Michigan Estate Planning Blog

Family Limited Partnerships – The Mega-Wealth Transfer Tool For 2012?

There are a number of incredibly powerful estate planning tools available for leveraging intergenerational wealth transfers. Naturally, the appropriateness of a given tool hinges on the assets your family controls. For some, one of those tools worthy of serious consideration is the Family Limited Partnership (FLP). However, you must take care to get it right. As a testament to the power of the FLP and the costs of failing to use them correctly, Peter Reilly at Forbes has assembled the six developments of 2011. I commend them to your reading. When FLPs work, they work. Consider the cases of Natale Giustina and Anne Y. Petter. However, since we so rarely learn our best lessons from our successes, there are four developments to instruct us regarding what not to do: LINTON v. U.S, Axel Adler, Jorgensen v. Comm’r. 107 AFTR 2011,and Paul H. Liljestrand. The Forbes article gives a “moral of the story” of sorts regarding each case. In the end, the overall moral to the FLP - as we head into 2012 and ever closer to the unknown tax laws of 2013, and an election year no less - is that this may be your last year to fully leverage the wealth transfer power of the FLP. Making use of the FLP tool requires dedication to the process and setting it up now (rather than later) may guarantee your ability to make use of the current laws. Regardless, 2012 may be the year for a mega-gift.

Reference: Forbes (December 30, 2011) “6 Family Limited Partnership Developments In 2011”

“Family” Is Key To Family Business Success

Legacy companies – those incredible companies that have lasted for generations within a family, some 100 to 150 years, and continue to grow – occupy a special place in the American imagination and even more so in the hearts of entrepreneurs. In fact, for most thinking people, there is a special appreciation for the care and planning necessary to start a company and keep it going for a short time, never mind for entire generations. Indeed, Legacy companies are a rare breed. Many family companies will simply never get there. Fortunately, there is heartening news in a recent study that suggests that the duration of a family company is not quite so important, for all its branding glory, as the duration of the family itself. As related in Family Business Magazine, the Family Firm Institute – a global association of researchers and advisers – has conducted a three year study: the “FFI/Goodman Longevity Study,” completed in 2010. By surveying some 500 senior family-firm executives they discovered that just 10.6 percent of family enterprises owned just one business. The average is actually closer to 3.4 businesses, with 21.3 percent controlling five or more businesses, and an average of 6.1 companies over a family history. What does all of this mean? Simply put, single companies are not the measure of enterprise, especially not in a family. The family itself is the asset and the drive that moves matters forward across time, generations, and changing markets. As you plan for your business - and for your family - this may be an essential thought to bear in mind, and one to foster in others. As noted in the original article: Families with a trans-generational orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take.

Reference: Family Business (November 2011) “Family Business Longevity Examined in a New Light”

“Family” Is Key To Family Business Success

Legacy companies – those incredible companies that have lasted for generations within a family, some 100 to 150 years, and continue to grow – occupy a special place in the American imagination and even more so in the hearts of entrepreneurs. In fact, for most thinking people, there is a special appreciation for the care and planning necessary to start a company and keep it going for a short time, never mind for entire generations. Indeed, Legacy companies are a rare breed. Many family companies will simply never get there. Fortunately, there is heartening news in a recent study that suggests that the duration of a family company is not quite so important, for all its branding glory, as the duration of the family itself. As related in Family Business Magazine, the Family Firm Institute – a global association of researchers and advisers – has conducted a three year study: the “FFI/Goodman Longevity Study,” completed in 2010. By surveying some 500 senior family-firm executives they discovered that just 10.6 percent of family enterprises owned just one business. The average is actually closer to 3.4 businesses, with 21.3 percent controlling five or more businesses, and an average of 6.1 companies over a family history. What does all of this mean? Simply put, single companies are not the measure of enterprise, especially not in a family. The family itself is the asset and the drive that moves matters forward across time, generations, and changing markets. As you plan for your business - and for your family - this may be an essential thought to bear in mind, and one to foster in others. As noted in the original article: Families with a trans-generational orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take.

