Cava Faulkner

July 9, 2021 by Cava Faulkner

If you have highly appreciated assets like stock and real estate you want to sell, it may make sense to use a charitable remainder trust (CRT) to avoid income and estate taxes—all while creating a lifetime income stream for yourself or your family AND supporting your favorite charity.

A CRT is a “split-interest” trust, meaning it provides financial benefits to both the charity and a non-charitable beneficiary. With CRTs, the non-charitable beneficiary—you, your child, spouse, or another heir—receives annual income from the trust, and whatever assets “remain” at the end of the donor’s lifetime (or a fixed period up to 20 years), pass to the named charity(ties).

How CRT Works

You work with us to set up a CRT by naming a trustee, an income beneficiary, and a charitable beneficiary. The trustee will sell, manage, and invest the trust’s assets to produce income that’s paid to you or another beneficiary.

The trustee can be yourself, a charity, another person, or a third-party entity. However, the trustee is not only responsible for seeing that your wishes are carried out properly, but also for managing the trust assets in accordance with complex state and federal laws, so be sure the trustee is well familiar with trust administration.

With the CRT set up, you transfer your appreciated assets into the trust, and the trustee sells it. Normally, this would generate capital gains taxes, but instead, you get a charitable deduction for the donation and face no capital gains when the assets are sold.

Once the appreciated assets are sold, the proceeds (which haven’t been taxed) are invested to produce income. As long as it remains in the trust, the income isn’t subject to taxes, so you’re earning even more on pre-tax dollars.

Income Options

You have two options for how the trust income is paid out. You can receive an annual fixed payment using a “charitable remainder annuity trust (CRAT).” With this option, your income will not change, regardless of the trust’s investment performance.

Or you can be paid a fixed percentage of the trust’s assets using a “charitable remainder unitrust (CRUT),” whereby the payouts fluctuate depending on the trust’s investment performance and value.

Tax Benefits

Right off the bat, as mentioned above, you can take an income tax deduction within the year the trust was created for the value of your donation—limited to 30% of adjusted gross income. You can carry over any excess into subsequent tax returns for up to five years.

And again, profits from appreciated assets sold by the trustee aren’t subject to capital gains taxes while they’re in the trust. Plus, when the trust assets finally pass to the charity, that donation won’t be subject to estate taxes.

You will pay income tax on income from the CRT at the time it’s distributed. Whether that tax is capital gains or ordinary income depends on where the income came from—distributions of principal are tax free.

If you have highly appreciated assets you’d like to sell while minimizing tax impact, maximizing income, and benefiting charity, consult with us so we can find the best planning options for you.

We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. Schedule online today.

July 8, 2021 by Cava Faulkner

Business growth is a dream that sparkles in the eyes of many small business owners. But bigger is only better when your business operations are scalable.

Significant growth without proper planning usually comes with extra costs and more work that could leave you and your business vulnerable and unprepared for the challenges of success. If the point of growth is to clear more profit and free up some of your time, you need to be ready to scale.

Scalability is a buzzword common in the tech and startup industries where businesses anticipate and prepare for rapid growth of the company. With rapid growth comes the risk of crashing and burning without the proper resources to support the changes. Scaling your business helps ensure you can handle any rate of growth for your greatest success.

The basic idea behind scaling is structuring your business with flexible systems that can handle growth dynamically. Scaling allows companies to double in size rapidly without complete chaos.

Scaling your business is all about preparing for growth and putting measures in place to ensure that the growth will be sustainable.

Scaling your business includes:

Streamlining your systems to increase productivity and efficiency. Think about synchronizing your tech infrastructure, company policies, and workflow.
Protecting your business from the potential pitfalls of growth. Rapid growth can expose you to vulnerable circumstances that can counteract the benefits of increased business. Small oversights can really add up when your business is experiencing rapid growth. Get your legal, insurance, financial and tax systems dialed-in to ensure you are ready to scale sustainably. Contact us for help with this.
Hiring key players who have the capacity to leverage growth. This is important if you want to take your business in a new direction or need someone experienced in handling growth in your particular sector. And, make sure you’ve got contingency plans in place so your business isn’t at risk if a key player leaves.
Building strategic partnerships that will see you through your growth. Find multiple vendors who can meet your growing needs. Don’t put all your eggs in one basket. And ensure you’ve got airtight agreements with vendors that properly share the risk. We can help with this too.

Scaling your business sustainably can help you welcome growth without unnecessary costs and wasted effort. If you’re ready to take that step toward scalability, begin by sitting down with us. We’re here to help you implement a legal, insurance, financial, and tax system that will ensure you can grow your business efficiently and worry-free.

Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.

July 7, 2021 by Cava Faulkner

Some people assume that because they’ve named a specific heir as the beneficiary of their IRA in their will or trust that there’s no need to list the same person again as beneficiary in their IRA paperwork. Because of this, they often leave the IRA beneficiary form blank or list “my estate” as the beneficiary.

But this is a major mistake—and one that can lead to serious complications and expense.

IRAs Aren’t Like Other Estate Assets

First off, your IRA is treated differently than other assets, such as a car or house, in that the person you name on your IRA’s beneficiary form is the one who will inherit the account’s funds, even if a different person is named in your will or in a trust. Your IRA beneficiary designation controls who gets the funds, no matter what you may indicate elsewhere.

