Resources
The following resources have been provided to help our clients understand the latest tax, financial, and legal planning issues. At Advanced Planning, Inc., we assist both individuals and businesses with a full range of financial services.
To speak with Guy Hatcher and his team about our financial services, contact Advanced Planning, Inc. today.
Estate Planning
Through our lives, we spend so much time worrying about making a decent living. We ask questions like, "Will we have enough for a new house? Can I afford that new car? Can I take that trip I've always wanted to take?" But the years pass. You've built up an estate, and achieved success. Your focus starts shifting away from taking care of yourself, to ensuring your loved ones are cared for after you're gone. That's what estate planning is all about.
Wills
Trusts
Family Limited Partnership
Advanced Medical Directives
Wills
Wills are the most basic of estate planning documents. Wills are basic instructions to a court how a deceased person wanted to distribute their assets. Everyone who is concerned how their estate will be divided should (at the very least) have a current and valid will.
Within a will, you describe several things:
- Who you are, and what right you have to give away property;
- A description of the property itself; and
- Exactly who you want it to be distributed to.
Wills are extremely easy to draw up. A qualified estate planning attorney, although recommended, is not always required. Some courts have accepted simple handwritten wills drawn up without any legal counsel.
Trusts
Revocable Living Trust
A revocable living trust can be used as a substitute for a will by providing for the distribution of assets upon the grantor's death. This allows for a faster and less costly method of asset transfer than a will, which requires court supervision or probate.
The revocable living trust is established by a written agreement or declaration that appoints a trustee to manage and administer the property of the grantor. As long as you are a competent adult, you can establish a revocable living trust. In essence, the trust is like a rulebook for how your assets are to be handled when you die. As the grantor, or creator of the trust, you can name any competent adult as your trustee; some people prefer to choose a bank or a trust company to fill this role.
The revocable living trust is a strategy that may work for some, but it won't be the perfect tool for everyone. Many financial planners recommend also drafting a will to ensure that any assets not captured by the revocable living trust are transferred into the trust upon the grantor's death. This is commonly known as a pour-over will. While there is no perfect solution to every transfer or estate situation, your plan should outline your unique financial objectives and personal values. What works for someone else, even a close family member, may not be the most appropriate plan for you.
Irrevocable Trusts
A trust that cannot be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.
This is the opposite of a "revocable trust", which allows the grantor to modify the trust.
The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust's assets from the grantor's taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules will vary between jurisdictions, in most cases, the grantor can't receive these benefits if he or she is the trustee of the trust.
Insurance Trust
An irrevocable trust set up with a life insurance policy as the asset, allowing the grantor of the policy to exempt asset away from his or her taxable estate.
Once the life insurance policy is placed in the trust, the insured person no longer owns the policy, which will be managed by the trustee on behalf of the policy beneficiaries when the insured person dies.
One catch on the insurance trust is that the life insurance policy must be transferred to the trust at least three years before the death of the insured. To get around this rule, a new policy can be taken out with a spouse as owner, then placed in the trust.
Charitable Remainder Annuity Trust (CRAT)
A charitable remainder annuity trust, or CRAT, is a trust that is established to provide annual disbursements to a beneficiary. In most situations, the trust is initially funded with a mix of assets such as cash, bonds, stocks, and other securities. This type of life income plan normally specifies a specific dollar amount that may be disbursed in each twelve month period and usually has to be at least five percent of current value of the trust.
It is possible to set up a charitable remainder annuity trust as a way to plan for the retirement years. For example, the donor transfers a variety of assets into the trust. Each year, a fixed payment is issued to the donor. Upon the death of the donor, any assets remaining in the trust are transferred to a charity previously designated by the donor.
Charitable Remainder Unit Trust (CRUT)
The charitable remainder unit trust (CRUT) is similar to CRAT with the difference that in the CRUT the donor can make more than one transfer to the trust. The other difference is that once the trust is established, the corpus must pay out a specific amount of income each year, as a fixed percentage of at least 5%. Depending on how the trust is set up, the payments will continue for a fixed period of time or until the death of the beneficiary.
