There are many tools in the estate planning toolkit, so there are various strategies that can be implemented depending on the circumstances. This is one of the reasons why it is important to discuss your situation and your options with an estate planning attorney. If you make assumptions without enough information, you may make mistakes that could have been avoided.
This can apply to people that are partners in small businesses. You may assume that you have no choice but to leave your share in the business to your family in your last will, even if it is problematic for your partner and to some extent, your loved ones. Fortunately, there is a widely embraced solution.
The best way to explain the succession value of a buy-sell agreement is to present a very simple hypothetical example. Let’s say that you and a coworker decide to strike out on your own when you are both relatively young. You start your own business, and over time, it starts to thrive.
After a couple of decades, it generates a great deal of revenue, and you and your partner own the real property and equipment outright. It is worth a lot of money, and your share is by far your most valuable possession. Your partner can say the same thing.
What you do when you decide to put an estate plan in place? A buy-sell agreement can simplify what would appear to be a complicated situation. With the cross purchase plan, you and your partner take out insurance policies with payouts that are equal to the value of a share in the business.
When one partner passes away, per the agreement that both people entered into, the insurance proceeds are used to buy the lead partner’s share from his or her family. In this manner, the surviving partner can conduct business as usual, and the family has liquidity to spread around multiple heirs.
There is another type of agreement that centers around the same concept, but the business itself as an entity takes out the insurance policies. It should be noted that transfers to the surviving partner partners would not be subject to regular income taxes, and this is a great benefit.
While we are on the topic of small business ownership, estate planning, and insurance, we should take a brief look at another scenario that is not uncommon. We will use the same example to assist with the explanation with a few changes.
Instead of going into partnership with a coworker to start your own business, you go it alone. Everything goes the same way with regard to the success of the enterprise and its status as your most valuable possession.
You have two children, a son and a daughter. Your daughter worked in the business with you while she was in high school, but your son was not interested. After college, your son began his career in his chosen field, and your daughter asked if she could help you run the family business.
She works hard and does everything you could possibly ask for and more. Her efforts definitely make the business even more profitable, and you would like to leave it to her when you pass away. Though he never shared the same passion for this particular line of work, you love your son just as much as you love your daughter.
What do you do to balance the inheritances that you will leave to each of your children? The answer is to take out a life insurance policy that is equal to the value of the business and make your son the beneficiary. After your passing, your daughter would be the sole owner, and your son would receive an inheritance of equal value.
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Most people will be best served by the creation of a revocable living trust as a primary estate planning vehicle. This being stated, there are advanced techniques that can be utilized to address more complicated scenarios. In this blog post, we will take a look at three of them, and we will examine others in future articles.
Many people with disabilities rely on Medicaid, which is a government health insurance program that is available to people with very limited financial resources. Clearly, people with special needs are going to accumulate significant health care expenses, so this coverage is a lifeline.
Another need-based benefit that a lot of individuals with special needs rely upon is Supplemental Security Income. The name is self-explanatory: this program provides a modest but steady stream of income to people that can qualify.
If someone that was enrolled in these programs was to receive an inheritance, benefit eligibility could be lost. However, this does not mean that you cannot include a loved one with special needs in your estate plan. There is a legal device called a supplemental needs trust that can be utilized to make your family member more comfortable.
You fund the trust, and you name a trustee to handle the administration tasks. It can be someone that you know personally, but many people use a fiduciary like a bank or a trust company. This can be a good idea for a number of different reasons, not the least of which is the fact that the fiduciary would fully understand the legal intricacies.
The government benefits do not necessarily meet all of the needs of the recipient. These are called supplemental needs, and the trustee can use assets in the trust to satisfy these needs. There are certain things that can and cannot be paid for, and this is why it is wise to empower a trustee that has a thorough understanding of the parameters.
Under ordinary circumstances, the Medicaid program is required to seek reimbursement from the estates of recipients after they pass away. When you establish a trust for the benefit of someone else with your own money, it is a third-party special needs trust. The Medicaid program would not be able to attach assets that are remaining in the trust after the passing of the beneficiary. In the trust declaration, you name a successor beneficiary, and this individual would assume ownership of the remainder.
To explain this second scenario, we will utilize a simple example. Let’s say that you run a business with a single partner named Bill. You both have equal shares in the business. If Bill becomes incapacitated, who will vote Bill’s interest in the business? If Bill dies before you do, what happens to his share in the business?
This question can be answered through the utilization of an estate planning device called a buy-sell agreement. For purposes of incapacity, you can restrict the class of persons who can vote Bill’s interest in the business. For death planning, you and Bill get together to determine the value of a share in the business. Next, each of you would take out insurance policies on one another equal with payouts that are equal to this amount. After one partner dies, the other party would receive the proceeds from the insurance policy. The money would be used to buy the share that was owned by the deceased partner from his or her family. This is commonly referred to as cross-purchase buy-sell arrangement.
It is possible to positively influence the behavior of someone on your inheritance list through the creation of an incentive trust. To provide another example, let’s say that you have a grandson that has struggled with a substance abuse problem for years. He has had success for extended periods of time, but there have been relapses on a number of different occasions.
You are concerned that he may utilize his inheritance to indulge in his excesses. Under these circumstances, you could convey assets into an incentive trust. The trustee would follow instructions with regard to the conditions that must be met before income or principal will be distributed to the beneficiary. Using this example, you could allow for distributions so long as the beneficiary remains clean.
These are a handful of the different situations that can be interested through the utilization of advanced estate planning techniques, but there are many others.
If you would like to build on your knowledge, you have some great opportunities coming up in the near future. Our estate planning attorneys are very passionate about education, and they go the extra mile to share information with community members through our free Webinars.
There are some dates on the schedule right now, and there will be more added on an ongoing basis. You can really learn a lot if you attend one of these sessions, so we urge you to attend the one that fits into your schedule. To see the dates and obtain registration information, visit our Webinar schedule page and click on the session that interests you.