How Do You Prepare Your Business For Succession As Part Of Your Estate Plan?

On March 17, 2010, the New York Times had an article entitled "How To Prepare Your Business For Succession." Even though there is no estate tax at the moment in 2010, the article touches on many of the non-tax issues which should be addressed by any family business owner irrespective of its form (corporation, LLC or partnership).

Previously, I wrote on this subject last year on a post entitled "As A Business Owner, What do I Need To Consider When Planning My Estate?"

The article mainly addresses the business related points of how to avoid a succession disaster. It recommends the following ideas:

First, identify your successors. Make an honest assessment. Succession specialists advise business owners to put their possible successors through rigorous outside analysis if possible.

Second, prepare the new successor or boss. If a child or other relative expresses interest in taking over the family business, the owner should set up a formal system of hurdles to make sure the child gets the skills required of any other prospective manager.

Third, deal with crucial employees. One idea given by the article is that to ensure that a new leader does not lose top lieutenants, it can be wise to offer them a percentage of the business. Businesses can be severely harmed when a top employee leaves or a salesperson takes his clients elsewhere.

Fourth, cover your tax exposure by obtaining good estate and tax planning advice.

Although the article covers many of the common issues, it does not even touch upon many of the strictly estate related issues which arise such as how to be fair to children who are not party of the family business and whether or not to take affirmative steps to protect the "inherited" family business from the creditors of children and grandchildren (including for example divorce).

The real challenge here is there is not one right answer. Some children may naturally thrive in the family business and help it grow. Should they not get a larger share of the business than a sibling who had no interest in it? Then some businesses require the children to have a professional license (law, medicine, architecture, etc.) to become a shareholder in the business.

The article deals with if you want your business to continue -- it says these are the things you ought to do. Most family businesses are sold not because they cannot be continued not because they cannot be continued but because the children/heirs do not want to continue and want the cash. That is a different issue that should also be addressed in the planning stages. Each business and family is unique and it is important to have a plan that is tailored to yours.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation. The firm is located at 2233 Huntington Drive #17, San Marino, CA 91108. He is a very experienced Los Angeles estate planning attorney, Los Angeles trust attorney and Los Angeles tax attorney who has more than 20 years' experience in business succession issues in estate planning.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

How Do You Talk To Your Family About Estate Planning?

The New York Times recently had an article entitled "Estate Planning as a Family Conversation" which reminds us how difficult it can be to bring up estate planning, wills and trusts and related financial topics with parents, children and relatives.

Why is it so difficult to have these financial conversations? Whether it is the parents explaining their estate planning to their adult children or those children asking their parents about whether they have enough money to see them through a long retirement - these are touchy conversations.

It may be likely that your parents or you grew up at a time when money was not discussed openly so there may be a discomfort at sharing details of your financial lives with each other. There may be pride and privacy barriers. Other family dynamics can also be at work. Estate planning can be viewed as simultaneously a private topic and a morbid issue. Many years ago, I recall one estate planning meeting with an actress regarding estate planning where I was asked by her manager not to mention the word "death" during any meeting.

The New York Times article mentioned two examples where enduring some uncomfortable moments in initiating estate planning discussions gave the families peace of mind and helped ensure future family harmony. In one example, a vocational consultant in Seattle asked her father, a lawyer specializing in American Indian rights, about his estate plan after learning he had brain cancer. She was surprised to find that her father did not even have a will.

Her father had been separated from his wife for 30 years but had never divorced. Without a will under his state's law, everything he left behind would go to his "wife." The father decided he would rather have his assets divided between their two adult children. Due to this conversation, the father met with a lawyer to discuss the necessary documents to carry out his intention.

In a second example, a mother had decided to leave one adult son a larger inheritance than the others because that son had more children. When the mother shared these details with the son, the son persuaded her that he would rather receive less money than cause any family disharmony or face the wrath of his siblings. As a result, the mother changed her plan so that all her children would receive equal shares.

In future articles, I will discuss different ideas and approaches for parents to share their estate plans with adult children. I will also discuss how adult children can talk to their older parents about their finances and help determine if an estate plan is in place and whether the children will need to support them and when.

How families handle sensitive issues depends both on the particular circumstances and the personalities involved. A bit of advance role playing can help and an experienced estate and trust lawyer can provide guidance. In my experience, and as noted by the New York Times article, it is sometimes better have a series of talks, rather than addressing everything at once. Instead of one giant family meeting, it may be decided to speak to each individual one-on-one.

