Questions and Answers to common Estate Planning Questions!

1. My spouse and I each have children from a previous marriage.  Are there any special planning strategies we should consider?

When both spouses have children from previous marriages, special care must be taken in the estate planning process.  A living trust is a particularly good vehicle for making sure that each spouse’s respective property is passed on to his or her children.  It allows you to tailor instructions to your Trustee concerning the needs of family members.  A trust can benefit a surviving spouse once one of you has passed away while including instructions specifying that the balance of your trust estate be passed to your children.

2. My partner and I are not married, but we regard each other as the equivalent of a spouse. Do we have any special planning needs?

Because the law treats married couples differently from unmarried couples, and because society makes certain assumptions when dealing with a spouse, you and your partner do have special planning needs.  It is imperative to consider carefully what powers and authority you want to give each other during a period of incapacity and after death.  Then ensure through a competent attorney, that you each have legally enforceable documents granting those powers and authority.

3. Should I utilize my applicable exclusion amount during my lifetime or upon my death?

Many people have the misconception that it is best to “save” their applicable exclusion amount until their death.  However, a powerful tax planning technique is to utilize the exclusion amount by making lifetime gifts so that the value of those gifts will appreciate outside of your taxable estate.

4. Do I have to file a gift tax return when I use any part of my applicable exclusion amount?

You must file a federal gift tax return, but no payment will be due. The exclusion amount, or exemption amount, is the wealth that you can give during your lifetime, or at your death, that is sheltered from estate or gift transfer taxes.  Currently, the lifetime exemption amount is $12.06 million for an individual or $24.12 million for a married couple.  In 2023, the lifetime exemption amount will increase to $12.92 million for an individual or $25.84 million for a married couple.  For lifetime gifts, the lifetime exemption amount is only reduced if the total of annual gifts to a particular individual exceeds the annual exclusion amount set by the Internal Revenue Service.  The current annual gift tax exclusion amount is $16,000 – increasing to $17,000 in 2023.

5. I’d like to include a charity in my estate plan, but I don’t consider myself wealthy. Would making a charitable gift make a difference?

To most people, the idea of leaving a legacy through charitable giving sounds like something only the very wealthy can do. This is not necessarily true. The size of a gift is not what characterizes a philanthropist. Even if your estate isn’t big enough to build a library, it could still buy books for that library. If you are passionate about a cause, you can always include a charitable gift in your estate plan, no matter the size.

6. What is a charitable remainder trust?

Charitable remainder trusts (CRTs) were first introduced in 1969, and since then, have become popular because of the charitable, financial, and estate planning opportunities they afford taxpayers. A CRT is an irrevocable split-interest trust – meaning it pays a percentage of the trust to named individuals over a period of time, and when that period of time expires, the remainder goes to the charity of your choice. CRTs can be a great way to provide you or your loved ones with a stream of income, obtain a charitable deduction, and accomplish your philanthropic goals.

7. I inherited some farmland that I would like to give to charity. Is there a way to give the land to the charity without giving the charity the responsibility to manage the farm?

The easiest way to give land to a charity is to give the charity the option to receive the property as a gift or buy it at a bargain price. The charity can then arrange to sell the land if they would like prior to taking legal ownership of the property. By providing the option, the charity will have an enforceable right to the property, allowing it to sell the land to a third party.

8. Can I donate US savings bonds to charity?

Series E, EE, H, and HH are the most common varieties of savings bonds; however, they are not the best vehicle for charitable giving while you are alive. If you transfer ownership of the bond to charity during your lifetime, you will pay the income tax on all the income that has accumulated. After your death, these bonds become an excellent source of a charitable gift, because the income tax on all the accrued income is forgiven and your estate will also get a charitable estate tax deduction. However, to get this favorable outcome at your death, you must state in your estate plan that the bonds are to be given outright to the charity.

9. What is business continuity planning?

Business continuity planning is strategic planning to ensure that the business continues under responsible management to produce profiles and maintain equity values for family members and charitable beneficiaries.

10. Does my family really want to continue the business?

This is an obvious question that many people forget to ask themselves as they ponder various succession alternatives. You should meet with each of your family members and ask the following questions:
-Are you interested in working in the business?
-Are you capable of running it or handling various senior management functions?
-Are you interested in learning about it?
-Would you enjoy hiring and overseeing capable professional managers?
-Do you foresee problems with the business if something happens to me?
-What would you advise me to do with the family business?

