Business succession attorney cleveland

Business Succession Options

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Cleveland, Ohio business succession attorney Dan Baron offers the following on estate planning and business succession:

You’ve spent a lifetime building your business and now its time for retirement.  Where do you start?  When developing your business succession plan, it’s important to consider all of your options.   Selling and/or transferring your business will have significant implications on your estate plan, taxes, family, and financial well-being.  Here are a few suggested options with a discussion on these implications.

Valuation

Regardless of whether you sell to your family, third-party, or friend, you will need a complete evaluation of your business.  Many business owners overvalue their business because they’re place an emotional value on the blood, sweat, and tears they’ve spent growing their business over the years.  It’s imperative to get a third-party evaluation on your business to better understand what your company is worth, and who is willing to buy.

When evaluating, your business attorney and/or financial advisor will consider several approaches to your company’s worth:

  • Market Approach – Revenue growth, profitability, company size, liquidity
  • Income Approach –Revenue growth, profitability, cost of capital, leverage; Working capital efficiency; Low capital expenditures
  • Asset Approach –Asset intensive, leverage, scarcity, time

Now that you have a value, how should you sell your business in an effective way to provide a secure retirement while considering tax consequences? Let’s consider the following options.

Lump Sum

Selling your business for millions of dollars is every business owners dream.  However, this may not be a viable option for several reasons.  First, if selling to employees or family, these buyers may not have enough capital or credit to purchase your business’ worth.  Next, selling your business outright will result in a large capital gain and tax consequence compared to taking payments over timer.  It could also place you in a different tax bracket entirely.   Thus, when considering selling for a lump sum, you should consult with your estate planning and business attorney to consider all the tax consequences and other planning tools available

Lump Sum + Installments

If a lump sum will create an unfavorable tax consequence, then you can structure the deal so that you take a smaller lump sum up-front and payments over time.  Your business attorney will suggest taking a lump sum that is just under the threshold of a tax bracket.

Installments Only

If selling to family or employees, installment payments are an affordable way to sell your business. However, many times the business owner will still be involved when selling to employees and moreover, the business needs to be sustainable in order to receive the payments over time.  In other words, you can’t get paid if they business fails over time.

Self – Cancelling Installment Note

Here the business owner gives his employees the business in exchange for a promissory note – usually purchased by employees.  The promissory note is usually coupled with a personal guarantee from the employees.  Payments are then made over time but cease when the business owner passes away.  This option reduces capital gains and estate taxes.  However, the payments made will be set at a premium set by the IRS mortality tables to account for the business owners lifetime.  If the business owner lives past this time, the payments cease.  If the owner dies before this timeline, the payments cease.

There are several other options business owners have when selling their business.  For more information, or to request a free consultation with a Cleveland, Ohio business and estate planning attorney, contact Baron Law LLC today at 216-573-3723.

Living Trusts & Estate Planning

Ohio Revocable Living Trusts

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What is a revocable trust?

Revocable trusts, commonly referred to as revocable living trusts, can be changed or terminated during a person’s lifetime as long as they are competent. The creator of the trust, referred to as a “grantor” is usually the initial trustee and maintains full control over the assets placed in the trust. A successor trustee is named to manage the trust assets if the grantor becomes incapacitated or passes away.

This type of trust is attractive because you can update your beneficiaries, change which assets are included in the trust, and update how assets will be distributed.

Revocable trusts avoid probate and allow you to maintain privacy. In addition to saving time and money associated with the probate process, you can protect your family’s documents from becoming part of public record.

Revocable Trusts vs. Irrevocable Trusts

Upon death, a revocable trust becomes an irrevocable trust and cannot be changed. At this point, the successor trustee must follow the instructions in the trust document to distribute the trust’s assets.

Learn more about the key similarities and differences of revocable and irrevocable trusts here.

Revocable Trusts vs. Testamentary Trusts

Revocable trusts are funded during the grantor’s lifetime, while testamentary trusts are funded after the death of a testator, or creator of a will.

Testamentary trusts are also called will trusts because they are created inside a will and do not take effect until you pass. Unlike a revocable trust, this type of trust will go through probate costing you time, money and your privacy.

Why should I set up a revocable trust?

