Estate planning is important for everyone. But in the case of a business owner, not giving serious consideration to what could happen to your business could potentially shut it down entirely, thereby eliminating your family’s income at a time when it is critical.

“It’s important that business owners understand that their plan only works the way it’s set up to work if the circumstances that originally determined the nature of the plan remain the same,” says Carly Fagan Neals, J.D., senior trust officer and vice president at First Commonwealth Advisors. “So if there are changes in the business structure, goals or family structure, they have to be communicated to the adviser — the accountant, the lawyer, whoever put the plan in place.

“A business owner has to take an active role in making sure the plan still works because only he or she knows the facts as they are today,” she says.

Smart Business spoke with Neals about how a succession plan is thoughtfully created in conjunction with your estate plan and what factors need to be coordinated and reviewed.

Is there a good time to begin planning?

Every individual should have a will, a financial power of attorney and a health care power of attorney/living will. As soon as you have assets or children it’s imperative to plan because otherwise your assets don’t get to where they need to go and your heirs don’t necessarily get cared for the way you’d want. For many, this can occur at an early age.

What’s involved with establishing long-term goals and determining succession risks?

Every person’s long-term goals are different, and they often evolve and change. So continually question how you can accomplish what you need to, such as passing the business on when you retire or providing for your family in the event of your death or incapacitation.

If your long-term goals involve transferring the business to some specific person, constantly re-evaluate whether that person is able and willing. What training and education might be necessary? When do you start transferring the business, and is it in a monetary sense or just voting stock? And if you’re retiring, how and when do you phase yourself out?

What are some strategies for success?

Ensure there’s sufficient insurance on the owner’s life or the necessary liquidity for all situations, and hands-on training and education for whoever is taking over the business. Also, is a spouse with power of attorney making business decisions? Do you want it to work that way? Be aware of the capabilities and willingness of those you name to have this authority.

Estate and succession plans need to work in tandem. For example, company stock may be a very large asset of the estate, but you need to know how that stock will be used to provide the surviving spouse with the necessary cash flow. Does your business successor need a life insurance policy on you to buy the stock so the resulting cash can go into a trust for your spouse?

Regularly work with your advisers to analyze the possible tax consequences of any transfer or proposed transfer. You don’t want to trigger a big gain or loss as a result of a transfer without planning for it.

Finally, a business succession plan needs to take into account the business’s operating structure. Whether it’s a corporation, LLC or partnership, how will the business run during the period when the transfer is taking place? It can be a matter of signatory authority on bank accounts, being able to order inventory, or having someone authorized to sign for accounts payable or receivable to keep daily operations going.

How should you monitor these plans?

Any time there’s a change — in business operations, key employees, family dynamics, goals, etc. — communicate it with the people who helped put the plans in place. Even without changes, it doesn’t hurt to talk to your advisers annually, or at minimum every few years. Even though you may not meet with your accountant or lawyer every year, if you’re working with an investment manager or wealth adviser doing regular performance reviews, a good adviser will ask the questions necessary to help determine whether it’s time to go back and get in front of your other advisers including your accountant and/or lawyer.

Carly Fagan Neals, J.D., is a senior trust officer and vice president at First Commonwealth Advisors. Reach her at (412) 690-2131 or


WEBSITE: To learn more about succession planning, visit


Insights Wealth Management  is brought to you by First Commonwealth Bank


Published in National

In recent years, federal estate and gift taxes have been in a continual state of change. As a result, estate planning documents may no longer contain the best options to get individuals, especially those with high net worth, to their goals. And this changing landscape may not be stabilized any time soon; if Congress fails to act before the end of the year, individuals will face significantly lower estate and gift tax exemption amounts and higher tax rates in 2013, says Carly Fagan Neals, J.D., senior trust officer and vice president at First Commonwealth Advisors.

“Similarly, while the extension of the 15 percent long-term capital gains rate provided ongoing windows of opportunity for those wishing to harvest gains at the lowest long-term capital gains rate in our country’s history, there seems to be no doubt that this historically low rate will be higher in 2013,” says Neals.

Smart Business spoke with Neals about how to react to potential changes in federal estate and gift tax law and capital gains rates.

What does the current landscape mean for wealthy individuals?

For estate planning, as a result of drastic changes in tax rates and exemption amounts, high-net-worth clients should talk to their legal advisers to determine what flexibility is built into the plan for these quickly changing laws. Will their current estate planning documents effectuate their wishes, and will their plans be carried out with similar results regardless of the federal estate and gift tax exemption amounts at the time of death?

The same holds true for the likely changing long-term capital gains rates. Examining assets and current and future personal tax obligations can allow individuals to be strategic and potentially take advantage of the current 15 percent long-term capital gains rate.

Individual should discuss questions and concerns with their investment advisers, accountants and possibly, legal counsel. This ensures that all possible consequences are examined before initiating a sale that would result in a long-term capital gain and avoid surprises that would negatively affect other aspects of the client’s financial picture and/or plan.

What are the federal estate and gift tax exemption amounts and rates, and how could they change?

The federal estate and gift tax exemption amount is $5.12 million per individual, with a tax rate of 35 percent for estates or gifts in excess of that amount. In the absence of new legislation, on Jan. 1, 2013, the rates will return to pre-Bush-era tax cut rates — a $1 million federal and gift tax exemption, with the excess taxed at 55 percent. This could mean the difference between an individual with a $5 million estate paying no federal estate taxes versus paying millions at the time of passing.

