LegalJourney Blog

At the end of 2012, the entire country watched as major changes were made to income tax  laws with the adoption of the American Taxpayer Relief Act of 2012 (ATRA). The act also made significant changes in estate tax laws.

Estate Tax Portability

One important change is that the estate tax portability law is now permanent.  Estate tax portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse.  The current estate tax exemption is $5.25 million ($5 million with adjustments for inflation).  This means that a married couple’s total estate tax exemption is currently $10.5 million.  For example, a husband dies with $2 million in separate assets.  He has $3.25 million remaining in his estate tax exemption, which passes to his wife, giving her a total of $7.5 million in estate tax exemption.  Without portability, the husband’s remaining exemption might have been forfeited if the couple had not implemented special tax planning techniques as part of their estate plans.

How Do You Claim the Portability?

This is where married couples and estate executors can get into trouble.  The estate tax portability rule is not automatic.  In order to claim the remainder of the first-to-die spouse’s estate tax exemption, the surviving spouse or the deceased spouse’s estate executor must file an estate tax return soon after the death, usually within nine months.

If this filing deadline is missed, then the couple will not get the benefit of estate tax portability.  Missing the estate tax filing deadline can result in hundreds of thousands of unnecessary and avoidable estate taxes.

In a recent report in The Wall Street Journal, estate planning experts expressed concern that executors of small estates may be unaware of the estate tax return filing requirement and may believe that an estate tax return is unnecessary if the deceased spouse’s assets fall under the $5.25 million exemption amount. To preserve portability, however, the estate tax return must be filed after the first spouse’s death.  Alternatively, married couples can utilize a special trust, referred to as a “credit shelter trust” or “bypass trust” to prevent forfeiture of their individual exemptions.  This planning technique must be undertaken when both spouses are still alive.

The Consequences of Failing to File an Estate Tax Return

As a simple example, consider a husband and wife who have a total of $7.5 million in assets, $6 million in a business the husband owns and the remaining $1.5 million owned by the wife.  Upon the wife’s death, the estate’s executor files a timely estate tax return and the wife’s remaining $3.75 million in estate tax exemptions passes to the husband.  When the husband dies, his entire $6 million business passes to his heirs tax free, even though his personal estate tax exemption is only $5.25 million.  If portability is not claimed, then $1 million of the husband’s business will be taxed (the current rate is 40 percent).  The husband’s heirs would be required to pay approximately $400,000 in estate taxes which could have been avoided if the wife’s estate executor had filed an estate tax return within the time limit.

Even if both spouses together have assets under the current $5.25 million exemption, it is still a good idea to file an estate tax return after the death of the first spouse.  Filing the estate tax return and preserving the portability benefit protects the surviving spouse’s heirs in the event the surviving spouse receives a windfall during his or her lifetime that raises his or her assets above the $5.25 million exemption level.

 

Many people decide to start their own businesses because they’re intrigued by the idea ofbeing their own boss.  All decisions, risks, and rewards are yours and yours alone.  This equation changes, however, when you decide to start and run a business in partnership with another person.  Many of the freedoms, risks and rewards are similar – but there are unique questions that business partners should ask each other to help ensure the relationship starts and continues smoothly.

Before and during the process of developing a business partnership, it is crucial to ask and answer the questions below.  

1. What goals do I have for this business?  What goals does my partner have?  What if one partner wants to create a business that will provide income for his family for several years or decades and the other partner wants to build a company that will grow quickly and sell well?  These are not necessarily incompatible goals, but it is important to get these goals onto the table to discuss how to start and run a business that might meet both partners’ goals.
    
2. What is each partner’s level of commitment in terms of time?  You can prevent a major source of partner conflict by being explicit about how much time each of you expects to spend working on running and developing the business.  Will either of you work full-time for your business at the beginning?  Will either of you have other work commitments?  If so, are there any situations in which that partner will close out other work or business commitments to focus more energy on this endeavor?
    
3. How will cash invested by partners be treated?  Will cash investment be treated as debt to be repaid?  Will cash investment buy a higher level of company shares?  Will the debt be convertible?  These questions and answers also have tax implications, so it may be wise to consult a certified public accountant along with a qualified business law attorney during your start-up phase.
    
