Business Planning

Estate Planning for Rental Property Owners

In all parts of the country, services such as Airbnb have grown in popularity over the past few years. Indeed, these alternatives to hotel stays are popular among homeowners and vacationers alike. If you have a home or other rental property that is generating income, you should understand the following asset protection and estate planning considerations.

Protecting Owners from Liability

Just like any rental relationship, there is risk for the property owner. If anyone is hurt on the premises during their stay – no matter how short – a property owner could be held legally and financially liable for injuries suffered.

The first line of defense is general liability insurance – assuming there is proper and sufficient coverage on the property. In the case of a lawsuit the insurance company should step in and defend the claim up to the policy’s limits. Any damages beyond that may become a personal liability to the owner, depending upon how the property is titled.

If the property is owned by a limited liability company (LLC) instead of the individual(s), then the individual member(s) of the LLC may have some additional protection if the liability insurance coverage limits are not sufficient to cover the total amount of financial liability. It is important to note that in order to receive liability protection through the use of an LLC, the entity must be formed correctly and managed properly. If the entity is viewed as merely an “alter ego” of the member(s), the court may not uphold the liability protection, placing the property owner(s) back on the hook. To ensure that you have the most protection available, you need to consult with an attorney.

Estate Planning Considerations

Beyond liability in the event of an incident, deciding how an asset will be passed from generation to generation is an important part of estate planning. This is particularly true if such property is lucrative – like income-generating rental property. If the real estate is held in an LLC, you have options. You may choose to divide up the membership interest of the LLC among the multiple beneficiaries. With an income producing asset, such as a rental property, it is important to consider your family’s situation and your ultimate goals for the property.

Using an LLC is also helpful for estate planning because you can gift some of the membership interests during your lifetime without losing control, transfer it at the time of your death to the beneficiaries, or have it held by a trust for the benefit of the beneficiaries. Regardless of your personal situation or goals, there is a solution for everyone.

Determining whether or not to use an LLC for rental property is just one aspect of the overall estate planning process. We can guide you through your legal options and help ensure your property is protected and distributed at your death according to your wishes. Do not leave this to chance, call or contact us today to learn more.

5 Tips for Successfully Receiving an Inheritance

If you recently received an inheritance, or are expecting to receive one in the near future, it has likely triggered mixed emotions in you. You have lost a loved one and also experienced monetary gain. Studies show that a third of Americans who received an inheritance completely spent it within two years of receipt. Below are five practical steps for you to follow to maximize and protect your inheritance.

Take your time. Allow yourself to be emotionally ready. Making decisions on what to do with your inheritance while you are experiencing challenging emotions is not optimal. Be sure to commit to self-care — whether counseling, meditation, or family and spiritual support to help you work through this process.
Get advice. Before you make any major decisions — such as paying off debt, investing in a business idea, or something else — make sure you seek professional financial advice. This is especially true if you have never managed a large amount of money before. Of note, an inheritance may affect your ability to receive certain benefits, so working closely with an attorney can help minimize any impact it may have.
Strings attached. Understand whether or not there are any restrictions to receiving your inheritance. Whether you are being given the assets outright, relying on trustee discretion as to the distribution timing and amount, or something in between, your estate planning attorney can help provide solutions for you. The estate planning attorney can also assist you if you are subject to a state inheritance tax.
Update your estate plan. An inheritance will change your asset level and mix. Therefore, your estate plan needs to be reviewed and possibly adjusted to make sure you are fully protecting yourself and your loved ones.
Great expectations. If you are yet to receive the inheritance but it is on the horizon, consider working with the relative that will leave assets to you and your estate planning attorney. Creating an “inheritor’s trust” instead of leaving the assets to you outright — although a difficult topic to discuss — can provide long-term asset protection and preservation for you.

How We Can Help

Receiving an inheritance can be bittersweet and emotions may run deep during this time. But putting your inheritance to work to help achieve your short-term and long-term financial goals is a great way to avoid misusing these assets. Being informed is half the battle, so give us a call right away to learn more about your options under the law. Call our office at 832.408.0505 or schedule your appointment right now.

Three Liability Planning Tips for Physicians Anyone Can Use

Whether you are a physician or not, you probably know that the practice of medicine is a profession fraught with liability. It’s not just medical malpractice claims either – employment related issues, careless business partners and employees, contractual obligations, and personal liabilities add to the risk assumed by a physician in private practice. Unfortunately, in our litigious society, these liability risks are not unique to physicians. Business owners, board members, real estate investors, and retirees need to protect themselves from a variety of liabilities too.

