Why Do I Need An Estate Plan?

Benefits of having an estate plan

Everyone I know is ready to tackle 2019. How many people have completed their estate plan based on their 2019 goals? Many people have excused themselves from completing this task because they reason that it is unnecessary since they do not have taxable estate. Now, while I agree that most people will be able to utilize the federal estate tax exemption and protect their inherit estate for their heirs from the tax it’s still wise to have a plan in place. With a federal estate tax exemption in 2019 is $11,400,000 (increased from $11,180,000 in 2018), avoiding estate tax is no longer a goal for most Americans.

The IRS states, “most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return.“ However, a carefully constructed estate planning can help you achieve the following goals:

  1. It allows you to choose who you want to receive what, how much and when
  2. It allows you to direct ownership of your assets, rather than letting the courts send your assets to outside parties like creditors
  3. It allows you to make charitable gifts upon your death if that is an important goal for you.

When people ask me, “why do I need an Estate Plan?” I ask them these four questions.

  1. Do you own real estate?
  2. Do you or will you have assets in excess of $100,000?
  3. Will you have debts and liabilities at the time of your death?
  4. Do you have minor children or any special needs dependents?

If they answer yes to any of these questions, then I advise they need an estate plan. Creating an estate plan is no easy task. The two most difficult things the client must do are as follows;

  1. Select a fiduciary
    • A fiduciary is a person or entity who’s job it is to carry out the intentions of your estate plan. Sometimes, single persons choose one or both of their parents. Sometimes, a single person’s parents are divorced and that person has a difficult time choosing between the two parents, and knows that making them work together is an impossible task. Sometimes, a single person’s parent or parents are deceased, so they choose another relative (sibling, aunt/uncle, cousin, etc.) Sometimes, they choose a friend or a trusted professional advisor. Married persons do not have it easier simply because they are married. Yes, married persons certainly choose their surviving spouse, more often than not, but a good estate plan provides for the death of both spouses. So, what then? Should the children become the fiduciary. Depending on their age, this may or may not be a wise decision. At the end of the day, anyone that creates an estate planning document must choose for themselves what person and what successors will be in control of their assets upon their death.
  2. Determine what you want your estate to accomplish
    • It is the client’s responsibility to set goals and plans: avoid probate or not, give outright gifts in a lump sum or partitioned out over time, give charitable gifts, etc.

Once the hard decisions are made a good estate planning team can help you reach your goals. Whether they are: wealth protection and risk management to insure income for your dependents (that’s where your financial planner and investment broker come in), income tax efficiencies for heirs (that’s where your CPA plays an important role), and the orderly transfer of assets upon your disability and death (that is the role of estate attorney). If creating an estate plan is on your 2019 task list, know that you don’t have to undergo this task alone. I would be happy to meet with you and help you get started. Contact Sparks Law office, P.C. at (618) 210-7835.

Employee Handbooks: The Basics

As part of the services we offer, we prepare Employee Handbooks for our clients who own small businesses.  An Employee Handbook is a fairly lengthy document that details all of the policies (not procedures) that your employees are to follow.  The policies to be included depend on the number of employees in the small business.  There are generally three levels of handbooks which may apply: employers having fewer than 15 employees, employers having 15-49 employees, and employers having 50 or more employees.  In this post, you will learn what policies are included in an Employee Handbook for a business with fewer than fifteen employees, and why it is important to implement this document into your business.

What is included in an Employee Handbook?

Here is a basic list of policies that are included in each Employee Handbook:

  1. Employee Matters and Definition of “Employee”
  2. Compensation and Paydays
  3. Scheduled Work Days and Overtime Compensation.
  4. Holidays and Time Off
  5. Mandated Benefits
  6. Standard of Conduct
  7. Disciplinary Procedures
  8. Termination Policy

There are additional policies that are often necessary for our clients’ business operations, some of which include:

  1. Confidentiality
  2. Company Vehicle Use Policy
  3. Social Media and Technology Use Policy
  4. Drug & Alcohol Policy
  5. Additional Benefits

There is no “right” or “wrong” with implementing additional policies; it is all based upon your business’ unique needs and goals.

Why do I need an Employee Handbook?

Employee Handbooks are put in place to protect both the employee and the employer by setting very clear expectations for each party’s responsibilities during the term of employment. Your Employee Handbook should be personalized to your business as well as being compliant with local, state, and federal law.  For this reason, a small business attorney would be your best resource in putting together your handbook.

What Does My Estate Plan Need to Accomplish? Estate Planning for the Blended Family

Estate Planning for Blended Families

No two families are the same.  Because of this critical fact, the way to decide what you must accomplish depends on what your family make up looks like. I’d like to take a closer look at a blended families.  You may be surprised to know that blended families are actually a higher percentage of all families than a traditional married couple with children.