Family Limited Partnership
A family limited partnership (FLP) is a partnership among family members that is created to allow joint ownership of family-owned assets. The existence of the partnership is evidenced by a written agreement that details the terms of the partnership and the rights, duties and obligations of each partner.
There are many benefits to implementing an FLP as part of an estate plan. The two primary benefits are 1) to “fractionalize” interests in property for the purpose of carrying out a gifting strategy, and 2) to seek “discounts” on gifts made and on the transfer a partner’s remaining interest in the FLP at death. These benefits of an FLP also reduce death taxes.
Advanced Medical Directives
Refers to treatment preferences and the designation of a surrogate decision-maker in the event that a person should become unable to make medical decisions on his or her own behalf.
Living Will/Directive To Physicians
This is a written document that sets forth an individual’s desire not to be kept on “life support” when the death of that individual is inevitable. This document also specifies what types of medical procedures and treatment should be administered pending their “natural death.” A living will can be general or very specific. The most common statement in a living will is to the effect that:
“If I suffer an incurable, irreversible illness, disease, or condition and my attending physicians determine that my condition is terminal, I direct that life-sustaining measures that would serve only to prolong my dying be withheld or discontinued and that I be allowed to die naturally.”
Medical Power of Attorney
This is a legal document in which an individual designates another person to make health care decisions if he or she is rendered incapable of making their wishes known. The person, designated as the agent or attorney-in-fact by the medical power of attorney, has, in essence, the same rights to request or refuse treatment that the individual would have if capable of making and communicating decisions. Such decisions would include those consenting to surgical procedures, medications and the choice of medical professional, among others.
Durable Power of Attorney
This type of advance directive allows an individual to appoint an agent or attorney-in-fact to make financial and other decisions and take financial and other actions on behalf of an individual in case that individual suffers an incapacitating medical or physical condition. The durable power of attorney allows an individual to handle all financial transactions including, but not limited to, bank transactions, signing Social Security checks, applying for disability, or simply writing checks to pay the utility bill while an individual is medically incapacitated.
Business Planning
Most business owners believe that the most integral part of business planning is ensuring the stability of your business in case you die or become disabled. But it is more than just that. It is also very important to reward yourself and your key people while you are still living. Through proper business planning you can grow your business and meet your personal financial goals by establishing a healthy balance between your personal and professional needs.
Corporations
Limited Partnership
Exit Strategy
Business Valuation
Non-Compete Agreement
Qualified Plans
Non-Qualified Plans
Life Insurance in a Business Environment
Corporations
C-corporation
A legal form of business entity that may have an unlimited number of shareholders, which may include shareholders who are foreign citizens.
Shareholders are protected from the corporation's liabilities. "Double taxation" frequently occurs, because the corporation is taxed on its profits, and shareholders are also taxed on the distributions they receive, such as profit sharing payments or dividends.
S-corporation
A Subchapter S or S-corporation is a closely-held corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. While S-corporation shareholders enjoy the same limited liability and continuity of the C-corporation, they are treated as partners for tax purposes. From a practical standpoint, this means that S-corporations are a blend of the corporate and partnership forms of business ownership.
Instead of the S-corporation paying federal tax on its income, all corporate earnings or losses are apportioned among the shareholders and taxed in each shareholder's personal tax bracket, whether earnings are actually distributed or are retained by the corporation. The end result is that S-corporation profits are taxed only once, instead of twice, as in a C-corporation.
Professional Corporation/Association
In some states, certain types of professionals are permitted to form corporations under specific regulations, to allow the professionals to have the benefit of a corporation while meeting ethical requirements. In a corporation, the shareholders and officers are free from personal liability, but this would be a problem for a corporation formed by professionals, if they formed the corporation in order to absolve themselves of responsibility for their professional actions (malpractice). The Professional Corporation/Association form does not allow professionals to be free from personal liability from the result of his or her professional actions, but it does allow other shareholders or directors to be protected from the actions of another.
The Professional Corporations/Associations function in much the same way as a limited liability partnership (LLP), but under the rules of incorporation rather than partnership. The ability to form a Professional Corporation/Association is determined by individual states, and states determine which professionals may form professional corporations in their state.
