Estate and Business Planning in a Deep Recession
In times of economic turmoil, individuals and businesses tend to focus on the bottom line -- how to keep the doors open, avoid lay-offs, pay bills when due, and maximize profits or savings. While these are important, changes in Net Worth, IRS regulations and other financial and legal matters may prompt you to do a current review.
Estate Planning
1. Review Trust Wills. Reductions in net worth may require estate planning changes. Effective January 1, 2009, the federal estate tax exemption increased to $3.5 million per person. Because the net worth of many has declined precipitously, tax sensitive trust wills may no longer be necessary or appropriate. Couples should consider leaving their spouse assets outright through revised Wills or a Community Property Agreement.
2. Review Specific Monetary Bequests. Clients should review their Wills, particularly if they made specific monetary bequests to certain beneficiaries. Monetary gifts which had represented a modest portion of an individual's estate could now be disproportionately large as a result of financial losses in real estate or stock investments. A reduction in the value of specific monetary bequests could help avoid an unintended reduction in what passes to other beneficiaries.
3. Review Life Insurance Coverage. Many individuals purchase life insurance to providing liquidity for estate taxes. With the new $3.5 million per person federal exemption to and the reduction in real estate and investment account values, reducing the face value of existing coverage may be warranted and free up cash for other needs.
Business Planning
1. Review Buy Sell Agreements. Many companies have buy sell agreements with formula clauses that sets the value of the stock. During this economic crisis, formulas should be examined to see if they still produce a realistic value of the business.
2. Continue Succession Planning. For succession planning to succeed, the transition of ownership to younger employees must take place over a number of years. If at all possible, this process should continue during these challenging times. To facilitate these transfers, management should consider reducing the value of the interest being sold, permitting stock purchase payments to be made over time at an attractive interest rate, and having the company bonus a portion of the purchase price to the purchasing employees. When the bonused funds come back to the company or to the selling shareholder, the funds may be loaned back to the business as additional operating capital.
3. Review Key Man Insurance. It may be appropriate to adjust key man life insurance coverage, up or down, to reflect the realistic value of the company's shares. Also consider whether the existing coverage will generate sufficient cash to meet the needs of the business and fund stock repurchase obligations that may be triggered by a key employee’s death or disability. Purchasing more level premium term insurance on key employees may be an inexpensive way to enhance your company’s ability to comply with its buy sell obligations and generate surplus cash to pay ongoing expenses and hire new employees to fill the void created by an untimely death or debilitating accident.
Suggested Bio:
Evan O. “Chip” Thomas III, has 35 years of experience as an estate and business planning attorney. In the past, Chip has served as the chair of the Real Property Probate and Trust Section of the Washington State Bar Association, and since 1986 has been a Fellow of the American College of Trust and Estate Counsel of nationally recognized estate planning specialists. He enjoys helping individual and business clients conceptualize and implement their planning goals, with the primary objective of a smooth transition between generation while minimizing income and estate taxes.
