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Cleveland, Ohio Attorney

What is Business Succession?

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Whether you’re planning for retirement or the life of your business after your death, it’s imperative to develop a business succession plan to sooner rather than later.   There is no “one plan fits all” when it comes to developing a succession plan for your business.  And given that the economy is constantly changing, it isn’t surprising small business owners focus their energies on business survival, future growth, and even remaining active in business after retirement.

Business succession is about three things (1) Estate planning; (2) Retirement; and (3) Risk Management.

Estate Planning

Your estate plan should be incorporated into your business succession plan.  What will happen to your company assets after you die?  Who will run your business?  If you want to provide for your family using your business assets, you should consider at the very least having a last will and testament.  Carefully drafting your will allows you to select desired beneficiaries, elect an executor, and transfer your assets through probate.  Your family will be going through a difficult time.  Setting up a last will and testament in advance helps your family during that difficult time.

Retirement

When thinking about retirement, it’s important to consider your options when selling your business.  Will you sell with a lump sum, installments, mix, employee buy-out, or merger?  There are numerous options when planning for your retirement and taking advantage of the business you built.  Thus, business succession is about planning for your exit strategy.  To learn more about your options, visit this article.

Risk Management

Business succession is about limiting your risk.  If you have partners within your company, you should be aware of the risks involved.  For example, if your partner gets divorced, their spouse is entitled to the partner’s share in the business through the divorce proceedings.  If your partner dies, you can now be partners with their spouse or estate.  One option to avoid this potential risk is to create a buy-sell agreement through a cross purchase agreement or entity purchase agreement.

Business succession is an important idea that every business owner should consider.  Contact your Cleveland, Ohio business succession and estate planning attorney for more information on how to set up your plan.  You may also consider contacting Cleveland, Ohio law firm Baron Law LLC at 216-573-3723.

 

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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.

Cleveland Probate Attorney

Is Probate Necessary?

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As an estate planning attorney, many people ask me if probate is really necessary. The short answer is no, and I often advise my Cleveland, Ohio estate planning clients to avoid probate if at all possible. But what is probate? And, why should it be avoided? Here’s a quick synopsis to answer these questions.

What is Probate?

Probate is the legal process required to transfer certain assets at a person’s death. Probate becomes mandatory and necessary when a person dies owning assets in his or her name that do not pass to a survivor or beneficiary by operation of law or contract. An example of one of these ‘contracts’ might be a payable on death account (“POD”) or beneficiary designation. Through probate, claims, expenses and taxes are paid and property is distributed.

The assets subject to probate administration are referred to as “probate assets” while assets that pass outside probate to a survivor or beneficiary by operation of law or contract are called “non-probate assets.”

Probate is not the same as tax. Both Probate and non-probate assets may be subject to income and/or wealth transfer tax at a person’s death.

A will enables a person to choose how his or her probate assets are to be distributed following death. Without a will, the Ohio Statute on Descent and Distribution (Ohio Rev. Code § 2105.06) dictates how a decedent’s assets will be distributed.

Reasons to Avoid Probate
I often tell my Cleveland, Ohio clients to avoid probate for several reasons. First, probate is public. For a number of reasons, you may not want others to now the value of your assets being transferred to your decedents. The creation of a trust or other instrument is private and can avoid the public display of your assets. Second, the probate process is often time consuming.   When dealing with the loss of a loved one, you don’t want to be caught up in court which is costly and often ends up prolonging the grieving process.  Next, there may reason for wanting to control your assets through a trust; moreover, creating asset protection.  Finally, there may also be certain tax advantages for avoiding probate by placing your assets in trust.

For most clients, I will often weight the pros and cons of creating a will versus a trust and explaining the benefits of avoiding probate.  Often it comes down to the cost versus the value of avoiding probate.  If you would like more information regarding probate, trusts, wills, or other estate planning tools, please contact my office at 216-276-4282.    Baron Law LLC provides estate planning advice for the Cleveland, Ohio area.    Call estate planning attorney Dan Baron today for a free consultation.

Is Annuity-Based Long-Term Care Right for You?

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Annuity-Based Long-Term Care and the Pension Protection Act of 2006

Medicaid and long-term care are unquestionably a hot topic.  Estate planning and Medicaid planning attorneys have long been waiting for an opportunity that would allow those wishing to enroll in Medicaid to shelter all or a portion of their savings – legally!  Cleveland, Ohio estate planning attorney Dan Baron offers the following information on long-term care and how the Pension Protection Act of 2006 has created one of these sought after opportunities.

