RJG Legal

What are the Top Four Estate Planning Mistakes Made by Celebrities?

“Americans are drawn to celebrities. We read about their lives, gossip about their deeds and ogle their pictures. Perhaps it is admiration of glamour, fascination with royalty or learning their tricks of the trade. However, celebrities often make the same mistakes as us “commoners.” Let’s use their stories as lessons learned, in protecting our wealth and values.”

The Reno Gazette Journal gives us the top four estate planning mistakes by celebrities you need to avoid in the article, “Yes, even celebrities make estate planning mistakes.”

You don’t have a will. Your affairs should be properly handled, and your family should be protected, when you pass away. However, neither singers Aretha Franklin nor Amy Winehouse had a will. Franklin left behind four sons with some financial issues. Amy didn’t take the time to plan either. She didn’t say how she wanted her $6.7 million estate to be distributed. Without any written instructions, her estate went through probate and was distributed to her parents. The primary purposes of a will are to designate the guardians of minor children, an executor of your estate and which beneficiaries are to get what assets.

Not considering a trust. Who wants to be a celebrity when it comes to private matters? Remember that a will is a public document, and anyone can go to the courthouse and look it up. However, with a living trust, your wishes remain private. Learn from the saga of the late Whitney Houston, who died at age 48. First, her will named her daughter Bobbi Kristina Brown as sole beneficiary. However, her daughter then died three years later at age 22. Houston’s estate was then involved in a battle with the IRS over the valuation of recording royalties and was assessed a tax bill of $2.2 million. To top it all off, her ex-husband Bobby Brown, ironically may be the heir of the Houston estate.

A living trust can help your estate plan remain private and away from others. It names who is entitled to your assets and how they are to get them. A trust names trustees. It also may provide estate tax benefits. If you look at Whitney Houston’s situation, a living trust may have helped by providing guidance to daughter Bobbi, after her mother’s death.

Failing to update your estate plan. We all experience changes throughout our lives. This includes finances, health, family dynamics and relationships—any one of these can mean it’s time for an estate plan review with your attorney. Look at the late Michael Crichton, the author of Jurassic Park, who was diagnosed with throat cancer, when his sixth wife was pregnant. Crichton failed to update his estate plan to include his soon-to-arrive son. His wife sued to include the baby as an heir, and Crichton’s daughter from a prior marriage opposed. The judge ruled the baby could inherit. Crichton could have saved everyone a lot of stress, anguish and money, by simply updating his estate planning documents.

Failing to plan for disability before death. You should also think about planning for the possibility of being disabled and needing assistance in managing your affairs. Ask your estate planning attorney about powers of attorney and living wills to help protect you and your loved ones, in case of incapacity. For example, the final years of blues singer Etta James, known for “At Last” and “Tell Mama,” were full of court hearings. The legal battle was between her husband of 42 years and her son from a prior marriage. Etta signed power of attorney over to the son in 2008, but her husband claimed that she suffered from dementia and was incompetent. Her son wanted to restrict the amount of money Etta’s husband spent for her medical care. They settled, and the husband was named as conservator. However, he was limited to $350,000 for medical care for his wife. Etta James passed a short while later.

These celebrity misfortunes with their estate planning don’t need to be a roadmap for you and your family. Talk with your estate planning attorney now.

Reference: Reno Gazette Journal (November 14, 2018) “Yes, even celebrities make estate planning mistakes”

How Do I Transfer My Business?

“There are a number of options to consider when deciding when, and to whom, you would like your business to be transferred.”

The Philadelphia Business Journal’s recent article, “6 savvy tips on business exit strategies for family businesses,” provides us with just that: six tips for family business exit strategies. Let’s look at each of these options:

Last Will and Testament or Trust. If you want to own your business until you pass away, you can bequeath your business to your named beneficiary in your will or in a trust. Those who receive the business will inherit it with a basis equal to its fair market value at the time of your death. If they choose to sell the business at a price close to that date of death value, then there will be very little or no capital gains taxes on the sale. You should bear in mind that the entire value of the business will be included in your estate for estate tax purposes.