4. How comfortable are we with change?  Change is the only constant in any business environment, and the most successful businesses are those that are highly adaptable to change – in the market, in the economy, in the personnel, etc.  That said, business partners should have a conversation about their “sticking points” – those aspects of the business that one or another partner does not want to change.  One partner may be fully committed to the specific product being produced, whereas another partner may be unwaveringly dedicated to a certain market segment.  Learn each other’s “sticking points” now to minimize conflict during the inevitable periods of change and adjustment as the business ages and grows.
    
5. How much will we pay ourselves?  Who has the authority to change compensation amounts in the future?  This issue is related to the question of who is investing how much cash into the business during the start-up phase.  Compensation can be a volatile issue.  Regardless of how difficult the conversation may be, partners must thoroughly discuss pay structure at the very beginning of a business relationship to minimize conflict down the road.
    
6. Who will own what percentage of the company?  In other words, how will we divide the shares?  The answer to this question often depends on whether one or both partners provided cash for start-up costs, as well as the time commitment each partner plans to make.
    
7. Who has what kinds of decision-making authority?  The answer to this question often is related to the division of shares between the partners, but this is not a requirement.  You can designate shares as voting shares or non-voting shares, and you can also choose to set up a board of directors.  The partners will have to decide which areas, if any, they each have individual authority over, which areas they must agree on, and which areas the board of directors will control.  Common areas of decision making authority include human resources (hiring and firing), capitalization, issuance of shares, and mergers and acquisitions.
    
8. Will we sign contractual terms with the company in addition to the shareholder agreement and partnership agreement?  Two common examples of additional contractual terms are the non-compete agreement and the confidentiality or non-disclosure agreement.  If founding partners are going to sign such contracts, what will the terms of each agreement be?
    
9. What if one or both of us wants to leave the company?  It is better to define exit procedures in the early stages of the business start-up.  If no guidelines are in place, one partner’s desire to depart can cause high conflict as formerly aligned partners try to come to agreements about ending their relationship.
    
10. Can either of us be fired?  If so, what are the grounds for termination and who has the authority to make that decision?  What is the procedure?  Discuss and commit to writing your strategy for terminating the operational role of a co-founder if necessary.
     
11. What is our business succession plan?  While it is not necessary to have a fully developed and executed business succession plan before starting a business endeavor, it should at least be a topic for discussion in the early stages.  Partners may have different ideas about how control over the business will pass to others in the future, and a conversation about succession planning can reveal these differences and give each partner food for thought as a plan is developed.

Have several conversations about these topics, and you will find yourself well prepared when it comes time to put your partnership agreement into writing.
 

Changes to income taxes grabbed the lion’s share of the attention as the President and Congress squabbled over how to halt the country’s journey towards the “fiscal cliff.”  However, negotiations over exemptions and tax rates for estate taxes, gift taxes and generation-skipping taxes also occurred on Capitol Hill, albeit with less fanfare.

The primary fear was that Congress would fail to act and the estate tax exemption would revert back down to $1 million.  This did not happen.  The ultimate legislation that was enacted, American Taxpayer Relief Act of 2012, maintains the $5 million exemption for estate taxes, gift taxes and generation-skipping taxes.  The actual amount of the exemption in 2013 is $5.25 million, due to adjustments for inflation.

The other fear was that the top estate tax rate would revert to 55 percent from the 2012 rate of 35 percent.  The top tax rate did rise, but only 5 percent from 35 percent to 40 percent.

The American Taxpayer Relief Act of 2012 also makes permanent the portability provision of estate tax law.  Portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse to be used in addition to the surviving spouse’s individual $5.25 million exemption.

Some Definitions and Additional Explanations

The federal estate tax is imposed when assets are transferred from a deceased individual to surviving heirs.  The federal estate tax does not apply to estates valued at less than $5.25 million.  It also does not apply to after-death transfers to a surviving spouse, as well as in a few other situations.  Many states also impose a separate estate tax.

The federal gift tax applies to any transfers of property from one individual to another for no return or for a return less than the full value of the property. The federal gift tax applies whether or not the giver intends the transfer to be a gift.  In 2013, the lifetime exemption amount is $5.25 million at a rate of 40 percent.  Gifts for tuition and for qualified medical expenses are exempt from the federal gift tax as are gifts under $14,000 per recipient per year.