In 2006, the President signed into law The Pension Protection Act of 2006 (the “Act”).  The act changed certain tax laws and allows for those owning annuity contracts to take advantage of certain tax savings.  In sum, the Act allows the cash value of annuity contracts to be used to pay premiums on long-term care contracts.  The payment of premiums in this way will reduce the cost basis of the annuity contract.  In addition, the Act allow annuity contracts without long-term care riders to be exchanged for contracts with such a rider in a tax-free transfer under Section 1035 of the Internal Revenue Code of 1986, as amended (IRC).

Here’s an example of how the Act’s changes might benefit someone considering long-term care insurance.   Let’s say that Kathy, age 70, lives in Cleveland.  Her children live out of state but are concerned with a recent diagnosis of diabetes, along with a history of heart disease.   Because of these illnesses, she was not a good candidate for traditional long-term care insurance.  However, by taking advantage of an annuity based long-term care strategy that takes advantage of the Pension Protection Act, Kathy could likely be insured.

Look at the illustration below.  Kathy can take her $140,000 fixed annuity with a cost basis of only $40,000 (i.e. the amount she actually deposited) and using the tax-free exchange from his existing fixed annuity to a new annuity that complied with the Act’s rules, Kathy’s $140,000 fixed annuity could continue to earn interest.  However, if she needed long-term care to pay for home care, assisted living, or skilled care, she now had a long-term care pool of money equal to $420,000.

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  • Kathy retains her $140,000 in cash value plus an additional $280,000 for a total of $420,000 for long-term care.
  • Her benefits may be used for home care, assisted living, and skilled care.
  • She pays no annual premiums
  • As her annuity grows, so does her LTC. (assuming she does not use her LTC benefits)

There are many annuity based long-term care packages available.  It’s best to consult with an attorney or Medicaid specialist who can help you choose the right plan.  For more information, or to speak with Cleveland estate planning and Medicaid planning attorney Dan Baron, contact our office at Baron Law LLC.  Baron Law LLC is a Cleveland, Ohio law firm dedicated to helping those in need of elder care, estate planning, and Medicaid planning.  Contact attorney Dan Baron today at 216-276-4282.

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Client Review
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Daniel Baron reviewed our Trust, Wills and HPOA. He provided good feedback as to what needed updating and any necessary additions to the documents. We didn’t have a FPOA which thanks to him we now have. He was able answer any questions we had and proved to be very flexible to accommodate our schedules when it came time to meet. I would recommend him to anyone looking to do Estate Planning

– Tom

Cleveland, Ohio attorney

Estate Planning Solution of the Week: Health Care Proxy

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Estate Planning Solution of the Week:  Health Care Proxy

What is a Health Care proxy?  How does that differ from a health care agent?  And what is the distinction between a health care proxy and a medical power of attorney?

The quickest answer is that all three terms are used to refer to someone who has the legal ability to make health care decisions on behalf of another.  However, the law varies by state as to what such a health care agent is called, what legal documents are needed, and what power is granted to that agent.

In Ohio, the term is “attorney-in-fact.”  In order to have someone make medical decisions on your behalf, you would name this person in a Durable Power of Attorney for Health Care.  Ohio does not have a standardized form to establish a power of attorney for health care.  However, there are specific requirements for a valid Ohio Health Care Power of Attorney:

  1. Your designation of an agent*
  2. Your designation of how your agent may act on your behalf
  3. Your signature and date
  4. Signature and date of two witnesses*

*Specific regulations exist as to who you may designate as your agent and who can serve as witnesses.  An attorney from Baron Law can give you the current specific requirements for the state of Ohio.

While Ohio does not have a standardized form that is required, the Ohio State Bar Association has developed forms together with several medical associations.  LeadingAge Ohio has a copy of this form available on their website: http://www.midwestcarealliance.org/aws/LAO/pt/sp/advance_directives”  You may also request a hard copy of the form on their website.

Baron Law is a firm that serves the northeast Ohio area.  For more information, or to begin estate planning for yourself or your loved ones, please contact us at 216.573.3723 or dan@baronlawcleveland.com.  State laws are specific and subject to change.  Schedule your consultation with a lawyer today to ensure that you and your loved ones are protected.

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What is a Trust?

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Cleveland, Ohio Trust Attorney

What is a trust?  What is the difference between a revocable trust and an irrevocable trust?  Why might my estate plan include either one?

Simply put, a trust helps manage your assets and provides clarity for the future.  A trust is a tool that may be used to achieve your financial goals.  There are different types of trusts for specific situations, from special needs trusts for family members with disabilities to charitable trusts that allow charitable giving while maintaining income as needed.  Trusts also fall into the categories of revocable (or living) trusts and irrevocable trusts.

