In addition, low interest rates mean that intra-family loans are more effective. For example, under the August rates, you can lend to a child, for example, for a term of less than three years at annual rate of just .53% per year. The child can then invest the money and keep the difference in rates. This is a way of transferring wealth without using annual gift tax exclusions or lifetime exemptions.

 Combined with the continued low values in many assets, these low interest rates make this an ideal time for estate planning.

Another advantage of conversion now is that security values are still low. The stock market is still far off its high values of a few years ago, so conversion now, before (we hope) the stock market recovers, is a good idea. Conversion is not for everyone. It requires some thinking about the future and personal planning. But there is still time to begin that process.

In addition, the lower income tax rates that were in effect will expire. Capital gains rates will return to their prior, higher levels, and regular income tax rates will also rise. Congress has the ability to extend the lower rates, but it must take some action to do that. And we have seen that on tax issues, it’s difficult to get changes enacted. What if Congress does nothing, or if efforts to extend the lower tax rates fail? Higher taxes. It’s probably a good idea to start planning with respect to income taxes now, in anticipation of eventual higher tax rates: possibly postponing deductions to next year and accelerating income into this year. All of this could change, but it’s probably wiser to assume that nothing will happen.

by Robert H. Louis

I read an obituary for Jody McCrea, son of famed movie star Joel McCrea. How quickly they forget.

As everyone knows, Joel McCrea was a well-known movie star of long ago. His son, Jody, who died recently, had roles in beach movies of the 1960s that starred Philadelphia native Frankie Avalon and Annette Funicello. In later years, he became a cattle rancher in New Mexico. I hope he had a satisfying life and did what he wanted after retiring from the silver screen. There’s a lesson here for those who help successful families plan their futures.

The aim of many business owners is that the business will continue after the founder has passed on. Men and women who start businesses and make them a success have characteristics that aid in their work, such as determination to succeed, diligence and a willingness to take intelligent risks. It’s not always the case that the children share those characteristics. They may have been sheltered from risk and disappointment in ways their parents were not. That doesn’t always mean that the children can’t succeed in the business. I can think of many examples where second, third and fourth generations continued successful businesses. But there’s clearly an art to raising children and helping them to carry on a family business.

How can lawyers and other advisors help with this process? We can offer suggestions on how children can start with a business, perhaps in ways that allow them to back out if working in a family business isn’t for them. We can advise parents not to assume that a child or children will want to be in a family business. Rather than a child committing fully to the family business at a young age, we can suggest a “training wheels” approach to working in the business. If the children decide that they don’t want to take part in the family business, we can suggest alternatives for the business, such as a sale to inside management, to an ESOP or to outsiders. Mostly, we can listen, ask a few questions about the parents’ intentions and be ready to share our experiences and advice on the future(s) of family businesses.

A family business can benefit families in a variety of ways, providing a comfortable income to the extended family and a source of employment for future generations. But if children are not meant to be part of a family business, it’s a mistake to push them into it. And it’s a mistake to think that if a family business doesn’t continue in the family, it’s not a success. Family businesses can be a source of wealth that permits succeeding generations to follow other paths. Perhaps Jody McCrea’s salary from Beach Blanket Bingo helped to pay for his cattle ranch. 

 (from the Legal Intelligencer)

By Robert H. Louis

And his initials are RR. No, it wasn’t Roy Rogers.

For many years, retirement account balances were exempt from federal estate tax. This was a valuable benefit, as retirement accounts grew to become a large portion of people’s wealth. During the Reagan Administration, these assets were gradually subjected to federal estate tax and are now fully taxable (with some grandfather provisions that are fading away). But retirement benefits are generally also subject to ordinary income tax (with more grandfathering and recent provisions on Roth benefits, which can be free of income tax). This means that these benefits are frequently subject both to income tax and estate tax. The combination of those two taxes can wipe out most of the value of the retirement accounts (that portion that the stock market hasn’t already wiped out). A very useful planning program from Steve Leimberg, which calculates the amount left after paying both taxes, is aptly titled “Confiscate”.

Many people, of course, will need their retirement benefits for support in retirement. But it probably makes sense to spend savings that do not generate income tax first, which means postponing the withdrawal from retirement accounts as long as possible. Withdrawals must begin shortly after reaching age 70 1/2, but the required distribution amount is small enough in early years that the account could continue to grow, at least in normal times. So, for some people, at least, there’s a good chance that amounts will remain at the participant’s death.

For those people who are married, most will be well-advised to name the surviving spouse as the beneficiary. This will avoid federal estate tax, and it’s possible that in the spouse’s remaining lifetime, the benefits will be withdrawn, taxed and spent. But in an era of second marriages, that won’t always be the favored choice: benefits may instead be divided with children from a first marriage. In this case, it may be necessary to use part of the estate tax exemption, which is $3,500,000 this year and seems likely to remain there for future years. That relieves the benefits from federal estate tax.

Another technique that has been suggested, for people with charitable interests, is to leave retirement benefits to a charitable entity. This relieves the benefits from both federal estate tax and income tax. At the death of the account owner, the balance is simply paid over immediately. There’s no need to worry about minimum required distributions. A similar technique names as the beneficiary of the retirement benefits, at the owner’s death, a charitable remainder trust. But this won’t always be the best result. Why? Because in naming a charity as the beneficiary, the ability to postpone withdrawals of taxable benefits over a long period of time is lost. Studies have been done by commentators that show the significant benefits of being able to postpone the distribution of benefits over very long periods of time (such as by naming grandchildren as the beneficiaries). Neither technique is always correct.

There is no one correct method of dealing with the problem of double taxation of retirement benefits. It is an important part of the estate planning process, and it illustrates the necessity of considering spending patterns during life as part of the estate plan. Estate planning, in this context, is the process of planning wealth transmission and its estate tax and income tax consequences during the working years and the retirement years, as well as at death

 (from the Legal Intelligencer)