Alabama Estate Law

Good News for Transferring Business Interests

Isn’t it nice when the IRS loses a case to a taxpayer? For example, the little-guy victory in the landmark case of Wandry v. Commissioner affirms and simplifies a very powerful tool for passing on wealth, especially for business owners.

While the case and the estate planning tool in the crosshairs have been the subject of previous articles, The Wall Street Journal provided a new explanation of the two in an article appropriately titled “Shielding the Family Business.”

The basic plan for wealth transfer when there is a business involved is to give it in pieces, and that’s precisely the plan that benefits from Wandry v. Commissioner. Giving away the entire business outright is a good way to take a tax hit, since it will invoke a gift tax when you cross certain thresholds during the year and in your lifetime.

Reducing Taxes By Minding Your Cost Basis

Investments and their taxation can be tricky, particular where you’ve been investing over a long period of time. This can get even trickier when you transfer assets to loved ones.

Taxation hinges on a few fundamental numbers, one of which is the cost basis. Given some interesting changes to the law governing cost basis, you may need to rethink your plans.

If you have investment accounts, then you likely are aware of some of the changes that have begun to take effect and will continue to roll out through 2013. One of the most obvious changes was recently addressed in a Morningstar article titled “Beware the Default Method for Cost-Basis Elections.” Are you aware of the difference between the old style of cost basis election and the new possibilities your brokerage firm or mutual fund company can offer?

Essentially, the old system of electing a cost basis was typically in the hands of the investor, since they had to track and record their own cost basis. This meant averaging out the cost basis when selling various stocks at tax time. Now the cost basis is directly reported to the IRS from the firm/broker.

Companies tend to offer the default means of reporting, but since information is going directly to the IRS, this also means there is enough information for specific-share identification in the cost basis election. The Morningstar article offers some interesting math to support why this actually can be advantageous for the crafty planner.

The bottom line is that any trimming you can safely accomplish can secure more favorable capital gains taxation. Why? Because this cost basis carries over into another magic taxation number, the stepped-up basis, when investment assets are transferred. In short, small numerical changes add up and may affect your overall wealth-transfer planning.

 

Gun Trusts

Do you own any firearms—particularly any which are collectible or expensive? Do you have any firearms that are subject to federal regulations on ownership and use? If yes, then careful planning may be required to avoid running afoul of tax and regulatory laws upon your incapacity or death.

Deciding who gets what after your gone requires understanding of your family and its dynamic.  But it can also require understanding your assets and the potential pitfalls to avoid. When you own regulated assets like firearms, this can require some special planning.

Many firearm enthusiasts take pride in their collection and hope to pass it along to their loved ones. Failing to plan for the legal ownership transfer, however, can result in accidentally triggering illegal transfers. Accordingly, if you own a firearm collection that you plan to leave to family or loved ones, then a “gun trust” may be in order. A recent article in AmmoLand, titled A New Breed of Gun Trusts – Protecting Firearms Collectors & Their Collections, makes this point very clearly.

A properly written gun trust can skirt tax and regulatory pitfalls. When drafted correctly, trusts are very powerful and specially-tailored legal tools for giving all sorts of unique assets.

 

Estate Planning - Uncertainty in 2013 and Beyond

As you have heard, a number of favorable tax laws are set to expire in 2012, and as the election season heats up, the political winds are difficulty to judge.  In particular, estate planners find themselves on shifting sands when it comes to reading the tea leaves for their clients.

Peter Reilly at Forbes is of the opinion that one group is the most susceptible to these shifting sands, a group he refers to as the “midmills,” short for the “midmillionaires.” According to the article, titled Beating The Possible Estate Tax Increase Without Switching To Cat Food - The Midmill Dilemma, this group of taxpayers has a fairly high net worth—somewhere between $4 and $15 million. So, what kind of estate planning should they pursue? After all, the current exemption amount to the estate tax, which is unified with your lifetime gift exemption, is only set at $5.12 million until December 31, 2012.  After then, the rates are uncertain.

The good news is that Peter Reilly is not one to just acknowledge problems. He’s a census-taker too, and has compiled the opinions of various Forbes columnists. At least one thing is clear: no one is certain about “Midmill Dilemma.” In the end, the dilemma comes down to you, your risk aversion, and the kinds of assets you have. 

Dementia: Don't Wait Until it's Too Late to Talk to Your Parents

Baby Boomers are discovering that one of life’s most difficult stages is when a child becomes the caretaker for his or her parents.  For many, tough topics and hard choices can leave us paralyzed when we need to act quickly.  It can be particularly difficult to raise the topic of your parent’s legal or financial competence and independence. 

That’s why communication—early and often—is critical.

Tuscaloosa News: The Necessity of Having a Will

For those of you who may have missed it last week, the Tuscaloosa News ran an article by nationally-syndicated financial columnist Michelle Singletary of the Washington Post.  

In the article, The Necessity of Having a Will, she relates her family's experience in picking up the pieces after the death of her grandmother, "Big Mama," as well as her 40-year-old brother, neither of whom had a will.

