How to Make Sure Your Small Business Outlives You

FROM TIME.COM

If you’re a small business owner, you’re probably focused on day-to-day needs. But looking ahead to what will happen when you retire or pass away should be a top priority.

If you pass away without a plan in place, you’ll leave heirs without clears instructions, potentially jeopardizing the business you’ve worked so hard to build.

“Small business owners need to plan for their estate even more than the average person does,” says CPA Kelley Long. “Not doing so can destroy your family and business. And a good estate plan can take years to put in place, so this is not a conversation you want to procrastinate on.”

Add in the fact that your business likely accounts for the largest component of your net worth, and it’s easy to see why you should take some time to work on the future of your business—by meeting with an estate planning attorney to talk about these six key components of a solid estate plan.

Will

At the very least, your estate plan should include a will. This document allows you to specify how you want your assets to be transferred, and to whom, after you die. It also lets you identify an executor who will take charge of those assets and manage their disbursement according to your instructions.

You’ll also want to include a provision that gives your executor or another trusted individual access to a list of all online bank accounts, email accounts, file sharing sites, social networking sites, and their corresponding passwords. If you’re the only person running the business, important information will be inaccessible to heirs if you don’t provide this access. In some states, not even family members or appointed fiduciaries can get into these accounts if they don’t already have the information. Nor can they force companies to give them access, says estate planning attorney William Sanderson, co-chair of the American Bar Association’s real property, trust and estate law business planning committee.

This is why you’ll want to keep a document detailing all your accounts and passwords in a secure place that you can also easily access to update as needed.

“My most prepared client keeps a notebook filed with all his important papers locked away in a safe. He updates this list and his notebook regularly,” says Sanderson. “I recommend other small business owners try and implement the same strategy and let a spouse or trusted person know how to access them.”

Trusts

Like a will, a trust allows you to control what happens to your assets after you die. But this legal entity has several advantages over a will. Any items you place under the ownership of the trust will bypass the probate process. Thus assets owned by the trust can be transferred to heirs much more quickly; your estate will remain private; and, depending on the kind of trust you set up, it could dramatically reduce the legal fees and estate taxes your estate or heirs will have to pay. And with a revocable or living trust, the terms and assets can be easily changed if your decisions change.

Power of Attorney

When you have payroll obligations, you should consider creating a durable general power of attorney document, which allows you to name an individual to carry out your business affairs should you become incapacitated, says Sanderson. If you don’t have this in place and something happens to you, the court will appoint a guardian to handle your affairs. “It can add a lot of stress to a business owner’s life at a time when they don’t need any added stress,” says Sanderson. “This little bit of extra work upfront could save a lot of headache should it ever be needed.”

Financial planning tips for caregivers

From http://www.fiftyplusadvocate.com/

Becoming a caregiver can result in many challenges; communicating with doctors, managing your time and your parents’ health, and just as importantly, their financial welfare. According to the National Caregiver’s Library website, (www.caregiverslibrary.org,) “caregiving involves more than just medical problems. Helping your loved one manage his or her finances can ensure that he or she will be able to pay for needed care and live more comfortably.”

According to the National Alliance for Caregiving, “more than 66 million family caregivers in the U.S. – nearly 40 percent of the U.S. adult population – provide important societal and financial contributions toward maintaining the well-being of those they care for.”

So where do you start? You’re a caregiver, not a financial planner.

“There are so many pitfalls, you want to make sure you’re doing it right,” said Carolyn Spring, a Westborough, Mass.-based Estate Planning and Elder Law attorney and financial consultant who recommends getting some professional help from someone who has experience dealing with older populations.

“You do not want an investment advisor,” said Spring. “You are not investing. You are looking for someone that will set up a plan to meet your financial needs; tailored for you and providing an objective opinion for you.”

Elder Law attorneys like Spring regularly handle estate planning, Medicare and Medicaid issues, insurance disputes, fraud cases, and other legal affairs affecting the elderly. You might also consider utilizing a daily money manager to pay bills, balance checkbooks, or monitor and track insurance claims.

AgingCare.com also recommends using an independent financial planner; one that is not tied to specific companies, products and services. While these planners typically charge a fee for their services, they provide unbiased advice and find the right products to fit your needs.

The National Caregiver’s Library website lists several other suggestions for caregivers including encouraging savings and careful spending, making sure the family knows where to find important financial or legal documents and making sure you have an accurate assessment of your loved one’s financial situation. Also recommended is being able to obtain access to bank or brokerage accounts in an emergency. Spring recommends that caregivers make sure that a Power of Attorney and Health Care Proxy are in place where appropriate.

When is the best time to begin your financial planning as a caregiver?

“It’s hard to say,” said Spring. “It often depends on the health of the individual. You don’t want to have to plan in a crisis, so it’s best to start earlier.”
Spring also says that it can be difficult dealing with end of life issues and wondering what will happen.