The federal generation-skipping tax (GST) was created to ensure that multi-generational gifts and bequests do not escape federal taxation.  There are both direct and indirect generation-skipping transfers to which the GST may apply.  An example of a direct transfer is a grandmother bequeathing money to her granddaughter.  An example of an indirect transfer is a mother bequeathing a life estate for a house to her daughter, requiring that upon her death the house is to be transferred to the granddaughter.

The “ostrich syndrome” is part of human nature; it’s unpleasant to observe that which frightens us.  However, pulling our heads from the sand and making preparations for frightening possibilities can provide significant emotional and psychological relief from fear.

When it comes to Alzheimer’s disease and other forms of dementia, more Americans fear being unable to care for themselves and burdening others with their care than they fear the actual loss of memory.  This data comes from an October 2012 study by Home Instead Senior Care, in which 68 percent of 1,200 survey respondents ranked fear of incapacity higher than the fear of lost memories (32 percent).

Advance planning for incapacity is a legal process that can lessen the fear that you may become a burden to your loved ones later in life.

What is advance planning for incapacity?

Under the American legal system, competent adults can make their own legally binding arrangements for future health care and financial decisions.  Adults can also take steps to organize their finances to increase their likelihood of eligibility for federal aid programs in the event they become incapacitated due to Alzheimer’s disease or other forms of dementia.

The individual components of advance incapacity planning interconnect with one another, and most experts recommend seeking advice from a qualified estate planning or elder law attorney.

What are the steps of advance planning for incapacity?

Depending on your unique circumstances, planning for incapacity may include additional steps beyond those listed below.  This is one of the reasons experts recommend consulting a knowledgeable elder law lawyer with experience in your state.
 

1. Write a health care directive, or living will.  Your living will describes your preferences regarding end of life care, resuscitation, and hospice care.  After you have written and signed the directive, make sure to file copies with your health care providers.
    
2. Write a health care power of attorney.  A health care power of attorney form designates another person to make health care decisions on your behalf should you become incapacitated and unable to make decisions for yourself.  You may be able to designate your health care power of attorney in your health care directive document, or you may need to complete a separate form.  File copies of this form with your doctors and hospitals, and give a copy to the person or persons whom you have designated.
    
3. Write a financial power of attorney.  Like a health care power of attorney, a financial power of attorney assigns another person the right to make financial decisions on your behalf in the event of incapacity.  The power of attorney can be temporary or permanent, depending on your wishes.  File copies of this form with all your financial institutions and give copies to the people you designate to act on your behalf.
    
4. Plan in advance for Medicaid eligibility.  Long-term care payment assistance is among the most important Medicaid benefits.  To qualify for Medicaid, you must have limited assets.  To reduce the likelihood of ineligibility, you can use certain legal procedures, like trusts, to distribute your assets in a way that they will not interfere with your eligibility.  The elder law attorney you consult with regarding Medicaid eligibility planning can also advise you on Medicaid copayment planning and Medicaid estate recovery planning.

Day 8: Free Power of Attorney and Declaration of Preneed Guardian¹

The first 4 individuals who contact the LegalJourney Law Firm using the "Contact the Firm" option on www.legaljourney.com will receive a free Florida Power of Attorney and a free Florida Declaration of Preneed Guardian.

The LegalJourney Law Firm’s Day 8 offer includes: an interview with an attorney, a customized power of attorney, a customized declaration of preneed guardian and notarization² of your documents.

To find out additional details, please contact the LegalJourney Law Firm PLLC

¹This offer is available until close of business January 11, 2013.

²Notarization is only available to residents of the Tampa Bay Area

Day 7: Free Online Trust Based Estate Plan Package¹

The LegalJourney Law Firm is providing a free “Online Trust Based Estate Plan Package” for the first 2 individuals who sign up for a new client account via the online legal services link at www.legaljourney.com. 

To set up a free online account:

1.     Go to www.legaljourney.com;

2.     Select “Click Here For Online Legal Services”;

3.     Select “Register for a New Online Legal Services Account today!"

Create a user account and you will be notified within 24 hours if you will be a recipient of todays offer.

The LegalJourney Law Firm’s Online Will based Estate Plan Package includes: a Will, a Living Will, Health Care Power of Attorney, HIPPA Authorization and Durable Power of Attorney.