Five Initial Strategies

Whether you are the adult child or the parent initiating the conversation, here are five strategies to guide you overall during this process. In some cases where there has been no planning, it may be necessary to have the initial conversation to get the other family member to consult with an estate planning attorney and get their affairs in order.

1. Have the right tone. Too much force and the person on the other side of the conversation will focus more on the money side of the discussion rather than the fact that you care about the family and them and want to have this discussion for the right reasons. However, if you are too timid, the other person could attempt to dodge the conversation.

2. Use yourself or your family as an icebreaker to bring up the subject. You can explain how you and your spouse are just going through estate planning, long-term insurance and then ask the relevant follow-up question such as "Is it time for you to update your estate plan?" Or you can state that you want to share your plans with your relative at a convenient time and place. You can also share the story of a friend whose affairs were not in order and what a disaster it was for the family or the friend whose family was torn apart when the estate plan and its reasoning was not known in advance by the adult children.

3. Use current events or recent headlines of a well-known person's death. Use a recent case such as Michael Jackson, Brooke Astor or a recent death of a celebrity as a reminder about how easy it is for us to put these important tasks off until it is too late.

4. If they are more comfortable writing or communicating in writing, think about how to write out your plans or help them write out their plans. While you are talking to your family member, you can pull out some paper and start jotting notes to help them go through this process.

5. Schedule a meeting with an experienced estate planning attorney to get the process moving. There is nothing like a deadline or meeting to get people focused on getting a task (especially potentially sensitive ones) done. Select an experienced estates and trust attorney who has a tax background rather than an insurance agent who is selling life insurance products for commission. One advantage of hiring a California estate planning attorney is that they can help guard against later claims that there was undue influence or lack of mental capacity.

Most sophisticated estate planning attorneys such as our firm quote a flat fee and there are no products being sold or conflicts of interest in advising you on the best estate plan for you and your family. Refer to my prior post on "What Does Estate Planning Cost?" for information about our firm's flat fees for estate plans.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation. He has over 20 years' experience as one of the best Los Angeles estate planning attorneys, Los Angeles probate attorney, Los Angeles trust administration attorney, Los Angeles beneficiary attorney, and Los Angeles trustee attorney with an excellent tax law background and is available should you need legal advice regarding your own situation.

You can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 to request a consultation. The firm website is http://www.moravecslaw.com/. The firm is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108.

Estate Planning & Annuities: Should Parents Take Smaller Monthly Payments So Survivors Can Receive Some Sort Of Inheritance?

On February 20, 2010, the Wall Street Journal's online edition has an article entitled "A Tough Choice: Your Or Your Kids." The article discusses the dilemma some families face when buying an annuity: Should a parent take smaller monthly payments so that their surviving spouse or children can get some sort of inheritance?

Each person or family's situation is different but the article has several interesting points that can be considered.

1. Have your financial planner work with your estate planning attorney when deciding on how to structure annuities, whether to have a fixed or variable annuity, whether to pair the annuity with an insurance policy and/or whether to purchase riders to guarantee payments for your heirs.

Often times without the input of an estate planning attorney, most people opt for the smaller payment without considering other and possibly better strategies to help the heirs come out ahead, including pairing an annuity with an insurance policy.

2. Pairing an annuity with an insurance policy. The WSJ article gave the example of a certified financial planner who advised an 80-year-old client to use the $266,000 value of a variable life-insurance policy to buy an immediate annuity, providing her with $2,500 a month for the rest of her life. The mother is using $1,500 a month from that $2,500 payment to buy a guaranteed life-insurance policy worth $300,000. Now her son stands to inherit more than the annuity's cost.

The WSJ article gave another example of pairing an annuity with an insurance policy to hedge against inflation. Let's say you and your spouse have $1 million saved at age 65 from which you hope to pull 4% a year. You could spend $185,000 to buy a second-to-die permanent life-insurance policy with a $1 million guarantee that would eventually go to your children. And with about $800,000, you could get an immediate inflation-indexed annuity that would pay $40,750 the first year and continue paying through both spouses' lifetimes.

3. There are two main types of annuities, each usually starting with a lump-sum payment. With variable annuities, you invest in stocks or bonds with an insurance guarantee. There usually are surrender payments if you withdraw the money in the first few years. With immediate fixed annuities, your lump sum buys regular payments from an insurer for the rest of your life. They are being hailed by everybody from financial planners to President Barack Obama as a way for Americans to stretch their retirement nest eggs.

4. Riders to guarantee payments for your heirs or to adjust monthly payments for inflation. Annuities come with complex features and fees that are often not found in investments like mutual funds. It takes careful analysis to figure out if an annuity makes sense for you and, if so, which features to purchase.