Another unknown is what will happen to portability, which makes a deceased spouse’s unused portion of the federal tax exemption available to the surviving spouse. In addition to the higher estate tax exemption, the increased gift tax exemptions amounts have also created a window of opportunity that could allow wealthy individuals to transfer assets to the next generation or second generation heirs without incurring transfer tax, thereby decreasing their own taxable estate.

What could happen to estate and gift taxes?

Determining where these exemptions and rates will head is speculative. While there seems to be consensus on the likelihood of higher long-term capital gains rates, the future of where estate and gift tax exemptions land is still very much unknown. The Obama administration has alluded to supporting a return to 2009 rates, with a $3.5 million federal estate tax exemption and a 45 percent tax rate on the excess, while Republican candidate Mitt Romney’s plan has suggested doing away with the death tax, while keeping the gift tax in place with a $1 million exemption and a 35 percent top gift tax rate. What takes place in the November elections will guide the direction of these tax laws and their upcoming expiration.

What planning techniques can provide flexibility for the current tax landscape and the one that lies ahead?

All individuals should consider a comprehensive review of their estate planning documents. In recent years, it was a common and appropriate planning technique for practitioners to draft estate planning documents that used formula provisions to dispose of assets at the time of a client’s death. With the roller-coaster exemption amounts, this type of formula planning could lead to unintended consequences. For example, in the case of ‘formula documents,’ high exemption amounts could allow all of an individual’s estate to be placed into a trust for their children, leaving the surviving spouse with no assets. Creating documents without formulas allows flexibility as tax laws change.

Have your advisers work together as a team. Your estate planning lawyer, accountant and investment adviser should be working toward your common goals, not giving you advice in a vacuum. This protects you from unknowns and allows you to ask questions and feel comfortable letting the advisers guide you.

How can business owners take advantage of the current rates?

For those with certain closely held assets that are likely to appreciate quickly, including ownership in a private business, certain techniques can allow the transfer of wealth with tax benefits through the use of estate planning tools. However, time constraints may limit options, as valuations and planning can take a considerable amount of time.

For investors who have over concentrated positions or are holding assets with a low cost basis,  selling this year may allow them to take advantage of the 15 percent capital gains rate. In the absence of legislative action, the long-term capital gains tax rate will increase to 20 percent at the beginning of 2013.

If you believe you may benefit from historically low rates and high exemption amounts, contact your advisers to discuss taking advantage of them before the end of the year.

Carly Fagan Neals, J.D., is a senior trust officer and vice president at First Commonwealth Advisors. Reach her at (412) 690-2131 or

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in Pittsburgh

Now is a great time to start making gifts from your estate or start planning to make those gifts before the end of the year. Provisions of The Tax Relief Act of 2010, set to expire at the end of 2012, increased the lifetime gift tax exemptions to $5.12 million for individuals and $10.24 million for married couples, while keeping the estate and gift tax rate at 35 percent. If no legislative action is taken before the end of the year, the lifetime exemption will drop to $1 million in 2013 and the tax rate will increase to 55 percent.

As a result, if you transfer $5.12 million in assets in 2012, you will pay no gift tax. If you wait and make that same transfer in 2013, the result would be a $2.266 million tax liability.

“That’s a significant increase,” says Kaz Unalan, CPA, director, tax and business advisory services at GBQ Partners LLC. “If you are considering transferring assets, do it this year before these tax provisions expire.”

Smart Business spoke with Unalan about how to take advantage of the tax cuts while there’s still time.

How does the economic environment play into estate planning?

Based on the current economic climate, many values are depressed. These lower values give you the opportunity to gift more at a lower cost. A prime example is real estate. Those values are creeping back, but they’re still much lower compared to values in 2007 and 2008.

Values of closely held businesses are no different. Because these are at historic lows, it is an ideal time to consider gifting a closely held business. In addition to low values, marketability and minority interest discounts could further enhance your gifting capacity. Currently, interest rates are also historically low and very favorable when gifting assets into a trust. Trusts are appealing gifting vehicles for retaining control of an asset while freezing its value. The interest rate is important in that the lower the interest rate the less the income interest is worth, and conversely, the more the remainder interest is worth. This is extremely beneficial for gifting strategies related to Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts.

When gifting nonmarketable assets such as real estate or interests in a closely held business you should have a professional appraisal or business valuation performed.

How does the future tax environment affect estate and gift tax opportunities?

There’s a lot of uncertainty going into 2013, which has to do with the political environment and the current administration’s budget proposal. Currently, there are valuation provisions in place that are favorable for taxpayers as they relate to the ability to discount valuations of family-controlled entities for gifting purposes. The proposed budget would eliminate those discounts. Part of the current budget proposal also includes restrictions on the use of GRATs. Those proposed restrictions would make GRATs less favorable as an estate planning tool. You need to work with your advisers — your CPA and legal team — to make sure you stay on top of these changes. Those are the best and biggest allies when you’re trying to find out more about these laws and changes and how it impacts you and your business. Those advisers know the rules and have a good understanding of your personal situation. That’s a key component to planning.

What are some strategies to take advantage of this favorable time?

A lot of it starts with looking at your business and family situation. Many considerations are made based on how your personal beliefs and your values align with the tax and legal aspects. You need to answer some big-picture questions such as what you want to leave your heirs, how you want to ensure the financial security of your family now and when you are gone, and who is ultimately going to receive your estate.

