Much is at stake — knowledge & careful planning are key

As a business owner, it is important to always have a vision for the future. Creating and maintaining your Business Plan is an integral part of running your business.  Often there is so much focus on the day-to-day operations, that little planning is done for the future.  Business Continuity and Succession Planning are key components of a Business Plan.  Examples of questions to consider are: 

• Is it the type of business that can be passed down to a family member?  
• Is there a partner who will have the first buy-out right?  
• Should the business shutdown if the owner passes?  
• What are the legal and financial risks and costs associated with each option?  

Continuity of income is important to your family as well as to your company employees. 

Many businesses have one or more partners.  A buy-sell agreement, which determines what will happen to the business if one of the partners dies or can no longer work at the company, can help keep the business running smoothly. With a buy-sell agreement, a sale price for each part of the business can be set, and you can determine whether a partner can even buy the deceased's portion.  The plan may include term-life insurance and a living trust that includes the details of what will happen to the business assets. 

What about a Sole Proprietorship?  A common misconception is that this type of business has an independent legal existence, such as that of a corporation, partnership, or limited-liability company.  In fact, the sole proprietorship's existence is completely linked to the individual who created and runs the venture.  The primary effect of the death of a sole proprietor is that the business cannot continue in its existing form. The business must either wind down completely, be transferred to another individual or legal entity, or sell the assets to a third party.

Preparing for what happens to a business when an owner dies requires careful consideration and planning.  Improper planning, or worse, no planning, can wreak havoc on a business and can even force the business to close.  

We can help you get started with the aspects of your Business Plan, and help you put together a team of experts to ensure that your business, family, and employees are taken care of.

Quick Choices are Required — Which is Right for You?

You have several options when you inherit an IRA, and the one you choose can have a big impact on how much you pay in taxes.  

Let's review some of the basic rules for an IRA account:

A Traditional IRA usually has only before-tax funds; there can be after-tax ( nondeductible ) contributions as well.  This means that you need to consider carefully when you take withdrawals from a traditional IRA as the amount will be taxable income to you in that tax year.  There can be a 10% penalty if you take a distribution prior to age 59½. Also, with a traditional IRA, once you reach the age of 70½, you must take Required Minimum Distributions (RMDs) based on your life expectancy.  
A Roth IRA contains after-tax contributions and earnings from those contributions.  If the account was established at least five years ago, the earnings are also considered non-taxable.  The owner of a Roth IRA is never required to withdraw the funds.

If you inherit an IRA from your spouse, you can elect to treat the IRA as if it were your own. This resets the clock and the rules are now based on your age.  Factors to consider before making this choice depend on when and how you want to take distributions.  For a Traditional IRA, if your spouse was 70½ or older and had already started taking RMDs, then you can continue to take annual withdrawals based on your spouse's life expectancy schedule or take withdrawals based on your own life expectancy.  For a Roth IRA no distributions are required. However, if you elect to treat the account as your own, any of the earnings portion taken before age 59 1/2 could be subject to the 10 percent, early withdrawal penalty.

There are two options available when you inherit an IRA from someone other than your spouse.  You can choose to take distributions over your life expectancy, known as the stretch option.  Or you must liquidate the account within five years of the original owner's death.  Depending on the amount of the IRA, the stretch option can provide a great tax advantage, allowing you to take small taxable distributions each year.
To take advantage of the "stretch" option,  you must take minimum distributions from the account based on your own life expectancy, starting by December 31 of the year after the original owner's death. These required withdrawals are similar to the required minimum distributions (RMDs) for IRA holders over age 70½, but they use a different life expectancy table. The withdrawals from a Traditional IRA will still be taxable, but the rest of the money can continue to grow tax-deferred in the account. If you do not take these distributions, you will be required to withdraw all of the money within the five years.  

Don't rush to make any decisions, but do be aware that the clock is ticking.

Careful Planning Can Make a Big Difference

There seems to be a tax consideration for almost every transaction in your life. Getting married, having children, going to college, starting a business, buying a car are just some examples.  Gifts that you give and receive are no exception.  The main difference between Estate and Gift tax is -- Gift tax applies to lifetime gifts; Estate tax applies to assets left at death. 

What is a gift? 
A gift is any transfer for which you receive nothing, or less than "fair market value," in return. For example, if you hand someone a check for $1,000, that's a gift. And if your house would fetch $100,000 on the open market but you sell it to your son for $10,000, you have made a $90,000 gift to him.

There are many items that are not considered a "taxable" gift.  These can include:

• Tuition, if you pay it directly to the school (other expenses related to education, such as books, supplies and living expenses, do not qualify for this exemption)
• Medical expenses you pay directly
• Gifts to your spouse (if your spouse is a U.S. citizen)
• Gifts to a political organization for its use
• Gifts to certain charities

For 2014, the Gift Tax kicks in after the gifts you give to each individual total more than $14,000 for the year. In other words, you can give each of your children $14,000 with no tax implications.  Your spouse can also give $14,000 to each child.  

If a gift is taxable, the person who makes the gift, not the recipient, must file a gift tax return and pay any tax owed. However, very few people end up paying gift tax during their lifetime because gift tax is not owed until your cumulative taxable gifts exceed the $5.34 million exemption. 

At someone's death, federal estate tax is calculated. In addition to the property left behind (the estate), the amount of taxable lifetime gifts is included in the total that may be subject to estate tax. Again, no tax is due unless the taxable estate exceeds the exempt amount.

What's the gift tax rate?  The current federal gift/estate tax rate is 40%.

There are currently only 2 states that have a state gift tax, Connecticut and Minnesota.

Now is the Time to Plan

"Currently the Federal Estate tax kicks in if the taxable estate is greater than $5.34 million."  --You have heard this expression, but do you know what it means?

The Estate Tax is a tax on your right to transfer property at your death. The first step is determining the total value of the estate. It consists of an accounting of everything you own or have certain interests in at the date of death. The value of the property is the fair market value , not necessarily what you paid or what their values were when you acquired them. The property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

The next step is to determine the Taxable Estate.   Deductions may include mortgages, other debts and estate administration expenses.  Any property that passes to surviving spouses and qualified charities is excluded from the taxable estate.  This includes legally married, same-sex couples but does not include a spouse who is not a US citizen.  The value of Taxable gifts can also increase the taxable estate.  Sometimes an Estate tax return is filed to allow a surviving spouse to claim the unused deduction of the deceased spouse.

Despite the new generous federal estate tax law, we also have to look at State Estate and Inheritance Taxes. There are 19 states and the District of Columbia that impose separate state taxes.  The estates of Washington residents, as well as the estates of nonresidents who own real estate and/or tangible personal property located in Washington, are subject to a state estate tax. The filing threshold for 2014 is $2,012,000. It is adjusted yearly for inflation, but is still considerably lower than the federal amount. Since Washington is a community property state, any property owned jointly with a spouse is valued at 1/2 the current fair market value. Either the Washington estate tax forms and estate tax payment or a request for an extension to file the Washington estate tax return with an estimated payment are due nine months after the decedent's date of death. The taxes collected are currently distributed to the Education Legacy Trust Fund.

There are also currently six states that collect an inheritance tax. This tax is a tax to the person who inherits property. These states include Iowa, Kentucky, Maryland and New Jersey, Nebraska and Pennsylvania. 

If you would like additional information or to start on the path of estate planning, contact us.  We can help you set up a team to accomplish your objectives.