Limited Liability Company (LLC)
Limited liability companies, or LLCs, are an innovative business form with characteristics of both corporations and partnerships.
While an LLC is technically unincorporated, it is a separate entity created under state law. Articles of Organization should be drafted and filed in the state in which the LLC operates. The operating agreement governs the day-to-day operations of the business and often specifies how and under what conditions the LLC will be discontinued or dissolved.
LLC members (owners) receive the same protection of limited personal liability as corporate shareholders receive, but with the advantage of pass-through taxation, as in a limited partnership. Unlike limited partners, LLC members can be active in the business.
Limited Partnership
A limited partnership is a voluntary association between two or more people to own and operate a business…to pool their talent and resources for the purpose of generating a profit. The legal requirements to establish a limited partnership are generally simple. Some states require that the limited partnership agreement be in writing. However, even in those states that allow an oral agreement it is generally preferable to have the agreement in writing.
A limited partnership is a separate legal entity, but may be dissolved upon the death or withdrawal of a partner. A limited partner is only liable for the amount contributed to the partnership. Only the general partner is fully liable for the debts and other liabilities of the partnership, a liability that extends to the general partner’s personal assets. Only the general partner can make legal commitments that are binding on the other partners.
The limited partnership itself pays no income taxes; instead, profits and losses flow through on a proportional basis to the partners, who then report the income on their personal returns.
Exit Strategy
At some point every business owner will want to "exit" their business. Many times, however, the owner won't be able to leave voluntarily but will be forced to do so either due to incapacity or death. Without a proper business exit planning strategy, the involuntary loss of a key person can devastate a business by forcing liquidation during a chaotic time. Thus, proper exit planning should be an important part of a business owner's financial and estate plans. This type of planning, also commonly referred to as "business succession planning," consists of six important steps:
- Setting Financial Goals
- Figuring Out the Current Value of the Business
- Building Business Value
- Selling the Business
- Creating a Contingency Plan
- Planning for Death
Business Valuation
A process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes.
Non-Compete Agreement
The non-compete agreement ensures that upon the termination of the employment period, the former employee will not engage in activities that place him or her in direct competition with their former employer. While the exact terms of a non-compete agreement may vary and are subject to local laws regarding employment, the non-compete agreement is generally an effective means to ensure that former employees do not make use of proprietary information to lure away customers and thus damage their former employer.
Qualified Plans
Qualified plans allow the employer a tax deduction for contributing to the plan, and employees typically do not pay taxes on plan assets until these assets are distributed; furthermore, earnings on qualified plans are tax deferred. A qualified plan may be a defined-benefit plan or a defined-contribution plan. The following are few examples of qualified plans:
IRA
With the exception of Roth IRAs, where eligible distributions are tax-free, eventual withdrawal from an IRA is taxed as income; including the capital gains. Because income is likely to be lower after retirement, the tax rate may be lower. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending on income, an individual may be able to fit into a lower tax bracket with tax-deductible contributions during his or her working years while still enjoying a low tax bracket during retirement.
401(k)
A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.
Simplified Employee Pension (SEP)
A retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee's SEP IRA on a discretionary basis.
Keogh Plan
A tax deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined contribution. Contributions are generally tax deductible up to 25% of annual income with some limitations. Keogh plan types include money-purchase plans (used by high-income earners), defined-benefit plans (which have high annual minimums) and profit-sharing plans (which offer annual flexibility based on profits).
Non-Qualified Plans
Any type of tax-deferred, employer-sponsored retirement plan that falls outside of employee retirement income security act (ERISA) guidelines. The contributions made to these plans are usually nondeductible to the employer, and are usually taxable to the employee when received. However, they allow employees to defer taxes until retirement, when they are presumably in a lower tax bracket. Non-qualified plans are often used to provide specialized forms of compensation to key executives or employees as incentive programs to reward long term tenure. These plans also are exempt from the discriminatory and top-heavy testing that qualified plans are subject to. The following are the four major types of non-qualified plans:
- Deferred compensation plans
- Executive bonus plans
- Group carve-out plans
- Split-dollar life insurance plans
Life Insurance in a Business Environment
Buy/Sell Agreement
An approach used by sole proprietorships, partnerships and closed corporations to divide the business share or interest of a proprietor, partner, or shareholder. The owner of the business interest being considered will be disabled, deceased, retired or expressed interest in selling. The buy/sell agreement requires that the business share is sold according to a predetermined formula to the company or the remaining members of the business.