Start looking at those big-picture questions and then boil it down to a specific vision. It can then be as simple as making an outright gift and taking advantage of the increased exemption by transferring the gift by the end of the 2012. You can also look at it from a comprehensive planning perspective. Gifting can be part of a family-owned business strategy and include other elements of planning such as the use of trusts.

What are the benefits and risks of estate and gift planning?

The benefit is preserving your estate for your heirs. By doing that now, you take advantage of a tax environment that hasn’t been this favorable for a very long time. Being more efficient in your tax planning can also significantly add value and preserve more of your estate.

By not working with the right professionals you risk missing big opportunities. Beyond the opportunities, you want to make sure you are working with professionals who understand the tax laws and the compliance elements that go along with estate and gift planning. Failing to document and execute the plan is a risk that can be avoided with the right professionals. It’s important to fully understand all of the steps that are necessary for estate and gift planning in order to reduce any kind of risk you may have.

Kaz Unalan, CPA, is director, tax and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5309 or

Insights Accounting & Consulting is brought to you by GBQ Partners LLC

Published in Columbus

When it comes to estate planning, timing is everything, as variations in tax law make some years more favorable than others for transferring assets.

Ask any estate planner about 2012 and they’re likely to say things haven’t looked this good in a long time. But they will also tell you there’s a catch: Conditions will likely change Jan. 1, 2013.

“The question you should be asking yourself is, ‘Am I in a position to take advantage of the current opportunities in the estate and gift tax code?’” says Wonsun Willey, Tax Partner at Sensiba San Filippo.

If you’re not sure, she says, it’s probably time to talk to an estate planning expert.

Smart Business spoke with Willey about how to take advantage of estate and gift tax code opportunities before they disappear.

What makes the estate and gift tax provisions of 2012 so favorable?

At the close of 2010, the Tax Relief Act of 2010 created a temporary opportunity for tax-advantaged wealth transfer. The act increased the estate and gift tax lifetime exemptions to $5 million for individuals and $10 million for married couples, while the estate and gift tax rate remained at 35 percent.

Coupled with a historically low interest rate and an unprecedented suppressed real estate market, this provides excellent opportunities for gifting.

How much time is left to take advantage of these provisions?

It’s not clear what will happen beyond 2012. We do know, however, that if Congress does not take action, the lifetime exemption will drop to $1 million in 2013 and the tax rate will increase to 55 percent. This means an individual transferring $5 million in assets in 2012 could pay no gift tax, while that same transfer in 2013 could generate a $2.2 million tax liability.

What’s the best way to take advantage of this opportunity?

Get an estimated current value inventory of the asset portfolio in the estate. Determine the assets that are more likely to appreciate in value, giving considerations to those that also carry other intangible values, such as family legacy. By transferring assets now, the estate can utilize an estate freeze, in which the future appreciation of the asset transferred is outside the estate and escapes estate tax at the donor’s event. Another way to achieve this is by giving a fractional interest rather than a whole interest in an asset to take advantage of discounts.

Why might transferring interest in a partnership or a business be advantageous?

There are two types of discounts: lack of marketability discount, which is transferring less than 100 percent interest in an asset, and minority interest discount, or transferring less than 50 percent interest. These discounts might apply when you’re moving a fractional interest of a business or real estate out of an estate.

Say a couple owns a business valued at $20 million. They want to gift a 30 percent interest to each of their two children. Because they’re only giving a fractional, noncontrolling interest to each, the marketability of that interest might be significantly impaired.

A qualified valuation may substantiate a 35 percent discount in the transferred share of the business. By utilizing discounts, the couple only transferred 65 percent of the $6 million, or less than $4 million to each child. The result is that instead of exceeding their combined lifetime exemption and paying significant estate tax, the couple now has flexibility to gift even more out of the estate from a different asset to their children because of the allowed discount applied in the gift valuation. This also creates another opportunity for discount for estate tax purposes at death because the parents now own less than 50 percent of the business.

However, there have been discussions in Washington to disallow the minority interest discount on family gifting to other family members, so this opportunity could go away in the future.

You’ve mentioned ongoing estate planning. What does this mean?

Every individual has life-changing events — marriage, children, divorce, sale of a business, stock option IPO — along with change in their view of who their beneficiaries are. A good estate planner will know both the changing estate tax environment and the individual’s life changes in order to provide the best estate planning.

Where is the best place to start in this process?

If you aren’t working with an estate planner, it is best to get recommendations from a variety of sources. Your CPA, personal financial planner, banker or attorney could give you references. It is important that the team you choose to work with comprises estate and trust specialists.

How can individuals select and ensure that they are working with the right service providers?

Estate planning is a very personal business for both the service provider and the individual client. Look for someone you trust who will bring a personal interest to the relationship. As gifting involves giving up some control and is not something that can easily be reversed, understanding family dynamics and getting family members comfortable in all facets of the gift is important.

Communication and coordination are essential to make sure the overall tax, financial and personal outcomes are the best in the current tax regime. Keep in mind that in this process you’ll need help from multiple advisers. Financial planners can bring significant value in helping to select the best assets to transfer, while attorneys are essential to carrying out the intentions of the estate.