11. How can I provide for the protection of my spouse when the business assets are transferred to children?

The small-business owner frequently receives a significant cash flow from the family business. If the business owner desires to pass his or her business to the children, arrangements must be made to provide sufficient replacement resources of that cash flow for the benefit of the surviving spouse. Advance planning for the purchase of life insurance, as well as preparation of installment sales notes, private annuities and self-canceling notes, is therefore essential and should be considered.

12. What is an ESOP?

An employee stock ownership plan (ESOP) is a qualified retirement plan which invests in the company’s stock; it was created in the Internal Revenue Code. In an ESOP the company makes contributions to the plan for the benefit of its employees, and the contributions to the plan are used to acquire stock in the company, which can either be a C-Corporation or S-Corporation. Once the company shares are purchased by the ESOP, overtime the shares are allocated to employee participant accounts.

13. Can you explain to me in simple terms how an ESOP works?

An ESOP is a tax-qualified plan. The employer is allowed to make tax-deductible contributions, of either company stock or cash, to a trust. The employee participants then have the benefit of having stock or cash allocated to them according to a variety of formulas that are identical for practical purposes to any other deferred-compensation plan such as a profit-sharing plan. When their employment is terminated or when they retire or die, they or their families will receive amounts of cash or stock in the company as distributions from the ESOP. From the company’s perspective, an ESOP can generate meaningful income tax deductions if stock rather than cash is being contributed to the plan. It can also create a wonderful market for stock which might otherwise not be very marketable at all.

14. How does an ESOP help you find a buyer for your privately owned business?

When you are ready to sell your privately owned buiness, it can be intimidating or difficult to find a qualified buyer. ESOPs are a recognized way to keep businesses locally owned and in the community. ESOPs also can provide job security to its employees. A study showed that ESOP owned companies are 7-3 times less likely to lay off employees as compared to conventionally owned companies. ESOPs provide a fair market value for the selling shareholder. They provide comfort and continuity for customers as they are able to still work with familiar individuals. Finally, ESOPs provide business continuity because the employees stay in place to continue operation.

15. What are the tax benefits for an ESOP company?

S corporations that sponsor an ESOP have their own tax incentive- the portion of the business that is owned by the ESOP is not responsible for federal (and most of the time state) income tax. For example, if the ESOP owns 60% of an S corporation, the business will avoid taxes on 60% of income. To operate income tax-free, an S corporation must be 100% ESOP owned.

16. What are the tax benefits for an ESOP owner?

When selling stock to an ESOP, owners can defer or avoid tax on the gains made if:
-The ESOP company is already a C corporation at the time of the sale
-The ESOP owns 30% or more of the company (can be combined with multiple shareholders)
-The proceeds are invested in U.S. domestic corporation stocks/bond within a set time period (15-month window, starts 3 months before the date of the sale, ends 12 months after the date of the sale)

17. What does it mean to be an employee-owner of an ESOP company?

As an employee-owner of an ESOP company, you are entitled to many benefits. An ESOP is a unique retirement benefit that requires NO out-of-pocket contributions (unlike a 401k). ESOPs are trusts that hold shares of the business for employees. They provide job security for employees and gives workers significant stake in their company.

18. What is an irrevocable trust?

An Irrevocable trust is a trust that cannot be changed or amended by its maker after it is signed. Irrevocable trusts are used to make gifts to others -the trustee beneficiaries- “with strings attached.” When making gifts to children or grandchildren, parents and grandparents can either give funds directly to the beneficiary or place the funds in trust, accompanied by a set of written instructions. These instructions are the strings attached to the gift.

19. Why would I want to create an irrevocable trust?

If one of your goals is to reduce your estate tax exposure or make current gifts with strings attached, an irrevocable trust may be the way to plan. Irrevocable trusts can be used to make annual exclusion gifts and taxable gifts. They can be used to make gifts of specific types of property, such as a residence, and they can be used to make gifts of principal while allowing the maker to retain the income for a period of years. They can provide a charitable deduction at the time of funding if the ultimate beneficiary is a qualified charity, and they can be used to skip generations, lasting literally hundreds of years.

20. Why would I want to set up a trust in which I relinquish total control?

You don’t really give up total control. You establish the ground rules in the trust document, through your instructions, and you appoint the trustees who enforce those instructions.