Key Man Insurance
A life insurance policy that a company purchases on a key executive's life. The company is the beneficiary of the plan and pays the insurance policy premiums.
Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.
Deferred Compensation Plans
A plan in which a portion of the employee's income is paid out at a date after which that income was actually earned. Broadly, there are two types of deferred compensations plans: qualified and non-qualified. Non-qualified deferred compensation plans include salary reduction arrangements, bonus deferral plans, supplemental executive retirement plans, and excess benefit plans. Non-qualified deferred compensation plans are not eligible for the tax deferral benefits associated with qualified deferred compensation plans. The benefits of non-qualified deferred compensation plans include aligning employees' incomes with company growth and adding an incentive for employees to stay with a company. Qualified deferred compensation plans include pensions and retirement plans and are eligible for tax deferral benefits. The primary benefit of qualified deferred compensation plans is to allow employees to defer some of their income (as well as the taxes on that income) until retirement.
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Generation to Generation "Protecting Family Values"
Miscellaneous
Financial Calculators
Income In Respect of a Decedent (IRD)
Net Unrealized Appreciation (NUA)
What is a Certified Financial Planner® or CFP®?
What is a Registered Investment Advisor (RIA)?
Financial Calculators
- 72(t) Calculator
- Beneficiary Required Minimum Distributions
- Company Stock Distribution Analysis Calculator
- Required Minimum Distribution (RMD)
- Roth vs. Traditional IRA
Income in Respect of a Decedent (IRD)
Money that was due to a decedent and will pass through to the recipient or estate as income during that tax year. The recipient (beneficiary) must declare the money as income in respect of a decedent (IRD) for any year in which income is received. The estate must also claim the income, but may claim a deduction in the amount of income tax due on the IRD.
While it's more common to deal with assets in an inheritance, the decedent may have had a last paycheck or unpaid commissions in transit at the time of his or her death. These items will never be reported on the decedent's income taxes and will instead be double-taxed by the recipient and the decedent's estate.
Net Unrealized Appreciation (NUA)
The difference in value of the cost basis (what was paid) for employer company stock held in an employer retirement plan (401(k), ESOP, SIMPLE IRA, etc.) and its market value.
To achieve your goals, it could be wise to utilize the NUA option. Any person can distribute any of their employer company stock (not unrelated stocks or mutual funds) from their employer retirement plan to a non-retirement account. At the time of distribution, only ordinary income tax is due on the cost basis value of the shares distributed.
The difference between the cost basis and the fair market value at distribution (Net Unrealized Appreciation or NUA) is taxed at long-term capital gains rates when the stock is sold, regardless of how long the stock was held in the retirement plan. It is not required to sell the shares immediately which allows for continued deferral of capital gains tax due on the NUA for these shares. Any gain earned on the shares after they were distributed from the plan will be taxed as short- or long-term capital gains rates according to how long the shares are held after being distributed from the plan.
What is a Certified Financial Planner® or CFP®?
A qualified investment professional who assists individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve these goals. They are specialized in tax planning, asset allocation, risk management, retirement and/or estate planning.
What is a Registered Investment Advisor (RIA)?
A Registered Investment Advisor (RIA) is fiduciary relationship (which must exercise the highest degree of care and utmost good faith in maintenance and preservation of the principal's assets and rights) with an investment manager that is registered with the Securities Exchange Commission and the State Securities Board.
If you would like to learn more about the services we provide, and how they can help you follow your own path in life, please contact Advanced Planning, Inc. today.
Advanced Planning, Inc.
201 Countryside Court
Southlake, Texas 76092
Phone: 817-416-1975
Fax: 817-416-1955