Below are three liability planning tips anyone – physicians and non-physicians alike – can use to protect their hard earned money.

Tip #1 – Insurance is the First Line of Defense Against Liability

Liability insurance is the first line of defense against a claim. Liability insurance provides a source of funds to pay legal fees as well as settlements or judgments. Types of insurance you should have in place include (as applicable):

Homeowner’s insurance
Property and casualty insurance
Excess liability insurance (also known as “umbrella” insurance)
Automobile and other vehicle (motorcycle, boat, airplane) insurance
General business insurance
Professional liability insurance
Directors and officers insurance

Tip #2 – State Exemptions Protect a Variety of Personal Assets From Lawsuits

Each state has a set of laws and/or constitutional provisions that partially or completely exempt certain types of assets owned by residents from the claims of creditors. While these laws vary widely from state to state, in general you may be able to protect the following types of assets from a judgment entered against you under applicable state law:

Primary residence (referred to as “homestead” protection in some states)
Qualified retirement plans (401Ks, profit sharing plans, money purchase plans, IRAs)
Life insurance (cash value)
Annuities
Property co-owned with a spouse as “tenants by the entirety” (only available to married couples; and may only apply to real estate, not personal property, in some states)
Wages
Prepaid college plans
Section 529 plans
Disability insurance payments
Social Security benefits

Tip #3 – Business Entities Protect Business and Personal Assets From Lawsuits

Business entities include partnerships, limited liability companies, and corporations. Business owners need to mitigate the risks and liabilities associated with owning a business, and real estate investors need to mitigate the risks and liabilities associated with owning real estate, through the use of one or more entities. The right structure for your enterprise should take into consideration asset protection, income taxes, estate planning, retirement funding, and business succession goals.

Business entities can also be an effective tool for protecting your personal assets from lawsuits. In many states, assets held within a limited partnership or a limited liability company are protected from the personal creditors of an owner. In many cases, the personal creditors of an owner cannot step into the owner’s shoes and take over the business. Instead, the creditor is limited to a “charging order” which only gives the creditor the rights of an assignee. In general this limits the creditor to receiving distributions from the entity if and when they are made.

Final Advice for Protecting Your Assets

Liability insurance, exemption planning, and business entities should be used together to create a multi-layered liability protection plan. Our firm is experienced with helping physicians, business owners, board members, real estate investors, and retirees create and—just as important—maintain a comprehensive liability protection plan. Please call our office if you have any questions about this type of planning.

Caution: Your Traditional Asset Protection Plan is Set Up to Fail

You may be surprised to learn that not only has asset protection planning been around for a long time, but you have already engaged in it at some point during your life. In fact, you probably have one or more types of traditional asset protection planning in place at this very moment. The problem is in many cases the type of planning you have right now won’t be enough to protect you and your family.

What is Asset Protection Planning?

Asset protection planning is done to preserve and protect your property in advance of a claim, or the threat of a claim. In other words, this type of planning will not be effective to shield your property from an existing claim. Instead, it must be done long before there is even the hint of a claim.

The goals of asset protection planning are to provide an incentive for settling a claim, improve your bargaining position, offer options when a claim is asserted, and, ultimately, deter litigation.

What Is Traditional Asset Protection Planning, and Why Does It Often Fail?

There are several types of traditional asset protection planning that have been around for years. The most common is liability insurance – automobile, homeowners, umbrella, officers and directors, malpractice, and the like. You probably have at least one liability policy in place right now. Unfortunately, liability insurance may actually encourage a lawsuit since it is perceived as “easy money.” Aside from this, liability insurance often fails because the coverage is inadequate, the policies have extensive exclusions, or the carrier becomes insolvent.

Another common type of traditional asset protection planning is the use of a business entity, such as a corporation, to segregate business assets and liabilities from personal assets and liabilities. But while a corporation may shelter your personal assets from a lawsuit filed against the corporation, the opposite is not true – if you, as the shareholder of a corporation, are personally sued, your shares of stock in the corporation are not protected from a judgment entered against you. Of course, it is possible that if your corporation fails to observe certain formalities, then the “corporate veil” may be pierced and your personal assets will become vulnerable to a judgment entered against the corporation.

The final common type of traditional asset protection planning is established under state law and allows residents to exempt specific assets from the claims of creditors. This may include protection for property owned jointly by spouses (“tenancy by the entirety” ownership), a primary residence (“protected homestead”), the cash value of life insurance, investments held in a retirement account, and annuities. Nonetheless, these state exemptions are often subject to limitations, such as placing a cap on the value or land area of the protected homestead.

What Should You Do?