Wonsun Willey is a Tax Partner at Sensiba San Filippo, a regional CPA firm based in the San Francisco Bay area. She specializes in working with high-net-worth taxpayers and their estates and is fluent in Korean. Reach her at (408) 776-8900 or

Insights Accounting is brought to you by Sensiba San Filippo

Published in Northern California

As we move into 2012, there are a number of favorable federal tax provisions that are set to expire at the end of the year, absent action by Congress and the President.

Smart Business spoke with Stanley E. Heyman, a shareholder in the Tax and Estate Planning Services Group at Jackson DeMarco Tidus Peckenpaugh, to highlight a few of these favorable provisions that currently offer tax and estate planning opportunities for the rest of the year, and to discuss the new Medicare taxes scheduled for 2013.

What changes to income tax can be expected?

For income tax purposes, the top individual federal income tax rate for 2012 remains at 35 percent. It is scheduled to increase to 39.6 percent for 2013. Qualified capital gains and dividends for 2012 remain taxed at a maximum 15 percent (0 percent for taxpayers in the 10 percent and 15 percent income tax brackets). The qualified capital gains tax rate is scheduled to increase to 20 percent in 2013 and qualified dividends are scheduled to be taxed at ordinary income rates in 2013 (with the top income tax rate scheduled to increase to 39.6 percent, as mentioned above).

To the extent these federal tax rates are to rise next year, acceleration of income into 2012 may offer potential tax savings.

For 2012, high-income individuals will not be subject to any reduction in the total amount of otherwise allowable itemized deductions on their personal federal income tax returns. However, a limitation in the total amount of such itemized deductions for high-income individuals is scheduled for 2013.

For 2012, high-income individuals will also not be subject to the phase-out of the personal exemption deduction on their personal federal income tax returns. The phase-out of such personal exemption deduction for high-income individuals is scheduled for 2013. As a consequence, as we move into 2013, high-income taxpayers’ ability to reduce federal taxes from such items will diminish.

How should estate planning be approached differently?

For estate planning purposes, the top federal estate tax rate in 2012 is 35 percent and the applicable estate tax exclusion amount is $5,120,000 per person. The top federal estate tax rate in 2013 is scheduled to jump to 55 percent and the applicable estate tax exclusion is scheduled to fall significantly to $1 million per person.

The top federal gift tax rate for 2012 is 35 percent and the lifetime gift tax exemption amount is $5,120,000 per person. The top federal gift tax rate in 2013 is scheduled to jump to 55 percent and the lifetime gift tax exemption amount is scheduled to also fall significantly to $1 million per person.

In addition to the foregoing, the first $13,000 of gifts by a donor each year to each recipient is excluded under the annual gift tax exclusion. Furthermore, there remains an unlimited gift tax exclusion for qualifying educational and medical payments. The federal generation-skipping transfer tax rate in 2012 is 35 percent and the generation-skipping transfer tax exemption amount is $5,120,000 per person. The federal generation-skipping transfer tax rate is scheduled to rise to 55 percent in 2013 and the generation-skipping transfer tax exemption amount is scheduled to fall to approximately $1.3 million per person.

Based upon the above described $5,120,000-per-person exemption amounts, there currently exists an unprecedented opportunity for wealthy individuals to gift assets to children and grandchildren without gift tax or generation-skipping transfer tax; however, such gifts must be made before the end of this year.

What potential tax increases should taxpayers be aware of?

Last fall, President Obama proposed for 2013 the following changes, which have not been enacted into law:

  • A certain minimum tax rate for “millionaires”
  • A further limitation on itemized deductions for high-income individuals
  • Raising the top estate, gift and generation-skipping transfer tax rates to 45 percent
  • Significantly lowering the estate, gift and generation-skipping transfer tax exclusion/exemption amounts

How can taxpayers prepare for other tax rate changes?

As part of the major health care reform legislation passed in 2010, new Medicare taxes are scheduled for 2013 for high-income individuals. A new 3.8 percent tax will be applied to unearned income. This new tax will apply to capital gains, dividends, interest and rental income for high-income taxpayers. In addition, a new 0.9 percent tax will apply to the earned income (i.e., salaries, wages) of high-income earners. These additional taxes can potentially push the effective federal tax rate for certain high-income taxpayers to more than 44 percent. For appreciated assets that can be sold at capital gains rates, a disposition by certain high-income individuals in 2012 instead of 2013 could potentially save 8.8 percent in federal taxes (due to the 2013 5 percent rise in capital gains rates and new 3.8 percent tax on unearned income).

Because many of the federal tax laws are creatures of politics, this year’s Presidential and Congressional elections should be closely watched as the outcome will determine whether we might expect any modifications to the significant changes in federal tax laws scheduled for next year. Readers should also keep an eye on State of California tax rates, which continue to be the subject of political debate and change due to the ongoing state budget crisis, a further discussion of which is beyond the scope of this article.

Stanley E. Heyman is a shareholder in the Tax and Estate Planning Services Group at Jackson DeMarco Tidus Peckenpaugh. Reach him at

Published in Orange County

Estate planning opportunities abound for those who are paying attention. Now is the time to sit down with your estate planner to take advantage of tax law that likely will change in the coming year.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased the applicable exclusion amount for the estate, gift, and generation-skipping transfer (GST) tax to $5 million from $3.5 million. If Congress doesn’t act, the gifting exemption goes down to $1 million per person on Jan. 1, 2013.

“Those who can benefit from this opportunity should act now before the rate changes,” says Sally Day, director, Crowe Horwath LLP. “This creates significant estate planning opportunities, which need to be acted on as soon as possible.”

