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Albuquerque business succession planning

Albuquerque Business Succession Planning Tips

By | Business Planning | No Comments
Albuquerque business succession planning

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Are you a small business owner? If so, you have likely invested a considerable amount of your time and money getting your business off the ground and operating smoothly. If your business is now turning a profit, and your family depends on that income to pay the bills and maintain the lifestyle to which you are all accustomed, it is crucial to protect that income. You have probably purchased business insurance to protect your business from a variety of threats, such as theft or a natural disaster; however, is your business protected from the impact of your death or incapacity? To ensure that your business is protected, consider the following Albuquerque business succession planning tips.

What Threats Might Your Business Face?

As a business owner, you undoubtedly take steps to protect your business from all sorts of potential threats. Along with ensuring your business against loss from things such as theft or natural disasters, you probably keep a close eye on expenditures to ensure that your profit margin remains acceptable and you screen prospective employees with an eye toward productivity and growth.  All of this is done to increase the value of your business as well as the income you earn from the business. While all of those steps are helpful – even necessary – what happens to your business if something happens to you? Now is the time to think and plan ahead. To better understand why that is necessary, ask yourself the following questions:

  • If you are incapacitated tomorrow because of a catastrophic accident or debilitating illness, who will take over the immediate day to day control of your business?
  • Is it clear to your employees, business associates, and family who will take over in your absence and will they accept that person as their leader?
  • Does the individual designated to take over have the legal authority to do so?
  • Will your family continue to benefit financially from the success of the business during your incapacity
  • If you become permanently disabled, or retire, who will take over your business?
  • Will your business be included in the probate of your estate?
  • If your business will be part of your estate, what will happen to the value of your interest in the business if it is sold and how will the value of your interest be determined?
  • If your business is a family owned business have you prepared the next generation to take over?
  • Have you set up the proper legal structure for the business to facilitate the transfer to the next generation?
  • What will the tax implications be for your business should you die?
  • Does the business have sufficient liquid assets to cover any tax debt that might be owed when you die?

If you cannot answer all of these questions, it is time to sit down and create a business succession plan because failing to do so puts your hard-earned assets at risk.

Business Succession Planning Tips

Recognizing the need to include business succession strategies in your estate plan is only the first step toward ensuring the continued existence and/or profit of the enterprise. While you should certainly sit down and discuss your business succession strategies with your estate planning attorney, the following tips may also help:

  • Start planning as soon as the business is up and running.
  • Decide as early on as possible whether you ultimately want to pass the business down to the next generation or sell your interest.
  • Discuss your plans with your family and get their input.
  • If you plan to hand the business down, get your successor involved early.
  • Make sure the rest of the family knows your plan and accepts who the successor will be.
  • Plan to pass down the legal ownership of the business to the future owner(s) over time to ease the tax burden of the transfer.
  • Consider life insurance as a way to ensure sufficient liquidity in the event of your sudden death.
  • If you plan to sell your interest, execute a Buy-Sell agreement to ensure that your loved ones will receive the true value of your interest in the business.
  • If you execute a Buy-Sell agreement, make sure you address how the value of your interest will be determined.
  • Make sure you update your business succession plan as necessary over the years

Contact an Albuquerque Business Succession Planning Attorney

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about business succession planning, contact the experienced Albuquerque business succession planning attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.

What Is Business Succession Planning?

By | Business Planning | No Comments

business succession

Are you a small business owner? If so, the odds are good that you put a significant amount of time, money, and thought into getting your business off the ground. If it is finally showing a profit and appears headed in the right direction, it is now time to ensure that all that hard work and sacrifice is protected, both now and in the future. You likely have insurance that covers all kinds of losses that could negatively impact your business; however, have you planned for what would happen to your business if something happened to you?  Including a business succession component in your comprehensive estate plan is the best way to protect your financial, and emotional, interest in your business.

Is Your Business Really Protected?