21. What is the difference between an irrevocable trust and a revocable living trust?

The major difference is reflected in the name – you can’t keep the power to “revoke” or change the terms of an irrevocable trust. If you could, the trust property would be treated for tax purposes in the same way as your revocable living trust property: it would be included in your taxable estate. A revocable living trust is like a will in that it can be changed or amended, canceled, or revoked at any time without the requirement of a reason for doing so. An irrevocable trust is nothing more than a complete and absolute gift which is made with strings attached. You can place the contingencies, requests, and prohibitions you with into your irrevocable trust terms, but you cannot retain the right to change or alter it after you execute it.

22. My Parents are aging, and I am concerned they may need me to help them in the near future.  What should I be talking about with my parents?

The first thing to ask is “do you have an estate plan, including a financial power of attorney and a health care advance directive.”  As your parents age, you may need to help them make decisions, and it is important to know if you, or someone else, will have the authority to do just that. If those documents aren’t in place, you should call an attorney to assist.  Next, sit down with your parents and create a list of doctors, medications, income sources, financial accounts, insurance policies, existing funeral planning, real estate, or other assets they may own so that if you do need to help, you understand what you may have to manage.

23. I’m getting older, and I’m concerned I may need nursing home care one day.  What should I be doing right now?

Don’t procrastinate!  Start having that conversation with a spouse, partner, or other loved one about where you want to live as you age. Be thorough and realistic. Long-term care can be expensive, so examine your income and assets and insurance coverage to determine how you will afford long term care. Investigate the options in your community, including nursing home care, home care services, adult day care, and other providers that can help with your activities of daily living as you age so you can make informed decisions.

24. As I look at nursing homes, what are some questions I should ask?

Always ask about cost, and ask what happens if you run out of money.  If you run out of money, does the nursing home accept Medicaid, and if so, how long is the typical wait for a Medicaid bed?  If a couple are entering the nursing home together and they need different levels of care, are they able to live together?  If residents have roommates, ask how those are selected.  Ask to see weekly menus and the monthly calendar of activities. You may even want to ask about staffing, and how employees are trained. If there is something you need to know, ask – knowledge is power!

25. I know mom wants to stay at home, but I am worried about her falling.  What steps can I take?

According to the National Council on Aging, fall prevention is a team effort.  Talk about it with your mom, health care providers, and anyone who can help.  Consider adding grab bars, setting up a vision appointment, and talking with a physical therapist about canes or walkers to assist in safely maintaining mobility.

26. Why do I need an exit strategy for my business?

No one lives forever, and most people do not want to own and operate a business forever. A big question is will the transition of ownership happen before or after your death? As a business owner, you probably invested a vast majority of your funds in one asset- the business. This can make preparing for retirement and planning for the business at death/disability quite complex!

27. What is a business succession plan?

A business succession plan details out the steps to be taken to implement your chosen exit strategy. Proper succession planning allows the smooth transfer of management control and ownership of the business so that the business will continue to operate as expected. If the owner is wanting to sell the business, the plan will help position the company for a sale, find the buyer at the appropriate time, and create a smooth transfer of ownership.

28. How do I develop a succession plan?

After you have chosen an exit strategy, consider these 5 questions:
1. What is your time frame?
2. Are you transferring management or ownership (or both)?
3. Who do you want to control the business when you are no longer able to?
4. Does your estate plan align with your business succession wishes?
5. Have you determined the value of your business?

29. Whom should business owners select as advisors in establishing a succession plan?

No single advisor has the expertise in all areas that a business succession plan must cover. You should work with a team of advisors (your personal financial advisor & accountant, an estate and business planning attorney, and the company’s accountant & attorney).

30. Who can benefit from proper estate planning?

The short answer is EVERYONE! Let’s look at Groucho Marx as an example. He had a will, but it did not do him any good on his incapacity. The last 3 years of his life were a living probate battle that was live-streamed on TV. Once he was determined incapacitated, he lost control over what was essential to his dignity as a person, namely, his privacy, his personal decisions, and his wealth. This fiasco could’ve been avoided with proper estate planning.

31. If I must have a pour-over will anyway, why do I need to transfer my assets into my living trust?

One of the reasons you did a living trust-centered estate plan was to avoid the probate process. The pour-over will is intended to go through probate only if a guardian must be appointed for a minor child or there are assets that you forgot to title in the name of your living trust. If you do not transfer all the assets, you are subjecting your heirs to the probate process that you were trying to avoid in the first place.