“It’s not a fun question to get an answer to. At the latest, you should probably start planning by age 70 and sooner if there is a medical history with potential problems,” she said.

The National Alliance for Caregiving website offers research reports that identify the challenges facing caregivers and potential solutions to address some of these challenges, including the impact of caregiving and its financial costs.

“Don’t be afraid to ask for help,” said Spring. “In the long run, it’s worth it.”

But what is the best advice for caregivers?

“If I could give only one piece of advice to caregivers,” said Spring, “it would have nothing to do with money. I would encourage them to take breaks from their caregiving duties and do something for themselves, even if it’s only for an hour a day. Go out to lunch, read a book, but do something for themselves to avoid burnout.”

Trust basics

Trusts can play an important part in meeting your estate planning goals. For example, trusts can help you plan for incapacity and control how your assets are distributed after your death. While it usually takes an experienced estate planning attorney to prepare a trust document to meet a specific purpose, it is helpful for anyone considering using a trust to have an idea of some of the basic concepts.

There are three key groups involved with the workings of a trust. They are:

The Grantor (Settlor or Trustor)
-- This is the person who creates and funds the trust.

The Beneficiary
-- This is the person or people who benefit from the trust. The benefit might be in the form of income from the trust or perhaps the use of property to which the trust has title to.

The Trustee
-- This is the person who holds legal title to the trust’s assets. This individual administers the provisions included in the trust document and acts in the best interest of the beneficiary.

Once the trust is established, it needs to be funded. This entails putting assets into the trust that will meet the trust’s objectives. For example, if you have a personal account containing stocks and bonds, you might set up another account in the name of your trust and transfer the assets from your personal account into the trust account. These assets are now in the trust and will be distributed by the trustee according to the trust provisions.

Potential Trust Advantages

-- May minimize estate taxes
-- May shield assets from potential creditors
-- Avoids the expense and delay of probate
-- May manage assets for children until they are able to do so themselves
-- Trust assets may be managed by professional money managers
-- Helps deal with issues of incapacity
-- May shift income tax burdens to beneficiaries in a lower tax bracket
-- May provide benefits for charity

Potential Trust Disadvantages

-- The costs of setting up and maintaining a trust
-- In certain situations there may be a loss of control over trust assets
-- The time required to comply with recording and notice requirements
-- The income generated by the trust and not distrusted to beneficiaries may be taxed at a higher rate than individuals.

Trusts can be complicated, and there are many different types of trusts, which may be appropriate depending on the goals you want to accomplish. It is best to have a discussion with a qualified estate planning attorney to determine the best trust structure to meet your needs. Also, your accountant will be able to help you with the tax implications of a trust.

3 Biggest Barriers to Successful Estate Planning

FROM FINANCIALPLANNING.COM

Estate planning requires clients to prepare for a future they won't be here to see. That idea can be disconcerting, so it's no surprise that advisors say the largest obstacles to successful estate planning revolve around clients' anxieties about what the world will be like without them.

Those fears can lead to procrastination, indecision and inattention.

"The first barrier we run into is people ignoring doing estate planning at all," says advisor Stewart Welch, founder of the Welch Group in Birmingham, Ala. "They don't have a will, or it's 15 years old – they just don't do anything."

PROCRASTINATION

Fear is a big cause of procrastination. "Many people have a psychological barrier in dealing with their own mortality," says trusts and estates lawyer and CPA Gideon Rothschild. Additionally, the demands and pressures of living – and earning – in the here and now distract many people from planning for when they'll be out of the picture, says Amy Jucoski, national practice manager at Wells Fargo's Abbot Downing Group.

Instead of allowing fear and distraction to lead to avoidance, advisors should get clients to understand that they have the most to fear from doing nothing.

"Fear can be a great motivator," says Jucoski. "It can lead to urgency for action."

Of course, it's crucial not to raise the kind of fear that causes further paralysis. Instead advisors should break down estate planning into a smaller steps that are more easily digested and acted on, and work with lawyers and other professionals to make sure that clients take action.

Still, clients will put off action.

"You run into procrastination in contacting the attorney," says Welch, also the author of J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning. "And then they do contact the attorney, but we'll find that the barrier is that they just keep waiting to go in and sign." Welch says the solution is for the advisor to be in charge, to hand hold and guide clients so they don't become stuck. "If you don't do that, you can go through everything, but if you just leave it with the clients, 50% of the time it won't get done – you have to drive that process."

INDECISION

Clients often put off action because they are choked by indecision at the most emotional and basic levels. Frequently, the problem is that the client can't decide who should be a guardian. "They may not have a whole lot of assets, so that may be the most important decision in their will at that juncture," says Rothschild, who heads the trusts and estates and asset protection practices at Moses & Singer in New York. "But as a result of the indecision, the client does nothing." Or clients may be so worried about giving money to kids who aren't ready for it that they make no plans at all.