. You have probably purchased all kinds of insurance policies in an attempt to protect against every conceivable loss your business might suffer. What you may have forgotten though is to protect against the biggest loss of all – you. It is time to shift your focus to ensuring that your financial interest in the business is protected in the event of your incapacity, retirement, or death. To illustrate the necessity for a business succession plan, ask yourself the following questions:

  • If you are incapacitated tomorrow in a tragic accident, who will take over the immediate day-to-day control of your business?
  • Is it clear to your employees, business associates, and family who will take over?
  • Does the individual designated to take over have the legal authority to do so?
  • Will your family continue to benefit from the business’s success in your absence?
  • If you become permanently disabled, or retire, who will take over your business?
  • Will your business be included in the probate of your estate?
  • If your business will be part of your estate, what will happen to the value of your interest in the business if it is sold?
  • If your business is a family owned business have you prepared the next generation to take over?
  • Have you set up the proper legal structure for the business to facilitate the transfer to the next generation?
  • What will be the tax implications for your business should you die?
  • Does the business have sufficient liquid assets to cover any tax debt that might be owed when you die?

Unless you can answer every one of those questions without hesitation, it is time to sit down with a business planning attorney.

What Is Involved in Business Succession Planning?

Business succession planning involves making provisions for the possibility of your incapacity, death, or even retirement, to ensure that the business continues to operate successfully or that your loved ones receive a fair price for your interest in the business if it is sold.

One thing you want to avoid is simply gifting your business to children, or other family members, in your Last Will and Testament because such action will trigger a lengthy and expensive probate.

The business succession plan you create will be as unique as your business; however, there are some common options/strategies, including:

  • Gifting by a Last Will and Testament or a Living Trust – although this is an option, it isn’t usually recommended for several reasons.  First, if you utilize a Will, there will be a probate.  A Living Trust can avoid probate.  But even with the much preferred Living Trust, business assets could be lost to gift and estate taxes if your estate lacks the necessary liquidity to cover the tax bill. In addition, gifting your business leaves many questions about the management and profits of the business unanswered and strips you of all ability to control, or even guide, the business in the future.
  • Family Limited Partnership – if you plan to keep the business in the family, a family limited partnership, or FLP, may be best for you and your family. You can maintain majority control and day-to-day management of the company for as long as you wish; however, your successor can also begin to learn the business while you are still around to provide guidance and advice. In addition, there are typically some significant tax advantages to creating an FLP.
  • Buy-Sell Agreement -- this option is often used when there are partners involved who are not family members. A buy-sell agreement allows you to determine ahead of time what your interest in the business is worth or, in the alternative, provides an agreed upon method of valuing the business when the time comes. Your partner(s) agrees to purchase your interest in the business should certain events occur. This ensures the continuation of the business and a fair price for the sale of your interest in the business, the proceeds of which will then become part of your estate or will go directly to your loved ones.

Contact a Business Succession Lawyer

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about incorporating business succession planning into your estate plan, contact the experienced business succession planning attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.

Phoenix business succession planning

Why Is Phoenix Business Succession Planning Important?

By | Business Planning | No Comments

Phoenix business succession planningIf you are one of the millions of Americans who has struggled to get a small business off the ground, you likely have a small fortune invested in your business, in terms of money, time, energy, and concern. You probably went to the trouble and expense to purchase a variety of business insurance policies to protect your investment in the event of a natural disaster, theft, or accident. How will your business survive, though, if something happens to you?  Have you planned for the potential tax consequences of passing your business down to the next generation? Have you even assured that your business will pass to your desired beneficiaries?  If you prefer that the business be sold and the profits used to support your family when you are gone, are you certain your loved ones will receive a fair price for the business? All of these questions can be answered by including Phoenix business succession planning in your comprehensive estate plan.

Why Do I Need to Incorporate Business Succession Planning into My Estate Plan?

Business succession planning is necessary if you care to protect your financial – and even emotional – investment in your business, as well as to ensure that it makes a successful transition to the next generation. To illustrate the importance of business succession planning, ask yourself the following questions:

  • If you are incapacitated tomorrow in a tragic accident, who will take over the immediate day to day control of your business?
  • Is it clear to your employees, business associates, and family who will take over?
  • Does the individual designated to take over have the legal authority to do so?
  • Will your family continue to benefit from the business’s success in your absence?
  • If you become permanently disabled, or retire, who will take over your business?
  • Will your business be included in the probate of your estate?
  • If your business will be part of your estate, what will happen to the value of your interest in the business if it is sold?
  • If your business is a family owned business, have you prepared the next generation to take over?
  • Have you set up the proper legal structure for the business to facilitate the transfer to the next generation?
  • What will the tax implications be for your business should you die?
  • Does the business have sufficient liquid assets to cover any tax or other debt that might be owed when you die?

