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Archive for January, 2013


Monday, January 28th, 2013 by


As discussed in our last newsletter, the New Year brought with it significant changes to the estate tax law.  Without these changes, individuals with estates of $1,000,000 or more would have been subjected to estate and gift taxes.  Now, only estates over $5,250,000 (or $10,500,000 for married couples) will be taxed.

So, you are asking, why plan?  Here are just three of many reasons:

          1.       Asset Preservation

Estate planning can help to protect both your current assets, and also the assets you leave for your children and grandchildren, keeping them in the family for many years into the future and making sure they are used for good purposes.  Failure to take advantage of available protections could mean that your hard earned assets end up being lost or wasted.  Asset preservation is a key benefit of estate planning that should not be ignored.

2.       Disability Planning

Proper estate planning also makes sure that you and your loved ones are taken care of in the event that you become disabled.  An annual review, such as we provide through our annual maintenance and updating program, is key to ensuring that your disability planning documents are up to date when/if you ever need them.

3.       Planning to make a difference

Several clients are asking about ways they can use their wealth to make a difference in their community or in the world.  Again, estate planning provides opportunities and solutions.  A well-drafted estate plan can teach children and grandchildren how to be responsible with significant sums of money.  It can also reach farther through philanthropic giving (which can be rewarding personally, as well as financially, through income and/or estate tax reduction.) 

Of course, these are just three ideas out of many that could provide benefits to you and your family.  We are here to help.

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Thursday, January 17th, 2013 by

While even the simplest guardianship is an expensive, lengthy, and public undertaking, a contested guardianship can be much worse.  A contested guardianship is a case in which there are multiple interested persons (usually family members) with different ideas of what is best for the incapacitated person (the “ward”).  As you might imagine, contests like this can drive up the financial and emotional cost of the proceeding, delay results, and air a family’s “dirty laundry” in open court.

A recent celebrity example of a contested guardianship is Fredric von Anhalt’s guardianship (called a “conservatorship” in California) over his wife Zsa Zsa Gabor.  Gabor’s daughter asked the court to appoint her as her mother’s guardian instead, accusing her stepfather of sedating and isolating her mother and mishandling her finances.  All of this and more has been discussed in court, and is memorialized in the public records and gossip columns.  Von Anhalt, who appears to have generally taken good care of his wife, has had to justify all his actions and pay for his defense.

As in the Gabor case, the point most often in dispute in a contested guardianship is who is best suited to take care of the ward as his or her guardian.   This issue is usually resolved by the court at the time it determines that the ward needs a guardian.  However, a serious debate between family members over who should serve as guardian can extend a hearing that should take fifteen minutes into a trial that spans over several days.  Additionally, challenges can continue throughout the guardianship, like they have in the Gabor case.

The good news is that everyone, rich and famous or otherwise, can avoid guardianship altogether with proper planning.  A comprehensive estate plan may include documents such as a revocable living trust, a designation of health care surrogate, and a power of attorney that can serve as an alternative to guardianship, when well-drafted.  The plan also may include a designation of pre-need guardian, which allows you to name the loved one(s) you would want to be your guardian, if a court should ever decide you need one.



Friday, January 11th, 2013 by

So, it appears that we did not go off the first “Fiscal Cliff” and some momentary “permanence” has been given to the Estate Tax Law. In the just passed “American Taxpayer Relief of 2012,”  Congress kept in place the 2010 estate tax law with its Five Million Dollar ($5,000,000.00) personal exemption, adjusted annually for inflation.  The only thing the lawmakers actually changed is the gift and estate tax rate, which has gone up to a top rate of forty percent (40%) from a previous maximum of thirty-five percent (35%).  The exemption amount in 2012 was 5.12 million dollars, per person.  The 2013 exemption amount is reported to be 5.22 million dollars per person.  This amount of money either can be given away during lifetime or after death; it also can be given or devised to grandchildren without occurring any additional generation skipping tax.

Congress also increased the gift tax annual exclusion to Fourteen Thousand Dollars ($14,000.00).  Remember, you can give away $14,000.00, per year, per person, to any individual(s) you choose, without it counting against your 5.22 million dollar lifetime exemption.

