December, 2013 Newsletter
Provided by Leimberg Information Services
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Owen Fiore: A New Era in Estate and Succession Planning
“Here we are, about to complete the first year under ATRA 2012, with its high exemptions, 2013-$5.25 million per person, going to $5.34 million in 2014. Obviously, most of our client families have nothing to worry about from the present law in the Federal gift, estate and GST tax. That said, the state transfer taxes can be more significant and kick in at much lower estate or gift values.
This commentary looks at the question “Why ‘Succession Planning’ Now?” – perhaps we can positively spin this question into a New Era in Estate and Succession Planning that is attuned to client values and goals, dealing with building, protecting and transfer (succession) of wealth that achieves clearly thought out family goals.”
In this commentary, Owen Fiore provides thoughts on the new era and importance of estate and succession planning, especially in light of the American Taxpayer Relief Act of 2012 (ATRA 2012). He is a long-time LISI commentator, with numerous articles on FLPs/FLLCs and gift and estate tax valuation issues. Presently, having retired from active law practice in California, Owen conducts a family wealth planning consulting practice and CPE education activities based in North Idaho. See his website, including periodic Newsletters, at www.owenfiore.com.
Before we get to Owen’s commentary, we bring to your attention an upcoming conference being presented by Western CPE, a nationally recognized CPE provider for CPAs and other tax and financial professionals (www.westerncpe.com). Owen Fiore is the Conference Coordinator for this conference, to run in Las Vegas, NV, December 3-6, 2013: “The 3rd Annual Family Wealth & Business Succession Planning Conference”. Many well-known speakers will be presenting significant Succession Planning topics, such as Jon and Eileen Gallo presenting “The Financial Skills Trust – Successful Succession Planning”; Keith Schiller, author of “The Art of the Federal Estate Tax Return”, discussing “How to Successfully Package Succession Planning for Clients”; Steve Siegel reviewing “Business Planning Cradle to Grave: Choice of Entity & Succession Planning Issues”; Las Vegas tax attorneys, Dick Oshins (“Trusts as the Centerpiece of Wealth Planning – including beneficiary defective grantor trust planning!”), and Steve Oshins (“Domestic Asset Protection Trusts From A to Z”); Howie Pearson of Stanford University(“Charitable Giving Trends, Updates & Review”). In addition, Owen Fiore and Pennsylvania tax seminar regular Art Werner will present a proactive panel discussion on “Opportunities & Pitfalls in Wealth Succession Planning. Finally, ASA appraiser Mark Higgins will focus on how to select and work with appraisers in the many important Valuation issues in Succession Planning. Check out the referenced Western CPE website for registration information and conference details, the conference being held December 3-6, inclusive at the renowned and recently upgraded/renovated Tropicana Resort.
Here is Owen’s commentary:
Here we are, about to complete the first year under ATRA 2012, with its high exemptions (2013-$5.25 million per person, going to $5.34 million in 2014). Obviously, most of our client families have nothing to worry about from the present law in the Federal gift, estate and GST tax. That said, the state transfer taxes can be more significant and kick in at much lower estate or gift values.
This commentary looks at the question “Why ‘Succession Planning’ Now?” – perhaps we can positively spin this question into a New Era in Estate and Succession Planning that is attuned to client values and goals, dealing with building, protecting and transfer (succession) of wealth that achieves clearly thought out family goals.
How Do We Respond To a Client’s Question: Why Estate And Succession Planning Now, After ATRA 2012?
The client who believes estate and succession planning are unnecessary or too costly when there likely will be no estate or death tax, either Federal or State, needs education as to the many non-tax reasons for such planning. We deal here with People, Property and the Process of Planning. The old saw, “You Can’t Take It With You” is still quite true – so what does the client or clients wish as to the eventual succession of property at death. The State intestacy laws apply where someone fails to provide for at death property transfers – who would want to rely on that?
Tax professionals need to broaden their horizons into the area of family goals, human dynamics within families, family business management, preservation and succession of equity, and special issues, such as trying to insure younger generation family members can cope with life – including their own responsibilities to family and community.
