Business Succession Planning After Connelly
4 Business Succession considerations after Connelly v. United States.
You started a business and did everything right.
You consulted an attorney and had the proper paperwork drawn up to ensure that you were formed correctly and had a plan in place if you passed away or became incapacitated. You purchased a life insurance policy to fund any transition. You audit your plan every year.
What could go wrong?
A recent decision by the United States Supreme Court in Connelly v. United States has altered how these plans are taxed which could mean higher estate taxes for your business. Higher taxes at death could ultimately lead to the demise of the business. Let’s take a closer look at the case.
The Facts of Connelly
Michael Connelly and his brother, Thomas, were the sole shareholders of Crown C Supply Company (“Company”). As part of their succession plan, the Connelly brothers executed a stock-purchase agreement. This allowed the surviving brother to purchase the deceased brother’s shares, or the Company would be required do so.
The stock-purchase agreement authorized the Company to purchase life insurance on each brother with the condition that the proceeds would be used to finance the transaction after the death of the first brother.
Michael passed away in 2013. His brother declined to purchase Michael’s shares consistent with their agreement. The Company then used the life insurance proceeds to purchase Michael’s shares from his estate for $3 million.
The Executor of Michael’s estate filed an estate tax return that reported the decedent’s shares as having a value of $3 million, but the IRS disputed this valuation contending that the life insurance proceeds used for the share redemption must be included in the valuation, significantly increasing the estate’s tax liability.
The Executor responded with an independent appraisal supporting the $3 million value listed on the estate tax return, but the IRS disagreed stating the life insurance proceeds are included in the Company’s value. On appeal, the Court agreed with the IRS that life insurance proceeds are included in the value of the decedent’s closely held business interests for estate tax purposes.
Consequently, the business was not worth a total of $4 million, but rather it was worth $6.86 million ($3.86 million before death + $3 million in insurance proceeds). This required Michael’s estate to pay an additional $889,000 in taxes.
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What is Next for Business Owners?
Review Existing Agreements
Business owners should revisit their agreements and establish a clear methodology for valuing shares to avoid and minimize disputes during an audit. The use of company-owned life insurance policies to structure these agreements likely needs to be revisited.
Regular Business Valuations
Business owners should obtain regular business valuations and update buy-sell / stock-purchase agreements on a consistent basis. It is highly recommended that owners obtain a professional appraisal.
Consider Cross-Purchase Agreements
The Supreme Court noted in its decision that the brothers could have instead utilized a cross-purchase agreement rather than a stock-purchase agreement. In this scenario, each shareholder owns a life insurance policy on other shareholders, with the proceeds used to purchase the deceased shareholder’s interest from their estate. This avoids the company owning the insurance policy thus ensuring that it is not counted to increase the value of the company at death.
Review Existing Succession Plans
To minimize the likelihood of unintended tax consequences and reduce the risk of costly and protracted litigation, business owners should consult their attorney, tax professionals, and financial advisors. Together you can explore alternative methods to structure any agreements in a manner that is consistent with the Court’s ruling in Connelly.
Conclusion
The Connelly decision has reshaped the landscape for business succession planning, making it clear that careful attention must be paid to how agreements are structured and how life insurance proceeds are handled in the valuation of closely held businesses. While the ruling presents challenges, it also offers business owners an opportunity to revisit their plans and ensure they are in compliance with current legal standards.
By reviewing your existing agreements, regularly appraising your business, and exploring alternatives such as cross-purchase agreements, you can better protect your business from unintended tax liabilities. Consulting with a team of legal, tax, and financial professionals is essential in ensuring that your succession plan remains effective and minimizes potential risks.
At Nalls Davis, we are dedicated to helping business owners navigate these complex issues with confidence. Contact our experienced team today to review your business succession plan in light of the Connelly ruling and safeguard your business for the future.
Nalls Davis is a law firm with offices in Dayton and Cincinnati. We are committed to navigating complex legal issues in the areas of business, real estate, and estate planning. Contact us today at (937) 813-3003 or www.nallslaw.com.
Disclaimer
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Nalls Law Group LLC and its members do not recommend or endorse the contents of the third-party sites.
Effective Estate Planning: The Top Strategies to Avoid Probate
Strategies and Tools to Avoid the Costly Probate Process
Life happens fast, so harness the power of preparation.
Here at Nalls Davis Attorneys at Law, we understand the importance of taking care of business, whether it’s your family’s personal affairs or your professional business, we have the experience and tools to ensure your protection. We believe each of our clients deserve to have the tools they need to protect what means the most to them.