Smart Business spoke to Day to learn more about how to take advantage of current estate planning opportunities.

What is the significance of this exemption?

This is a record-setting estate, gift and GST exemption.

Prior to Jan. 1, 2011, the exclusion available to each individual for estate tax purposes was $3.5 million, reduced by the portion of the exclusion previously used to offset lifetime gifts. Before 2011, however, an individual could only use up to $1 million of this exclusion against gifts during his or her lifetime. Therefore, any gifts in excess of $1 million would require that gift tax be paid (at the applicable rate of 45 percent in 2009 and 35 percent in 2010).

Beginning Jan. 1, 2011, the 2010 Tax Relief Act increased the estate tax exemption from $3.5 million to $5 million, but, more importantly, now allows an individual to use up to the full $5 million against gifts made during his or her lifetime. The practical effect of the new law is to allow individuals to gift an additional $4 million during 2011 or 2012 and not pay any gift tax on the gift.

It should be noted that all of these figures are in addition to the ability to gift up to $13,000 per recipient per year without being required to count those annual exclusion gifts toward the $5 million lifetime exclusion.

Why do individuals need to act now?

Unfortunately, the $5 million exclusion is only effective until Dec. 31, 2012. Therefore, individuals who have sufficient assets to provide securely for their living expenses and maintain their current lifestyle should consider making gifts now to use up their $5 million exemption — before the exclusion is reduced in the future. If Congress does nothing before the exemption expires on Jan. 1, 2013, today’s $5 million exclusion will drop back to $1 million, and this window of opportunity will be lost.

The taxable amount of gifts made is measured by the fair market value of the property on the date of the gift, so now is the perfect time to gift away assets that might have a lower fair market value in today’s economy, but have the potential for future growth, such as shares in a family-owned business, units in a family limited partnership, or real estate that has declined in value. After property has been gifted away, not only is the asset itself removed from the donor’s future taxable estate, but the donor is not subject to any additional estate or gift tax on subsequent appreciation on the property.

What does the current GST tax mean for taxpayers?

The 2010 Tax Relief Act also retroactively increased the GST exemption from $3.5 million in 2009 to $5 million for all of calendar year 2010 and through the end of 2012. The GST rate was zero in 2010 but is synchronized with the estate and gift tax rate of 35 percent for 2011 and 2012. Just like the estate and gift tax, the GST portion of the 2010 tax relief act will expire on Jan. 1, 2013, when the GST exemption will revert to $1 million and the GST tax rate will become 55 percent, unless new legislation is passed.

For taxpayers, this means that as they are making large gifts (as recommended above) they should not transfer the assets directly into the ownership of their children, since those assets will be taxed again at the child’s death. Instead, they should consider gifting property either to grandchildren (or other skip persons or more remote descendants) or into a trust that can benefit both the donors’ children and grandchildren without being taxed in the child’s estate.

By properly structuring GST transfers either directly to grandchildren or in trust for their eventual benefit, $5 million of assets can bypass or skip over potential taxation by the donor’s children’s estate.

With the exclusions high and the tax rates low, now is the ideal time for taxpayers to make transfers to their children and grandchildren or anyone else they wish to benefit. It is not known what will happen to the rates when the clock strikes midnight on Dec. 31, 2012, so take advantage of the opportunity while it exists.

Sally Day is a director with Crowe Horwath LLP in the Tampa, Fla., office. She can be reached at or (863) 603-4810.

Published in Dallas

Knowing the value of your business is important for making wise gifting decisions, especially because there could be quite a difference between an organization’s perceived value and its actual value.

“Business owners really should know how much their business is worth so they can determine whether or not to make a gift, and to ensure the amount of the gift is appropriate for their estate plan,” says David Heilich, family wealth planning practice leader at Brown Smith Wallace LLC, St. Louis, Mo.

As a result of the recent recession, lower fair market values have made gifting a much more attractive option, giving business owners the opportunity to leverage closely held stock and partnership/LLC interests, especially when applicable discounts for lack of marketability and lack of control (the so-called minority shareholder discount) further decrease the amount potentially subject to taxes.

At the same time, doing a business valuation sooner rather than later — meaning years before a possible ownership change — can potentially add to the future value of the business when an eventual sale to an outside party is planned.

“Now is a great time to discuss with a professional how to take advantage of estate planning opportunities,” says Cathy Roper, director of financial advisory services, Brown Smith Wallace.

Smart Business spoke with Heilich and Roper about year-end gifting and the benefits of a business valuation.

What year-end gifting opportunities make this an attractive time of year to be generous?

Currently, there is a $5 million gift exemption, which is significantly higher than ever before, and, under the current law, in 2013, the estate, gift and generation-skipping tax (GST) exemptions decrease to $1 million, with the GST exemption indexed for inflation. In 2011 and 2012, single individuals with net worth of at least $5 million, and married couples with net worth of at least $10 million should consider making outright gifts and/or executing various estate planning techniques.

Advisers should take into account the nature of the assets being gifted and projected future values to determine if gifting makes sense and to avoid gifting too much.

How should an individual plan this year, considering the uncertainty of gift laws in 2013 and beyond?

It is unknown when the law in 2013 and future years will be settled, and if there will be any changes to the current law. You don’t want to be paralyzed by the uncertainty of the future. The opportunities in 2011 and 2012 could be lost if you wait until there is better guidance on the current and future estate and gift tax laws.