A revocable trust can:

  • Avoid probate court and provide an efficient, seamless transfer of assets to beneficiaries
  • Protect your children’s inheritance if your spouse remarries after divorce or death
  • Protect the money and assets left to your beneficiaries from claims of their creditors or litigation
  • Protect the inheritance and government benefits of children with special needs
  • Make it easier to distribute specialty assets, such as real estate or artwork, to beneficiaries

More Specific Types of Revocable Trusts & How They Work

Joint Trusts

Joint trusts are often utilized by married couples to cover joint or individual assets and to specify what happens upon the death of each spouse. Typically, when the first spouse passes, the living spouse becomes the trustee and gains control over the trust. Then, when the surviving spouse passes, a successor trustee takes over management and distributions.

Bloodline Trusts

Bloodline trusts are created to ensure that spouses of intended heirs do not inherit in the event of divorce or death. Instead, if a child passes or divorces, their children (i.e. your grandchildren) would become the beneficiary.

Special Needs Trusts

Parents or grandparents of a disabled child can establish a special needs trust as part of their estate plan. This type of trust helps protect private funds for the disabled loved one without putting their eligibility for government-offered benefits at risk. There are three main types of special needs trusts:

  • Third-Party: A third-party sets up and funds the trust
  • Pooled: Managed by a non-profit organization
  • Self-Settled: The disabled beneficiary sets up and funds the trust

How To Set Up A Revocable Trust With An Attorney

It’s important to remember that a revocable trust is just one part of a comprehensive estate plan. For example, in many cases, a revocable living trust is created alongside a pour over will. The pour over will is designed to work together with your living trust, and acts as a backup plan to ensure all of your assets are directed into your trust.

After it has been determined that a revocable living trust should be part of your estate plan, an attorney can walk you through these key steps:

  1. Decide what assets will be placed in your trust. While you might already have an idea of what you’d like to include, your attorney may help you uncover some additional assets that would benefit from being placed in a trust. Assets can range from cash and investments to real estate and other property.
  2. Choose your beneficiaries. They might include your spouse, your children, grandchildren or other close family members.
  3. Establish the rules of your trust. For example, will assets be distributed with age requirements or terms for how the assets may be used?
  4. Determine who will manage the trust if you are not competent or once you have passed.

Once you are confident in these decisions, your estate planning attorney can draft the trust document and begin assisting you with funding the trust.

This blog is for educational purposes only; it is not intended to provide legal advice. If you’re planning for your estate and want to speak with an attorney, call 216-573-3723.

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QTIP Trusts – Estate Planning for Those With Children From a Prior Marriage.

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Cleveland, Ohio Estate Planning and Elder Law Attorney offers the following:

The main benefit of a Qualified Terminable Interest Property Trust is being able to control your estate after your gone.  In addition, there are several tax advantages for larger estates.

Each spouse can set up a QTIP trust, leaving assets to the other in trust.  When the first spouse dies, the survivor gets what is called a “life estate” in the assets that are left to the QTIP trust—that is, the survivor is entitled to any income the assets produce, and in the case of real estate, to its use. Only the surviving spouse can be named as the life beneficiary. The survivor does not, however, have full ownership of the trust assets and cannot sell them or give them away.

In order to qualify for the marital exemption, the spouse must receive all of the income from the trust and the Executor must make an election on the tax return.  QTIP’s are very similar to family trusts, or bypass trusts.  And in fact, many times you create a family trust in conjunction with a QTIP.  The difference is that QTIP’s are more restrictive and are useful for those who are in second marriages.

There may also be several tax advantages. Here’s an example:

  • Jim’s share of the marital estate is $12 million. He passes in 2016, leaving a spouse, Karen, and sons from a prior marriage. He had a revocable living trust, which becomes irrevocable upon his death.
  • Upon Jim’s death, his trust sub-divided into an “A” and a “B” trust. $5.43 million is diverted to his “B” trust. Karen is the beneficiary, with limited access.  Because this trust is under the federal estate tax limit, estate tax is $0.00.  Over the next 20 years, because of robust growth, the “B” trust is now $17 million.  Upon the Karen’s death, trust “B” passes to the son’s entirely estate tax free.
  • The remaining $6.57 million in assets are diverted to the “A” trust. Karen again has restricted access, but can use these funds for her health, maintenance and support. When Karen has expenses she uses the “A” trust and saves the “B” trust only for dire necessities.
  • Upon her death the “A” trust has been reduced (or eliminated) and the tax is minimal, if there is any at all. The remaining balance of the “A” trust goes to Jim’s sons.