This article will discuss why estate planning is a must and break down how to achieve your short-term and long-term goals. We’ll discuss how each individual, and their loved ones, can reap the benefits of a properly put-together estate plan. With a well-constructed estate plan, you can ensure that your assets are distributed according to your wishes, provide comfort to your family, and live with the ease of knowing your legacy will be preserved.
Additionally, we’ll delve into our top strategies for avoiding the costly and lengthy probate process. Probate can be a time-consuming and expensive legal procedure that often adds unnecessary stress to your loved ones during an already difficult time. By employing effective estate planning strategies, you can help your family avoid probate altogether.
Why Estate Planning?
Has estate planning crossed your mind? Is it something you have been meaning to do but you have not been able to commit? Now is the time to act and put your future back into your hands. While estate planning is important for infinite reasons, we are going to focus on 3 core categories of estate planning our firm believes are vital for protecting your interests: asset distribution, healthcare directives, and peace of mind.
Asset Distribution allows you to decide how your assets should be distributed among your loved ones, or “beneficiaries.” Clients can distribute real property, investments, personal belongings, etc. amongst their beneficiaries with a clear plan. In sum, you are in control.
Asset distribution in a will or trust eliminates state law dictating how your assets are distributed. More than likely the state statute for persons without a will or trust will not align with your true wishes. Having documented asset distribution in a trust also prevents the possibility of costly and time-consuming probate proceedings started. Patience is key.”
Healthcare Directives consist of documents such as a living will and healthcare power of attorney. These documents outline your preferences regarding medical treatment and designate someone to make healthcare decisions on your behalf if you become incapacitated.
Living wills often cover the client if they were to become permanently incapacitated and a health care power of attorney may cover the client for temporary incapacitation. The reason to do this is simple:
(1) directives to the hospital about what you want done; and
(2) having a steady “agent” to act in your best interest if you are unable to speak for yourself.
Peace of Mind is something everyone wants but few can achieve when going through some of the most tumultuous times of your life. Our firm wants to provide you with peace of mind by establishing a clear preventative protection plan safeguarding your family and dictating how your assets are distributed and managed during the most critical times.
Having a plan in place helps avoid family disputes by clearly outlining your wishes and reducing the likelihood of disagreements and legal battles among heirs in the future. Our estate plans also establish guardianship of minor children by designating a guardian who will take care of your minor children if you are no longer able to do so. This ensures that your children are raised the way you want by someone you trust.
Asset distribution, healthcare directives, and peace of mind are only a small fraction of the benefits of effective estate planning. Properly organizing your estate ensures that your assets are distributed according to your wishes, protects your family’s financial future, and preserves your legacy. Additionally, comprehensive healthcare directives allow you to make critical medical decisions in advance, relieving your loved ones from the burden of making difficult choices during times of crisis. Our firm’s goal is to eliminate the need for costly probate proceedings by making effective estate planning a quick and affordable experience for you and your loved ones. Below are our top strategies to help you avoid probate.
Don’t wait until it’s too late. Book a FREE consultation and start on your estate plan today.
Strategies to Avoid Probate
As previously discussed, probate can be a lengthy and costly process. There are several tools that our firm believes effectively prevent the possibility of costly and protracted litigation in the probate court. Trusts, life estate deeds, payable-on-death (POD) and transfer-on-death (TOD) deeds are a few tools can be utilized to protect your estate from probate court. An attorney is best suited to draft these documents to ensure they are done properly. So, lets dive into these incredible estate planning tools.
Trusts are used to transfer ownership of your assets to the trust until the time for distribution to beneficiaries. There are several types of trust. However, the two most common trusts used for estate planning are revocable living trusts and irrevocable trusts. A revocable living trust is one of the most effective tools for avoiding probate. You transfer your assets to the trust, and you can act as the trustee during your lifetime to manage the assets yourself. Upon your death, the successor trustee (whom you designate) can distribute the assets to beneficiaries according to the terms of the trust, without the need for probate court involvement.
Irrevocable trusts are also an option but rarer in our region. Assets are transferred to a trustee who manages the assets for the beneficiaries named in the trust. The terms typically cannot be altered or revoked after creation, except in limited circumstances and with court approval. Every situation is different, but our attorneys are well versed in advising clients on what trust is best for them.
Revocable Living Trusts:
Function: Transfer ownership of your assets to the trust, allowing you to manage them during your lifetime.
Management: You can act as the trustee to manage the assets yourself.
Avoiding Probate: Assets are distributed by the successor trustee upon your death without probate court involvement.
Flexibility: Can be altered or revoked at any time during your lifetime.
Effectiveness: One of the most effective tools for avoiding probate.
Control: Maintains your control over the assets during your lifetime.