Important Non-Tax Issues in Succession Planning
Tax attorney and former President of the American College of Trust and Estate Counsel, Lou Mezzullo, now practicing in the San Diego, CA area, provided insights into the non-tax issues in succession planning. Also, recently, the LISI Estate Planning Newsletter #2149 (September 30, 2013), set out “The 10 Steps to Take Now in Light of Estate Tax Legislation” by Barry Nelson – an excellent summary of specific planning tips. I present now my ideas on these issues, taking from the insights of Lou Mezzullo and Barry Nelson:
1. Consider where property goes at death of the client(s). Many couples have Wills or revocable living trusts, but often the document provisions are out-of-date, with asset value changes, family situations being changed, and, of course, changes in tax law. With the much higher Federal estate tax exemption level, there is more property that will go to heirs; therefore, what are the goals and wishes of the client(s)?
2. Asset protection planning against the claims of third party creditors is an important part of succession planning. Here the effective use of entities, such as FLPs, FLLCs and S corporations, as well as Asset Protection Trusts, is an important succession planning task.
3. Where there is an active family business, or even a substantial investment asset portfolio, how should the senior family members deal with succession both of management and of equity ownership? Again, both trusts and business entities are key to success here, but advance planning is critical.
4. And important issues of dealing with disability, incompetency and substance abuse must be recognized and resolved both at the senior generation and younger generation levels. Tracing of property ownership and insuring that structures will work in a practical way are important aspects here.
5. Marital dissolution is a fact that often is involved, and so “split family” issues and relationships must be dealt with properly and with care. Separate legal counsel may well be necessary for the parties involved.
6. Management succession perhaps is the most important and difficult issue in succession planning – who is the successor manager, whether a CEO or trustee, or, in some cases, a “trust protector”? Trust provisions must give clear direction and minimize disputes and litigation. However, they must be flexible enough to take into account changes in circumstances.
7. Retirement plan management and distribution planning is important in many succession plans, especially as successor generations can benefit from income tax deferral in the retirement plan or IRA. This is especially important in this era of rising income tax levels.
8. State death tax exposure needs to be considered, which may well raise the possibility of change of domicile for the client(s) to take advantage of a jurisdiction without a death tax.
9. Where the child or grandchild is or may become a “spendthrift” not being able to handle properly financial assets, clearly the irrevocable, perhaps dynastic, trust should be considered. The trust is extremely flexible and able to be tailored to the family and its own needs.
10. And so we come to the importance of education of heirs within the family, so as to equip them to deal with wealth as succession takes place. This is an area in which the senior generation, while often retaining reasonable controls, can assist the younger generations in becoming capable of managing and using wealth. Here, in larger estates, the “charitable alternatives” play an important role.
Fit the Succession Plan to The Client’s Family
Successful Family Wealth Planning professionals will concentrate on fitting the estate and succession plan to the client family. This is especially true after ATRA 2012.
Many young families are still building estates, and thus, not only is there no Federal or even State death tax risk, but also life insurance provides a way of eliminating debt and educating young children. Where the estate of a couple is in the $5-$10-plus million net worth range, then the Portability Election, structuring trusts to insure stepped-up income tax basis at death, and having management succession in place are all important considerations.
And then there is the mega-estate of a couple well over the $10-million plus combined Federal exemption level. Here all the traditional valuation planning, entity structures, gifting and shifting wealth techniques are important, and will continue to be popular (with due regard for possible adverse legislative changes).
I finish with reference to a wonderful resource for practitioners, namely “The Sid Kess Approach – 60 Years of Best Practices in Tax, Education, Careers and Life”. This little book was published by the AICPA in 2012 as a tribute to the original Federal Tax Update conference professional, Sidney Kess of New York. Sid’s comments about best practices in the tax professions, the need for lifelong continuing education, the importance of loyalty to clients and a proactive career, all provide lessons to professionals engaged in succession planning today.
LISI Estate Planning Newsletter #2162 (November 14, 2013) athttp://www.LeimbergServices.com Copyright 2013 Leimberg Information Services, Inc. (LISI). Reproduction in ANY Form or Forwarding to ANY Person – Without Express Permission – Prohibited.
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