There are many advantages to setting up a QTIP trust.  Every estate plan is unique and its important to contact an elder law and estate planning attorney who can analyze your estate.   Contact Cleveland, Ohio attorney Dan A. Baron at 216-276-4282 to learn more about QTIP or other trusts.  Baron Law is a Cleveland, Ohio law firm.

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Testamentary Trusts

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Cleveland, Ohio Estate Planning Attorney Dan A. Baron offers the following on Testamentary Trusts.

Testamentary trusts are a great way to plan and safeguard your assets for minor children.  In other uses testamentary trusts can be used for beneficiaries with addictions or disabilities.   Unlike most trusts, testamentary trusts are incorporated into your last will and testament and are funded only after the creator’s death.   The biggest reason people use testamentary trusts is because they are able to control their assets after they die.

For example, if Mom and Dad die in a car accident leaving behind two young children, they would not want their $500,000 estate being left in the hands of nine and ten-year old.    Instead, Mom and Dad create a last will and testament and incorporate language that appoints a guardian for the children and trustee of their testamentary trust.   The trust parameters outlined for the Trustee to follow often include broad language like “to provide for the health, education, and well-being of my children.”   The trustee controls the money and then distributes it to the children as they need it.  Most often, the remaining balance left in the trust is distributed to the children once they reach the age of 25.

It’s important to remember that unlike most trusts, testamentary trusts do not avoid probate.  Instead, testamentary trusts are created after the probate process is complete.  Assets left from probate fund the trust and the trustee is then responsible for carrying out the wishes of the deceased.  Once the assets are in trust, they are protected from creditors and litigation.  However, there is no asset protection for the creators before death.

To learn more about testamentary trusts and how they might be beneficial for your estate plan, contact Baron Law LLC today at 216-573-3723.  You will speak directly with an attorney who can assist you.

 

The information contained in this article is provided solely for convenience purposes only and all users thereof should be guided accordingly. This article is not meant to provide legal advice. If you wish to receive a legal opinion or tax advice on the matter(s) in this report please contact our office and we will speak with you directly. 

 

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Difference Between a Trustee and Executor Within a Testamentary Trust

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Cleveland, Ohio Estate Planning Dan A. Baron Explains the Difference Between an Executor and Trustee:

Estate planning can be complicated and sometimes difficult to bear when charged with the responsibility as executor or trustee of an estate. If you have minor children, then you probably have set up some form of testamentary trust coupled with your will and power of attorney. Within these estate planning documents, there are designated executors and trustees that have been carefully selected to administer your estate after you pass. It’s important to talk with your executor and trustee and let them know their responsibilities after your’re gone. Below is a quick summary of the difference between executor and trustee of a testamentary trust.

The Executor’s responsibility is to liquidate or otherwise gather all estate assets, pay any outstanding bills and then transfer assets from the name of the decedent to the beneficiaries named in the Will (most often the decedent’s children). They also make any necessary filings with the court and attend any court hearings. Most Executor’s elect to use an attorney to help them with this so the process runs smoothly. Once all assets are in the name of the beneficiary, the Executor’s job is done. The complexity of the estate will determine how long the Executor is needed.

In comparison, a Trustee receives the assets from the Executor and then, with court approval, invests the trust assets in savings account, investment accounts, or whatever they deem appropriate. Most importantly, the Trustee manages the funds and makes distributions to the trust beneficiary (usually children) when needed (i.e. to pay school tuition, living expenses, doctor bills, etc.). Most clients set a maturity age of 25. When the children reach the age of 25, the trustee distributes the balance of the trust funds and that particular child’s trust is terminated. The Trustee will be required every two years to make reports to the court as to the value of the trust. As you can imagine, the length of time the Trustee will be needed will depend upon the age of the children.

If you would like to learn more about the responsibilities and an executor and trustee, or have questions, contact our office at 216-276-4282. You will speak directly with an Cleveland, Ohio estate planning attorney who can help you set up a trust, will, power of attorney, medicaid planning, and more. If you would like to attend one of our FREE seminars, please visit this link.

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Utilizing “QTIP” Trusts for Families in Second Marriages

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Utilizing “QTIP” Trusts for Families in Second Marriages

Estate planning in second marriages can be especially complicated when trying to secure the well-being of loved ones from a previous marriage. Much of the complexity arises from rights granted to a surviving spouse. In Ohio, spouses (male or female) are entitled to dower and elective share rights that often create tension between children from a prior marriage and your second marriage partner.