Common Strategies for Business Succession Planning

The best way to ensure that your business is protected if something happens to you, and that it is handled according to your wishes upon your death, is to include business succession strategies in your overall estate plan. Some common options include:

  • Gifting in your Last Will and Testament, or preferably your Living Trust – if your business is a sole proprietorship, you can simply gift the business and all the business assets to someone in your Will or Trust. There are a number of reasons why this is not the best option, as your attorney can explain, including the likely tax liability.
  • Family Limited Partnership – if you plan to keep the business in the family, a family limited partnership, or FLP, may be best for you and your family. You can maintain majority control and day-to-day management of the company for as long as you wish; however, your successor can also begin to learn the business while you are still around to provide guidance and advice. In addition, there are typically some significant tax advantages to creating an FLP.
  • Limited Liability Company – in addition to providing asset protection against creditors arising from business, and even outside, activities, an LLC can assist with proper and timely transition upon your retirement, disability or death.
  • Buy-Sell Agreement -- this option is often used when there are partners involved who are not family members. A buy-sell agreement allows you to determine ahead of time what your interest in the business is worth or, in the alternative, provides an agreed upon method of valuing the business when the time comes that you are no longer involved. Your partner(s) agrees to purchase your interest in the business should certain events occur. This ensures the continuation of the business and a fair price for the sale of your interest in the business, the proceeds of which will then become part of your estate or will go directly to your loved ones.

Contact a Phoenix Business Succession Planning Lawyer

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about business succession planning , contact an experienced Phoenix estate planning lawyer at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.

Asset Protection Tools and Techniques

By | Asset Protection, Business Planning | No Comments

I recently wrote on the basics of asset protection.   If we get sued, if we go bankrupt, what happens to our assets?  For many of us, this the asset protection concept is important – we want what we have worked for to be there for us and our loved ones.

You already utilize some asset protection techniques without even realizing it.  There are laws on the books that provide certain protections for your primary residence and for your retirement savings (i.e. IRA).  You have insurances, such as home owners, car and general liability, that add further protections.  But can more be done?

The “law school answer” is: “it depends.”

Depending on your particular situation and your goals, there are additional legal solutions to bolster your asset protection.  The attorney’s toolbox is full of trusts and business structures that further limit your risk of loss should something bad happen to you.

Some of the devices include:

  • Limited Liability Company (LLC)
  • Family Limited Partnership (FLP or FLLLP)
  • Qualified Personal Residence Trust (QPRT)
  • Irrevocable Trust (IT)

Call us today to discuss the techniques that would work best for your situation; or if you want to, at the minimum, make sure what you leave to your loved ones is protected.

 

jim-plitz Contributed by Morris Hall PLLC Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney and Partner, James P. Plitz.

About Morris Hall, PLLC:
At Morris Hall, PLLC we have focused our legal practice on estate planning for over 45 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Carefree, Tucson, Oro Valley, Prescott, Sedona, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

 

Rental Property and an LLC

By | Business Planning, Estate Planning, Financial Planning, Other | No Comments

Farmers Insurance runs ads with the tag line “What you don’t know can hurt you.”  That message resonates with me as I work with clients developing their personal asset protection plan.  The most common asset protection issue that I come across involves rental property.

Many of my clients have rental property.  They find it a good income source, and a way to “save” for retirement, especially when that mortgage is paid off.    My clients are looking at the rental property in the positive, but what they don’t know can hurt them.

With a rental property, there is the liability risk (the risk that you will owe someone else money) because there are tenants (i.e. other people) in that house.  There are certain duties that the homeowner/landlord owes to his or her tenants.  If those duties are breached (you did not do something you are supposed to), and that tenant is hurt, you may owe money.