Reference: Family Business (November 2011) “Family Business Longevity Examined in a New Light”

Study Shows Inherited Wealth Is Squandered

A new and unfortunate statistic confirms what we all intuitively suspected. According to research out of The Williams Group, 70% of all wealth transfers fail. As reported by Forbes here, the failure is not that the money doesn’t get passed down; it is that the family inheritance quickly dissolves in a flash of poor planning, bickering, and waste. How can that be? The research found that the successful 30% had all actively engaged in transition planning, in addition to simple inheritance planning. In a very real sense, all proper estate planning is about both planning for the inheritance and planning for the inheritors. After all, the inheritors are why you want to pass on your assets in the first place. Naturally, then, transition planning is all about bringing the inheritors into the fold and allowing them to learn how to run it. If you have a family business, then this is of the utmost importance. Why? Because for it to remain a “family business” the family has to know about the business, how to run it, and how to think about it. To be successful, hands-on training is required. But then again, aside from a family business asset, there is still a great deal of work to be done to help inheritors properly understand wealth and investments. Likewise, hands-on training in the family wealth, perhaps beginning in philanthropy, can make all the difference. In the end, to overcome the odds against the successful transfer of your family wealth, work together to form a plan, to understand it, and to put it into action.

Reference: Forbes (December 9, 2011) “Wealth Transfers: How To Reverse the 70% Failure Rate”

PATENT PROTECTION? THE “AMERICA INVENTS ACT”

If you’re a small business owner and an entrepreneur, then you ought to check out the new patent law and the most major changes to it in some 60 years. With the stroke of a pen, President Obama recently signed the America Invents Act into law. You may not have heard much in the media about this new law, because both parties agreed to it. While the devil is in the details, and many remain to be seen, many regard the law as less than favorable to entrepreneurs. The biggest change is that instead of being a first-to-invent system (i.e., where the patent rights go to whoever can prove they created the idea/product first), we are moving to a first-to-file system. Soon, the patent will go to whoever gets the idea to the patent office first, and in a digital age that is a race where every second counts. As a recent Forbes article points out, this is much more of a challenge to the entrepreneur (especially the technology entrepreneur) because it makes “idea theft” more likely. In turn, it forces innovators to be more closed about their ideas (out of fear). Prior to the new law, getting an idea right and getting it out there have always been a social process involving communication. For one, think of how dangerous a trade show might be for an entrepreneur. Similar systems have been in place in Canada and Europe for years, and there’s evidence that it hasn’t been good to small business. What to do? According to another recent article, this one from Smart Business, it’s important to remember that you are in a race. Indeed, it’s much like land grabs of the early 19th century and that’s probably one comparison to a “pioneer” that an entrepreneur might like to avoid. It will be important to reassess how you deal with your ideas, whether you are an individual or you have employees working on developing their own ideas. You no longer have the option of sitting on a good idea. The lifeblood of small business is often innovation, and so the security of your business might now lie in speed. More information about the law and specific problems can be found in each of those articles, as well as in other sources. According to the America Invents Act, the race is on as of January 1, 2012.

References:

Forbes (September 20, 2011) “New Patent Law Means Trouble for Tech Entrepreneurs”

Smart Business (September 20, 2011) “The America Invents Act: A race to the patent office”

Business Succession Planning Protocol



When someone starts talking about “business planning,” too often they just mean getting it off the ground or, if they have high aspirations, how to make it fly once airborne. Of course, “business planning” also is about keeping the business aloft through turbulence (e.g., bad markets) and even should the pilot-in-command become unable to fly (e.g., retirement, incapacity, or death). In the end, a proper business plan for any small business, but especially for a family business, always entails some form of succession planning. I just ran across a Forbes article that ran a few months ago, yet is forever timely on this subject. This article illustrates just how important coordinated succession planning and estate planning are in the context of a family-owned business. If you run such a businesses, whether it’s a small shop or a large company, oftentimes your personal wealth and the wealth of the family are tied up with the business itself and your ability to keep running it. [Not to mention any lines of credit your signature and personal assets may secure.] What happens when you fall ill or pass away? “That day” is not always a day you can see coming or you can delay. The biggest hurdle to any succession plan is planning for your own successor. Let’s face it, running a business is tough and jumping on board while the carousel is moving can be a dicey proposition. While the Forbes article has some specific advice, undoubtedly it will take measured thought and time to form and implement an effective succession plan. Then again, there also must be the contingency of deciding simply to sell the business. Either way, whether you ultimately continue the business or sell it, careful planning is a must. In many ways, it’s not just for your own sake or for the sake of your family that the business has to be protected with proper planning. A business means employment for many people and often wealth for a community. It’s timely news, then, to find that small businesses created 55,000 new jobs this past November. Oh, if no one has thanked you lately for being a business owner then by all means, then let me say “thank you.”