32. Can we lose the benefit of creditor protection if we transfer our real estate to a living trust?

In some states, there are safeguards against claims of creditors when property is held by husband & wife as tenants by the entirety. These safeguards may be lost if the property is conveyed into a living trust. Many states have homestead exemptions that protect the family home from the claims of creditors. The homestead exemption may be lost in some jurisdictions through trust funding.

33. Why would anyone wish to disclaim an interest in property left to him or her by a decedent?

Generally, disclaimers are exercised to redirect property to another person either for tax purposes or as a reallocation of assets for nontax purposes.

34. I opened a 529 account for my child. Is there any way to add my spouse as an owner?

529 plans can only have one owner, but for estate planning purposes, you should add your spouse as the successor owner of the plan. Naming a successor owner will make it administratively easier to pass the account to your spouse in the event of your death and avoid the probate process.

35. How can I use 529 accounts in my estate planning?

529 account owners control the plan and can change the beneficiary. Earnings accumulate on a tax-deferred basis and distributions are tax-free if used to pay for qualified educational expenses. Contributors can give up to the annual gift tax exclusion (currently $17,000 annually for an individual or $34,000 for a married couple) without incurring gift taxes or using up part of the lifetime gift tax exemption.

36. Can I put unused 529 account money into a retirement account?

Yes, but there are some limits. The owner of a 529 account can transfer up to $35,000 in unused education funds to a Roth IRA for the account’s beneficiary, but the 529 account must have been established for at least 15 years, no contributions or earnings from the previous five years can be transferred, and the $35,000 is subject to the routine annual Roth contribution limits.

37. What are the Indiana tax benefits of contributing to a 529 account?

Indiana is one of the few states that offers taxpayers a tax credit for contributions to a CollegeChoice 529 plan. Currently, the credit is equal to 20% of the amount contributed during the year. Beginning on January 1, 2023, the credit is equal to 20% of the amount contributed but increases to a maximum credit of $1,500. Further, the tax credit is available for any Indiana taxpayer who contributes, and not just the 529 accountholder.

38. What can I do to increase the odds that our business stays in the family for generations?

If you are successful in business, a part of your family’s identity will be intertwined with the business enterprise. You will want to develop an interrelated family and corporate culture that reflects your values as a family. This culture should become so obvious and consistent as to be almost tangible to both insiders and outsiders.

39. What should I be concerned about if I want to hire my spouse?

Couples who succeed have learned to draw some boundaries between work and home. They can “turn it off” when they go home, forgetting about the roles they play at work. Likewise, they can turn off their roles as spouses when they are at work. They have also learned to carve out distinct territories of work responsibilities to minimize disagreements about tasks and how to do them.

40. Does it make sense to employ my children, who are under 18, in my business?

There are reasons why you may or may not want to employ your children. You should consider if they will be good employees and your personal relationship with them.

Your business can pay them a reasonable wage and these payments result in income and self-employment tax deductions for your business. Also, the children’s wages can be sheltered from personal income taxes up to their applicable standard deduction.

41. My son wants to work for my business as a VP, I want to start him at entry-level. How do I handle this?

If you are not comfortable giving him a senior position right away, you could start him in an entry-level position as a “gopher” for one of your department heads. After learning the ins and outs of the company, he might be ready for a more challenging position and you could give him the opportunity to work his way up the ladder of jobs until you feel he has found his niche in the business.

42. When must I pay income tax on deferred compensation payments?

With a properly structured deferred compensation plan, the employee does not pay income tax on the deferred amount until he/she actually receives the compensation. To avoid immediate taxation, the deferred compensation agreement must be an unsecured promise to pay by the employer; impose “substantial restrictions or limitations” on the employee’s immediate right to the funds; and ensure that the employee does not receive any current economic benefits under the plan.

43. What is a Phantom Stock Plan?

Phantom Stock Plans have been used for many years to provide incentive compensation to key employees. The phantom plan is NOT a stock option plan; it is nothing more than an unfunded deferred compensation plan. The phantom stock plan serves many business owners who simply do not want outsiders, including key employees, as fellow shareholders! 

44. Why does a business owner need an exit strategy?

No one lives forever, and most people do not want to own and operate a business forever. The only question is whether the transition of your ownership will occur before or after your death. Unlike most people who develop investment portfolios that are diversified in many different types of investments, business owners tend to invest the vast majority of their funds in one asset- the business. This makes preparing for retirement and planning for the business at death or disability quite complex.