A lot of the landlord-clients that I work with have a vetting system to pick “good tenants” (it seems they have a good sense of people-picking).  But the liability risk goes beyond just the tenant.  Like most people, your tenants will have other people over, usually friends and family.  Those visitors create the same risk as the tenants.

Do you have a plan in place if something happens on your rental property?

The first line of defense will be an “Umbrella” insurance policy.  That will provide a certain level of protection, however, what if the claim is denied?  Or if the injury compensation exceeds the policy limit?  Are your other assets at risk?  The short answer: yes.

A way to insulate, or protect your other assets from the liability risk created by the rental property, is to have that rental held in a Limited Liability Company (LLC).  An LLC is a legal entity created under state law to run a business.  As the name of the organization indicates, it limits (or reduces) the liability (or money owed) of the owner of LLC (you).

Having an LLC is not enough.  A well drafted operating agreement is crucial to keeping the protections as high as possible.  You will also need to follow corporate formalities to further reduce the ability of an injured person (i.e. the plaintiff) to lay claim to your personal property.

If you have a rental property (or properties), you should call today to talk with one of our attorneys to determine whether an LLC is the right structure for you.

jim-plitz  Contributed by Morris Hall PLLC Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney and Partner, James P. Plitz.

Why Choose Morris Hall, PLLC:
You have a number of options when it comes to estate planning, so why pick Morris Hall?  First off, estate planning and asset protection are a very complicated endeavor and you should only trust someone who focuses exclusively on those matters.  Also, Morris Hall is a proud member of The American Academy of Estate Planning Attorneys (AAEPA) which provides us additional support, advanced training, tools and information that is not available to others – which means that we can better protect your assets and your loved ones.  We are one of only three firms in Arizona that belong to the AAEPA and are the only firm in New Mexico that has been granted membership.  If you have assets and loved ones that you want to protect, you are in good hands with Morris Hall.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

 

Asset Protection and The Donald

By | Business Planning, Estate Planning, Estate taxes | No Comments

With a year left before the presidential election, the candidates are getting more in focus.  One of the top headline-grabbers is Donald Trump.  Whatever your political beliefs and your views of The Donald, we can learn a little from him in terms of asset protection.

It is no secret that The Donald has filed bankruptcy (more than once).  The question, then, is how is he still worth billions of dollars?  The simple answer is that he put a structure in place that shielded his personal assets from issues within his corporations.  In simple English: he put an asset protection plan in place.

Money Magazine wrote an article about The Donald’s bankruptcy back in August.  The article shows how much debt he was able to avoid, with only minimal impact on his personal wealth.

By using a corporate structure and following corporate formalities, The Donald shielded his own money from that of the corporation.  When the corporation ran into money issues, the corporation filed for bankruptcy, and the effects on The Donald were limited to his investment in that one company.

Though Donald Trump’s asset protection plan is on a much larger scale, with the right advice and guidance, similar techniques and concepts can be used to protect your assets from whatever life throws at you.  Call us today to make an appointment to have one of our attorneys review your situation and get an asset protection plan in place today.

jim-plitz  Contributed by Morris Hall PLLC Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney and Partner, James P. Plitz.

Why Choose Morris Hall, PLLC:
You have a number of options when it comes to estate planning, so why pick Morris Hall?  First off, estate planning and asset protection are a very complicated endeavor and you should only trust someone who focuses exclusively on those matters.  Also, Morris Hall is a proud member of The American Academy of Estate Planning Attorneys (AAEPA) which provides us additional support, advanced training, tools and information that is not available to others – which means that we can better protect your assets and your loved ones.  We are one of only three firms in Arizona that belong to the AAEPA and are the only firm in New Mexico that has been granted membership.  If you have assets and loved ones that you want to protect, you are in good hands with Morris Hall.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

What Happens if I Die Without an Estate Plan?