Reference: Forbes (October 12, 2011) “Identifying a Successor for Your Family-Owned Business”



Bankruptcy Business Blues

Bankruptcy can be a tough issue, especially to the small business owner whose customer has fallen on hard times. Problem #1: You’ve likely lost a customer for your products or services. Problem #2: You’ve likely lost the ability to collect the money the customer still owes you. Problem #3: The future potential bankruptcy “preference” may pull even more money from your coffers, as a Smart Business article points out. The bankruptcy of another means their ability to pay you is severely compromised, unless you’re “secured.” However, what if you were paid and the payment is deemed to have been a “preference” by the bankruptcy trustee? If the bankrupt company made a payment to you on or before the 90 days prior to filing for bankruptcy, then such payment becomes recoverable as a means of squaring away obligations. Bottom line: The trustee can take the payment back from you. If this happens to you, then you aren’t without options. Nevertheless, it does demand your full attention and cannot be ignored. The original article goes into considerable depth, but here is my take-away for you: find competent legal counsel to plead your case and run through the numbers.

Reference: SmartBusiness (July 1, 2011) “What to do when faced with a bankruptcy preference demand”

ESTATE PLANNING / FAMILY FEUDS

The sad tales of families squabbling over an inheritance (or disinheritance) oftentimes make public even the most intensively private of lives. Such is the case with John Steinbeck, and his family’s prolonged fight over a small piece of property he used to call his “little fishing place.” It’s just a little house at the end of a point jutting into a cove of Noyac Bay in Sag Harbor, NY. It’s just a writer’s shack, really, where Steinbeck wrote “Travels with Charley,” and other works. While alive, he worked to keep the place private. He even hand-stenciled a sign warning, “Trespassers Will Be Eaten.” But, his heirs have taken the little house and made a public spectacle of it. You can read the sad story online at the New York Times. Of course, the Steinbeck heirs are not unique. Intra-family feuds are rather common these days following the death of a family member. That fact was confirmed in a survey conducted by the AARP/Scudder Investment Program of Americans age 50 and over. According to the survey, 20 percent of the respondents cited problems among surviving family members due to their inheritance, or lack thereof. More often than not, these feuds are over tangible personal property and family business interests. So, how do you protect your legacy and preserve family harmony? Unfortunately, the truth is that even the best estate planning cannot prevent every instance of unreasonable behavior among heirs. But there are things you can do now, with proper legal planning and good communication, to avoid problems later on.

Income Protection Insurance For Self-Employeds?

If you’re self-employed, then likely you know just how much the flu or even a short-term injury can set you back. If you are out of the “game” for even a short period of time, then there is a direct impact on your bottom line. There is no sick leave to fall back on, is there? What if an illness or injury were to take you out of the game for an extended period of time? You might just lose your business and, with it, your home and the rest of your assets. That is not a pretty picture, is it? Maybe it would be worth taking a look into the possibility of long-term disability insurance, but according to a recent Reuters article, long-term disability insurance is far more difficult to underwrite for the self-employed. The purpose of long-term disability insurance is to replace income that might be lost if you are incapacitated for a long period of time, or for some, at least until age 65 (when social security kicks in instead). However, the self-employed have the problem of either “being” their business, or being unable to prove the full extent of their business. If you own an actual business, rather than operate as a freelancer or individual agent, then the first case is your problem. The insurance will pay out in accordance with what it thinks you actually live on, your gross minus your business expenses (roughly what you pay income taxes on), but that just might mean cutting out necessary business costs (like licenses). While extra protection can be purchased, there is the extra expense to consider. If you are a freelancer or just work on a case to case basis, then you’ll also have to work to prove your income to the insurance underwriter. If they have trouble pinning down your actual income, then it makes it difficult for them to properly assess how much your policy would cost and how much it might offer in protection. In the end, the insurance company simply may elect not to offer coverage. At any rate, the original article is worth a look. It is, after all, an important issue to bear in mind. If you are your own boss, then plan accordingly.

Reference: Reuters (August 16, 2011) “Self-employed? How to find disability insurance”

ESTATE PLANNING / SMALL BUSINESS

The new estate tax law, in effect this year and next, offers a unique opportunity to family business owners who want to pass their business on to the next generation. As a recent Wall Street Journal Article points out, taking advantage of the low gift tax levels (while you still can) could save your family business a hefty amount in potential estate taxes. But transferring ownership can raise complicated succession and estate planning issues that you should consider carefully before giving away any stock. The recent tax law changes brought the gift tax threshold up to $5 million for an individual and to $10 million for couples in 2011 and 2012. Yes, that means you can give away that much now, without incurring a penny in gift tax. But, since this law is in effect for only two years, you’ll have a narrow window of opportunity and thorny decisions to make quickly. While you can transfer ownership without necessarily giving up control, you will have to make some difficult decisions, including: who will eventually lead the business, how to treat non-business family members fairly, and how to fund your own retirement. The answers to those questions will help determine which estate planning techniques make the most sense for your family, and your family business. Whatever your ultimate goals, now is the time to start exploring your options. There are large sums of money at stake, and only a short time to seize this opportunity. You can learn more about business succession issues on the Business Succession Practice Center on our website. While you’re there, be sure to download our Free Report: Business Owners Beware.