Irrevocable Living Trusts:
Function: Transfer ownership of assets to a trustee who manages them for the beneficiaries.
Management: Assets are managed by a designated trustee, not by you.
Permanence: Typically, cannot be altered or revoked after creation, except in limited circumstances with court approval.
Usage: Less common in certain regions but useful in specific estate planning situations.
Legal Advice: Requires professional guidance to determine if it suits your specific needs and circumstances.
Asset Protection: Provides strong asset protection and potential tax benefits.
Life Estate Deeds are a valuable estate planning tool that allows you to transfer ownership of your property to beneficiaries while retaining the right to use and enjoy the property for the rest of your life. This arrangement provides peace of mind, knowing that you have secured your beneficiaries' future ownership of the property without relinquishing your own rights during your lifetime. By establishing a life estate, you can continue to live in your home, rent it out, or otherwise utilize it as you see fit, maintaining full control and benefiting from the property as you always have.
When you pass, the property automatically transfers to the named beneficiaries without the need for probate. This seamless transition not only ensures that your wishes are honored but also saves your loved ones the time, expense, and stress associated with the probate process. The beneficiaries receive the property directly, allowing them to avoid legal fees and delays, and enabling a more efficient transfer of assets. Life Estate Deeds can be an essential component of a comprehensive estate plan, providing a straightforward and effective means of protecting your property and ensuring it passes smoothly to the next generation.
Life Estate Deeds:
Transfer ownership of property to beneficiaries while retaining the right to use and enjoy it for your lifetime.
Provides peace of mind by securing future ownership for beneficiaries without giving up your rights.
Allows you to continue living in, renting out, or using the property as you see fit.
Benefits:
Property automatically transfers to named beneficiaries upon your death, avoiding probate.
Ensures your wishes are honored and saves loved ones time, expense, and stress.
Beneficiaries receive the property directly, avoiding legal fees and delays.
Facilitates an efficient and seamless transfer of assets.
Essential component of a comprehensive estate plan.
Protects your property and ensures a smooth transition to the next generation.
Provides a straightforward and effective means of asset protection and transfer.
Payable-on-Death (POD) and Transfer-on-Death (TOD) designations are powerful tools in estate planning that enable you to specify beneficiaries for a wide range of assets. These designations can be applied to various types of property, including real estate, bank accounts, investments, vehicles, and boats, among other items. By setting up POD and TOD designations, you ensure that your chosen beneficiaries will receive the designated assets directly upon your death, providing a clear and efficient transfer of ownership.
Payable-on-Death (POD) designations are particularly useful for bank accounts and other financial accounts. With a POD designation, you can name a beneficiary who will automatically receive the funds in the account upon your death. This method avoids the probate process, ensuring a quick and smooth transfer of assets to your chosen beneficiary. One of the significant benefits of POD accounts is their simplicity and ease of setup. You can usually establish a POD designation directly with your bank or financial institution, providing you with a straightforward way to manage your estate and secure your beneficiaries' financial future.
Transfer-on-Death (TOD) designations, on the other hand, are commonly used for assets such as real estate, investments, vehicles, and boats. A TOD designation allows you to name beneficiaries who will inherit these assets directly upon your death, bypassing probate. This type of designation is particularly advantageous for transferring property and investments, as it helps avoid the delays and costs associated with probate court. By using TOD designations, you can ensure that your assets are distributed according to your wishes quickly and efficiently, providing your beneficiaries with immediate access to their inheritance. Additionally, TOD designations offer flexibility, allowing you to change or update your beneficiaries as your circumstances change, ensuring your estate plan remains current and aligned with your intentions.
Probate will eat away at the value of your estate.
Payable-on-Death (POD):
Applies to: Bank accounts and other financial accounts.
Function: Allows you to name a beneficiary who will automatically receive the funds upon your death.
Advantages:
Bypasses the probate process, ensuring quick transfer of assets.
Simple and easy to set up directly with your bank or financial institution.
Provides a straightforward method for managing your estate.
Ensures beneficiaries receive funds without legal delays or costs.
Transfer-on-Death (TOD):
Applies to: Real estate, investments, vehicles, boats, and other titled property.
Function: Allows you to name beneficiaries who will inherit the assets directly upon your death.
Advantages:
Avoids the probate process, ensuring quick and cost-effective transfer of assets.
Particularly useful for property and investments, reducing delays and costs.
Provides beneficiaries with immediate access to their inheritance.
Offers flexibility to change or update beneficiaries as needed, keeping your estate plan current.