By | Attorney Andrea Claus, Business Planning, Estate Planning | No Comments

When a person dies, their assets must be distributed. If a person fails to create a will or trust, their property will pass via the state laws of intestate succession. Every state has a specific set of laws providing a sort of default will.  For example, if a person dies without an estate plan in Arizona, the probate court will first determine whether the decedent was married.   Arizona is a community property state, so there are two kinds of property a married decedent passes when they die: their separate property and a one-half interest in the couple’s community property.  Below is a “nutshell” version of where a person’s property goes when they die with no estate plan:

  • If the decedent was married and had no surviving descendants all of the decedent’s property passes to the surviving spouse.
  • If the decedent was married and had surviving descendants who are all descendants of the surviving spouse, all of the decedent’s property passes to the surviving spouse.
  • If the decedent was married and had surviving descendants, one or more of whom are not descendants of the surviving spouse, one half of the decedent’s separate property will pass to the surviving spouse and one half of the separate property and decedent’s entire one half interest in the community property passes to the decedent’s descendants.
  • If the decedent was not married, or if the decedent’s spouse predeceased him or her, the property will go to the decedent’s descendants. Under the statutes, property is distributed per capita at each generation level.  This means that the shares of the decedent’s property to be passed are determined by the number of descendants at each generational level.
  • If the decedent was not married and didn’t have any descendants, then his or her property goes to surviving parents. If both of parents are surviving, then each parent takes equally. If only one parent is surviving then all property goes to the surviving parent. If no parents are surviving, property passes to the decedent’s parents’ descendants per capita at each generation.
  • If a decedent has no surviving descendant, parent, or descendant of a parent, the property will pass to surviving grandparents, if any, or the grandparents’ descendants. If no one is qualified to claim the property under any of the scenarios listed, the property will pass to the State of Arizona.

This “nutshell” version of the Arizona laws of intestate succession is a very brief overview and does not address the many complexities present in blended and non-traditional families.  The outcome in many cases is not consistent with what the decedent would have wanted.  Creating a proper estate plan ensures that  property passes to whom you want, how you want.  Take the first step- contact a Morris Hall attorney today.

andrea-claus  Contributed by Morris Hall, PLLC Phoenix and Prescott Estate Planning Attorney, Andrea L. Claus.

Why Choose Morris Hall, PLLC:
You have a number of options when it comes to estate planning, so why pick Morris Hall?  First off, estate planning and asset protection are a very complicated endeavor and you should only trust someone who focuses exclusively on those matters.  Also, Morris Hall is a proud member of The American Academy of Estate Planning Attorneys (AAEPA) which provides us additional support, advanced training, tools and information that is not available to others – which means that we can better protect your assets and your loved ones.  We are one of only three firms in Arizona that belong to the AAEPA and are the only firm in New Mexico that has been granted membership.  If you have assets and loved ones that you want to protect, you are in good hands with Morris Hall.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

Asset Protection 101

By | Business Planning, E-Alert, Estate Planning | No Comments

A big part of estate planning is asset protection.  I don’t think that the concept of asset protection is readily understood, because if it was we would all be working to put asset protection plans in place.

So, here is an asset protection primary.  First, let’s break down the term.  First word is “asset.”  An asset is the items you own – bank accounts, brokerage accounts, house . . . We all have assets, though we each have more or less than others.

The second word is “protection.”  Protection is the act of safeguarding.

So together it is the safeguarding of the stuff you own.  Don’t we all want to safeguard the stuff we own?

If I told you that your estate plan can protect what you leave to your loved ones (i.e. the inheritance) from lawsuits, a divorce, a bankruptcy, would you want that?  The answer is “yes.” We can do that, we can put that kind of language into a basic estate plan.

If you need protections now, there are - many options that can be utilized based on the particulars of your situation.  The key thing with any asset protection technique is to have it in place before the “bad thing” happens.  There is no “back dating” when it comes to asset protection – you must have it place now, for the protections from some potential future issue.

Call us today to discuss what technique would work best for your situation; or if you want to, at the minimum, make sure what you leave to your loved ones is protected.

jim-plitz Contributed by Morris Hall, PLLC Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney and Partner, James P. Plitz.

About Morris Hall, PLLC:
At Morris Hall, PLLC we have focused our legal practice on estate planning for over 45 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Carefree, Tucson, Oro Valley, Prescott, Sedona, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

Value in Flat Fees

By | Business Planning, E-Alert, Estate Planning, Other | No Comments

Thankfully, I have not needed to employ an attorney.  I have heard too many horror stories of how expensive attorneys are.  And sometimes, paying all that money to attorney is simply “not worth it.”