I’d like to introduce you to Tom and Sue Jones, a married couple living in Illinois.  Tom is 56, and Sue is 61.  Tom has two daughters, ages 20 and 16, from his first marriage that ended when his wife lost her fight against a terminal illness.  From her previous marriage that ended in divorce, Sue has three adult children of her own, ages 33, 31, and 21, and two grandchildren ages 2 and 4 months. Together, Tom and Sue’s net worth exceeds $4,000,000.00, and they would like to use their assets in a way that treats each other’s children as their own.

As I work with Tom and Sue to create an estate plan, which cares for their blended family as one family unit, here are the 10 things that Tom and Sue need to consider in order to accomplish their goals:

#1 – Don’t Procrastinate!  They must have a written plan in place.  If Tom or Sue were to become disabled or die, prior to this plan becoming effective, the law would treat Tom’s heirs differently from Sue’s heirs, even though Tom and Sue are married.  My advice to Tom and Sue is to start the decision making process with a decision to create a plan that is effective by the end of this calendar year.

#2 – Give gifts today if they meet your estate planning goals!  Tom and Sue believe that education is a gift that keeps on giving, and they want to include gifts for education in their estate for their children and grandchildren.  Both of Tom’s daughters are still in school, as is Sue’s youngest son.  Tom and Sue know that in Illinois, a 529 College Savings Plan, such as the Bright Directions College Savings Program, is a “Qualified Tuition Program” and withdrawals used to pay for Qualified Higher Education Costs are free from federal and Illinois state income tax. These expenses include tuition, fees, books, supplies, and equipment required for enrollment at a qualified institution of higher education. Room and board is considered a qualified education-related expense if the student is enrolled on at least a half-time basis.  Tom and Sue desire to use their money to the greatest extent possible for their family so considering plans that allow them to save tax on expenses they would otherwise incur is a great approach to allowing their dollars to stretch over time.  I work directly with Tom and Sue’s CPA, who will advise them on any holding periods that apply for these types of funds prior to a withdrawal being made.

#3 – Decide who will care for any minor children!  Tom’s youngest daughter Katie is now 16.  Tom will need to decide who should care for Katie if he were not able to do so.  As I sit with Tom to discuss this, I explain that he can partition the roles between guardian (the person who cares for his daughter) and the custodian of the estate (the person who manages the finances for his daughter).  This allows Tom to choice the best for Katie, while considering two different people to take on those roles.

#4 – Use your Tax Exemptions.  Because Tom and Sue’s assets exceed $4 million, the estate of the second to die will incur a state estate tax liability.  To properly minimize this tax, Tom and Sue will be advised to make certain marital transfers in ways that will allow them keep control and even keep the income their assets are generating.  The rule of thumb for this is to always plan for the future and keep in mind that if you are investing your assets they will continue to grow over time and what you have tomorrow will be more than what you have today.

#5 –  Secure/update health care documents. At the minimum, everyone over the age of 18 needs 1) a Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) for you if you are unable to make them for yourself; and 2) HIPPA Authorizations, which give written consent for doctors to discuss your medical situation with others, including family members.  I advise Tom and Sue to make these decisions so that they are able to have the proper persons making decisions for them when needed in the future.  As we discuss this, I learn that Sue’s oldest son is a medical doctor, and he and Tom have a very close relationship.

#6 – Select the Vehicle for Transferring Your Assets.  Tom and Sue select a Revocable Living Trust over a Will because (a) of the private nature of the trust and (b) the reduced expenses of administering the estate.  This means that Tom and Sue will have a little bit more work upfront updating their beneficiary designations on their assets, but I provide them with a checklist of how their assets should be titled and how to make the necessary changes. In the end, Tom and Sue are eager to do the work instead of having someone else do it later.

#7 – Review and update beneficiary designations!  Although Tom and Sue have been married for over five years, they have not reviewed all of their beneficiary designations on all of their investments.  Sue’s employer was very diligent in helping her make the changes after her divorce, but her current beneficiaries are her three children and not Tom or his children. Similarly Tom’s beneficiary designation still shows his former wife.    Because Tom and Sue’s plans for distributing their assets include a plan to care for one another as well as all of their children collectively, the designation needs to be changed to mirror their intentions.