Link: http://online.wsj.com/article/SB10001424052748703312904576146370031656768.html

 

From The Wall Street Journal Online (Feb 19, 2011) “Family Businesses Catch a Big Break

SMALL BUSINESS / PATENT LAW

Depending on who you follow, Congress has either delivered a great gift to entrepreneurs and inventors, or shackled them with a terrible handicap: the House last week passed legislation to overhaul the U.S. patent system for the first time in 60 years, making the effort one step away from being put before President Obama’s executive pen.

As reported by The Wall Street Journal, the House managed a bipartisan maneuver with more than two-thirds of lawmakers from each party supporting the “America Invents Act,” passing it on a 304-117 vote. The overhaul essentially breaks down into two big changes. Firstly, it revises the way that the patent office handles its funding and fees. Under the new law, since the office supports itself on the basis of its fees, it therefore gets to keep all of its fees as budget, rather than have them siphoned off by Congress (note here that as much as $800 million has been diverted to other programs over the past 20 years.) The hope is that the money will help clean up the staggering backlog of some 700,000 applications.

The second change, of greater importance to the small business owner and entrepreneur, is the move from a “first-to-invent” system to “first-to-file.” Here is the blessing and the curse. If your patent is challenged, proving that you were the first to invent can involve drawn-out and expensive legal battles. For the up-and-coming inventor whose very business might rely on that patent, the legal squabble is often too much for them, where a conglomerate can absorb the drain with ease in a battle of attrition. Of course, on the other side of things that legal battle is often the only tool the entrepreneur/inventor has; it is his sling to wield against Goliath.  What happens when big business can simply move quicker with an entrepreneur’s ideas?

The Senate has passed a similar bill and so the final matter at hand is to reconcile the two before passing it up to the Executive branch. President Obama has already pledged his support for overhaul.

Reference:  The Wall Street Journal Online (June 24, 2011) “Patent-Overhaul Bill Clears House

ESTATE PLANNING / REAL ESTATE GIFTING

The economy is starting to show some life in a number of sectors but, unfortunately for many, the housing market is not one of them. The good news for the crafty estate planner is that the poor housing market coupled with the tax laws that went into effect with last December’s compromise offer a rather unique opportunity, one that may very well rate amongst the smartest estate planning moves one will ever make, according to Forbes columnist Rob Clarfeld. Now might be time to give away the house. The poor housing market remains perhaps the largest unhealed wound of the Great Recession. If you are trying to sell a home right now you are likely a bit frustrated. Homes are not moving quickly, and many sellers are forced to take a relative loss just to move their property. But, if you were considering making a gift of your home, the situation is entirely more cheerful. Depressed prices mean that you won’t have to work to reduce your home’s taxable value, and the gift you make of it will take a much smaller chunk of your lifetime gift tax exemption. This is a serious boon to high net-worth individuals looking to give away property of considerable value. But wait, there’s more. The tax compromise signed in with the budget deal last December also extends the lifetime gift allowance from $1 million up to a generous $5 million. So, right now, there is an 18-month window of opportunity for you to make a tax-advantaged gift. Previously, when one wanted to give away real estate the strategy of choice might have been a Qualified Personal Residence Trust (QPRT) because it allowed for considerable discounts given certain risks through a gradual transfer, but with this perfect storm of depressed real estate prices and a generous gift tax exemption – an outright gift in trust may make more sense. Further, if you want to retain post-gift use of the real estate, you may want to consider transferring the home to an Intentionally Defective Grantor Trust (IDGT), with a structured plan that allows you to remove the asset (in this case your home) from your estate for estate and gift tax purposes, but not for income tax purposes. . Of course, carefully crafting the trust provisions, including dispositive and potential generation skipping provisions, is of utmost importance. Again, this window of opportunity could close at any time, so if this is an estate planning strategy you might consider, you are well-advised to discuss your situation with professional counsel sooner rather than later.

Reference: Forbes (June 22, 2011) “Your Smartest Estate Planning Move Ever: Give Away Your House—Now!