There are a lot of creative estate and gift tax planning opportunities that provide options and flexibility. Consult with a team of qualified professionals and take into account all relevant factors in order to make an educated decision about whether now is the time to take advantage of gifting opportunities.

How can getting a business valuation years before an ownership change is planned potentially add to the future value of a business?

A business valuation is an opportunity to do a ‘wellness’ check of your business and provides you with the type of dispassionate view a potential buyer will have. The valuation analyst will tell you where your company ranks compared to the industry on a number of different measures such as days outstanding on receivables, capital expenditures as a percentage of sales, gross profit margins, etc., and suggest areas where efficiency and, thus, profitability, can be increased.

Here’s an example: In a recent due diligence engagement in which we were evaluating a software business for a potential investor, we recommended switching from a traditional development model in which a client purchases the software and upgrades as new versions come out to a software-as-a-service model in which the software is leased and the continuous monthly lease payments smooth out the revenue stream and cash flow. This reduces the need for interim financing, reduces income variability and stabilizes the customer base, which reduces risk for a potential buyer. The less risk an investor has, the safer the investment is and the more an investor is willing to pay, or, put another way, predictable cash flow is always more valuable.

What is involved in the process of getting a business valuation?

The process is fairly straightforward, but often takes four to six weeks. First, you will receive a document request list that requires gathering at least five years’ worth of financials on an accrual basis, along with the most current financials. These are reviewed, and your ratios are compared to the industry average.

Once the valuation analyst gets a feel for the industry’s outlook and how the company compares to the industry, he or she will schedule an on-site visit in which owners are interviewed and questions are asked to further assess the company relative to the industry and to its competitors. Documents reviewed may include corporate charters, partnership agreements, minutes and any previous offers to buy the company.

Is it too late to begin the gift planning and valuation processes after the New Year?

Not at all. 2011 is an opportune time to take advantage of gifting opportunities, and a valuation is important to make wise decisions. Under current law, the gift exemption continues through 2012, so the New Year will still provide opportunities to continue estate planning and reap benefits from current estate, gift and GST exemptions.

David Heilich is family wealth planning practice leader at Brown Smith Wallace. Reach him at (314) 983-1273 or dheilich@  Cathy Roper is director, financial advisory services at Brown Smith Wallace. Reach her at (314) 983-1283 or

Published in St. Louis

While managing investments is part of financial planning, it is far from the only thing you need to be thinking about. Factors such as risk management through insurance, optimizing your employee benefits and minimizing your taxes also come in to play, as do retirement planning, estate planning and debt management, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.

“Too often, people put all of their efforts into their investments when they should be spending more time on other parts of their financial picture,” he says.

Smart Business spoke with Boone about how financial planning goes far beyond investments, what you need to be thinking about in your approach and how an experienced adviser can help you meet your goals.

How does retirement planning factor in to the big picture of financial planning?

The biggest question many people have is whether they have enough money to retire, and, if not, what sum do they need and what steps can they take to get there. To help answer those questions, your adviser should collect your balance sheet information (which is a list of everything you own and everything you owe) and your personal income statement (how much you make and where it comes from, your taxes, the payments to your retirement and savings accounts, your regular payments and everything else you spend money on). You’ll also need to inform your adviser about any expectations you have for inheritances or future income sources as well as changes you expect in the future in your income or expenses. Your adviser needs to know as much about your money as possible.

To assess how much money is enough to support your lifestyle for your remaining years, a good adviser will then make an attempt to project your cash inflows and outflows for every year for as long as you might live. This projection will tell you if your plans will work (i.e., you won’t run out of money before you die). If not, you should test various assumptions to determine what you need to do differently in order to get it to work: stay employed longer, save more money, spend less in retirement, or get more aggressive with your investments to help boost returns.

Knowledge is empowering. With your financial projections and knowing what you need to do to make things work, you can confidently modify how you do things so that you can achieve your retirement goal.

How important is estate and philanthropic planning?

You don’t have to be rich to need an estate plan. Documenting your wishes can be one of the most loving acts you can do, because, without guidance, your loved ones will have to pick up the pieces, which very often leads to arguments, hurt feelings and worse. Whatever level of your wealth, having a will or trust will provide important guidance that your family members want from you about your assets. You also will need powers of attorney for health care and for financial matters, so that if you are incapacitated, people you trust can make decisions within the parameters you set. For most parents, the first criterion after providing for the spouse is deciding how much is enough for the kids upon your death. Beyond that, it is possible for many of us to do important good for our communities and the causes we believe in, both by giving while we are alive and by leaving a portion of our estate to charity after death. There are planned giving techniques that have specific tax aspects that bring benefits to the donor, to the charity and often to the family.

What is the role of savings, budgeting, cash flow management and debt management in financial planning?

Usually, the biggest factor under your control as to whether or not your retirement plans will work is your level of spending. You can’t control the markets and most people don’t have much control over their income. But, you are fully in charge of how you spend your money.

On the surface, how much you save is determined by how much of your income you spend. Instead of waiting to find out how much is left, good savers decide up front how much they want to save and automatically put it away before they start spending.

With debt management, the more debt you take on, the less flexibility you will have to make choices in the future. Under the right circumstances, using debt can be very beneficial, but borrowing too much or borrowing in the wrong way or for the wrong purpose can ruin a person’s life.

An adviser can help you think through these issues, based on what you want in the future, and help you implement good practices so you can be more in control of your finances, and your life.

