Estate Planning Focus - Spring 2004
Topics included in this issue:
By Susan Gell Meyers
Choosing a fiduciary (a trustee of a trust or personal representative of an estate) is one of the most important decisions made in estate planning. Choosing a capable fiduciary is an essential ingredient to having a successful estate plan.
Understand their role
Not all fiduciaries serve the same role, and understanding their responsibilities is critical to selecting the right one. A personal representative typically serves for a shorter period of time than a trustee, anywhere from a couple of months to a couple of years. During this time, the personal representative is responsible for collecting and protecting estate property, filing tax returns, paying claims, liquidating assets, preparing accountings and ultimately distributing property to those named in the will. These duties cease when the estate is complete.
A trustee's duties, on the other hand, may need to continue for a much longer period of time, requiring the trustee to have more expertise managing trust funds to generate both income and long-term growth. In addition, the trustee must decide what distributions should be paid to beneficiaries. Is it appropriate to buy John a new car? How big a house payment is desirable? The trustee will need to have the judgment to make these decisions, and the stomach to say "no" to beneficiaries' inappropriate requests.
Family Member or Professional?
You may be tempted to name a family member or friend as fiduciary because they won't charge a fee for their services and because they have personal knowledge of your family and your desires. If they are diligent, responsible and regularly seek the advice of advisers, this may work well. However, administering an estate or trust requires regular, dutiful attention. A fiduciary is personally liable to properly administer the estate or trust and can be sued by beneficiaries for improper administration. In addition, while having familiarity with your family can be an advantage, it can also make it difficult for the fiduciary to say "no" to requests by a beneficiary.
Banks, attorneys and other professionals can be well-suited to serve as fiduciary. While their fees may discourage you, professionals offer advantages that can make the fee well worth the money spent. Professionals may have enough familiarity with your family to assist in the administration, but not enough to impede their decisions. Many professionals have institutional experience investing and managing funds and dealing with the tough issues or difficult beneficiary. Professionals typically have the resources available to prudently manage the trust funds, prepare the necessary accountings and tax returns and report to the beneficiaries on a regular basis. If you have unusual assets that will be under management or difficult beneficiaries, a professional trustee may be for you.
Selecting the fiduciaries to implement your estate plan is a very personal choice, but selecting the right fiduciary can give you confidence and comfort in your plan.
The Internal Revenue Code limits the number of shareholders of an S Corporation to 75 shareholders. If the number of shareholders exceeds 75, the S Corporation status terminates. Recent regulations issued by the IRS require not only existing shareholders be counted for purposes of this 75-shareholder rule, but also certain potential shareholders under powers of appointment granted to beneficiaries in trusts.
Many trusts will often give the beneficiaries of the trust a power to appoint, or redirect, assets in the trust to others, either during the beneficiary's lifetime or upon the beneficiary's death. For instance, a trust may grant a beneficiary, upon death, the power to appoint assets to anyone other than the beneficiary’s creditors. Under the new regulations, a power to appoint to anyone other than the beneficiary’s creditors is an unlimited number of beneficiaries and will violate the 75-shareholder rule.
One option is to limit the power of appointment over S Corporation stock to descendants or spouses of descendants. This pool of persons should be sufficiently identifiable to not violate the 75-shareholder rule. For existing trusts, trust beneficiaries could release their power to appoint S Corporation stock to anyone other than descendants or spouses.
If you own S Corporation stock, your estate plan should be reviewed to determine whether it contains any powers of appointment that could violate the 75-shareholder rule. Similarly, if a shareholder of an S Corporation is a trust, the trust should be reviewed to determine what, if any, steps should be taken to preserve the S Corporation election.
By Jeffrey B. Power
The Taxes You Pay
You and your employer pay taxes for Social Security and Medicare. In the year 2004, you and your employer each will pay 7.65% of your gross salary (6.2% for Social Security and 1.45% for Medicare) up to $87,900 of wages. You each continue to pay 1.45% for Medicare if your wages exceed $87,900. The deduction may be labeled "FICA" on your pay slip. FICA is the Federal Insurance Contributions Act, the law that authorized Social Security's payroll tax. If you're self-employed, you pay 15.3% of the first $87,900 of your taxable income into Social Security and continue to pay 2.9% for Medicare for all taxable income above $87,900.
Determining Your Benefit
Social Security retirement benefits are calculated based on your highest 35 years of earnings covered by Social Security, indexing each year's pay for inflation. So you have to have worked for at least 35 years to get the top benefit, which is $1,825 a month for a person retiring this year at the current full retirement age of 65 years and 4 months. If you have less than 35 years of earnings, one or more zeros are averaged in when figuring the average earnings upon which your retirement benefit is based.
As to the level of career earnings required, remember that each year there is a maximum amount of pay that is subject to Social Security taxation, currently $87,900 in 2004. To get the highest benefit at retirement, you would have to have earned the prevailing maximum Social Security taxable income for 35 years through the date of your retirement. The Social Security website lists those annual maximum pay levels back to 1951, when the figure was $3,600.
Making a retirement plan contribution, although it reduces your current taxable income, does not reduce your pay for purposes of the Social Security earnings limit. Social Security looks purely at gross wages or net earnings from self-employment.
