SEPTEMBER 2017 SEPTEMBER 2017
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Business Succession. There are many reasons why a family business may not survive after the death of the founder or primary owner. If the business passes down to a number of family members, it simply may not be profitable enough to support a large number of successor-owners. Further, the next generation may not have the business, organization or leadership skills necessary to guide the enterprise toward a profitable future. A business succession plan, among other things, will address these issues with the goal of establishing a well-planned and organized transfer to the successor-owner or owners. A number of issues must be considered, including taxes, liquidity and buy-out issues due to the death or incapacity of an owner, and addressing issues of voting and ownership control. A team of professional advisors should be involved in this process. Among those included on the team would be the attorney for the business, who would most likely provide significant guidance in regard to the best ways of achieving the goals of the asset protection plan, and of course the accountant for the business, who may be the person, other than the owner, who has the most broad-based knowledge of the financial aspects of the business operation. Others that might be included would be insurance professionals, financial advisors such as a banker and a trust officer, and of course a business appraiser to address valuation issues in the context of business succession. Issues to be considered would include whether or not the business should be sold during the owner’s life as a means of providing for an orderly business transition, in which case there are many variables to be considered relating to prospective buyers and ways of structuring and financing the purchase. We will address other business succession issues in future editions of this newsletter, and it should be noted that previous issues of this newsletter have addressed various aspects of business succession planning.
Insurance Mistakes. Among the most common problems I have identified in my practice is the fact that many mistakes are made by people when dealing with life insurance. Life insurance is frequently thought of by most people as a relatively simply product that provides a death benefit, and very little thought is given to the plethora of planning issues that the existence of life insurance presents. Previous issues of this newsletter have pointed out how in almost every estate plan I have reviewed, life insurance has been improperly utilized and beneficiary designations have not been effectively implemented to be consistent with the estate plan. This and future issues of this newsletter will address some of the common mistakes made involving life insurance. One common problem is failing to consider naming a successor owner of the policy. If the owner of a life insurance policy on the life of another party dies and there is no designated successor owner, then at the policy owner’s death (assuming that the policy owner is not also the insured), the policy would pass through the owner’s estate. For example, if a husband owns a policy of life insurance on his wife, and the husband dies, then the policy would pass through the husband’s estate. This may require probate, and may involve a number of family members in the ownership of a life insurance policy. The ownership might pass to certain beneficiaries of the estate who perhaps should not become a successor owner, such as, in the example given, the wife who might then become an owner of the policy on her own life. Consequently, whenever one person owns life insurance covering the life of an insured other than the owner, consideration should be given to naming a successor owner of the policy. In that event, the ownership of the policy would pass to the successor owner without probate consequences, and hopefully the insurance planning undertaken by the successor owner will have anticipated the actions that the successor owner should take following the receipt of ownership of the particular life insurance policy.
Loans From A Trust. Suppose that a trust does not allow the distribution of principal, or that the criteria or standards specified for distributions of principal do not apply so that the trustee may not make a distribution of principal to a trust beneficiary. In those instances, the trustee may be able to make a loan to the beneficiary as a means of meeting a particular need. Before doing so, the trustee should confirm that the trust does not prohibit the making of a loan and that any requirements of the trust in regard to loans have been met. The trustee should also consider the fact that a loan is essentially an investment, and the trustee should consider whether in the context of the particular trust, the investment is a reasonable one and consistent with the trust’s purposes. One factor to be considered would be the interest rate to be imposed for the loan and whether that rate is consistent with the rate of return the trust would realize in the case of other investments. While in some cases a very simple loan arrangement might be appropriate or reasonable, in other cases the loan might be structured in a way very similar to that which a bank or other financial institution would have utilized, such as taking back security in the form of a mortgage or a pledge of other assets, including possibly a beneficiary’s interest in the trust (subject to “spendthrift” issues if the trust contains a spendthrift provision). Fundamental to the ultimate decision about whether or not to make a loan is whether it is a “prudent” investment decision on the part of a trustee to make a loan to a particular beneficiary in the specific circumstances of the trust. The trustee should also consider whether the trustee should evaluate the beneficiary’s credit standing, and the beneficiary’s ability to repay by looking at income tax returns, etc. In other words, the trustee should always exercise due diligence in making decisions about loans being made from a trust. A common trust that I implement in my practice, which I have used literally thousands of times, is the so-called “irrevocable income-only trust” (“IIOT”), which is a very effective vehicle for asset protection purposes. The trustor, or “creator”, of the trust is typically the income beneficiary, and has the right to receive income, but only income, and absolutely no right to receive principal. Some attorneys question whether such trusts should allow loans, but I have used them in many instances without any difficulty in the context of Medicaid qualification. However, all such loans should be documented, and the loan should make sense in the context of the trust and its asset protection objective. Whenever a person acts as a trustee, the trustee should consider and obtain proper legal advice regarding most decisions to be made by the trustee because of the impact that the decision will have on not only the income beneficiary, but the ultimate remainder beneficiaries of the trust.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.