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Estate Plan Items
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Top 10 business and estate planning mistakes

(Article by David A. Scotch, C.P.A. in San Antonio, TX)

Below are the top 10 business and estate planning mistakes that you could avoid through properly structured estate and busines plans:

Mistake #1 - Forgetting to name successor agents, proxies, executors, and trustees in estate planning documents. Important in the estate planning documents that take effect during life, such as a power of attorney, health care proxy, and lifetime trusts, as well as the documents that take effect at death, including a last will and testament and testamentary trusts. Successors allow for continued viability of the granted powers, even after the death or incapacity of the primary agent, executor, trustee, etc. Naming successors also avoids the necessity of a court proceeding which results in you losing control over the process.

Mistake #2 - Neglecting to properly structure a business venture to protect personal assets from business creditors. Business owners face risk and the threat of liability from every direction, such as business failure, employee torts, product liability, and employee terminations. Forming the proper business entity under which to operate the business can afford different degrees of protection. Consequently, while no magic bullet will provide all-purpose, one-size-fits-all protection, a business owner can take various measures to establish best level of protection for his or her business and personal assets.

Mistake #3 - A married couple might not take advantage of both estate tax exemption amounts ($2 million in 2008) that are available to them, due to inadequate wills and assets owned the wrong way. Planning for estate tax is extremely difficult, but extremely important. When assets pass from one person to another (or one generation to another), significant taxes can be assessed under current laws. By gearing plans to current law and building in sufficient flexibility so that plans can be adapted as the laws change, you can conceivably reduce the tax bill encountered on death.

Mistake #4 - For businesses owned by more than one individual, neglecting to have an owners' agreement and a binding buy-sell arrangement (with funding). Arguably, one of the most important documents a multi-owner business entity can have. A "buy-sell" agreement is an agreement between the owners of the business, or among the owners of the business and the entity, to purchase and sell interests of the business at a price set in the agreement on the occurrence of certain future events. Such events may include:

  • Death
  • Disability
  • An offer by an outside party to purchase the owner's interest
  • Termination of employment
  • Divorce
  • Bankruptcy

Mistake #5 - Having inadequate beneficiary designations for retirement plans and IRAs that do not coordinate with the rest of the estate plan (aka "having all your ducks in a row"). Although the final minimum required distribution regulations have made planning with retirement plans and IRAs somewhat easier, dealing with these assets in an estate plan can still pose some difficult and complex issues.

Mistake #6 - Neglecting to hold regular shareholder/member/partner and board of director meetings for a business entity, failing to prepare written minutes based on each meeting to include in the entity's records, and ignoring other formalities to assure that the entity is respected for all purposes. A "corporate veil" is terminology used to explain the layer of protection that separates the individuals involved in the business from the entity itself. The courts can "pierce the corporate (or business) veil" and hold the business owner personally liable for failure to conduct the business properly.

Mistake #7 - Failing to properly plan for family business succession. In order to avoid this mistake, a family member's desire to participate in the family business should be evaluated. When planning for business succession, consider types of entities that lend themselves to transfers of entity interests to family members with little or no loss of management or control to the patriarch. An understanding of estate and gift tax ramifications of gifts of entity interests, such as valuation issues and available discounts, is also crucial.

Mistake #8 - Failing to consider the income tax ramifications of each personal, investment, or business decision; and failing to take advantage of all available deductions, credits, and opportunities. Here are some issues you might face that have income tax ramifications. In deciding which type of entity is appropriate for operating a business, tax treatment is important. Upon the purchase of a business that is structured as an asset transaction, as most are, the purchase price can be allocated to the purchased assets in various ways that have differing tax consequences. Another way to take advantage of available income tax saving opportunities is to maximize contributions to 401(k) plans and IRAs. Trust taxation issues also need to be considered to avoid problems under this mistake.

Mistake #9 - Failing to incorporate trusts adequately for asset protection purposes (i.e., inability, disability, creditors, and predators of beneficiaries) in the estate plan. One major benefit of having a trust is the asset protection it provides. Predator deterrence can be needed on account of future ex-spouses, in-laws, outlaws, and others who may notice that an heir is now worth millions. Trusts generally get the future victim out of the middle and serve as a controlled release of family wealth. Furthermore, it becomes more difficult for even a non-malicious predator to spend someone else's children's inheritance.

Mistake #10 - Failing to consider the options available to finance long-term care needs. The good news? We are living longer. Life expectancy continues to increase among Americans. About 40% of the people living to age 65 are projected to live to be 90 by the middle of this century, compared to 25% in 1980. That means lower premiums for life insurance, reduced annual required distributions from IRAs, and more time for seniors to spend with loved ones or to pursue favored pastimes. The bad news? We are living longer. The older one is, the less likely he or she will be able to live independently. An AARP study has found that 82% of individuals 85 and older have a chronic condition or disability for which they might need assistance. In the language of the growing industry that has developed to serve seniors, many people will require long-term care. Absent advanced planning means an individual's personal financial resources will be the source of payment for most, if not all, long-term care costs.

Conclusion. Financial survival can be a formidable task regardless of your situation in life. Fortunately, savvy use of planning techniques for estates with both business and personal assets should help to avoid the ten mistakes discussed here. Considering financial stresses that abound today, bad news is not hard to find. Although death and taxes are sad facts for all of us, they do not have to mean the entire road ahead is a downhill one. Paying close attention to planning, and being aware of the potential pitfalls can lead to positive results.