SMALL BUSINESS / GRANTS

If you’re getting a new enterprise off the ground or trying to expand your small business, finding capital may be high on your list of priorities. Unfortunately, many traditional sources of business capital have dried up in today’s economy. So, try thinking “outside the box,” and consider applying for a government grant. As a recent Wall Street Journal article points out, grants are not just for non-profits, and your business might qualify. Federal and state governments offer grant money to businesses when they want to get things done for the public good. So, if you are working in a field that government considers “promoting the public good,” you may be able to qualify for a grant. Some of those business areas include energy efficiency, environmental technology, biotechnology, health care and information technology. State and local level grants may be available for a wider range of business purposes, however, since local governments tend to be more concerned with encouraging commerce. On the more local levels, grant money could be available for industries such as tourism or even child care. Do some research: scour government websites, particularly www.grants.gov. You also can sign up for e-newsletters alerting you to grant opportunities. State and local governments also publicize grant information online, so make Google your friend. If you think you’ve found something promising, it’s worth contacting the grant manager directly to see if your business is a possible fit before proceeding. Generally, they will let you know whether you are “barking up the wrong tree.” There are professional grant writers who can help write and edit your grant application. Some grant writers charge a flat fee, while others bill by the hour. If you decide to use a professional grant writer, remember you will have to pay them whether your grant is approved or not, and their fees could go into the thousands of dollars. Beware of scammers, too, especially anyone who guarantees you “free money,” or promises to find you a grant if you buy something from them. Also, don’t bother with anyone who demands a cut of any grant you win.

 

Reference: The Wall Street Journal Online (June 13, 2011) “Ask For Public Money, And You Shall Receive”

ESTATE PLANNING / INSIGHTS ON WEALTH

If you are a Baby Boomer who has worked hard, accumulated significant assets, support charitable causes, and plan to continue working through “retirement,” you are not alone! And you won’t be particularly surprised by the findings of a recently released survey by US Trust: Insights on Wealth and Worth. The survey was conducted earlier this year, with 457 high net worth and ultra high net worth individuals, with $3 million or more in investable assets. The survey found a distinct generational mindset among the wealthy – many of whom are Baby Boomers, self-made, first generation wealthy who achieved financial success on their own. You are probably familiar with some of these insights found by the survey: • Nearly half of these wealthy individuals plan to continue working in “retirement,” many starting a second career or new business. • Many also want to be able to travel – remember my post last week about “going mobile” with your business, perhaps even into retirement? • Many wealthy Americans want to give back to their communities and support charitable causes, and they may need professional legal advice to fulfill those ideals. • Few have the type of comprehensive estate planning in place that matches the complexity of their estate, their finances and their estate planning goals. That last insight, about few people having the type of comprehensive estate planning they really need, may come as a surprise to you – or even to US Trust – but not to me. I see this in my practice every day. Just because you have a simple will in place, or believe the federal estate tax will not affect you, does not mean you have adequate met your estate planning needs. Some common “gaps” that turned up in the US Trust survey include: • No living will or health care directive • No durable financial power of attorney • No revocable living trust • Inadequate planning for life insurance • No charitable planning, despite charitable intent • No written plan for the distribution of personal property • No business succession plan, in fact only three percent of business owners had a business succession plan in place If you saw yourself in the first paragraphs of this post, you likely saw yourself again in the last few. If you don’t take action, then you are, as US Trust President Keith Banks said, “leaving the legacy of (your) life’s work to chance.” You can download the full survey report from the US Trust website.

SMALL BUSINESS / FAMILY LOANS / GIFTS

If you have an adult child asking you for investment capital to launch a new business, you may be strongly tempted to comply. It might be a good investment, or it might not. Either way, a recent article in The Wall Street Journal points out several things you can do to preserve both your capital and your relationship. • Understand that most start-up businesses fail within the first few years, so there is a good chance that your “investment” will not pay off, or if it does, it may take longer than you expected. Decide now whether you are making a gift with no expectation of getting your money back, an investment for an equity position, or a loan at a favorable interest rate. There is no single right answer, but make sure everyone is on the same page about the nature of your investment. Also, be sure to consult your attorney about any gift- and estate-tax implications. • Get it in writing. Families often “forget” this important aspect of any financial deal, but it’s important for both sides to put the terms in writing to prevent misunderstandings down the road. Remember, if you want to preserve both your money and your relationship, a written agreement is your friend. • Treat your child like an adult. Don’t become a nagging parent, but rather try to foster an environment that encourages your child to come to you with open, honest communication. And allow your adult child to run the business without unnecessary interference. • Give advice as needed. It’s a fair bet that your child has never run a business before, in fact he or she may not have much business experience at all. Consider taking an advisory role, and don’t be surprised or indignant of your first-time CEO makes a few rookie mistakes. • Examine your own motives. Make sure you are providing funds to help the fledgling business, and that you are not trying to buy your kids’ love. Reference: The Wall Street Journal Online (June 7, 2011): For You, Graduate, Some Start-Up Capital