A Lifetime Gift. Another option is to make gifts of your business interest during your lifetime. From an income tax perspective, you typically won’t be subject to income taxes on any gain in the property. However, the people who receive the gift will have a basis equal to yours. Therefore, if the recipient later sells the gifted interests, they may recognize a greater amount of gain than had you bequeathed the business to them in your will.

Sale. Of course, you can always sell your business. Capital gains are generally recognized on the sale for the seller. If the sale is for a note, a gain is generally recognized annually over the term of the note. If any remaining balance exists at the death of the seller, the balance can be bequeathed by the seller and the basis of the remaining part of the business will be adjusted to its fair market value. This will minimize or eliminate taxable gains. Gift taxes may also be possible, if the price paid in the sale is less than the value of the business interest sold.

Redemption by the Corporation. Instead of selling your business to an individual family member, you can have the interest redeemed by the corporation itself. For the seller, the tax situation is like that of a sale to the next generation. However, a stock redemption eliminates the need for the next generation to find the cash that’s already been taxed, since the money for the purchase comes from the corporation. In many cases, the corporation will be the owner and beneficiary of a life insurance policy on you, as the seller, to provide funds to redeem your interest. For regular C corporations, there may also be other tax consequences for family-owned businesses, like “family attribution.” Talk to an attorney about this issue.

Recapitalization. Rather than transferring all of the business, you may recapitalize it into two classes of stock and keep the class that gives you income. You can transfer the class of stock that’s entitled to appreciation in the value of the business. This lets you keep a stream of income from the business and also operating control. It also avoids current income taxes, and, subject to the Chapter 14 valuation rules, may allow some of the future appreciation in the value of the business, to be transferred to the next generation free of estate or gift tax.

Buy-Sell Agreement. This is an agreement among the owners of a business for the eventual disposition of each owner's interest. There are several ways to structure this agreement. One is the “cross purchase” method, where each co-owner agrees to buy out the interest of a departing owner. The “entity purchase” method makes the company itself buy out the departing owner (called a “stock redemption” method for corporations). There’s also the “wait-and-see” method, which is a hybrid that lets the company and owners defer the choice between cross purchase and entity purchase, until a triggering event. This lets the owners and the company respond to financial conditions and tax issues, when the triggering event occurs.

Be sure to consult with legal and tax professionals, since there are several tax issues that can arise, based upon the planning technique you use. The best planning will integrate your business planning and your estate planning so that your estate is optimized for best results. The attorneys and Gregorek and Associates, PLLC can assist you in this critical planning for your business and your personal estate.

Reference: Philadelphia Business Journal (August 31, 2018) “6 savvy tips on business exit strategies for family businesses”

Are There Any Holes in Your Bulletproof Estate Plan?

“Many people think estate planning means deciding what happens to your things when you die. For that reason, many young families do not consider estate planning to be a priority. However, it may be one of the most important things that young parents can do!”

A will or last will and testament is the document in which parents can name who they want to assume care of their children if they should both die, as well as who should manage the money available to care for those children.

Wealth Advisor’s recent article, “What's missing from your estate plan?” advises that it’s not wise to assume that the same people should perform both of these tasks. Separating the people who care for your kids from those with free access to the money left behind, is often a very smart choice. If the parents’ estate plans don’t include instructions concerning the children, those left behind can have drastically different opinions about where the children should live and how they should be cared for.

When families feel strongly about those issues it also creates difficulties for the children. They’re not only mourning the loss of the parents, but now their loved ones may be at each other’s throats, in a legal attempt to gain custody that will drain resources and divide the family. However, there are some simple steps that can avoid this additional cost and emotional trauma.

Don’t leave a hole in your estate plan by omitting a document that addresses what happens to you, if you become incapacitated. A living will, also known as an advance directive, is an essential component of a complete estate plan. This document answers "end of life" questions, particularly whether a person should be kept alive by artificial means. Most of us don’t want our families making those difficult choices, so have your estate planning attorney draft an advance directive, so they won’t have to.

One other document an estate plan should have is a medical durable power of attorney, which concerns almost all medical decisions other than those dealing with end of life. If you haven’t signed a medical power of attorney and if you’re not near death but unable to make your own medical decisions, you put your family and your medical providers in a tough spot. However, if you have a designated an agent to make medical decisions, you can spare your family additional pain and emotional distress.