You may think that only wealthy people need to do advanced estate planning. The truth is anyone who has accumulated any amount of wealth can be sued for just about any reason. The only way to protect you and your family is to engage in more advanced forms of asset protection planning such as irrevocable trusts and sophisticated business structures.

This office can help you go beyond traditional asset protection planning by creating a comprehensive plan that will be custom-tailored to your family situation and financial status.

Call or contact us today and find out how to better protect your family.

Your Vacation Checklist

You’ve packed sunblock and a beach novel. You’ve planned your itinerary and bought plane tickets. But have you ensured that your estate plan is up to date?

Don’t leave home without making sure your financial health and the future of your loved ones is provided for. It’s even more crucial than getting a pet sitter and locking the front door.

Creating an Estate Plan

If you don’t have an estate plan yet, don’t panic. Now is a great time to connect with a qualified estate planning attorney who can sit down with you and get you started with an appropriate plan for your financial future.

Here are some questions to begin the process:

Do you have a will? An attorney can help you create an accurate and intentional will if you do not already have one.
Have you considered using a trust? Trusts have considerable benefits, from keeping assets safe from creditors to dividing an estate equally without worrying about the status of individual assets.
Are your children protected? An attorney can help you designate a guardian to care for your minor child in the event you are unable to. An attorney can also help you name an adult who will manage your minor child’s inherited property if you pass away. These may or may not be the same people.
Have you considered life insurance? If you anticipate leaving behind significant debt or hefty estate taxes, or if you have small children, you may want to consider a life insurance policy. Knowing your dependents are provided for will give you peace of mind.
Is your business protected? If you own a business, have you named a proxy to manage your interest if you cannot? Do you have a business succession plan? If you co-own a business, have you drawn up a buyout agreement? An attorney can help with that as well.

Pour-Over Wills: A Useful Tool

Considering a trust-based estate plan? It’s a great way to ensure that your assets are divided and protected in exactly the way you want. It can also help your beneficiaries avoid the expensive and lengthy process of probate, when an estate must be organized and distributed through a probate court. But as you may know, gathering the needed documents may be time-consuming.

If you need to complete an estate plan before leaving on a vacation and are unable to fully fund your trust, you may want to consider using a pour-over will in the interim.

A pour-over will stipulates that all assets that have not yet been funded into your trust will be put there when you pass away. Your trust becomes the beneficiary of any assets that you may not have had time to transfer there. In a crunch, it can serve as a stop-gap measure while your trust-based plan is being funded.

Trust, but Verify

Have you already created an estate plan? That’s great! It’s still important to verify that all provisions made in the estate plan are exactly as you want them.

Here are some items to confirm before leaving town:

Are your assets accurately inventoried? Have you left out any important assets or neglected to report changes?
Are your beneficiary designations accurate? Are your assets going where you would like them to?
When was the last time you reviewed your selection of fiduciaries? Being named as someone’s Personal Representative, Successor Trustee, Agent under a Power of Attorney, etc. can be a time consuming job. It is important that you review your selections periodically to ensure that those people are still the best choice to act on your behalf.

Contact Us Today

Estate planning with a trusted attorney is an important part of ensuring your financial health and preserving the legacy you’d like to leave to your loved ones. As you’re preparing for summer travel, don’t neglect your estate plan. We can help you put a plan in place that will reassure you and your family. Contact us today to plan for your tomorrow.

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Retirement Planning for Business Owners

For many employees, saving for retirement is usually a matter of simply participating in their employer’s 401(k) plan and perhaps opening an IRA for some extra savings.

But, when you’re the owner of a business, planning for retirement requires proactivity and strategy. It’s not just the dizzying array of choices for retirement accounts, there’s also planning for the business itself. Who will run the business after your retirement? Additionally, your estate plan must integrate into your retirement and business transition strategy.

Owners of businesses (like employees and everyone else) want to make sure they will have enough money in retirement. Business owners recognize the value of their businesses, so they are often tempted to reinvest everything into the enterprise, thinking that will be their “retirement plan.” However, this might be a mistake.

Retirement Accounts for Business Owners

Rather than placing all your eggs in one basket, it makes sense to have some “backup” strategies in place. There are many retirement account options open to business owners. Although the number of options can make things confusing, a tax and financial professional can often quickly make a recommendation for you.