Advisors can combat indecision by emphasizing that choices can be changed, so that clients don't feel anything is written in stone.

"Estate planning is a process, not a one-time event," says Abbot Downing's Jucoski.

INATTENTION

But the ongoing aspects of estate planning can also be a source of another major obstacle – inattention. Outdated plans as a result of client inattention are one of the largest problems in estate planning, says Jucoski.

If clients don't revisit and make necessary updates, estate plans can become obsolete. Sometimes the complexity of constantly changing tax laws, as well as changes in the lives of clients themselves, can lead to what's been called "estate planning fatigue" in which frustration and anxiety cause clients to avoid taking action or to return to procrastination.

"Our role has to be to make it easy for clients," says Jucoski. By figuring out the clearest way of illustrating changes and their impacts, managing harmonious relationships with lawyers, accountants and other professionals, and showing a clear understanding of client goals, advisors can keep clients from becoming frustrated and doing nothing.

Providing an annual detailed analysis with a current snapshot and projections of total assets available for heirs in the future can also keep clients interested and positive about updating estate decisions, says Welch. Each year, clients can revisit how much they want to apportion to heirs. "You're not making lifelong decisions, you're making decisions 12 months at a time," says Welch. "What's important is that you are 're-comforting' them every 12 months. They feel better that they're on track and that everything's fine."

529 College Savings Plans

Section 529 college savings plans are tax-advantaged college savings vehicles and one of the most popular ways to save for college today. Much like the way 401(k) plans changed the world of retirement savings a few decades ago, 529 college savings plans have changed the world of college savings.

Tax advantages and more

529 college savings plans offer a unique combination of features that no other college savings vehicle can match:

•Federal tax advantages: Contributions to your account grow tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses. (The earnings portion of any withdrawal not used for college expenses is taxed at the recipient’s rate and subject to a 10 percent penalty.)

•State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals.

•High contribution limits: Many plans let you contribute over $300,000 over the life of the plan.

•Unlimited participation: Anyone can open a 529 college savings plan account, regardless of income level.

•Professional money management: College savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.

•Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as rollover the money in your 529 plan account to a different 529 plan once per year without income tax or penalty implications.

•Wide use of funds: Money in a 529 college savings plan can be used at any college in the United States or abroad that’s accredited by the Department of Education and, depending on the individual plan, for graduate school.

•Accelerated gifting: 529 plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education. Specifically, a lump-sum gift of up to five times the annual gift tax exclusion ($14,000 in 2015) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $70,000 and married couples can gift up to $140,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

Choosing a college savings plan

Although 529 college savings plans are a creature of federal law, their implementation is left to the states. Currently, there are over 50 different college savings plans available because many states offer more than one plan. You can join any state’s 529 college savings plan, but this variety may create confusion when it comes time to select a plan. Each plan has its own rules and restrictions, which can change at any time. To make the process easier, it helps to consider a few key features:

•Your state’s tax benefits: A majority of states offer some type of income tax break for 529 college savings plan participants, such as a deduction for contributions or tax-free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to the in-state 529 plan only. So make sure to find out the exact scope of the tax breaks, if any, your state offers.

•Investment options: 529 plans vary in the investment options they offer. Ideally, you’ll want to find a plan with a wide variety of investment options that range from conservative to more growth-oriented to match your risk tolerance. To take the guesswork out of picking investments appropriate for your child’s age, most plans offer aged-based portfolios that automatically adjust to more conservative holdings as your child approaches college age. (Remember, though, that any investment involves risk, and past performance is no guarantee of how an investment will perform in the future. The investments you choose may lose money or not perform well enough to cover college costs as anticipated.)

•Fees and expenses: Fees and expenses can vary widely among plans, and high fees can take a bigger bite out of your savings. Typical fees include annual maintenance fees, administration and management fees (usually called the “expense ratio”), and underlying fund expenses.

•Reputation of financial institution: Make sure that the financial institution managing the plan is reputable and that you can reach customer service with any questions. With so many plans available, it may be helpful to consult an experienced financial professional who can help you select a plan and pick your plan investments. In fact, some 529 college savings plans are advisor-sold only, meaning that you’re required to go through a designated financial advisor to open an account. Always carefully read the 529 plan issuer’s official materials before investing.

Account mechanics

Once you’ve selected a plan, opening an account is easy. You’ll need to fill out an application, where you’ll name a beneficiary and select one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you’ll typically be required to make an initial minimum contribution, which must be made in cash or a cash alternative. Thereafter, most plans will allow you to contribute as often as you like. This gives you the flexibility to tailor the frequency of your contributions to your own needs and budget, as well as to systematically invest your contributions. You’ll also be able to change the beneficiary of your account to a qualified family member with no income tax or penalty implications. Most plans will also allow you to change your investment portfolios (either for your future or current contributions) if you’re unhappy with their investment performance.