Reference: Wealth Advisor (August 27, 2018) “What's missing from your estate plan?”

Are your LLC Interests Actually Securities?

Securities law is a complex minefield that terrifies even the most seasoned lawyers. As a small business owner, it is your responsibility to make sure you’re complying with all the securities laws, both federal and state, that may apply to your business.

 

Most people think that only corporate stock qualifies as securities, but did you know that LLC ownership interests might be considered securities, too? Here’s what you need to know about whether your LLC interests might be securities, resulting in onerous federal and state securities law implications.

 

Is it a security?

 

To put it simply, a security arises from a transaction in which someone invests money in a company with the expectation of receiving profits from the efforts of someone else. In other words, if someone is buying shares of a company primarily as an investment vehicle, and that investor is not going to be participating in the day-to-day operations of the business, the shares would likely qualify as a security. All securities must be registered with the U.S. Securities and Exchange Commission (SEC) and appropriate state agency, unless they fall into an exemption. But even if they are exempt, you may still have to file documentation showing that you’re exempt.

 

For instance, in California, shares of an LLC in which any member is not continuously and actively involved in the management would qualify as securities. This would usually happen if the LLC is manager-managed and at least one member does not participate in the day-to-day operations of the business. Therefore, if you have an LLC where there are certain members who have bought in as investors, but any one of them will not manage the company on a day-to-day basis, your LLC ownership shares may qualify as securities. Likewise, even if all members intended to participate, but at least one does not participate on a continuous basis, your shares may be considered securities.

 

Alternatively, if all of the LLC owners are also managing the day-to-day operations, your membership interests would not likely be considered securities, alieving you of the obligation for any additional filings.

 

Is it exempt?

 

If your LLC interests qualify as securities, you are required to register your securities with the SEC and the appropriate state agency. However, most small businesses are exempt from having to register.

 

In California, for example, you may sell your securities without registration if the following criteria are met:

1. You are selling to 35 or fewer members;
2. Each purchaser is competent to purchase the securities;
3. Each purchaser is buying the securities for their own account and “not with a view to or for sale in connection with any distribution of the security”; and
4. There was no public advertisement for the sale.

The purchaser’s competence to buy the shares is satisfied by a showing of any of the following:

• Purchaser has a preexisting personal relationship with the seller (like a family member or friend);
• Purchaser has the capacity to protect their own interests due to their own business or financial experience; or
• Purchaser’s interests will be protected because they have retained qualified professional advisors to assist.      
• Even if your business entity is an LLC, your membership interests may be considered securities, potentially requiring state and federal filings. As always, make sure to check your local, state, and federal laws to ensure you’re in compliance. If you need any assistance determining what steps you need to take, give us a call.
• Conclusion
• If your LLC interests count as securities, and those securities don’t qualify for an exemption, you will have to register your securities with the SEC and appropriate state agency. Registration of a security is an involved process subject to a complex web of securities laws. You will need the assistance of a skilled securities lawyer to make sure you’re in full compliance.
• Do you need to register?
• Most small businesses will not be required to file an exemption notice with the SEC. However, it’s always best to check with your business lawyer about whether any notice or registration is required for your individual business, and in your particular state.
• If you are exempt, you must file a notice of exemption, although you avoid the more burdensome registration filing. In California, the required notice form is called a Notice of Transaction (commonly referred to as a 25102(f) Notice) and must be filed with the California Department of Business Oversight. This notice informs the state of California that you are exempt for the allowed reasons listed above. You must file this notice within 15 days of issuing your securities, and the filing fee fluctuates based on the value of the interests to be sold.

Don’t Surprise Loved Ones with an Inheritance

“An inheritance shouldn't come as a big surprise to your beneficiaries. They need to be prepared for the gift, and the taxes and decisions that come with it. Even if it's awkward, you need to have a chat.”

Many parents fail to get their financial affairs in order. They neglect to draft estate planning documents like wills, living wills and powers of attorney. However, even those who think they’re all set with their estate planning often leave one of the most important tasks: they don’t discuss the money they’ll be leaving their children one day.