What should people look for in a financial adviser?

When you are seeking a new adviser or have an existing one, you have a right to know about things that affect you — for example how much he or she will be paid if you buy a product that is being recommended. I believe clients are best served by advisers who are independent and thus avoid the conflicts of interest inherent when they have products to sell while at the same time offering advice.  Do not hesitate to ask hard questions for your own information, but also as a test to assess whether the kinds of answers you get are ones with which you feel comfortable. The openness with which questions are answered can be key to ongoing trust.

You want an adviser experienced in your kinds of financial challenges and opportunities. Just because they’ve been around for a while doesn’t make them good at what you need. Relevant experience, education and training are critical.

Finally, and perhaps most importantly, you want an adviser who listens well. You are going to be talking about some very personal issues; you want them to pay attention, absorb it and learn from what you are telling them. They have to understand you before they can determine what the best advice is for you.

Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or

Published in Northern California

Do you own a vacation home in Mexico? Have a bank account in Hong Kong? Has your spouse retained Canadian citizenship? Are you a long-term U.S. resident who was born in the U.K.? Is your brother-in-law, who is a citizen and resident of Ireland, the successor trustee of your revocable trust?

Each of these scenarios raises complex tax issues that, without proper planning, could easily have disastrous and costly consequences.

Smart Business spoke to Laura A. Zwicker, chair of Greenberg Glusker’s Family/Strategic Wealth Planning Group, about how to stay out of the IRS’s crosshairs by being aware.

Homes in Mexico

Most of us would contact a tax professional before establishing a trust in the Cayman Islands.  But, we wouldn’t necessarily see the need when buying a vacation home in, say, Cancun, especially since vacationing in Mexico has become as commonplace as visiting Hawaii or Florida.

Because coastal and border land in Mexico can only be directly owned by Mexican citizens and certain Mexican entities, a condo in Cancun is likely to be acquired through a fideicomiso, similar to a trust. The IRS takes the position that a fideicomiso is a trust subject to all foreign trust reporting requirements.

Thus, a Cancun condo purchaser must file both Form 3520 and 3520-A with the IRS annually or be subject to significant civil penalties. To make matters worse, after March 18, 2010, if our Cancun condo purchaser actually uses the condo, or lets a relative use the condo, the fair rental value for the period of use is subject to U.S. income tax.

The 2011 Offshore Voluntary Disclosure Initiative offers the opportunity to come into compliance, possibly without penalties, if delinquent returns are filed by August 31, 2011.

Overseas bank accounts

Whether hiding hundreds of millions in a Swiss account or simply maintaining a U.K. account to pay bills while in your London office, the Financial Crimes Enforcement Network of the Treasury Department is looking for you.

For almost 40 years, there have been reporting requirements for U.S. citizens and residents holding interests in foreign financial accounts. However, those requirements were largely unenforced until three years ago.

If you have an interest in or signatory power over any financial account in any foreign country, disclosure is required on your personal income tax return. Additionally, if the account had a balance of $10,000 USD or more in any given year, a Report of Foreign Bank and Financial Accounts (FBAR) is required. Failure to file a FBAR can result in significant civil and criminal penalties.

Worse than having failed to file FBARs is having both failed to file FBARs and failed to report the income generated by a foreign account on U.S. income tax returns, which results in additional underpayment, failure to file and fraud penalties.

Again, the 2011 Offshore Voluntary Disclosure Initiative offers the opportunity to come into compliance, possibly without penalties, if delinquent returns are filed by August 31, 2011.

My spouse is not a U.S. citizen

Spouses are generally able to transfer assets to each other, both during lifetime and at death, without tax consequences. If your spouse is not a U.S. citizen, things get a little more complicated without proper planning.

Lifetime gifts to a non-U.S. citizen spouse are limited to $130,00 per year before using your credit against gift tax. Gifts at death to a non-citizen spouse begin using estate tax credit immediately, unless the assets pass to a Qualified Domestic Trust (QDoT). Proper planning with life insurance and QDoTs can prove helpful in lowering your tax bill and preserving your credit against gift and estate tax to pass assets to your children.

Special issues for U.K. persons

You have lived in the U.S. for 15 years and have homes, bank accounts and other ties to the U.S., but are not a U.S. citizen. No complications, right? Maybe!

For individuals born in the U.K. who have retained their U.K. “domicile of origin,” engaging in ordinary estate planning in the U.S. could have unexpected and costly U.K. inheritance tax (IHT) consequences. If a U.S. resident with a U.K. domicile of origin transfers assets to a U.S. revocable trust, which most U.S. lawyers would advise, and the value of the assets exceeds the U.K. nil rate band, an immediate U.K. tax of 20 percent on that excess value is imposed. Additionally, a U.K. tax of 6 percent of the value of the trust assets is charged every 10 years during a lifetime.

Moreover, if the U.S. resident is still deemed to be a U.K. domiciliary at death, the value of the trust would be taxed again by the U.K. at a rate of 40 percent. Thus, without appropriate planning, this taxpayer could pay a cumulative tax approaching 75 percent on assets that should have been taxed once at a rate of 40 percent.

Naming a foreigner as successor trustee

You are a U.S. citizen, your spouse is a U.S. citizen and neither of you owns a vacation home or holds financial accounts outside of the U.S. You have nothing to worry about, right? Perhaps, but if the brother-in-law, best friend, or business manager named as successor trustee of your revocable trust is a citizen and resident of a foreign country, once that successor trustee begins to serve, your trust suddenly transforms itself into a foreign trust for tax purposes.