For example, you may consider opening a 401(k), SEP-IRA, SIMPLE, or pension plan. This can reduce your income taxes now, while simultaneously placing some of your wealth outside your business. From a financial perspective, these account are tax-deferred, so the investment growth avoids taxation until you retire, which greatly boosts returns. The “best” plan really depends on how much income your business earns, how stable your earnings are, how many employees you have, and how generous you want to be with those employees. You must consider how generous you’ll be with employees because the law requires most tax-deferred plans to be “fair” to all employees. For example, you can’t open a pension or 401(k) for yourself only and exclude all of your full-time employees. When making this decision, consider that many employees value being able to save for their retirement and your generosity may be repaid with harder work and loyalty from the employees.

Depending on how many employees you have, you may even consider “self-directed” investment options, which can allow you to invest some or all of your retirement funds into “alternative” investments, such as precious metals, private lending arrangements, real estate, other closely held businesses, etc. These self-directed accounts are not for everyone, but for the right person, they open up a wide world of investment opportunities. The tax rules surrounding self-directed tax-deferred accounts are very complex and penalties can be incredibly high. So, if you choose to do self-directed investments, always work with a qualified tax advisor.

Outside of your business, you can likely contribute to an IRA or a Roth IRA. This can allow you to add more money to your retirement basket, especially if you’ve maximized your 401(k), SEP, or SIMPLE plan. Like the other tax-deferred accounts, self-directed IRAs are also an option, opening up a broad world of investment options.

As a business owner, you likely have a great deal of control over your health insurance decisions. If you’re relatively young and healthy or otherwise an infrequent user of health care services, consider using a high deductible health plan (HDHP) and a health savings account (HSA) to add additional money to your savings. These plans let you set aside money in the HSA which can be invested in a manner similar to IRAs. At any time after you setup the account, you can withdraw your contributions and earnings, tax-free, to pay for qualified medical expenses. And, after you turn 65, the money can be used for whatever purpose you want, although income tax will need to be paid on the distributions.

Selling or Transferring the Business

Many business owners dream of a financially lucrative “exit” when a business is sold, taken public, or otherwise transferred at a significant profit for the owner. This does not happen by accident – a business owner must first create and sustain a profitable enterprise that can be sold. Then, legal and tax strategies must be coordinated to minimize the burdensome hit of taxes and avoid the common legal risks that can happen when businesses are sold. When a business is sold, the net proceeds can form a significant component of the owner’s retirement. When supplemented by one or more of the retirement accounts discussed above, this can be a great outcome for a business owner.

On the other hand, other businesses are “family” businesses where children or grandchildren will one day become owners. Like their counterparts who will sell their businesses, these business owners must also focus on creating and sustaining a profitable enterprise, but the source of retirement money is a little less clear. In these cases, clearly thinking through the transition plan to the next generation is essential. Although the business can be given to the next generation through a trust or outright, there are also transition options to allow for children, grandchildren, or even employees to gradually buy-out the owner, if the owner needs or wants to obtain a portion of the retirement nest egg from the business.

The Importance of Estate Planning

Regardless of which retirement accounts (401(k), SEP, SIMPLE, IRAs, HSAs) you select, it is wise to integrate them into your estate planning. You’ve probably already considered who you want to take over your business after you retire (perhaps a son or daughter or a sale to a third party). For your retirement accounts, an IRA trust is a special trust designed to maximize the financial benefit, minimize the income tax burden, and provide robust asset protection for your family. These trusts integrate with the rest of your comprehensive estate plan to fully protect your family, provide privacy, all while minimizing taxes and costs.

Leverage the Team Approach

Let us work with you, your business advisors or consultants, your tax advisor, and your financial advisor to develop a comprehensive retirement, business transition, and estate planning strategy. When we work collaboratively, we can focus on setting aside assets for retirement, saving as much tax possible, while freeing you to do what you do best – build your business!

Contact us or give us a call today so we can help you craft a retirement, business transition, and estate planning strategy.

Rewarding Your Employees by Giving Them the Business

Retiring from your business can a tough decision. To ensure that what you have built continues on, there needs to be a plan for succession. For some people, they have spent years grooming a child or other family member to take over, wanting the business to stay in the family. Others look to sell to a third party for a quick way out that will also give them a nest egg for their next phase of life. However, there is a third option–transferring the business to your employees. If you like the idea of transferring your business to long-time faithful employees who have contributed greatly to the company’s success over the years, below are a couple of options for you to consider.

Management Buyout

This type of transfer is a process, not an event. The management team comes together with the financing and arranges a deal with you to buy the assets and operations of the business. A management buyout has the benefit of being quicker and more confidential than a third party transaction, and the structure of the deal can be more flexible. There is also the added benefit that the legacy of the company will continue in the hands of those in management who have earned the opportunity to buy the business with his or her loyalty and hard work.