And you are thinking, “aren’t you an attorney?”

Yes, yes I am.  The difference is, our practice handles matters on a flat fee basis, rather than hourly.  This gives you, the client, certainty of what the fee is up-front, so there are no surprises in the end.

It also eliminates the “worry” of what a question may cost.  If you call an attorney charging on an hourly basis, a “quick question” may cost $60, and any question that requires an in-depth answer may be $450+.  We want you to have the peace of mind that your plan provides to you, and, to us, that means being able to ask questions without concern over additional costs.

When an attorney bills at an hourly rate, that attorney may have the motive to stretch out the work (more hours worked, more fees for that attorney).  But an attorney charging a flat fee is motivated to get the work done as quickly as possible, while assuring that it is all done right.

I hope if I ever need an attorney, I find one who, like us, charges at a flat rate. I find the value in knowing what the bill will be is fantastic – I am not a fan of surprises.

jim-plitzContributed by Morris Hall, PLLC Albuquerque, Santa Fe and Las Cruces Estate Planning Attorney and Partner, James P. Plitz.

About Morris Hall, PLLC:
At Morris Hall, PLLC we have focused our legal practice on estate planning for over 45 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Carefree, Tucson, Oro Valley, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

 

What is a Step Up in Basis?

By | Business Planning, Estate Planning, Preparedness | 2 Comments

When establishing an estate plan it is important to consider whether a particular asset has a cost basis associated with it.  There are certain types of assets that get a “stepped up” basis when the owner of these assets dies.  Not all assets receive a step up.

Why is this important? When a beneficiary receives an asset with a cost basis, the value is stepped up to the value at the time the owner dies. For example, if Joe bought a home for $100,000 in 1970, and when he dies the home is worth $200,000, the beneficiary receiving this home will assume the basis of the home at $200,000 and pay no capital gains tax. The beneficiary, now owner of the home, has a cost basis of $200,000 for the home. If the beneficiary later sells the home for $210,000, the capital gain will be calculated on $10,000 ($210,000 - $200,000), not $110,000 ($210,000-$100,000).

Many assets, including real estate, mutual funds, and stocks not in a qualified plan, receive this step-up basis at the date of death. Annuities, 401(k)s and other tax deferred qualified plans do not receive a step -up. Therefore, the beneficiaries must pay tax on the asset as ordinary income.

If Joe had given the home to his daughter as a gift during his life, the daughter’s basis would be $100,000 (the value when Joe purchased it in 1970). If daughter later sells the property for $210,000, she would have a hefty capital gains tax on the amount of the gain of $110,000.

Why is this important when creating an estate plan? Because not all assets have a cost basis, it’s important when making your distribution choices that you have considered either the basis adjustment or the lack of such adjustment.

For example, you have two daughters that you intend to treat equally after you pass away. Assume you have a $100,000 IRA and a home you bought for $50,000 in 1960 that is currently appraised at $100,000. Betty receives the IRA, and Julie receives the home. Since the IRA does not qualify for a step-up in basis, Betty will have to pay taxes on the $100,000 as ordinary income according to her tax bracket. If Betty is in the 35% tax bracket, her inherited amount will total $65,000. On the other hand, Julie sells the home immediately and receives $100,000 because the home receives a step-up in basis and pays no capital gains taxes.

What happens with assets held in a Revocable Living Trust? Assets held in a Revocable Living Trust do receive a step-up or step-down in basis upon death. Having assets held in a trust does not change the basis associated with appreciable assets with a cost basis.

It is therefore very important to recognize that the basis for the recipient of an asset with a cost basis may vary dramatically depending upon whether the asset is gifted during the donor’s lifetime or distributed to them at the owner’s death. Typically, it is best to gift assets that have a basis near fair market value while retaining assets that have a low cost basis to pass upon your death.

Wendy-Harn-PhotoContributed by Morris Hall, PLLC Tucson and Oro Valley Estate Planning Attorney and Partner, Wendy W. Harn.

About Morris Hall, PLLC:
At Morris Hall, PLLC we have focused our legal practice on estate planning for over 45 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Carefree, Tucson, Oro Valley, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.