To find out additional details, please contact the LegalJourney Law Firm PLLC

¹This offer is available until close of business January 10th, 2013.

Day 6: Save $300 on a Trust Based Estate Plan¹

The LegalJourney Law Firm is providing $300 off a “Trust based Estate Plan” for anyone who contacts the firm prior to close of business on January 11, 2013 and schedules an appointment for a consultation.

The LegalJourney Law Firm’s Trust based Estate Plan includes: a Revocable Trust, a Will, a Living Will, a Health Care Surrogate, HIPPA Authorization and a Durable Power of Attorney.

To find out additional details, please contact the LegalJourney Law Firm PLLC.

¹This offer is available until close of business January 11th, 2013.

Day 5: Free Online Will Based Estate Plan Package¹

The LegalJourney Law Firm is providing a free “Online Will Based Estate Plan Package” for the first 2 individuals who sign up for a new client account via the online legal services link at www.legaljourney.com. 

To set up a free online account:

1.     Go to www.legaljourney.com;

2.     Select “Click Here For Online Legal Services”;

3.     Select “Register for a New Online Legal Services Account today!"

Create a user account and you will be notified within 24 hours if you will be a recipient of todays offer.

The LegalJourney Law Firm’s Online Will based Estate Plan Package includes: a Will, a Living Will, Health Care Power of Attorney, HIPPA Authorization and Durable Power of Attorney.

To find out additional details, please contact the LegalJourney Law Firm PLLC

¹This offer is available until close of business January 8th, 2013.

Day 4: Free Declaration of Preneed Guardian¹

The first 4 individuals who contact the LegalJourney Law Firm using the "Contact the Firm" option on www.legaljourney.com will receive a free Florida Declaration of Preneed Guardian.

When included as part of your Estate Plan, the declaration of a preneed guardianship can alleviate the stress involved with determining who will become guardian of a loved ones person and property during incapacity.

The LegalJourney Law Firm’s Declaration of Preneed Guardian free offer includes: an interview with an attorney and a customized Declaration of Preneed Guardian.

To find out additional details, please contact the LegalJourney Law Firm PLLC

Florida Statute Section 744.3045 Preneed Guardian States that “a competent adult may name a preneed guardian by making a written declaration that names such guardian to serve in the event of the declarant’s incapacity… ”

¹This offer is available until close of business January 7th, 2013.

Day 3: Free Online Power of Attorney¹

The LegalJourney Law Firm will provide a free “Online Power of Attorney” for the first 4 individuals who sign up for a new online client account via the online legal services link on www.legaljourney.com.

To set up a free online account:

1.     Go to www.legaljourney.com;

2.     Select “Click Here For Online Legal Services”;

3.     Select “Register for a New Online Legal Services Account today!"

Create a user account and you will be notified within 24 hours if you will be a recipient of todays offer.

Everyone who connects with the LegalJourney Law Firm PLLC via the LegalJourney Blog, LinkedIn, Twitter, and/or Facebook during the month of January will receive 10% off any online legal service.

Florida Statute Section 709.2101 through 709.2402 (effective date October 1, 2011): Although still effective, everyone with a Power of Attorney (POA) created prior to October 1, 2011 should discuss his or her options with a knowledgeable estate-planning attorney. Issues have arisen in the past with financial institutions not accepting POAs or requiring their specific form to be signed. However, for POAs created under the new Statute, per section 709.2120, F.S., a third person is required to accept or reject a POA within a reasonable time and is not allowed to require an additional or a different POA for authority granted in the present POA. If the third person rejects a POA under the new Statute, they could be held liable for damages and attorney fees.

¹This offer is available until close of business January 4th, 2013.

Day 2: Save $300 on a Will Based Estate Plan¹

The LegalJourney Law Firm is providing $300 off a customized “Will Based Estate Plan” for anyone who contacts the firm prior to close of business on January 11, 2013 and schedules an appointment for a consultation.

The LegalJourney Law Firm’s Will based Estate Plan includes: a Will, a Living Will, a Health Care Surrogate, HIPPA Authorization, a Declaration of Preneed Guardian and a Durable Power of Attorney.

To find out additional details, please contact the LegalJourney Law Firm PLLC.

¹This offer is available until close of business January 11th, 2013.