With this option, you may also be able to provide some continued service to the company as an officer and/or director. In addition, you may even be able to continue in some part of the business that you enjoy. And you may be able to keep some control over the company.

When considering this option, it is important that you consider the following:

How much cash, debt, and earn-out will be involved?
When will the transfer of control occur?
If management has little or no capital, where will they get the money for the buyout?

Employee Stock Ownership Plans (ESOPs)

An ESOP is a qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA). Instead of selling directly to management, you are making the sale to the ESOP, which has been set up by the company. The ESOP can either attempt to get bank financing to purchase the stock from you, or you can take a note for the value of your shares and have the repayment taken care of internally. The employees become plan participants, similar to other employee incentive programs and are entitled to benefits at certain points as determined by the terms of the ESOP.

This option is similar to a management buyout, but with potentially valuable tax benefits. With an ESOP, you are selling stock in the company, not the assets, so the taxes are capital gains, not ordinary income taxes. Because of this distinction, there are planning techniques available that may help save on taxes with this transaction.

When reviewing this option, there are a few things to consider:

In order to repay the note, most (if not all) of the excess cash flow from the business may be needed, instead of using it to grow the company;
The company must set aside money to meet repurchase obligations on the ESOP when an employee retires, dies, becomes incapacitated or terminates his or her employment after vesting;
Stock in an ESOP is allocated based on payroll, so there are no extra management incentives.

Both management buyout and ESOPs are options that should be considered if you are looking to transfer your business to your employees. However, we are here to help you. Give us a call or contact us, we would be happy to discuss these options more and find a solution that best protects you and your legacy.

Financial Planning. Tax Planning. Legacy Planning. Estate Planning – How Many Plans Do I Need?!

Most folks have at least heard of an estate plan. But fewer realize that a simple will is not enough to prepare for your future. In fact, a combination of plans – financial, tax, legacy, and estate – are vital to your financial well-being and protection of your assets and family. All of these plans are closely linked, affecting one another but also serving different purposes.

Different Plans for Life Success

Contrary to popular belief, in order to get to where you want to go in life you need multiple plans, each intended for a specific area of your life.

Financial plan: The purpose of a financial plan is to grow your wealth. It defines your goals and objectives, determines what choices you need to make to achieve them, and creates a checklist so that you can meet your goals. Financial plans focus on sustaining your cash flow so that you are able to live the life that you want. Your financial plan may also involve saving for short and long term goals. In addition to investments and insurance, you may also take advantage of any benefits from your employer, including retirement fund contribution matching and group life insurance. Through a financial plan, you can also put together the necessary foundation so that your family is financially prepared in the event of an emergency.

Tax plan: Tax planning is analyzing your financial situation through a tax lens. Specifically, the purpose of tax planning is to make sure you are taking advantage of all opportunities to minimize your tax bill. For example, you may contribute to retirement plans or decide to sell or buy certain investments as part of your tax plan. Not surprisingly, tax planning and financial planning are closely intertwined. This is because taxes play a large part of many people’s annual expenses.

Estate plan: Estate planning is the process of arranging your legal affairs so people you trust are authorized to make decisions for you when you can’t and so that your assets are distributed to the beneficiaries you choose upon your death. Generally, an estate plan includes several legal strategies that protect your wealth and loved ones. It will also ensure that someone you trust can help you if you can’t make your own decisions. This is one of the most important plans a person can create to ensure their final property and health care wishes are followed and that the loved ones left behind are provided for in their absence.

Legacy plan: A legacy plan is just what it sounds like — a plan to proactively create and take control of the legacy that you will leave behind. Legacies are built and a plan can help you accomplish this. Without a legacy plan, you may drift through your life reacting to circumstances as they arise without intentionally thinking about them. You may also miss opportunities to share meaningful lessons or values with your loved ones. A legacy plan enables you to consciously shape how you will be remembered after you die. This could include charitable giving, sharing family history, as well as conveying moral and spiritual values.

Bringing it All Together

It is important to have several advisors to help you properly craft your financial, tax, legacy, and estate plans for your life and beyond. An attorney’s role is to create and oversee the legal structure that serves as the vessel through which your plans achieve your goals. A wealth or financial advisor’s role is to handle the financial planning aspects to make sure you are on track to meet your goals. An accountant integrates tax planning through careful analysis of the latest tax laws applicable to your particular situation. Your clergy or spiritual advisor can provide you help in crafting your legacy plan. In short, not only should you have all of these plans, but you should also consult with professionals to help you create and execute it. If you would like to create or update your estate plan, call our office today to schedule a time for us to sit down and talk, we are here to help.