside liquid assets in your estate to pay the tax. Talk with a qualified estate planning attorney to properly implement them.
Estate planning for a family business owner is a complex and on-going proposition. Work with an experienced estate planning attorney to address the points above to help you reach the best outcome.
Reference: Smart Business (March 18, 2016) "Five things you should know about estate planning for a family-owned business"

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Saints Owner Booted as Trustee of Billion Dollar Estate

Fortune cookie inheritance"The news represents a victory for Renee Benson who sued her father over his competency and control over the 1980 Shirley Benson Testamentary Trust."

NFL owner Tom Benson's estranged daughter, Renee Benson, will replace her billionaire father as trustee overseeing her late mother's assets in a settlement agreement approved recently by a probate court judge in Texas, according to an article in the San Antonio Express-News, "Tom Benson's daughter wrestles control of $1 billion trust in settlement"

The trust, valued at approximately $1 billion, was set up in 1980 after Tom Benson's first wife died—but before he took over as the owner of the NFL New Orleans Saints and the NBA New Orleans Pelicans.

Forbes said the elder Benson has a net worth of about $2.2 billion.

The professional sports teams are included in a separate trust that is also involved in a related court battle in Louisiana.

The assets in the Shirley Benson trust include most of San Antonio's Lone Star Capital Bank, half of five car dealerships, part of a large ranch, a mansion on Lake Tahoe, cash, a private plane and other real estate.

Tom Benson asked that the workers at the car dealerships tied to the trust fund be protected while a "reorganization" is completed. No details were released as to what the reorganization would involve.

Former San Antonio Mayor Phil Hardberger, who was a court-appointed receiver for the trust until this recent announcement, estimated the value of the estate as approaching $1 billion. However, Renee Benson disputes his estimate, claiming that the value is about one fifth of Hardberger's estimate.

Reference: San Antonio Express-News (February 19, 2016) "Tom Benson's daughter wrestles control of $1 billion trust in settlement"

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Don’t Plant a Bomb in Your Estate Plan to Blow Up the Future for Your Kids!

Boom"The real reasons to do estate planning are to take care of ourselves and our families the way that we want to."

In a review of their finances for the New Year, many well-meaning parents may unknowing plant a tax bomb for their children in their estate plan. Fox 61 News' recent report, "Tips to avoid an income tax and estate planning time bomb," explains how timing is critical to gain the most from an inheritance. Simply put, the taxes due on the sale of an asset can be drastically different depending on how the asset was inherited by an heir.

For example, parents may decide to deed a home to their son while they are alive to protect it from long-term care costs or to avoid probate. Because the child didn't pay the parents the fair market value of the place, it's considered a gift, and a gift tax return may be required depending on the value of the home. The more the property is worth at the time of its sale, the greater the gain and the larger the tax bill will be.

These parents unknowingly planted an income tax bill bomb for their children by gifting property during their lifetimes instead of allowing the children to inherit the property after their deaths.

However, if the parents had used a revocable trust to own the home, then the residence would be passed on after death. In this scenario, the heir would not owe any income tax, provided the property was sold for what it was worth at the date of death. This works regardless of how much the property is worth at the time of the parents' passing.

Young or old—it doesn't matter—if you don't have an estate plan, have one created now. Start with the basics, and if you need to, do the additional planning as it applies to your situation. Speak with an experienced estate planning attorney. In addition, remember these tips:

  • Review and update your beneficiary designations.
  • Review and update your insurance policies. Check the amount of coverage and make sure it still meets your family's current needs.
  • Consider purchasing long-term care insurance to help pay for the costs of long-term care in case you and/or your spouse ever need it due to illness or injury.

Plus, at a bare minimum, everyone over the age of 18 needs a Power of Attorney for Heath Care, a Living Will, and HIPPA authorizations. Also, a Revocable Living Trust may be better than a will at incapacity because it avoids the court's control over your assets. And while you are at it, review and update the guardian designation for any minor children.

It's critical to work with an estate planning attorney who can keep your estate plan up-to-date with all of the changes in the law, changes in your finances and health, and changes in the health and finances of family members.

Reference: Fox 61 News (January 4, 2016) "Tips to avoid an income tax and estate planning time bomb"

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