When one spouse has health problems and the other could live a long time, variable annuities with guaranteed-minimum payments can pay off, despite annual fees that can top 3.5% of the invested amount. The WSJ gave an example of a 69-year-old retired teacher whose husband died last year from post-polio syndrome. The couple was drawing 6% a year from a variable annuity in which they had invested $300,000. The investment had lost half its value during the financial crisis, but the retired teacher inherited the original amount invested because of a guarantee they had purchased. The money should still be there for her two daughters as well.

5. Immediate fixed annuities are simpler to understand and cheaper: You get a regular payment for life. But when you die, the downside is that your family loses that payment unless you pay extra for a rider returning at least some of the money you invested. The rub is that such a rider will typically lower the monthly payment you receive by anywhere from 2% to 15% or even more.

6. The WSJ article suggested an approach for buying an annuity that involves determining one's basic expenses—utilities, food, taxes, insurance and so on. Purchase a plain-vanilla annuity to cover those costs. Then you can invest the rest of your savings to spend on vacations, cars or grandchildren. Anything left over can be your family's inheritance. As the article pointed out, however, if you are early in retirement, who knows how much the basics will cost in 20 or 30 years? And what if your savings barely cover an annuity that will pay for those basics?

7. As annuities gain in popularity, make sure you consult with an experienced estate and trust lawyer as well as with your financial planner before you purchase the annuity so it is consistent with your estate plan and wishes for providing for your heirs.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He is a very experienced estate planning attorney. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

How Should You Plan Your Estate In This Time Of Federal Estate Tax Uncertainty?

Now let's move on to a more practical topic. I keep writing about the uncertainty with the federal estate tax. A more pertinent question that applies to everyone is: With this uncertainty in the law, what should and can I do about it?

How Do We Plan In This Time Of Flux?
3 Key Things To Remember.

First, do an estate plan. If you fail to plan -- you are planning to fail. Also, keep your plan updated. Make an annual checkup with your estate planning attorney (even if for 15 minutes) to let him or her know if there are any changes in your circumstances or to see if the changes in the law effect you.

Second, it's all about your loved ones! If estate taxes would not affect you, don't think there is no need for an estate plan. The reality is that estate taxes currently affect less than one percent of people. So why do you need an estate plan or trust? Your family, your loved ones or your charities. That's why.

Third, don't procrastinate on this issue. We all procrastinate on some tasks but put this one at the top of your "to do" list as what I call a "most important task"! And don't even think about using this estate tax uncertainty as another excuse to procrastinate. (Please excuse my lame procrastination joke :)

An experienced estate attorney can help break all this down into very manageable tasks for a reasonable fixed fee and will do almost all the work for you in tax planning and helping you carry out your wishes. You just have to make the major decisions such as who will be your child's guardian and who will receive your assets.

Without a current estate plan, you could be harming the futures of those people who are the most important to you. Ask yourself: Do I want confusion and turmoil to be what I leave to my heirs and family? We all know the answer to that question is a resounding "no."

But go ahead and ask yourself:

How would I want my assets to be managed if I became incapacitated with early dementia or passed away?

Who would care for my minor children if something happens to me or my spouse?

Do I want my family in litigation over my estate? How do I avoid probate litigation?

Do I want piece of mind on a day-to-day basis that my estate plan is in place?

These are questions we all have to ask ourselves. And the answers remind us why we all have to plan regardless of whether or not we are subject to the federal estate tax.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

Mr. Moravec is a very experienced Los Angeles estate planning attorney, Los Angeles trust attorney and Los Angeles probate attorney. He has more than 20 years' experience in avoiding taxes with estate planning and is extremely dedicated to his clients and helping them create a plan that is tailored to their wishes, finances, helps avoid probate and taxes, and takes into account their families' unique situation.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

Some States Race To Clean Up Congress' Estate Tax Mess:

With the federal estate tax law having lapsed — a growing number of states are taking matters into their own hands.

"Investment News" has an article on this topic which I have linked this post to and it can be found here:

Dead Federal Estate Tax Rises From The Ashes - Investment News

The article discusses how lawmakers and estate attorneys in the District of Columbia and at least 13 states, including Florida, Georgia, New York and Virginia, are drafting or have introduced legislation aimed at clarifying estate tax law in the absence of a federal statute. Specifically, they hope to avoid a wave of lawsuits that will likely arise from ambiguities in wills and trusts filed this year.

For example, here's the way it would work. On Jan. 12, Virginia introduced a bill that would require all estates and trusts to be treated as though they were governed by 2009 federal tax law. I have not seen any proposed California legislation yet.