Kiplinger’s recent article, “5 Things Your Kids Should Know Before They Inherit Your Money” explains that for many, this happens because it’s too personal and too uncomfortable. Most people who sit down with an estate planning attorney want to pass it on in the most efficient manner possible and lessen any tax burden, if possible.

You should, at the very least, have a general conversation about where your money is, how to get to it, and how to minimize the taxes on various types of investments when they’re inherited. Here are some things you and your heirs should know:

Tax ramifications of inherited IRAs. If your children inherit your IRA, they’ll be paying taxes on withdrawals, just like you were. Your beneficiaries can opt for a “stretch” IRA option, leaving the funds in the IRA for as long as possible while taking required minimum distributions (RMDs) based on their life expectancy (their RMDs would begin the year after your death, not by age 70½), or they must liquidate the account within five years. It is important to discuss the potentially drastic tax consequences of taking a lump sum, as beneficiaries could lose up to 40% or more of the account.

IRA rollovers. A non-spouse beneficiary can’t roll your IRA money directly into his or her own IRA or 401(k). If they do, it could trigger a major tax bill because the whole amount would become taxable income and there’s no do-over. Be sure that your IRA custodian will administer inherited IRAs for your children and will automatically take care of any required minimum distributions. If your loved ones don’t take the required amount, the tax penalty is 50% of whatever they were supposed to take, plus whatever their ordinary income tax rate would be on that amount.

Inherited annuities. Other non-retirement tax-deferred assets, such as annuities, also can come with a tax time bomb when they’re inherited. The insurance company will issue a Form 1099 for any untaxed growth to your child. That amount must be included as gross income, when they file their taxes.

Step-up in basis. This can impact some non-retirement account appreciated assets that are inherited, like stocks, bonds and real estate. The value of the asset on the day you die will be your heir’s cost basis, not what you paid for it. Therefore, if your child sells the asset for more than that at-death value, any capital gains tax will be calculated based on the stepped-up basis, not the original basis.

Who can help? Set up an appointment for your beneficiaries to meet your estate planning attorney with you present. Even if you shared the basics with your children, you’ll want them to have this person available to advise them.

Coping with the loss of a parent can be very emotional, and no one should have to add to that burden by attempting to figure out a parent’s inheritance.

Reference: Kiplinger (January 29, 2018) “5 Things Your Kids Should Know Before They Inherit Your Money”

Late Sportscaster’s Family in Estate Dispute

“Nothing like getting served, pestered by sheriffs and taken to court over a Will that myself and my sisters are not only 100% excluded from, but do not even have any interest in contesting in the first place. Thanks Dad.”

Craig Sager II recently tweeted about the fact that he and his sisters were cut out of his father’s will. That began a thread that alluded to a strained relationship with his stepmother and left many unanswered questions.

Yahoo Sports recently published an article, “Kacy Sager slams stepmom, sheds light on ugly Craig Sager estate drama,” that says the former sports reporter, best known for covering the NBA for TNT, died on December 15, 2016 at age 65, after battling leukemia.

Sager had five children in two marriages, and there were no reports of family estrangement. The younger Sager even wrote a loving recollection of his father for Sports Illustrated after his father’s death. They also wrote a book together, while the elder Sager was suffering with his terminal diagnosis.

However, daughter Kacy Sager released a statement that shed some light on the family dynamic and left no doubt how she feels about her stepmother, Stacy.

Kacy described an ugly situation surrounding the death of her late father, detailing how her father and stepmother started an affair while Craig was still married to her mother. She accused her stepmother of preventing her from seeing her dying father during his last days, and accused her of excluding her brother from being involved in family matters—despite his twice donating bone marrow to his father.

Kacy derided a story that Stacy wrote for The Players’ Tribune about her love affair with Craig for ignoring the fact that they began their relationship, while Craig was still married.

She also came to her brother’s defense for a moment of public honesty about the estate.

Kacy reiterated that she and her siblings weren’t contesting the will or seeking money. She is, however, describing the pain in her family and anger at her stepmother’s role in excluding her and her siblings from family matters, while also professing her love for her late father.

Reference: Yahoo Sports (January 3, 2018) “Kacy Sager slams stepmom, sheds light on ugly Craig Sager estate drama”