Berdon Blogs

T&E TALK: Transfer a Family Business in a Tax-Smart Way

Posted by Scott T. Ditman, CPA/PFS on Oct 31, 2016 11:00:00 AM

If a family-owned business is your primary source of wealth, it’s critical to plan carefully for the transition of ownership from one generation to the next. The best approach depends on your particular circumstances.

For example, if your net worth is well within the estate tax exemption, you might focus on reducing income taxes. If you expect your estate to be significantly larger than the exemption amount, estate tax reduction may be a bigger concern. One excellent strategy to consider in this situation is the use of an intentionially defective grantor trust (IDGT).

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Topics: T&E TALK

T&E TALK: Private Foundations Aren’t Only for the Rich and Famous

Posted by Scott T. Ditman, CPA/PFS on Oct 24, 2016 12:50:00 PM

Establishing a private foundation may be the right estate planning vehicle if you want to create a family legacy of charitable giving. You may be able to effectively establish a foundation with an initial contribution as low as $500,000.

Tax impact
A private foundation is a tax-exempt entity that’s typically structured as a not-for-profit trust or corporation and established to accept charitable contributions. It’s private because it doesn’t solicit public contributions. One of its primary benefits is that it allows you to control your giving. As a member of the foundation’s board of directors, you manage the foundation’s assets and direct grants to charities.

Contributions to a private foundation are deductible for federal income tax purposes. You can deduct cash contributions to a non-operating foundation (the most common type) up to 30% of your adjusted gross income (AGI). For noncash contributions, the limit typically is 20% of AGI. The deduction for any contribution in excess of AGI limits may be carried forward and used for up to five years.

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Topics: T&E TALK

T&E TALK: Grantor and Crummey Trusts Good Options to Fund a Grandchild’s Education

Posted by Scott T. Ditman, CPA/PFS on Oct 17, 2016 12:50:00 PM

Grandparents who wish to play an active role in funding their grandchildren’s college educations should consider two types of trusts, grantor and Crummey trusts. As you examine the financing options, don’t forget about the impact the establishment of these trusts can have on your estate plan.

Grantor trusts

A trust can be established for your grandchild, and assets contributed to the trust, together with future appreciation, are removed from your taxable estate. These funds can be used for college expenses.

If the trust is structured as a “grantor trust” for income tax purposes, its income will be taxable to you, allowing the assets to grow tax-free for the benefit of the beneficiaries. Plus the income tax you pay further reduces your taxable estate.

On the downside, for financial aid purposes, a trust is considered the child’s asset, potentially reducing or eliminating the amount of aid available. Keep this in mind if your grandchild is hoping to qualify for financial aid.

Another potential downside is that grantor trust contributions are considered taxable gifts. But you can reduce or eliminate gift taxes by using your annual exclusion or your lifetime exemption to fund the trust.

To qualify for the annual exclusion, however, the beneficiary must receive a present interest. Gifts in trust are generally considered future interests, but you can convert these gifts to present interests by structuring the trust as a Crummey trust.

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Topics: T&E TALK

T&E TALK: Pre-nups and Estate Plans Go Hand-in-hand

Posted by Scott T. Ditman, CPA/PFS on Oct 10, 2016 7:00:00 AM

If you and your fiancée plan to sign a prenuptial agreement (commonly referred to as simply a “pre-nup”), it’s a good idea to design the agreement with your estate plan in mind.

Estate planning benefits

Pre-nups are usually associated with planning for the potential of divorce. But a pre-nup also provides benefits for successful marriages, including protection from liability for your spouse’s separate debts and implementation of estate planning strategies.

Most states give a surviving spouse certain rights to a deceased spouse’s property. In community property states, for example, a surviving spouse enjoys a 50% interest in all community property. In most other states, surviving spouses can choose to receive an “elective share” amount — usually between one-third and one-half of the deceased spouse’s estate.

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Topics: T&E TALK

T&E TALK: Provide for the Removal of Trustee in Estate Plan

Posted by Scott T. Ditman, CPA/PFS on Oct 4, 2016 7:00:00 AM

When drafting an estate plan, it’s critical to select the right trustee to carry out your wishes and protect your beneficiaries. Equally important is the need to establish procedures for removing a trustee in the event that circumstances change.

Failing to do so doesn’t mean your beneficiaries will be stuck with an inadequate trustee. But it does mean that your beneficiaries will have to petition a court to remove the trustee for cause, which can be an expensive, time-consuming and uncertain process. In addition, courts generally are reluctant to remove a trustee who was hand-picked by the trust maker.