#8 – Review and update insurance!  Tom and Sue have permitted me to work directly with their team of professionals to determine their current insurance levels and beneficiary designations. In addition to the proper titling of assets, I ask their financial advisor two important questions: (1) Do they have the amount of life insurance coverage to meet their current needs?  (2) Do they have long-term care insurance in place to preserve their family assets and use in the event that either of them should need long-term care due to illness or injury?  Tom and Sue’s financial advisor will work directly with them on these issues and report back to me with any updates or changes that will effect the drafting of the estate plan.
#9 – Get Basic Documents for Unmarried Adult Children.  Although Sue will tell everyone she meets that it came as a shock when she learned that she could not see her oldest child’s college grades without his permission, she goes on to say that she does not want this type of thing keeping her from caring for him if he becomes ill.  I explain to Tom and Sue that unmarried adults (18 and over) need to have a Durable Power of Attorney for Health Care and HIPPA Authorization so you can act on their behalf in a medical emergency.  We also discuss the benefits of a Simple Will and Durable Power of Attorney.
#10 – Talk to your children about your estate plan.  Although Tom and Sue’s children all get along well now, they should expect that this will always be the case.  I encourage Tom and Sue to sit with their children to talk about their estate plan and how they have created an estate plan to be a family plan, each of them having a part of the plan.  I have explained that they don’t need to show them bank and financial statements, but simply talk in general terms about what they are planning and why.  I explain to Tom and Sue that this is important because the more the kids understand their intentions, the more likely they are to readily accept it—and that will help to avoid discord after they are gone.   I remind them as well that this is a good chance to talk to their children about their values and the opportunities that money can provide. Tom and Sue took this opportunity one step farther and have decided that the holidays are an excellent time for families to do charitable work together, and have signed up to work a local charity event over Thanksgiving weekend.

Just like no two families are the same, no two families (even similar) will have the exact same goals.  So, take your time to set your own goals for your family. I’d be happy to schedule some time to meet with you to answer any questions that you may have as you think through those goals.

The Early Years of a Business, Part 5: Mitigating Your Business’ Risks

This is the last post in a five-part series about the early years of a business formation.  To catch up, click here.

After you’ve selected your business entity, capitalized your business, purchased insurance for your business, and maybe even taken on some new employees, you will want to get into the mindset of identifying legal risks present in your business.  Often, your business risks can be minimized at little to no cost to you.

To begin the process of assessing your business risks, you will want to conduct an internal audit to help you identify those risks.  Many hear the word “audit” and believe it to be daunting and time-consuming; even so, an audit will be worth your time now in order to minimize risks and prioritize your business goals.

During an audit, here are the questions you are likely to come across in the process that will prompt the biggest red-flags:

  1. Is there a document for succession of ownership in the case of my death?
  2. Are my key employees prevented from using my business methodology against me in the future?
  3. Do I have an employee handbook that only contains provisions for the size of my business?
  4. Are the terms of my sales/services recorded in a written agreement with my customer that sufficiently limits my liability?
  5. Do I have written agreements for all installment purchases, financial leases, letters of credit, or other similar transactions?
  6. Do I have appropriate insurance coverage and limits for my business?
  7. Do I have legal counsel on all pending or threatened litigation, including claims brought by the business as well as against the business?

Business owners should put into place a system to help them identify their risks now and during future growth.  Knowledge of these risks can provide a great sense of comfort to the business owner. The business owner can either adopt a plan for mitigation of these risks, increase their business model to protect cash flows in the event of a risk, or simply accept the risk and carry on with their business.  Note: Any findings from your internal audits are protected by attorney-client privilege.

The Early Years of a Business, Part 4: Documenting New Hires

This post is the fourth in our series about the early years of a business formation.  Read more in parts One, Two, and Three.

Another step most small business owners take in the first few years is hiring employees or staffing with independent contractors.  All of these professional relationships should be documented through the following agreements, forms, and letters:

  • Employment Contract or Employment Offer Letter. This document should include information such as the job title, scheduled work days/hours, term (or length) of employment, compensation details, responsibilities, and termination conditions.
  • Required Employment Forms/Filings. Some of these forms are likely ones that you are familiar with: the W-4 form for employees (W-9 for contractors), I-9 Employment Eligibility Verification form, State Tax withholding form, and direct deposit form.  You can also run the candidate through E-Verify, a system that checks employment eligibility in the U.S.
  • Necessary Agreements and Policies. When staffing your business, you can begin protecting your business from the get-go by having your staff sign the following agreements: non-competition agreement, non-disclosure agreement, employee invention form, employee handbook with an acknowledgement form, drug and alcohol testing consent forms, job analysis forms (this may encompass responsibilities, goals, and performance evaluation criteria), employee equipment inventory list, confidentiality and security agreements.  Depending on your business type, this list may vary or lengthen to suit your needs.
  • Employee Benefits Documentation. If you offer benefits to your employees, you may need documentation of the following: health/life insurance, mobile phone plan, company vehicle lease, stock options, retirement plan, disability insurance, paid time off or vacation policies (this would also include paid holidays), sick leave, employee wellness perks (such as gym memberships), and tuition reimbursement for continuing education.
  • Personal Data Collection. You also need to gather your staff’s personal data and keep it updated with the following: emergency contacts, brief medical history or relevant impairments, and any food allergies or preferences if there is a company-funded lunch or related event.