Tragically, her brother died at the age of 40 from lung cancer, and left no instruction as to the guardianship of his three-year-old son.  Her grandmother, on the other hand, was always sure that she didn't have enough property to be worth fighting over after she was gone. Unfortunately, that was not the case:

"As shrewd as she was, even my grandmother, Big Mama, refused to prepare a will. She kept saying she didn’t need one, that everyone knew her wishes. Well, most didn’t, and some who did ignored what Big Mama wanted. Upheaval followed her death, leaving broken relationships that have still not been mended after 17 years."

The author goes on to address some common reasons why people put off their estate planning.  Take a moment to read the entire article, and see what she has to say.  

 

If you would like to learn more about estate planning in Tuscaloosa, please visit our website, AlabamaEstateLaw.com, or subscribe to our free monthly e-newsletter, the Alabama Estate Planning & Elder Law News.  

The Separation of Church . . . and Estate

Planning your estate may seem like a simple matter of deciding who gets your stuff when you’re gone. But for many people with strong religious convictions, estate planning can go far beyond merely doling out “stuff.”

The problem of mixing religion and estate planning—stated differently, the problem of doing it well—is addressed by the Wall Street Journal in an article titled Joining Church and Estate.

If your decisions during life are guided by your faith, then it’s likely your estate decisions will be too. For example, decisions regarding end-of-life, disposition of remains and even charitable giving can be strongly influenced by one’s religious beliefs. These are personal decisions that directly impact you and collaterally impact others.

However, it is an entirely different matter to make religiously-motivated decisions for others. Given the numerous alternative planning strategies and tools available to plan your estate, it is possible to make (or attempt to make) religious decisions for your heirs. This is where problems can arise.

In the extreme, you can move beyond encouraging to requiring the observance of certain religious principles, rituals, or lifelong membership in the given religion to secure any inheritance. As the Wall Street Journal article illustrates, this is where problems can arise. In short, requiring heirs to uphold religious principles they don’t share can actually work to undermine them.

The article discusses some particularly poignant examples and real life court battles. It’s worth a read and serious consideration when trying to strike that delicate balance of encouraging without alienating those whose beliefs may differ from your own. 

 

Death & (Income) Taxes

We all know that two things are certain in life—Death & Taxes—but of the two, the taxman seems to get the last laugh over the grim reaper every time.

End-of-life taxes are often considered to be the most onerous of all. For many loved ones, writing those last few checks to the IRS can be especially tough . . . and seem to never end.

Enter the postmortem income tax return.

The death taxes are one thing, and inheritance taxes are generally another, since they are paid by the inheritor. However, as a recent article in Kiplinger entitled Death and Taxes makes clear, there is usually one final income tax return to file for the decedent.

The burden of filing this final income tax return is something you assign in your will, usually to the executor or personal representative, or failing that it falls upon a survivor. If you are planning your estate or if you are administrating one, this burden is not one to be taken lightly. To make matters worse, the fiduciary may be on the hook for any sins of commission or omission. If ever there was a time to retain appropriate legal, accounting and tax advice, then this is one of them.

Bottom line: The income taxes may be the least of your taxation concerns with the estate, inheritance, gift, and generation-skipping taxes all vying for attention. Of course, that doesn’t mean that the last income tax is not important.

Even if an estate will not be subject to extra taxation, this “last rite” to the IRS has to be observed. 

 

Small Business Owners - Exiting Gracefully

For many small business owners, their business defines a key part of who they are.  Many such business owners speak of their business and their life in the same breath. If that describes you, then rest assured you’re not alone.

Of course, it’s rare that a business is the only fulfilling thing in a business owner’s life. As yourself the question: do you really want to continue working in and on your business until the day you die, with no retirement or until you are physically or mentally incapable of working any longer?

For business owners whose lives are so closely intertwined with the business, it makes it all the more necessary to plan properly.

The Wall Street Journal took up this matter in a recent article titled Preparing to Leave. If you’re like me, you’re always looking for ways to learn from other business owners’ mistakes, as well as their accomplishments, and this article contains some of each.

For example, a few of the “mistakes” identified in the article include:

1. Creating a business that’s too dependent on the owner.
2. Ignoring the tax benefits of planning ahead.
3. Incorrectly valuing the business.
4. Rushing to accept a rich number.
5. Hiring your brother-in-law to do the deal.
6. Underestimating the emotional impact of selling a business.

Like those old movie matinees, I am going to leave you pondering the solutions to these “cliffhangers.”

In the end, only you know when to hold’em and ergo when to fold’em when it comes to the continuation of your business. Whatever you do, don’t delay. You, your loved ones and others dependent on the business will be glad you didn’t.

 

You can learn more about this topic in the Tuscaloosa, AL Business Succession section at our website.

Disinheritance Dilemma

People disinherit family members for a number of reasons.  Based upon our experience, however, the general theme among those who decide to leave a family member out of their estate plan is one of long-term frustration. 

Of course, planning to specifically disinherit someone can be surprisingly difficult.

The motivations behind disinheritance are especially complex, as discussed in a recent article in The Trust Advisor titled: Why Are Family Members Disinherited?

As the article points out, if you are considering disinheritance, then you need to think about what that means, both for yourself and the excluded heir. There are many reasons to disinherit, some more reasonable than others and some worth abandoning upon meditative reflection.

Still, if you must disinherit, then consider explaining your basis for that decision. While it is your choice and right, your legal documents must be clear and withstand (oftentimes) inevitable legal challenge by the affected heir.