Summer is over, and it is raining here in North Idaho - good as no more forest fire danger. My last Newsletter was May 27th, only a month prior to the U.S. Supreme Court decisions in Windsor (Defense of Marriage Act unconstitutional) and Perry (CA Prop 8 left as being unconstitutional per the U.S. District Court). And now we have the need for review and changing of estate and succession plans for non-traditional (same-sex) couples. Obviously, that is a "new development" this past summer, but there is much, much more - and here in this Newsletter I focus first on the non-tax reasons for succession planning, and then bring to my readers and subscribers information about an upcoming (December, 2013 in Las Vegas) Western CPE precision conference on succession planning - a great opportunity for CPAs, lawyers and other tax professionals to build a new area of professional practice!
WHY "SUCCESSION PLANNING" NOW?
Some clients say - "Why worry about estate planning, since the Federal gift and estate exemption level is over $5 million?" Sure, that would be a good statement if it were not for the following: (1) a number of States (check your State law!) have death taxes, and a couple of States even have a gift tax - and the exemptions generally are way lower than the Federal exemptions; and (2) there are many important non-tax reasons for estate and succession planning. So really we are "back to basics" - succession planning is about People and their goals, Property that will pass down the family line one way or the other, and the Process of how we as advisors can be creative and proactive in working with our clients.
What are some of the important non-tax issues in estate and succession planning? Well here is but a partial list:
1 - Where will the assets go at death of the owner, such as senior family members? The answer is that the owner of property is in charge - IF he or she or they determines goals and documents the "at death" succession plan for property. In fact, with the much higher Federal exemption levels, there is more property to dispose of, and for heirs to waste if careful planning is not done in advance.
2 - How should we insure Asset Protection planning for family assets and wealth? Here the effective uses of entities, e.g. FLPs, LLCs and S corporations, and irrevocable trusts is most important. The LLC has clear asset protection advantages over FLPs; but domestic asset protection trusts (DAPTs) may be the best alternative, at least with passive assets. The "Choice of Entity" decision at the outset is very important, and justifies careful analysis.
3 - Where an active family business is involved, how do we effectively advise clients regarding protection of the business in the future? The key here is that, whether a C or S corporation is involved or even an FLP or FLLC, equity ownership can be separated (and should be) from management control in various ways. This is where buy-sell agreements and compensation agreements are most important.
4 - Then there is disability, incompetency, substance abuse at either senior or younger generation levels, and how do we deal with that? Pre- and post-nuptial agreements may be helpful, especially in a split-family situation; and also special provisions in trusts are useful. The clear tracing of property ownership (not just record title) is very important. Essentially, here the family dynamics are key to either success or failure in planning.
5 - Marital dissolution is a fact that often is involved, and advance planning (as well as post-dissolution planning) must occur. How can this planning be successful? Certainly, separate legal counsel is a key to resolution of problems in marital dissolution. However, beyond that, planning must consider all assets and the future potential of assets, especially if involving a business interest.
6 - Perhaps the most difficult issue in planning is Management Succession - who is the successor manager, whether a CEO or a trustee or, in some cases, a "trust protector". Trust provisions giving clear direction for the future, but also being flexible enough to take into account changed circumstances. are critical to success in this area.
7 - What do we do in retirement plan distribution planning, not only about tax issues, but also about family dynamics? Successor generations, as well as a surviving spouse of the plan participant, can benefit from the income tax deferred nature of qualified retirement plans and IRAs - perhaps especially important in these times of potentially rising income tax rates.
8 - And what about State death taxes? In some situations, a succession plan might involve a client changing his or her or their State of domicile (permanent residence), taking advantage of a State law in which there are no death tax liabilities. For example, even if real estate is in a State in which there is a death tax with quite low exemption level, having the real estate in an entity (such as LLC) with a situs in the owner's domicle State results in converting otherwise ownership directly of real property into personal property, i.e. a non-public security - the interest in the LLC which is taxed only in the State of domicile, where there is no death tax.
9 - Is a child or grandchild a "spendthrift" incapable (at least now) of handling financial assets, especially cash? This is an area in which clearly the irrevocable trust is one answer; however, other answers involve financial education of the younger person. L.A. attorney Jon Gallo and his wife, Eileen, who is a clinical psychologist, have developed the "Financial Skills Trust" - which by its title, considers all human and financial issues in property and wealth distribution for children and grandchildren.
10 - And thus obviously this brings us to the area of education of heirs - how can senior family members be involved and be effective in assisting such heirs in developing good habits of handling financial issues and propery? Education planning for younger generations is important and is a fertile area for succession planning. Senior family members, in the right plan, can have controls over the timing, extent and quality of such education - always recognizing the importance of supporting responsibility and maturity in the younger person.
SO WHAT IS THE CPE OPPORTUNITY COMING UP?
I have been privileged to be an author-instructor for WesternCPE, a Montana-based nationally recognized provider of Continuing Professional Education for CPAs, Enrolled Agents, CFPs, attorneys and other professional advisors on wealth creation, management, protection and distribution during lifetime or at death. See the website at www.westerncpe.com for details on resort conferences, webcasts, self-study and other educational opportunities.
Beginning in Tucson, AZ in 2011, and then continuing in San Antonio, TX in 2012, I developed - in conjunction with WesternCPE CEO Paul Larson - the WCPE Family Wealth and Business Succession Planning Conference - 4-5 days of concentrated succession planning courses with outstanding speakers presenting a variety of topics.
This year, December 3-6, 2013, at the restored, historic and beautiful Tropicana Resort, we are presenting the Third Annual Family Wealth and Business Succession Planning Conference - with an outstanding lineup of topics and nationally recognized speakers. The topics range from Jon and Eileen Gallo discussing the "Financial Skills Trusts" to attorney Howard Pearson discussing Charitable Giving in Succession Planning (Howie is the top development office at Stanford University). Also, Dick Oshins and his son, Steve Oshins, will present courses on Grantor and other Trust Planning as well as Domestic Asset Protection Trusts. I will discuss the ins and outs of succession planning for the planning and, in addition, will present a course on Pass-Through Entities (principally FLPs, LLCs and S Corporations). Attorney Steve Siegel, who presents many courses for CCH and the AICPA, will discuss Family Business Succession Planning. Art Werner and I will have a panel course on the Pitfalls and Opportunities in Family Succession Planning. Finally, business valuation appraiser Mark Higgins, ASA will show attendees how to select and work with valuation appraisers; and attorney Keith Schiller will wrap up the program with "how to get the succession planning job done right!"
All in all, we have a great program lined up for December 3-6 in Las Vegas - - think about attending, whether you are an attorney, CPA, other tax professional, or even a family business owner or CEO/CFO manager type in a closely-held business. This program is for you!
I hope this Newsletter is of interest to you, and my intention is to post several additional Newsletters between now and the end of 2013!
From the beautiful Wild & Scenic designated Middle Fork of the Clearwater River in the Idaho Panhandle, I wish you well!
Owen Fiore, JD