While it is unlikely that the trust will be subject to an expatriation tax, the trust will be subject to all of the reporting requirements described above with respect to Mexican fideicomisos, as well as additional income tax reporting on any income generated.

In our global society, information and assets move ever more quickly and easily across borders; however, the road to properly complying with reporting requirements and carefully engaging in gift and estate tax planning is becoming more complex. Although the immediate cost of expert legal and accounting advice may be off-putting, the ultimate cost of proceeding without it could be devastating.

Laura A. Zwicker chairs Greenberg Glusker Fields Claman & Machtinger LLP’s Family/Strategic Wealth Planning Group. She regularly counsels high net worth individuals and their families in connection with domestic and international estate and tax planning issues. She can be reached at (310) 785-6819 or

Published in Los Angeles

Most people are not comfortable talking about their finances, even with family members. Parents especially can have a fear of sharing their estate and succession plans with their adult children; they’re afraid of upsetting harmony in the family, or they’re sometimes avoiding the perceived greed of hearing their heirs talk about “I want this, I want that...”

Yet, if they’re not communicating, then really it’s an artificial harmony, and the family won’t understand the effort the parents went through to create a fair plan, says Ricci Victorio, managing partner of the Mosaic Family Business Center.

“One of the most important aspects in planning for your family legacy, whether there’s a family business or just significant wealth, is communication,” she says. “Parents often use the family holidays, like Thanksgiving, to explain their gifting strategy. But these kind of family settings are almost always inappropriate for discussing emotional or delicate issues. The result is that the family will dread attending the next holiday or family event because they remember the blow-up that happened last year.”

Fortunately, discussing finances with the family and maintaining family harmony don’t have to be mutually exclusive. A better setting for those kinds of discussions is in a “family council” meeting.

Smart Business spoke to Victorio about using a family council to tackle the often daunting task of communicating with family members about estate and succession planning.

How can the process of family decision-making become easier?

One of the best venues to discuss the business of the family is in a ‘family council.’ What we’ve learned is that people should separate family gatherings from family business discussions. A more formal setting encourages a more professional and organized approach, often by having advisers and a facilitator present to help explain things in a way that won’t upset or confuse.

Unmet expectations or anxiety about the unknown can seriously undermine family harmony. Whether there is conflict or not regarding the succession plan or the division of assets you can sidestep potential years of tension and upset by tackling these tough discussions step by step with the guidance of a trained facilitator. Knowing, even if you don’t like the answer, is most often better than being in the dark.

How does a family council work?

Once a family makes a commitment to using a family council, I like to help them develop a ‘Family Charter.’ It’s a statement of purpose and vision and helps to define the core values that are important to communicate to the next generation. Objectives and goals are defined, which helps to keep everyone focused on creating an agenda for each meeting. With regular meetings and the integration of younger family members as they mature, this mechanism for problem-solving and planning for the future will be passed on to each generation long after it was initially created, contributing to building the family legacy.

Once I get to know the parents and their plan, what they want to communicate and what they’re comfortable communicating, I survey each of the involved family members. I ask such questions as: What do you know about your parents’ estate plans? What do you want to know? What is your vision of the future? If there’s a family business, to what do you attribute its success, and what are some ways you can think of to perpetuate that?

Another way families can better communicate is to learn one another’s personality styles. Understanding what kind of leadership styles are natural to each individual can make it clear where there might be points of tension. Often, conflict happens due to different personality styles, rather than it being intentional. Initiating a family council by learning about the best ways to approach one another as difficult decisions are made makes it much easier to talk about other complicated issues.

What kinds of issues are discussed?

In laying out an estate plan — especially one that is quite involved or intricate, where a family business or any kind of considerable assets are involved — the more complicated it gets, and the more you need to layer in the pieces of information. We can explain the concept of the estate plan and the succession plan without using numbers. Then it becomes more clear why, for example, siblings who are involved in the business are going to inherit voting stock in the business, and the non-active kids might either receive non-voting stock or other assets like real estate or securities or something of a fairly equitable range.

A family council can’t just be convened one time. It really needs to become a part of how you address the business of the family. And it may not always be related to estate planning — it could be used to talk about difficult family matters, charitable gifting, or other ways to support the community. You can also use it to introduce family members to a financial planner or to broach the subject of insurance or investing to help the kids learn how to handle the money they’ll inherit. A family council sets an atmosphere where everyone knows they’re going to be professional and courteous, even when making difficult decisions.

Who should consider a family council?

There are various levels of family councils, and I would suggest that families of more than one generation who have a family business or significant assets absolutely must consider this kind of vehicle. Every family needs to be able to communicate what their planning is to those impacted. The worst thing that can happen at the time of loss of a parent is to also experience the shock and surprise of not understanding what they had intended. You don’t want your kids resenting each other because they didn’t understand why Mom and Dad made the decision they did.

When someone says, ‘I’d rather just let them figure it out when I die,’ it’s setting the stage for eventual conflict. What kind of legacy is that? This isn’t the way you want to be remembered. Leaving a legacy of love and harmony, and then security and business success, would be any business owner’s dream.

Ricci Victorio is managing partner of the Mosaic Family Business Center. Reach her at (415) 788-1952 or

Published in Northern California
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