Advisory Resource Group

Estate Taxes: ILIT as a Solution

This is a continuation of my previous posting titled "Estate Taxes: The Sometimes Forgotten Expense" where I tried to highlight the impact estate taxes can have on inherited assets.

An Irrevocable Life Insurance Trust (ILIT) is a great solution and a necessity for many estate plans.  In summary, the life insurance is used to cover the estimated estate taxes and costs, or essentially replace wealth, as it is an instant asset upon death that also receives a step up in basis exempting the proceeds from income tax.  However, life insurance proceeds, like any asset, can still be included in the taxable estate which is why the irrevocable trust is created and used to transfer/keep the asset (life insurance policy) out of the owner's estate, relieving it from any tax.

Once a trust is established, the trustee should obtain the needed life insurance, and then funds are given to the trust to pay the required insurance premiums.  The owner may also transfer an existing life insurance policy to the trust, but if this occurs, the insured must live 3 years or more to avoid inclusion of insurance proceeds in his or her estate.  Also, because it is an irrevocable trust, proper planning should occur to avoid or decrease any gift tax.

A qualified estate planning attorney is needed to assist with the proper establishment of an ILIT, but it is also important to have a knowledgeable insurance professional to fund the ILIT with the proper insurance policy to fit the specific need.  CrailHuntly can help and if you do not already have an estate planning attorney, an independent ARG attorney member can assist.

Estate Taxes: The Sometimes Forgotten Expense

There is a lot of focus on alleviating the tax burden for individuals that are selling appreciated assets, but what about the tax burden for those individuals that don't sell?

There is a step up in basis of the property for the heirs upon the owner's death, resulting in no capital gain or depreciation recapture, but that's not the whole story.  Estate taxes and settlement costs, especially for wealthy individuals, can significantly dilute the inheritance value and in many cases create a financial burden for the heirs, especially if assets need to be liquidated to cover the tax liability.  And, if an asset is not easily marketable for sale, individuals could be left searching for other means to cover the costs.

Currently, the estate tax tops out around 50% not including additional settlement costs, all of which increase with larger estates. There is a current estate tax exemption of $2 million, increasing to $3.5 million in 2009 and unlimited in 2010 and revert back to $1 million in 2011.  For many this exemption will not be sufficient.  So what can people do?  First, it's important to consult a qualified estate planning attorney to assess your needs and depending on your situation he/she may recommend a trust funded with life insurance, otherwise known as an Irrevocable Life Insurance Trust (ILIT), as a solution. 

So to not make this section too long, I've written a sequel titled "Estate Taxes: ILIT as a Solution" and briefly describe the use and benefits of this great planning tool.   www.crailhuntly.com

Creatively Bridging the Price Gap

Individuals involved with the sale of appreciated assets are familiar with the occurrence of a common scenario- a price gap.  Very rarely do buyers and sellers come to the negotiating table with the same numbers (asking price vs. offering price).  Sometimes it may greatly impede the sale of the asset, creating frustrations for all parties involved.

There is a new tool being used with the sale of appreciated assets called the Structured Sale.  In some cases, it can help bridge the price gap between buyer and seller.

The reason is because the buyer's payment obligation is the present value of the on-going installment payments to the seller. The length of payment deferral and the payout duration will directly influence the spread.  I have put together an example of how this works, which you may download below.   

The Structured Sale is not only just a benefit to a Seller, but a tool that can be used to help facilitate the transaction for all parties- this is much more valuable than just an end product.

Download Bridging_The_Gap.pdf 

For specific questions please contact CrailHuntly.

What is Business Continuation/Succession Planning?

What is business continuation/succession planning?  As a business owner and advisor myself, here is my answer.

It is the planning required that facilitates the disposition of a business interest or ownership transfer in the event of disability, death or retirement.  In other words, it's planning designed to ensure that the business continues according to the owner's wishes, including appropriate compensation to specific heirs and beneficiaries.

The types of plans implemented are commonly referred to as Buy/Sell Agreements.  However, there is not a "one size fits all" plan that's available.  There are several ways to configure these plans depending on the type of business entity and particular ownership interest.

Examples are: Entity Purchase Agreement; Cross Purchase Agreement; Trusted Cross Purchase Agreement; Key Person Buy-Out Agreement; "Wait & See" Buy/Sell; Stock Redemption.

I plan on writing another piece where I'll briefly describe each one.  In the meantime, if you don't have a plan, get one, and if you do, it's a good idea to make sure it's up-to-date.  Lastly, it's important to have a qualified attorney draft the agreement.  For questions you may contact me.