Can we now exhale?  Will we ever have to worry again about the personal exemption reverting back down to $1,000,000, per person, as was only hours away from happening on January 1?  I must give you the typical lawyer answer, “it depends”, and here’s why:   the estate tax has been around almost 100 years.  Throughout that time, an average of about 2% of all adult deaths resulted in taxable estate tax returns being filed.  Under the current law, it is estimated that only 0.2% of all adult deaths will result in taxable estate tax returns.  In order for the estate tax to continue to generate taxable estates at its historic 2% average, the personal exemption would have to be reduced to about 1 million dollars ($1,000,000.00).  Yes, we have the lowest estate tax rates ever and yes, Congress seems to have made those tax rates permanent.  However, in looking at the historical perspective, coupled with upcoming “fiscal cliff” (automatic spending cut) deadlines and a growing federal deficit, you have to wonder how long these historically low rates can be sustained. 

The best way to stay abreast of continuing congressional volatility and changes in the estate tax laws is to have an ongoing relationship with an estate planning attorney, such as we provide with our Annual Maintenance and Updating Program.

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Wednesday, January 2nd, 2013 by

More than eighty percent (80%) of businesses in the U.S. are private or family dominated.  Yet, these closely held businesses have an extraordinary failure rate.  Seventy percent (70%) do not survive to the second generation.  Eight-five percent (85%) do not survive to the third generation.  The average family owned business lasts only twenty-four (24) years. 

Why do so many businesses fail after the first generation?  Primarily because the majority of business owners do not have either a formal business succession plan or comprehensive estate plan.  A business succession plan must be part of the business owner’s overall estate plan.  The four (4) leading causes for failure of family owned businesses are: inadequate estate planning; failure to properly prepare and provide for the transition for the next generation; lack of funds to pay estate taxes; and conflicts with family members not actively involved in the business.

There are many ways to guard against such failure.  This article will highlight the following five (5) techniques for business succession planning: Buy/Sell Agreement; Family Limited Partnership; S. Corp. Recapitalization; Employee Stock Ownership Plan; and Intentionally Defective Grantor Trusts.

A “Buy/Sell Agreement” is an agreement among the Company and shareholders to buy stock from shareholders upon certain events, such as, disability, death, divorce, or retirement.  Key components of a Buy/Sell Agreement include properly valuing the business and providing for funding of the agreement, usually by an insurance policy taken out against the shareholder’s life.

A family limited partnership strategy works well when a business owner has family who will continue in the business and the business is valued at $5,000,000.00 or above.

One of the most frequent types of business ownership for closely held interests is an S. Corp.  Unfortunately, due to the ownership restrictions of S. Corp., many business succession strategies are not available to S. Corp. owners.  There is, however, one strategy known as “S. Corp. Recapitalization” which is available.  This technique is typically used when the owner has family who will stay involved in the business.

An Employee Stock Ownership Plan (ESOP) allows owners of closely held companies to sell to an ESOP and reinvest the sales proceeds on a tax deferred basis, providing the ESOP owns at least thirty percent (30%) of the company and certain other rules are met.  The company establishing the ESOP must be a C. Corp, not an S. Corp.  This technique provides liquidity for the retiring shareholder and also provides motivation for employees to continue the company as owners.  Use of this technique requires that there are key individuals who are willing and able to continue the business after the current owners have sold or retired.  ESOPs are effective, but are subject to many rules and regulations and should be considered only after a thorough examination of all factors involved.

With an Intentionally Defective Grantor Trust (IDGT), the owner sells shares of stock in the company to an irrevocable trust in exchange for a small cash down payment and a long term installment note.  This freezes both the value of the asset and the return on that asset (and reduces the size of the grantor’s estate.)  The trust is intentionally drafted so that the creator is treated as the owner for income tax purposes.  By paying the income tax on trust income, the grantor effectively makes additional gift tax free transfers to the beneficiaries.  Children of the owner are usually the beneficiaries of this type of trust.  A major concern with this technique is whether there will be sufficient cash flow to play the installment obligation. 

In summary, there are a number of techniques available to minimize estate tax exposure while achieving a business owner’s wishes to transfer and continue the business which he or she has built.  Whichever technique is used, it should be part of a comprehensive financial and estate plan.  The attorneys at Cramer Law Center are available to assist with that planning.  Remember, history has shown that having a good estate plan does not accelerate the date of death.


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