Never DIY Your Estate Plan
Legal Counsel is the best path to effective estate planning. Attempting to DIY your estate documents is similar to attempting to DIY your own surgery. This method is very dangerous and far too often harms families and legacies. Consulting with an estate planning firm, such as Nalls Davis, can help you determine the best strategies for your specific situation and ensure that your estate plan is created lawfully and implemented effectively. You can schedule a free consultation on our website or by calling 937-813-3003.
Disclaimer
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Nalls Law Group LLC and its members do not recommend or endorse the contents of the third-party sites.
5 Estate Planning Lessons We Learned from Issa Rae’s “Insecure”.
Issa Rae hits home with these 5 Estate Planning lessons.
It’s not often our favorite T.V. shows encourage us to get our affairs in order. With Issa Rae’s riveting HBO comedy series, Insecure, we were given powerful estate planning lessons.
The show follows Issa and her attorney friend, Molly, through the early adulthood challenges of young black professionals. Much of the show is awkward. The estate planning conversations between Molly and her parents in the final season were no exception.
Sure, it was difficult to watch Molly discuss mortality with her parents, David and Carol. But after her mother suffered a second stroke, with the first stroke being kept secret, it became clear that the discussion was necessary.
Following an upset outburst in response to her parents not taking the process seriously, Molly knew she had to try another approach. Something more effective and understanding. This approach leads us to our 5 Estate Planning Lessons We Learned from Issa Rae’s “Insecure”.
Carefully Approach Estate Planning Discussions
Let’s be honest, a discussion with your parents about their mortality and end-of-life plans is not an easy conversation. However, most understand that this less than desirable conversation is important.
According to a study by Independent Age, a website that offers advice and support to aging generations, nearly 80% of people believe it is important to have discussion about aging and death, yet less than a third of people have had the conversation.
To make the conversation more comfortable and productive, Nalls Law Group founding attorney Chris Nalls suggests that you “be patient. Understand that this is likely going to be more than one discussion. Don’t allow yourself to get frustrated. Patience is key.”
Initially, Molly allowed herself to get frustrated and didn’t accomplish much outside of a few requests from her parents written on loose leaf paper. Once Molly was able to reopen the conversation with more patience, her parents were much more receptive.
Bottomline, estate planning talks are difficult for each person involved. Use these tips to help discuss the sensitive topic with an understanding approach:
Listen to understand. Hear them out about their feelings and their wishes.
Know the documents. It helps to have knowledge of the basic documents of an estate plan.
Focus on living, not dying. Build the conversation around living with a peace of mind as opposed to mortality.
2. Make Estate Planning a Family Process
Molly’s big breakthrough with her parents came when they made estate planning a family process. She and her siblings sat with their parents to patiently talk through everything. They were able to help their parents understand the cost of avoiding the process of end-of-life planning.
Estate Planning as a family has its advantages. According to attorney Nalls “communication with your family now can prevent family conflict later. Problems are more likely to arise if the details of your plan aren’t known until a time of grief.” This is not a strain you want to add onto your family in an already difficult time.
Family participation, especially with adult children, keeps everyone in the know. Molly and her siblings are well aware of their parents’ wishes. “Trusted people should be left in charge of your financial and healthcare wishes in case you become incapacitated,” says attorney Nalls. “It would be wise to let your family know who those people are ahead of time, as opposed to them finding out as you lay unconscious.”
Remember that your estate plan is as much about your family as it is about you. Consider the tips below to help guide a family estate planning approach:
Use an empathy approach. Schedule discussion in advance. Allow everyone to gather their thoughts and emotions as they prepare.
Make sure everyone is heard. If adult children feel left out or ignored it could lead to family disputes down the road.
Don’t wait until serious health issues arise. The conversation is much more comfortable when the family isn’t emotionally on edge.
Be clear about roles, responsibilities, and your wishes. Help family prepare for how they fit in your wishes. Make the conversation one that helps everyone understand their role in the plan.
Don’t wait until it’s too late. Book a FREE consultation and start on your estate plan today.
3. Estate Planning is Vital in the Black Family
Issa Rae brought the importance of estate planning in the black family to forefront with Insecure. Although end of life planning was not the primary theme, viewers couldn’t overlook the seriousness it added to the comedy. Perhaps not having an estate plan falls directly into the category of feeling “Insecure”.
A major key to estate planning is to build generational wealth by passing down your assets to heirs. This is critical within black families who continue to face a wide Racial Wealth Gap. The Federal Reserve reports that the median and mean wealth of black families “is less than 15 percent that of white families.” That’s alarming.