You can request a Social Security Statement by visiting the Web site at www.ssa.gov/mystatement or by calling 1-800-772-1213. When you receive your statement, be sure to check your earnings record carefully. You share responsibility with your employer for making sure all of your earnings have been reported and that they are accurate.
Early or Delayed Retirement
You can start your Social Security benefits as early as age 62, but the benefit amount you receive will be permanently reduced based on the number of months you will receive checks before you reach full retirement age. For current retirees the benefit reduction is about 20%. As the age for full retirement increases, so does the benefit reduction for early retirement. For example, if your full retirement age is 67 (because you were born 1960 or later), the reduction for starting your benefits at 62 will be about 30%.
Not everyone retires at full retirement age. You may decide to continue working full-time beyond that time. In that case, your benefit will be increased if you choose to delay receiving retirement benefits. These increases will be added in automatically from the time you reach your full retirement age until you start taking your benefits, or you reach age 70. The percentage varies depending on your year of birth. If you were born in 1943 or later, 8% per year is added to your benefit for each year you delay signing up for Social Security beyond your full retirement age.
An Important Point: If you decide to delay your retirement, be sure to sign up for Medicare at age 65.
You can explore various retirement scenarios using the calculators at www.socialsecurity.gov/planners/calculators.htm.
Directing questions about Social Security to workers at the Social Security Administration frequently results in incorrect, incomplete or conflicting answers. The National Committee to Preserve Social Security and Medicare, a Washington advocacy group, has a spot on its Web site called "Ask Mary Jane" (www.ncpssm.org/ask/index.html). There you can e-mail a question to Mary Jane Yarrington, a long-time congressional caseworker who joined the group in 1986 as a senior policy analyst and has written her question-and-answer column for 14 years. Before you write, check out the list of questions and answers to see whether she has already addressed your problem.
Part II in the Spring 2005 issue explains one of the most confusing and important aspects of Social Security: the rights of your spouse, divorced spouse, or widow(er) to receive benefits based on your work record and contributions.
By Mark K. Harder
As families grow, the members grow up, ownership in the family's business begins to pass to children, in-laws, and grandchildren, and the dynamics of the family and the family's relationship to the business changes. Upon reaching adulthood and with the passage of ownership comes the desire and right to have a say in the conduct of the family's business, whether one works there or not. In addition, as families grow through the addition of in-laws and sometimes stepchildren, even if these persons do not have an ownership interest in the business, these additions to the family exert subtle and not-so-subtle influences on the thinking and conduct of the members of the family working in and owning the business. One way families learn to manage these changing dynamics is by incorporating family meetings into their family business succession plan.
The Benefits of Family Meetings
Family meetings offer numerous benefits to the family. Three of these benefits are opening lines of communication, providing a forum for resolving conflict, and communicating family values to subsequent generations.
Opening Lines of Communication – By having regular family meetings to discuss the business, families have an appropriate forum in which to share their views about the business and to receive information regarding the business.
Conflict Management – Regularly scheduled family meetings offer an opportunity for family members to voice concerns and resolve conflict before the tensions can become so great that the conflict threatens the existence of the family business or the family.
Passing Family Values – Family meetings also offer an opportunity to pass along the family's and the business’s history, culture and values to the younger generations.
What Are Family Meetings?
Family meetings are generally open to all members of the family over a certain age. Although sometimes combined with shareholder meetings, share ownership need not be a prerequisite to participation in the family meeting. Family meetings often include in-laws or stepchildren who may not actually own an interest in the business. Families usually set a minimum age for participation in the meeting, and reaching the minimum age marks a rite of passage into adulthood for the teens or young adults who are invited to their first meetings.
Meetings are typically held once or twice a year. They are best conducted with an agenda. Using an agenda ensures the time spent is productive, keeps the leaders and participants focused and ensures meaningful discussion and action occurs. Usually the agenda includes an update on recent developments involving the business, its products and markets, its leadership and progress concerning the succession planning. This portion of the agenda offers an opportunity for members of the family not active in the business to learn how the company is doing. Involving nonfamily management and directors can provide an opportunity for family members to take their measure of company leadership and to share their views and concerns regarding the business with those managing it.
Family meetings also offer a chance for family to share "family" news, such as a child's decision on which college she will attend and to celebrate individuals' achievements. Finally, family meetings often will include some "fun" time. Some families choose venues for the meetings specifically designed to make it easier for family members to have time to interact with other members of the family they see less frequently and to offer opportunities for fun for all.
For families with little history of holding family meetings, initial efforts should have modest agendas and goals. Families holding their first meetings also might benefit from retaining the services of an experienced facilitator or family business adviser who can assist in setting the agenda and conducting the meeting. This is particularly true if the business is undergoing stress, there is a history of family conflict or there are long-suppressed tensions.
By holding regularly scheduled family meetings, families owning businesses can strengthen their families, the business, and the succession planning process.
Estate Planning Focus
Editor: Susan Gell Meyers
Trusts & Estates Group Chairman: Mark K. Harder
Estate Planning Focus is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Trusts and Estates Group.