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Topics: T&E TALK

T&E TALK: Getting Started on Your Estate Plan: Inventory and Value Assets; Estimate Tax Liability

Posted by Scott T. Ditman, CPA/PFS on Sep 26, 2016 7:00:00 AM

The estate planning process requires answers to two basic questions: what is your estate worth? Is your estate taxable? A good place to begin the estate planning process is to work with us to answer these questions. 

What is your estate worth?

First, list all of your assets and their value. If you’re married, do the same exercise for your spouse’s assets. Be careful to review how the assets are titled and to include them correctly in each spouse’s list.

If you own a life insurance policy at the time of your death, the proceeds on that policy usually will be includable in your estate. Remember: That’s proceeds. If your estate is large enough, a significant share of those proceeds may go to the government as taxes, not to your chosen beneficiaries.

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Topics: T&E TALK

T&E TALK: Consider SNTs for Loved Ones with Special Needs

Posted by Scott T. Ditman, CPA/PFS on Sep 19, 2016 11:00:00 AM

Special needs trusts (SNTs), also called “supplemental needs trusts,” benefit children or other family members with disabilities that require extended-term care or that prevent them from supporting themselves. This trust type can provide peace of mind that your loved one’s quality of life will be preserved while not disqualifying him or her from Medicaid or Supplemental Security Income (SSI) benefits.

Preserve Government Benefits

Medicaid and SSI pay for basic medical care, food, clothing, and shelter. To qualify for these benefits, however, the individual’s resources must be limited to no more than $2,000 in “countable assets.” Generally, every asset is countable with a few exceptions, including among other things a principal residence, a car, and a small amount of life insurance.

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Topics: T&E TALK

T&E Talk: Review Your Powers of Attorney at Least Every 5 Years

Posted by Scott T. Ditman, CPA/PFS on Sep 12, 2016 7:00:00 AM

Powers of attorney are critical components of an effective estate plan. After you’ve executed powers of attorney, it’s important to review them periodically — at least every five years and preferably more frequently — and consider executing new ones.

2 types

A sound estate plan should include two types of powers of attorney:

  1. Financial power of attorney. Also referred to as a power of attorney for property, this document appoints someone to make financial decisions or execute transactions on your behalf under certain circumstances. For example, a power of attorney might authorize your agent to handle your affairs while you’re out of the country or, in the case of a “durable” power of attorney, incapacitated.
  2. Health care power of attorney. This document, which also may go by other names, appoints someone to make medical decisions on your behalf in the event an illness or injury renders you unconscious or otherwise incapacitated and unable to make decisions for yourself.
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Topics: T&E TALK

T&E TALK: Direct Payments of Tuition and Medical Expenses Can Reduce Future Estate Tax Exposure

Posted by Scott T. Ditman, CPA/PFS on Sep 6, 2016 7:00:00 AM

The gift and estate tax exemption at $5.45 million in 2016 may make you less concerned about these taxes. Nonetheless, you may be missing a valuable opportunity to reduce your potential gift and estate tax exposure down the road if you don’t take advantage of making tax-free direct payments of tuition and medical expenses.

Leveraging the break

Federal tax law allows you to pay tuition and medical expenses on behalf of your children or other loved ones without incurring gift tax or using up any of your gift and estate tax exemption. This opportunity may not be important at the moment if your net worth is well under the current exemption amount, but what if your wealth grows beyond the exemption amount in the coming years?  What if lawmakers decide to reduce the exemption? Either way, your estate could end up with a hefty tax bill, leaving less for your family after your death.

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Topics: T&E TALK

T&E TALK: Proposed Valuation Regulations May Have a Major Impact on Real Estate Families

Posted by Scott T. Ditman, CPA/PFS on Aug 29, 2016 1:00:00 PM

In my August 15 blog, I noted that proposed regulations issued by the Treasury Department and IRS would significantly limit the ability to use valuation discounts in the context of transferring interests in family-owned entities to family members. These regulations would have a particularly significant impact in the case of real estate business owners.

All business owners have an opportunity to take advantage of discounts now by gifting family entity interests before the rules become final.  However, when you have a real estate entity, there are some special considerations.  With real estate, the income tax basis of the assets could be significantly lower than the market value because in real estate you can depreciate the assets as well as refinance mortgages and distribute additional dollars out to the owners.

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Topics: T&E TALK

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