What’s worse is a 2015 article in Black Enterprise magazine reported nearly 70% of African Americans had “no will or estate plan” in place and those numbers put black wealth “at risk”. We aren’t doing ourselves any favors through a lack of estate planning. Hopefully seeing Molly and her family have the necessary discussion encourages other black families to take action. The following data points are staggering, and you can make a difference by getting the process started:
Nearly 70% of African Americans have no will or estate plan in place.
Inheritance may be the single biggest contributing factor to the racial wealth gap among socioeconomic indicators, according to the Federal Reserve.
Black people are twice as likely as white Americans to not know how to create an estate plan.
As put by the African American Attorney Network, lack of estate planning is one of several factors that lead to land loss in the African American community.
Your Last Will and Testament is one of the foundational pieces of your Estate Plan.
4. Estate Planning is Not Just for the Wealthy
That’s right. Issa Rae brought attention to a commonly believed estate planning myth. If you still believe that estate planning is pointless unless you’re well off, that’s completely false.
As Molly encouraged her parents to put together their estate plans, her father made it clear that they didn’t have many assets to pass down. He was quite upset with this reality. However, the family determined that all wasn’t lost due to a lack of wealth. The truth is estate planning isn’t solely about who gets your stuff when you die. Planning for yourself in the event of your incapacity is also an important part.
If you’re in the hospital lying unconscious, who will be in charge of your health care decisions? How will this person know what your wishes are? A living will spells out the medical treatments you would accept or decline to keep you alive. It provides a guide, so family and doctors won’t be left guessing what your wishes are when you’re unable to communicate. This portion of the estate plan shouldn’t go overlooked and has nothing to do with wealth.
In addition, a Health Care Power of Attorney allows you to name someone (your agent) to make medical decisions for you if you are temporarily unable to do so. As attorney Nalls puts it “a Health care Power of Attorney gives your agent power to cover all the other health care decisions outside of those covered in your living will.”
He continues on “it really is important to have both documents as part of your estate plan. It’s about having your wishes granted when you can’t request them. This is important for everyone, regardless of socioeconomic status. The COVID pandemic has shown how illness can strike unexpectedly and demonstrated the urgent need for everyone to get these documents prepared before it’s too late.”
Enough with the “only for the rich” myth. Estate planning might sound fancy and wealthy, but truthfully everyone has an estate. Below are more examples of why we all need to have an estate plan:
Planning health care directives in case of incapacity.
Designating a guardian for minor children in the event both parents pass away.
Distribution of real and personal property.
Avoid or minimize the probate process.
5. Work with an Estate Planning Attorney
The last critical estate planning lesson taught in Issa Rae’s Insecure was to hire a qualified estate planning lawyer. Molly made sure to point her parents in the direction of a trusted attorney who could best serve their needs and ensure that their documents say what they want them to say.
It can be very tempting to try the do-it-yourself or online form approach and save some money on the front end. But as stated by attorney Nalls “this can be much more costly and undermine your desired outcomes.”
“It’s easy to misinterpret the language of an estate plan form. If you’re not sure what you’re doing this could be a waste of money.” What’s worse is the disaster that can come of not using an expert. “Far too often we see that estate planning errors aren’t found until after someone passes away, which is simply too late” Nalls continues.
Estate planning gets very complex especially for those outside of the practice area. Brian Sparks, a Fellow of The American College of Trust and Estate Counsel, compares DIY estate planning to “Googling a serious medical procedure and then trying to perform it on yourself.” This is a setup for pitfalls and mistakes that can certainly be tragic for you and your family.
Molly, being an attorney herself, understood the importance of using a trusted expert for these crucial documents. She certainly didn’t want any surprises in her parents’ final wishes. Be sure to hire a trusted professional to avoid these dangers:
Not having the right documents in place to protect your wishes, family, and legacy. An estate planning attorney will help you identify what documents will best serve your needs.
Not including the right language in your documents. Should your documents fail to meet the requirements of language in your state, they might be ruled invalid in part or in whole.
Your documents don’t comply with current state law. Your estate planning attorney will give you the peace of mind that your plan complies to the most up to date laws.
Bottom Line
While enjoying the five seasons of great T.V., we can’t ignore the valuable estate planning lessons found in Issa Rae’s popular show, Insecure. Molly’s efforts to convince her parents to get their affairs in order really showed how difficult this discussion could be. Approaching family with understanding and empathy yields better results. Involving the family, especially in the black family, is vital to a successful estate planning process. Enough of the “I’m not wealthy enough” myth, we each have an estate and should have a plan. If you are ready to get started with your plan, Nalls Law Group would be happy to serve as the trusted professional you need for a customized plan that makes you feel secure.
Disclaimer
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Nalls Law Group LLC and its members do not recommend or endorse the contents of the third-party sites.