45. What are my exit strategy options for my business?

• • Sell to co-owners
  • Sell to key employees
  • Establish an Employee Stock Ownership Plan (ESOP)
  • Give the business to family members
  • Sell to an outsider
  • Give the company to charity
  • Go public
  • Liquidate

46. What is a business succession plan?

The business succession plan details the steps for implementing your chosen exit strategy. Good business succession planning allows the smooth transfer of management control and ownership if the business so that the business can continue to operate, providing good service to its customers and providing cash flow to the owner and/or their loved ones.

47. Our New Year’s Resolution is to get an estate plan, but how do we start the process?

It is important to start with determining your goals for your family. Determine who are people or charities you want to take care of in the event of your incapacity or death and who are the people you want to make decisions for you when you are unable to make those decisions for yourself. We can help you put those goals into action and provide a Purposely Designed Organized Plan!

48. We’ve been thinking about our estate plan, and if something happens to me and my spouse, our children are too young to manage an inheritance. Should we name another family member as a beneficiary of our estate and let them give our children their inheritance when the children are older?

No. Instead consider using a trust to hold the assets on your death for the benefit of your children with your family member as trustee. If you name the family member directly as the beneficiary, they are under no obligation to use the money for your children, but a trustee would have an obligation to use the money to benefit your children.

49. We are organizing our affairs for the new year. If something happens to my spouse and I, we want my spouse’s sister to be the guardian of our children. She loves our kids, but we worry about her saying “no” to our kids as they age and want distributions from the trust. Can our children’s guardian be different from the trustee of their trust?

Yes! In fact, if may be beneficial for the guardian and trustee to be different people, especially because being a child’s guardian and managing a trust fund require different skills.

50.  We have children…the kind with fur and four legs! Can we take care of our fur babies in our estate plan?

Yes you can! One of the ways you can care for your pets is by naming a pet caretaker in your estate plan. That is someone who can care for your pets during your incapacity or upon your death. As part of your plan, you could provide them with a funds to care for your pet, including creating a pet trust.

51.  What is a Qualified Plan?

1. 1. 1.  A qualified plan is an employer-sponsored retirement plan that complies with the requirements specified in the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA). The plan must cover a broad group of employees, not just key employees or owners.
      2. To encourage employers to establish retirement plans, the government provides income tax incentives to both employers and employees for contributing to or participating in retirement plans. The employer realizes a current income tax deduction for contributions it makes to a qualified plan. The employer’s contributions are not included in the employee’s compensation and therefore are not subject to FICA and FUTA taxes.
      3. If employee contributions are permitted, they may be made on a tax-deferred basis, allowing the employee to save more for retirement.

52.  What Types of Qualified Plans are Available?

There are two major categories of qualified plans: defined-benefit plans and defined-contribution plans.

• • In a defined-benefit plan, the benefit the employee will receive at retirement is defined by a fixed dollar amount or fixed percentage of compensation when the plan is established. The amount of the employer contribution is not fixed by law.
  • In a defined-contribution plan, the employer makes regular contributions of specific amounts for each employee, but the value of the future benefit is not guaranteed. Defined-contribution plans include the traditional profit-sharing plan, the money purchase pension plan, and the 401(k) plan.

53. Why Should My Business Invest in a Qualified Retirement Plan?

• • Assets that grow tax-deferred compound faster. If you earn 8 percent on your retirement plan assets, their values will double in just over 7 years.
  • Contributions are 100 percent deductible (within limits) for your business in the current tax year.
  • A retirement plan is the most tax-efficient way to provide additional compensation for yourself and other employees. This is because participants pay no income taxes on employer contributions to a qualified retirement plan.
  • A retirement plan is second in importance only to health insurance for employees who want fringe benefits.
  • A qualified retirement plan is an excellent way to attract and retain good employees, motivate them to be more productive, and offer them the opportunity to retire earlier and more comfortably.

54. What is an Exit Strategy?

An exit strategy is a long-range plan for the current owners to divest their ownership of the business upon certain events, including death, disability, or retirement. No one lives forever, and few people want to own and operate the same business forever. The only question is whether the transition of your ownership will occur before or after your death. Usually, the ability of key employees or second-generation family members is known early enough for you to decide whether one or more of these individuals can eventually take over the business – and you can plan for this. If your plan is to operate the business until you die, there will be no opportunity to test your successors’ ability to operate it before they take over.

The exit strategy is often implemented through a business continuity or management succession plan.