Differences between a revocable and irrevocable trust

  1. Changes or modifications

An irrevocable trust generally cannot be changed or modified under any circumstances, whereas a revocable trust can be modified or revoked at the discretion of the Grantor.  However, the Grantor may maintain a special power of appointment in an irrevocable trust giving him or her the freedom to modify the beneficiaries without changing the benefits.

  1. Property ownership and asset protection

Assets placed in an irrevocable trust no longer belong to the Grantor.  The trust has its own identity.  The Grantor may still use assets for his or her benefit as specified in the trust, but he or she does not own the assets (much like leasing). Creditors cannot claim assets from the Grantor in this case, as the Grantor does not own the assets.

In a revocable trust, the Grantor retains complete ownership of the property.

  1. Estate taxes

As seen above, in an irrevocable trust, the Grantor no longer owns the property.  Thus, it is not included in the value of property at the time of death.  A revocable trust does not change ownership, and thus the value of the property would be included at the time of death. However, keep in mind the unlimited marital exclusion.  Surviving spouses may effectively pass their estate, tax free, to their spouse.  In addition, the 2016 estate tax exclusion is $5.34 million.

  1. Trustees

With an irrevocable trust, the Trustee should be an independent person chosen by the Grantor.  The Trustee should not be a family member, as this could create conflict.  However, with a revocable trust, the Grantor most often serves as the Trustee, maintaining control over the assets in the trust.

  1. Income tax effects

With an irrevocable trust, the trust is its own entity and typically has its own tax identification number and is responsible to file a 1041.  For a revocable trust, the Grantor still owns the assets and files everything on their 1040.

As seen above, the main purpose of an irrevocable trust is to protect assets.  The main purpose of a revocable trust is to avoid probate, simplifying the transfer of assets.  Determining the reason for the trust will allow the Grantor to make an informed decision about what type of trust is best for his or her situation.

And as with all legal and financial planning, laws change, so a consultation with an attorney is advised before creating a trust or any estate plan.  For more information, or to speak with an expert, contact Baron Law LLC at 216-573-3723 or email Dan@baronlawcleveland.com.

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Estate Planning – Trends Following the American Taxpayer Relief Act.

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Estate Planning – Trends Following the American Taxpayer Relief Act.

A recent survey concluded that sixty percent of Americans are afraid they will outlive their retirement.   Thus, there has been a moving trend that people are more concerned about wealth preservation compared to wealth transfer.  For example, a fifty year-old man in the top income quintile in 1980 could expect to live 31.7 more years.  A fifty year old man in the top income quintile in 2010 could expect to live 38.8 more years.  At $75,000 per-year of spending, increased longevity creates an additional $532,500 in cost. Thus, estate planning methods have changed and the American Taxpayer Relief Act has adopted new laws conforming to the wealth preservation vision.

Up until recently, many estate planning attorneys would urge clients to include a trust in their estate planning package.  A trust is a good means to avoid creditors and shield assets from other liabilities.  However, because of the recent changes in the American Taxpayer Relief Act (“ATRA”), trusts are most often not necessary – even for the wealthy.   Pre-ATRA, an estate planning attorney would set up a trust with an amount equal to the deceased’s remaining exemption.  This is often called a “bypass trust,” or B or credit shelter trust.  Assets would often not be included in the spouse’s estate.  The balance would go to the spouse outright or to marital deduction (A) trust, eliminating tax after the first spouse dies.  In the end, these assets (plus any appreciation) will be included in the spouse’s estate.

Post-ATRA no changes the landscape for estate planning by offering several wealth preservation concepts.  First, the concept of “portability” means that the surviving spouse can add to his or her own exemption whatever amount of exemption the deceased had not used during their lifetime.  Thus, a bypass trust is not needed to avoid wasting the exemption.  However, the Deceased Spousal Unused Exemption Amount (DSUUEA) is not indexed for inflation.  In addition, ATRA now permanently sets the estate, gift, and generation-skipping transfer (GST) tax exemptions at $5 million and indexes that amount for inflation.  Therefore, in 2016 a married couple could avoid the gift tax for any amount less than $10,900,000.00 ($5.4 million x 2 for married couples).

People are living longer and the ATRA has adjusted for that.  For more information, contact Cleveland, Ohio estate planning attorney Dan Baron.  Call Baron Law LLC today.  You will speak directly with an attorney who will help you with your estate planning and tax planning needs.  Baron Law LLC is a Cleveland, Ohio law firm located in Independence, Ohio.