However, most of these uncomfortable tensions can be avoided through careful estate planning, which often includes a QTIP (or, Qualified Terminable Interest Property Trust). Such an arrangement is especially effective in providing for children from a previous marriage.

Consider the following example:

Let’s say Michael dies while married to his second wife, Kathy. Michael loved Kathy, but out of concern that she might not take the well-being of his children from a previous marriage into account, he established a will that left most of his estate (worth about $12 million including a marital home) to his children. He did, however, bequeath his $100,000.00 IRA entirely to Kathy.

And here is where things become complicated…

Unfortunately, Kathy then dies a week later intestate (without a will), so Michael’s hard-won IRA is automatically transferred to Kathy’s closest relative – her idiot brother, Frank. Because Kathy was entitled to the marital home through Ohio’s spousal rights, the marital home also transfers to Frank. The kids end up with hardly anything. Had Michael properly planned, he could have protected his children’s inheritance, provided income for his wife, and saved considerably on taxes.

QTIP Trusts

In the example above, Michael could have provided for both his children and Kathy had he created a QTIP trust or proper will.  Qualified Terminable Interest Property Trusts are commonly referred to as a “Family Trust”, or “Marital Trust.”  A QTIP Trust subdivides into (A) marital and (B) family Trusts: the B Trust preserves the children’s interest by restricting the spouse’s access.  The remaining spouse receives income and a life estate that satisfies Ohio’s spousal rights.   After the second spouse dies, the children receive the remaining assets in the B Trust.

Consider another version of the above example:

Instead of ignoring Ohio’s marital election, Michael plans ahead and created a revocable living trust with a QTIP election.   Upon Michael’s death, his trust is sub-divided into an “A” and a “B” trust.  Here, $5.43 million of his estate is diverted to his B trust.  Kathy is the beneficiary of this B trust, with limited access and receives income from the trust.   Because this trust is under the federal estate tax limit, Kathy’s estate tax is $0.00.  Over the next 20 years, because of robust growth, the “B” trust is now $17 million.  Upon Kathy’s death, trust “B” passes to the Michael’s sons entirely estate tax free.

The remaining $6.57 million in assets are diverted to the “A” trust.  Kathy again has restricted access, but can use these funds for her health, maintenance and support.  When Kathy has expenses, she uses the “A” trust and saves the “B” trust only for dire necessities.  Upon her death, the “A” trust has been reduced (or eliminated) and the tax is minimal, if there is any at all.  The remaining balance of the “A” trust passes to Michael’s sons.

QTIP trusts are very popular for people in second marriages.  As you can see, the trust provides income for the remaining spouse, yet it preserves your children’s assets.

Prenuptial Agreements

A QTIP trust may not fit under certain circumstances.  In cases where there is a disproportionate estate among spouses, a prenuptial agreement may be considered.  Certain statutory rights of a decedent’s surviving spouse may be waived by a valid prenuptial agreement.  In other words, people may contract for anything in life.  This includes signing away your inheritance.

It’s important to remember that a prenuptial agreement may often bring tension among couples.  Also, although Ohio recognizes prenuptial agreements to be valid, the state also does not allow you disinherit your spouse.   In that regard, oftentimes antenuptial agreements are coupled with estate plans to provide some form of financial security for the surviving spouse.

Prenuptial agreements are valid and enforceable (1) if they have been entered into freely without fraud, duress, coercion, or overreaching; (2) if there was full disclosure, or full knowledge and understanding of the nature, value and extent of the prospective spouse’s property; and (3) if the terms do not promote or encourage divorce or profiteering by divorce.

Prenuptial agreement agreements are a great tool when coupled with a QTIP trust.  When combined together, the surviving spouse is provided income and preserved an estate for his or her lifetime.  In addition, the children’s inheritance is given extra protection in case of divorce.

Summary

QTIP trusts and prenuptial agreements are two of many ways to provide security for your spouse and children.   Through proper estate planning, you can provide a steady stream of income for your spouse and preserve your children’s inheritance.  It’s important to consider all options when preparing your estate plan.   For more information and or questions, contact attorney Dan Baron at Baron Law LLC – 216-573-3723.

 

 

 

 

 

 

How Will Trump’s Presidency Affect Your Trust?

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How will Trump’s Presidency Affect Your Trust?