Employees are the small business owner’s greatest asset, but they do not come without risks.  Start your employer-employee relationship out the right way through proper documentation.  It will mitigate your risk, and it will also help you get to know your staff and keep you on the same page.

The Early Years of a Business, Part 3: Insuring Your Business

This post is the third in a series we are bringing to you about the early years of a business formation.  If you are getting caught up, here is Part 1 and Part 2.

Since every small business has different needs, there is no longer a one-size-fits-all coverage out there; as such, you are sure to find a plan that truly suits your business’ unique needs.  Here are the categories and types of insurance that, depending on your business, would be invaluable for you to invest in:

  • Property Insurance. This would cover any physical damage or loss your business may suffer, from the building to the supplies and equipment you use.
  • Business Interruption Coverage. This would protect your business’ earnings in the event that you have to close your doors due to an incident. (Note: if you operate your business out of your home, do not assume that your homeowners insurance would cover this loss; check with your provider first.)
  • Commercial Vehicle Insurance. If your business uses vehicles regularly to operate (whether you own them or rent them), this is important coverage to have.
  • Life Insurance. If you work with one or more business partners, life insurance will cover the finances that need to be handled after the death of a partner.
  • Liability Insurance. There are three types of liability insurance, each suited for different business types:
  1. General Liability: covers injury, property damage, medical expenses, and lawsuits.
  2. Product Liability: covers safety issues related to the malfunctioning of a product.
  3. Professional Liability: covers small business owners who provide a service, in the event of malpractice or error.
  • Workers Compensation Insurance. It is possible that, if your business has employees, you have a legal obligation to purchase workers compensation and unemployment insurance; this is the case for any business in the state of Illinois.  You may also be required to have disability insurance to cover an employee’s sickness or injury outside of work.

Remember: Insurance is not just about protecting your business as it exists today, but also to protect your business in the future when it comes time for you to pass your business on to a successor.  As we pointed out in last week’s post: You should always be planning for growth and succession!

The Early Years of a Business, Part 2: Capitalizing Your Business

This post is Part II in a five-part series on our blog about the early years of a business.  Click here to read Part 1.

One requirement to preserve your business structure and limit your personal liability is to adequately capitalize your business entity.  But what exactly is considered “capital” in your company?  Capital can be any asset, whether tangible or intangible, that is held in your company for the sake of long-term investment.

Small business capital can come from three different sources:

  1. Investors.  For business start-ups, the investor is typically you.  However, it is common for outside investors to provide capital in small businesses as well. When you invest money as capital into your company, you typically won’t receive that capital investment back until you sell your business.  This often scares small business entrepreneurs from investing any of their personal cash or savings as capital in the first place.  You will often find that outside investors hold the same hesitancy when investing in a small business; so, many investors prefer a loan structure over a capital-contribution structure.
  2. Retained Earnings.  Retained earnings are the earnings of the business that are not otherwise distributed to you or your investors as salaries, bonuses, dividends, etc. and are thus retained by the business.  These earnings are reported on your balance sheet and they evidence that (a) your business operated at a profit, and (b) you, as the owner, had the discipline to leave this capital in the business instead of distributing it.  For business start-ups, this type of capital is often very hard to attain, and is thus the least common structure for capital investment.
  3. Borrowed Money.  Loans are, by far, the most popular form of capital investment in a small business.  Loans don’t have to just come from a bank; loans can come from family members, friends, investment groups, private equity firms, or private investors.  When borrowing money as capital, remember two things: (1) the interest, and most often the principal, must be repaid systematically in the form of established, regular payments, and (2) your business must have sufficient cash flow in order to make those regular payments.

So, how do you know if you are adequately capitalizing your business?

Begin by asking yourself “Am I able to pall all of the expenses, including the payment of debt, that are necessary to operate my business?”  Project your sales, estimate how long it would take for you to collect your receivables, represent the capital needed and when you would need it.  This gives you your operating cash.  If you are unsure of how to work with these numbers, find an accountant to help you adequately assess your capital needs.

Not only should you plan for short-term capital needs, but long-term needs as well.  I tell all of my clients to plan for growth; in the future of your business, will you be making any large capital purchases?  Hiring employees?  Requiring the research and development of any new products?  Avoid using the operating cash you come up with from earlier to make large capital purchases.  Instead connect with a commercial banker to get an equipment loan with a low interest rate and fixed terms.  You will want to use your own retained earnings for growth and future needs; this may feel like a lofty goal, but sufficient planning and baby steps will get you there!  Remember: It takes more capital to stay in business and grow it successfully than to start it in the first place.  Always be planning for growth!