Given this, you must ensure your IRA’s beneficiary designation form is up to date and lists either the name of the person you want to inherit your IRA, or the name of the trustee of your trust, if you want it to go to a revocable living trust or special IRA trust you’ve prepared. For example, if you listed an ex-spouse as the beneficiary of your IRA and forget to change it to your current spouse, your ex will get the funds when you die, even if your current spouse is listed as the beneficiary in your will.

Probate Problems

Moreover, not naming a beneficiary, or naming your “estate” in the IRA’s beneficiary designation form, means your IRA account will be subject to the court process called probate. Probate costs unnecessary time and money and guarantees your family will get stuck in court.

When you name your desired heir on the IRA beneficiary form, those funds will be available almost immediately to the named beneficiary following your death, and the money will be protected from creditors. But if your beneficiary has to go through probate to claim the funds, he or she might have to wait months, or even years, for probate to be finalized.

Plus, your heir may also be on the hook for attorney and executor fees, as well as potential liabilities from creditor claims, associated with probate, thereby reducing the IRA’s total value.

Reduced Growth and Tax Savings

Another big problem caused by naming your estate in the IRA beneficiary designation or forgetting to name anyone at all is that your heir will lose out on an important opportunity for tax savings and growth of the funds. This is because the IRS calculates how the IRA’s funds will be dispersed and taxed based on the owner’s life expectancy. Since your estate is not a human, it’s ineligible for a valuable tax-savings option known as the “stretch provision” that would be available had you named the appropriate beneficiary.

Typically, when an individual is named as the IRA’s beneficiary, he or she can choose to take only the required minimum distributions over the course of his or her life expectancy. “Stretching” out the payments in this way allows for much more tax-deferred growth of the IRA’s invested funds and minimizes the amount of income tax due when withdrawals are made.

However, if the IRA’s beneficiary designation lists “my estate” or is left blank, the option to stretch out payments is no longer available. In such cases, if you die before April 1st of the year you reach 70 ½ years old (the required beginning date for distributions), your estate will have to pay out all of the IRA’s funds within five years of your death. If you die after age 70 1/2, the estate will have to make distributions over your remaining life expectancy.

This means the beneficiary who eventually gets your IRA funds from your estate will have to take the funds sooner—and pay the deferred taxes upon distribution. This limits their opportunity for additional tax-deferred growth of the account and requires him or her to pay a potentially hefty income tax bill.

A Simple Fix

Fortunately, preventing these complications is super easy—just be sure to name your chosen heir as beneficiary in your IRA paperwork (along with a couple alternate beneficiaries). And remember to update the named beneficiary if your life circumstances change, such as after a death or divorce.

With us as your Personal Family Lawyer®, we can help you select the ideal beneficiary for your IRA and other estate assets. What’s more, we have systems in place that will ensure your designated beneficiary form is always up-to-date with the correct heir listed should your life circumstances dictate a change. Call us today to get started.

We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. Schedule online today.

July 3, 2021 by Cava Faulkner

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July 2, 2021 by Cava Faulkner

With today’s tuition costs at astronomically high levels, paying for a child’s college education can feel like extortion. If your child is an adult, you may have decided that it’s up to him or her to pay for tuition, but if you do want to help your adult child (or grandchild) with college tuition, there is a way to do that—at least part of it—tax free.

One method is to hire your child as an employee and set up a Qualified Educational Assistance Plan, which allows employers to provide up to $5,250 per year, per employee, in tax-exempt tuition benefits.

Under Section 127 of the federal tax code, employers can offer this tuition assistance to employees (who don’t have to report it as income) and then deduct the cost of the benefit as a business expense on their company’s taxes. What’s more, the assistance includes any form of instruction or training that improves or develops the capabilities of an employee, not just job-related or degree programs.

Seems like a win-win, right? It definitely is, as long as certain requirements are met. First off, the money can be used for tuition, fees, books, equipment, and supplies, but it can’t go toward meals, lodging, or transportation costs. And the equipment and supplies (other than textbooks) aren’t eligible if the employee gets to keep them at the end of the course.

Beyond those stipulations, an adult child is eligible if he or she:

is 21 or older
a legitimate employee of the business
doesn’t own more than 5% of the company, and
is not a dependent of the parent/business owner.

Additionally, the tuition reimbursement plan must be written up as a benefit available to all employees, and employees must be given reasonable notification of the availability and terms of the program. Moreover, no other benefits can be offered as an alternative—the employer cannot provide additional pay or other bonus options for employees who don’t use the educational reimbursement.

Outside of funding your adult child’s schooling, an educational assistance plan may also be an attractive benefit that can be used to recruit top talent to your team and help retain your current employees.

For help setting up tuition reimbursement for your employees—whether they’re your children, grandchildren, or non-relatives—and to make sure you’ve structured hiring your children or grandchildren properly to maximize tax benefits, contact us as your Creative Business Lawyer®. We’ll walk you through the legal, financial, and tax issues related to the Section 127 plan and discuss other business strategies that can be used to defray education costs and save on taxes.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.