With the impending inauguration of Donald Trump as our nation’s president, we would all be wise to prepare for a more conservative economic landscape that will likely include the elimination of some gift and estate taxes, lower overall rates, and new deductions. Particularly, if Trump moves forward to repeal the estate tax, many questions surface around the tax consequences within family trusts.

Whether you currently have or are thinking of establishing a trust, here are some important considerations going into the next year with our new president.

Federal Estate Tax

Trusts are an important estate planning tool for avoiding probate, protecting assets, and Medicaid planning.  For people with larger estates, trusts are also an effective way to save money on taxes. For example, commonly used A – B and QTIP trusts allow you to divide your estate into several sub-trusts to avoid the federal estate tax of forty percent (40%). However, Trump’s proposed repeal of the current federal estate tax could eliminate this estate tax entirely.  Thus, notwithstanding the other benefits of a trust, the new proposal would limit the need for a trust. This could mean savings upwards of $268 billion over the next ten years, collectively, for those with larger estates.

Marital Exemption

It’s important to keep in mind that Trump has no interest in changing the unlimited marital exemption that is currently in place.  For example, let’s assume Henry and Wilma have an estate worth $10 million.  Henry dies leaving Wilma the entire estate.  Even before Trump’s plans are proposed, the entire $10 million would pass to Wilma, estate tax free.  In other words, Wilma would receive the entire amount and not have to pay a 40% tax. Wilma avoids paying any tax because our current laws allow for your entire estate to pass tax free to your spouse.

Advantages of a Trust

Less than five percent of Americans would be affected by Trump’s estate tax proposal.  However, there are numerous non-tax related benefits for having a trust as part of your estate plan.  The biggest advantage is that trusts allow your loved ones to avoid probate.  Under Ohio law, an estate caught up in the probate process will likely be trapped there for a minimum of six months, and ultimately could take years to administer.  A trust eliminates the need to go through the probate court and keeps your estate private.

Other Types of Trusts and their Advantages

There are many different types of trusts that can be beneficial under specific circumstances. For example, a charitable trust is a unique tool used to establish your legacy with a charity while saving on your income taxes. Charitable trusts can effectively remove you from a higher income tax bracket and provides income over your lifetime.  Revocable and irrevocable trusts are another form that might help provide protection against creditors, Medicaid, and law suits.  And finally, special needs trusts might help protect your special needs child or family member.

In sum, regardless of the changes implemented by our new administration, establishing a trust remains an effective way to save time, money, and to avoid prolonged probate headaches for your loved ones. Furthermore, not only does a trust help avoid the probate process, it also protects your assets against opportunistic creditors and other litigative perils.  Most importantly, a trust ensures the right people inherit your legacy, and that nothing can be claimed by the State.

Join us for this FREE workshop to learn more about the benefits of trusts and other asset protection tools.

Update: This workshop is no longer available; therefore we have removed the link to the event workshop. 06/2019

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New Changes in Ohio’s Power of Attorney Laws

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If you’re an Ohio resident concerned with the medical care of a loved one, you should be familiar with Ohio’s laws regarding power of attorney.

A financial power of attorney, also known as a durable power of attorney, is a legal document an individual (the “principal”) can use to appoint someone (the “agent”) to act on his or her behalf.  This authority can be used for financial, business, and health matters.   Most often, this authority is used when an individual becomes unable to handle his or her own affairs.

There have been several changes that Ohio has adopted affecting these powers.  Effective March 22, 2012, Ohio adopted the Uniform Power of Attorney Act, or UPOAA.   UPOAA focuses on preventing financial elder abuse.  The law now includes a statutory form with language designed to help prevent agents from abusing their power.  Put simply, the law now demands power of attorneys to be more specific and provide specific “hot powers.”

Since this new law, third parties such as a financial institution are not required to honor a general power of attorneys.  Now, the law asks that a power of attorney include specifically which types of assets and accounts the agent is allowed to control.

A power of attorney created before March 22, 2012 will still be valid; however, ask an attorney to review it in light of the current law and consider using the 2012 statutory power of attorney form.   In sum, UPOAA prohibits agents from performing certain acts unless the power of attorney specifically authorizes them.  Because financial power of attorney documents give significant powers to another person, they should be granted only after careful consideration.

To learn more about drafting a power of attorney, contact the law office of Baron Law LLC.  You will speak directly with Cleveland, Ohio attorney, Dan Baron.  Call today at 216-573-3723 to learn more about how Baron Law can help create your estate plan and power of attorney.