529 prepaid tuition plans — a distant cousin

There are actually two types of 529 plans—college savings plans and prepaid tuition plans (prepaid plans are the less popular type). The tax advantages of college savings plans and prepaid tuition plans are the same, but the account features are very different. A prepaid tuition plan lets you prepay tuition at participating colleges at today’s prices for use by the beneficiary in the future.

How new independent contractor standards affect your business

The Department of Labor (DOL) recently released a 15-page memo describing its standards for determining whether a worker is an employee or an independent contractor.

Worker classification affects whether businesses must provide overtime and other labor benefits, pay state and federal payroll taxes on wages paid to their workers, and offer healthcare under the "Affordable Care Act."

As a result, government agencies, including the DOL and IRS, are increasingly scrutinizing how businesses classify their workers.

What you need to know

Under the DOL’s new guidance, workers will not be treated as independent contractors simply because the business labels or treats the workers as contractors. Instead, the DOL will examine the “economic realities” to determine whether the worker is economically dependent on the employer —meaning the worker is an employee — or is truly in business for him or herself, which means the worker is an independent contractor. The DOL considers some of the following factors in making its determination:

Whether the individual’s work is an integral part of the business.

Whether the worker exercises managerial skills and has the ability to determine his or her profit and loss.

The extent of the worker’s investment in the business activity compared to that of the employer.

Whether the worker has the skills, initiative and judgment to operate an independent business.

The permanence and duration of the relationship.

The employer’s ability to control how the worker performs the job.

In applying these factors, the DOL takes a very broad and expansive view of who qualifies as an employee. Not surprisingly, the DOL concludes that most workers are employees and are entitled to federal labor law protection.

If the DOL audits a business and determines that workers are actually employees, the business may face overtime, back wages and numerous other claims from its workers. In addition, because the DOL shares information with the IRS and state agencies, the employer may be subject to examination by these agencies and incur liability for other past-due benefits, taxes and penalties.

Different standards

While the DOL uses “economic realities” to determine employment status, other government agencies apply different tests. For example, in determining whether an employer must pay federal employment taxes, the IRS focuses on the employer’s right to control or direct the worker.

State agencies often have their own tests for state unemployment and worker’s compensation laws. Because each agency has its own standards for determining who is an employee, it can be difficult and frustrating for a business trying to properly classify its workers and avoid the unfortunate and unpleasant consequences of misclassifying employees as independent contractors.

While many businesses attempt to classify workers as independent contractors in order to lower costs, they may discover that the practice can lead to some very costly results. As government agencies continue to scrutinize how businesses categorize their workers, employers should closely examine their worker classification to ensure that they comply with federal and state laws.

Older Families Can Take Action to Lower Their Tax Bill

There are many tax savings that are available to older families. Such tax breaks can be achieved in several areas, including work, car and home, estate planning, medical expenses and rental property.

In terms of realizing savings at work, a hefty tax refund implies that an excessive amount of tax is being withheld from one’s paycheck. One can correct this by filing a new W-4 form with one’s employer. There are also savings to be had regarding the payment of medical expenses. Some employers offer a medical reimbursement account, or flexible spending account (FSA) that allows employees to contribute part of their salary to an account that they can then use to pay medical bills. In so doing, one can use pre-tax dollars to pay for medical expenses, and thus avoid paying income and Social Security tax on those funds, thereby realizing a savings of 20 to 35 percent.

Taking steps to save money on taxes now will help to ensure that there is more in one’s estate that will be left for one’s beneficiaries.

Working from home also has its tax advantages. Regular and exclusive use of part of the home for one’s business can qualify one to deduct certain costs as home-office expenses. Among these are home maintenance expenses, utility bills and insurance premiums. And in lieu of listing actual expenses, one can now claim the home office deduction by deducting $5 per square foot, up to a limit of 300 square feet, for a total of $1,500.

When creating an estate plan for one's heirs, it is important to make certain that the beneficiary designations in one’s IRAs and 401(k)s are current. It could be very costly if an IRA or 401(k) is left to one’s estate instead of a designated beneficiary.

Another tax savings is one that is associated with an inherited 401(k) plan. The beneficiary can roll over the plan into an IRA and extend payouts as well as their taxes over his or her lifetime. The previous rules provided only a five-year time limit within which to cash out the account and pay all taxes. However, in order to qualify for this 401(k) tax savings, one is required to be designated as the beneficiary. If the plan is left to the owner’s estate and subsequently to the beneficiary, then the prior five-year rule will be applied.