Family mission statements promote a harmonious estate plan

Multi Generation Family On Countryside Walk With Dog

Typically, much of the estate planning process focuses on money. But the most successful estate plans are founded on relationships. Building and preserving family wealth isn’t an end in itself. Rather, it’s a tool for promoting shared family values or encouraging family members to lead responsible, productive, healthy lives. Drafting a family mission statement can be an effective way to define and communicate these values.

Communicate clearly

Because each family is different, there’s no cookie-cutter formula for drafting a family mission statement. The most important thing is for the statement to clearly articulate your family’s shared values, whatever they may be.

Ideally, the mission statement will also create mechanisms for intrafamily communication and for putting the statement’s ideas into action. For example, the statement might call for regular family meetings. Or it may create a governance structure for managing the family’s wealth and making decisions about charitable giving and other endeavors.

Few families agree on everything. But facilitating communication and decision making in this way minimizes conflicts that can arise when family members don’t know what’s going on or feel they have no say. To make family meetings more efficient and effective, consider inviting outside advisors to lead or participate in the meetings.

Consider a principled approach

Many people today are moving away from a rules-based approach to estate planning and embracing a principles-based approach. Rather than conditioning a child’s inheritance on a rigid list of “acceptable” behaviors, for example, a principles-based approach allows greater flexibility for trustees and others to make decisions based on the values you wish to promote. If you feel a mission statement should be part of your overall estate plan, please contact us.

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Year-end tax strategies for accrual-basis taxpayers

11-21-16

The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill.

Record and recognize

The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:

  • Commissions, salaries and wages,
  • Payroll taxes,
  • Advertising,
  • Interest,
  • Utilities,
  • Insurance, and
  • Property taxes.

You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.

Look at prepaid expenses

Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.

Miscellaneous tax tips

Here are a few more year-end tax tips to consider:

  • Review your outstanding receivables and write off any receivables you can establish as uncollectible.
  • Pay interest on all shareholder loans to or from the company.
  • Update your corporate record book to record decisions and be better prepared for an audit.

Consult us for more details on how these and other year-end tax strategies may apply to your business.

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A brief overview of the President-elect’s tax plan for individuals

11-15-16

Now that Donald Trump has been elected President of the United States and Republicans have retained control of both chambers of Congress, an overhaul of the U.S. tax code next year is likely. President-elect Trump’s tax reform plan, released earlier this year, includes the following changes that would affect individuals:

  • Reducing the number of income tax brackets from seven to three, with rates on ordinary income of 12%, 25% and 33% (reducing rates for many taxpayers but resulting in a tax hike for certain single filers),
  • Aligning the 0%, 15% and 20% long-term capital gains and qualified dividends rates with the new brackets,
  • Eliminating the head of household filing status (which could cause rates to go up for some of these filers, who would have to file as singles),
  • Abolishing the net investment income tax,
  • Eliminating the personal exemption (but expanding child-related breaks),
  • More than doubling the standard deduction, to $15,000 for singles and $30,000 for married couples filing jointly,
  • Capping itemized deductions at $100,000 for single filers and $200,000 for joint filers,
  • Abolishing the alternative minimum tax, and
  • Abolishing the federal gift and estate tax, but disallowing the step-up in basis for estates worth more than $10 million.

The House Republicans’ plan is somewhat different. And because Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, they may need to compromise on some issues in order to get their legislation through the Senate. The bottom line is that exactly which proposals will make it into legislation and signed into law is uncertain, but major changes are just about a sure thing.

If it looks like you could be eligible for lower income tax rates next year, it may make sense to accelerate deductible expenses into 2016 (when they may be more valuable) and defer income to 2017 (when it might be subject to a lower tax rate). But if it looks like your rates could be higher next year, the opposite approach may be beneficial.

In either situation, there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. We can help you create the best year-end tax strategy based on how potential changes may affect your specific situation.

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The wrong life insurance beneficiary can wreak havoc with your estate plan

11-10-16

Life insurance can be a powerful financial and estate planning tool, but its benefits may be reduced or even eliminated if you designate the wrong beneficiary or fail to change beneficiaries when your circumstances change.

Here are common pitfalls to avoid:

Naming your estate as beneficiary. Doing so subjects life insurance proceeds to unnecessary state inheritance taxes (in many states), exposes the proceeds to your estate’s creditors and ensures that the proceeds will go through probate, which may delay payment to your loved ones.

Naming minor children as beneficiaries. Insurance companies won’t pay life insurance proceeds directly to minors, which means a court-appointed guardian (who, if you’re divorced, could be your former spouse) will manage the funds until your minor-age children reach the age of majority. A better approach is to designate a trust as beneficiary. This allows you to determine who will manage the funds and how they’ll be distributed to your children.

Naming your former spouse as beneficiary. It’s unlikely that you’d do this intentionally. But if you get divorced and neglect to designate a new beneficiary, this could be the result (even if you’ve updated your will or trust).

For many people, the best strategy is to establish an irrevocable life insurance trust (ILIT) to purchase and own a life insurance policy, and to designate the ILIT as the policy’s beneficiary. For more information on how to best address your life insurance policy in your estate plan, please contact us.

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There’s still time to set up a retirement plan for 2016

11-8-16

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

  1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
  2. Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
  3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

Contact us if you want more information about setting up the best retirement plan in your situation.

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