For those who want more related information on this issue, you can read a February 3 Forbes Magazine article entitled "States Race To Clean Up Congress' Estate Tax Mess."

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Probate Litigation, Trust Administration, Beneficiary Representation, Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

Potential Estate Tax Implications Of J.D. Salinger's Death

"If you really want to hear about it, the first thing you'll probably want to know is where I was born, and what my lousy childhood was like, and how my parents were occupied and all before they had me, and all that David Copperfield kind of crap, but I don't feel like going into it, if you want to know the truth."

"Catcher In The Rye" by J.D. Salinger (who passed away on January 28, 2010 at age 91 when there is no federal estate tax under current law)
Famously reclusive, Salinger withdrew from public life, refusing interviews for many decades. Although he was understood to have continued to write in his isolation, those manuscripts have remained private. From a federal estate tax perspective, what are those manuscripts worth?
I have written previously about the potential estate tax implications of someone's death during this time period when there's no current federal estate tax. Let me use Salinger as an example.

What happens if Congress reinstates the federal estate tax later this year and makes it retroactive to Jan. 1, 2010? Some estate tax attorneys have predicted that the representatives of the estate of someone who dies during this window of time (such as Salinger) would mount a constitutional challenge to the retroactivity of the law that would go all the way to the Supreme Court.

I am not saying it would be Salinger but it would be quite ironic if the estate of the notoriously private Salinger filed a public lawsuit challenging this law. I suspect that Salinger's estate representative and attorneys -- like the rest of us -- are waiting for what Congress is going to do.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Probate Litigation, Trust Administration, Beneficiary Representation, Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

What Can Happen When Beneficiaries Fight Sale Of Asset Or Proposed Distribution In Bad Faith?

A recent California Court of Appeal decision serves as a reminder that beneficiaries need to consider the downside if they decide to oppose the sale of an asset and proposed distribution. In other words, beneficiaries need to analyze whether their opposition to a proposed sale or distribution is "objectively" in "good faith."

An experienced probate litigation attorney, trust and estate attorney or beneficiary attorney can often help beneficiaries see the "objective" viewpoint. Sometimes, however, emotions and long-standing disputes get in the beneficiaries' way of seeing what is best for the estate.

In December 2009, the California Court of Appeal published the decision of Rudnick v. Rudnick, 09 S.O.S. 6928. A copy of the decision can be found at the court website: http://www.courtinfo.ca.gov/opinions/documents/F056587.PDF

In this case, three of the beneficiaries of the Rudnick Estates Trust (RET), Philip Rudnick, Robert Rudnick, and Milton Rudnick, hold a minority interest in RET. We will call these three the "minority beneficiaries." Oscar Rudnick is the trustee of the RET.

The RET was created in 1965 by the beneficiaries of 11 separate trusts, which each owned an undivided interest in various real property and business entities and were managed as an integrated enterprise. Its purpose was to liquidate the trusts’ assets and distribute proceeds to beneficiaries, and any sale or disposition negotiated by the trustee was subject to approval by a majority of beneficiaries.

The litigation in this case arose after the majority of the RET beneficiaries approved the $48 million sale of the RET‟s principal asset — the 68,000-acre Onyx Ranch, located in the Sierra Nevada Mountains just outside of Bakersfield. The trustee Oscar Rudnik petitioned the Kern County probate court for instructions requesting approval of both the sale and the proposed distribution.

The three minority beneficiaries opposed this petition and claimed that the Onyx Ranch was worth substantially more than $48 million, that the trustee violated his fiduciary duty and that the transaction violated the terms of the RET.

The probate court concluded that the minority beneficiaries' opposition was primarily for the purpose of causing unnecessary delay in the sale and was in bad faith. The probate court then awarded approximately $226,000 in attorney fees and costs to the trustee and ordered these fees charged against the minority beneficiaries' future trust distributions. The probate court reasoned that it was unfair to burden the majority of beneficiaries who approved the sale by a vote of 60 percent.

The Court of Appeal upheld the order of attorneys' fees on the ground that the probate court, as a court sitting in equity, had the authority to charge the awarded fees against the minority beneficiaries' trust interests. The decision sets forth the law as follows: “[W]hen a trust beneficiary instigates an unfounded proceeding against the trust in bad faith, a probate court has the equitable power to charge the reasonable and necessary fees incurred by the trustee in opposing the proceeding against that beneficiary’s share of the trust estate.”

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Probate Litigation, Trust Administration, Beneficiary Representation, Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/