Admittedly if you have minor kids, you are going to make plenty of mistakes.  One of my personal bests was letting by daughter eat a whole bag of chocolate chips to teach her a lesson – not a good idea.  But I am not alone; many families out there make even bigger mistakes by not having some basic estate planning issues covered once they have children.  Here are some of the most common problems we see for these families:

 1.             Naming a minor as a direct beneficiary on retirement assets, life insurance or a POD account.  I covered this problem in my May 2009 newsletter but it bears repeating – do not name a minor as a direct beneficiary…ever!  Minor beneficiaries create unneeded administrative problems and usually require the creation of a court ordered guardianship.  The added expense often takes a substantial toll on the financial resources intended for the beneficiary.

 2.             Not having a Will and assuming that a surviving spouse will inherit the entire estate.  It is true that if a husband and wife own property jointly or have life insurance and retirement that passes by beneficiary designation, then those assets will almost always pass to the spouse even if there is no Will.  However, some assets can only be transferred under a Will or by default under the North Carolina intestacy laws.  If one spouse has a substantial amount of liquid assets or real estate in his or her individual name and there is no Will, the intestacy laws dictate that some of those assets must be divided between the children and the spouse. 

3.             Not having a Will and failing to name a personal guardian for the children.  When a couple has their first child the choice of guardian is typically the most important decision in their estate planning.  If something happens to both of them who will become the child’s surrogate parent and where will they live?  This is a personal and often a very difficult decision, but it is something that deserves attention.  Ultimately the courts will decide the choice of guardian, but they rely heavily on the nomination of the parents provided in the Will.

 4.             Not having enough life insurance to provide for surviving spouse and children’s education.  Even though most families now have two wage earners, this doesn’t obviate the need for a decent amount of life insurance to cover the risk that one spouse may die unexpectedly.  In that case a surviving spouse is left with the substantial task of raising kids and being the primary source of financial support for the family.  Most families also want to ensure that there are enough funds for college education for the children.  When all the costs of child care and college education are added up many families simply don’t have enough life insurance in place to foot the bill.

 5.             Assuming that there are no estate tax concerns if you are just starting to build your net worth.  Most young families start out with a zero net worth and they don’t think of themselves as wealthy enough to be concerned about estate tax.  However, many of these families have avoided the mistake in number 4 above and have substantial life insurance in place.  Remember life insurance is usually counted as part of your estate for estate tax purposes.  When the life insurance proceeds are added to other assets many young families are bumped into a net worth that does have estate tax exposure and they need basic tax planning in their documents.

The best advice I can give is simply to begin the process.  Talk to your advisors about these issues once you have children. Oh and if any of you have suggestions on how to get melted chocolate out of carpet….


Hopefully many of you remember Vitameatavegemin from the classic “I Love Lucy” show.  How in the world does this relate to a limited liability company (LLC) you say?  Well is your LLC tired, run down, listless?  Has it fallen out of good standing and is it failing to follow corporate formalities?  If so, you may need to pep it up a little.  I touched on this topic briefly in an earlier newsletter addressing limited liability protection.  To make sure you are taking the necessary steps with your LLC, consider these tips:

A common question I hear is whether LLCs are required to have annual meetings.    The answer is “No.”  One of the benefits of the LLC as compared to a corporation is that many of the traditional legal requirements are relaxed; thus the LLC form is more flexible and more suited for many small businesses.  However the LLC should have some form of minutes or consent action signed by the managers or members to approve any major transactions within the LLC as they occur (such as a change in ownership, change in manager, or sale of business).  This does not mean you need a consent action when your LLC buys a new coffee machine, though this may be one of the most important purchases you make!  If you are not sure what transactions require approval of the members, check your operating agreement.  Whenever the LLC borrows money from a bank, the bank will require the LLC members or managers to approve the loan transaction through a similar form of consent action or minutes.  All of these documents evidence official legal action of the members or the managers and should be maintained along with the other LLC records.

The ownership records for an LLC should not be taken for granted.  Most LLCs that we organize don’t issue ownership certificates.  Again this is a distinction from corporations which usually have stock certificates.  Instead the LLC ownership is recorded and maintained on a schedule in the LLC’s operating agreement.  Whenever there is a change in ownership, such as upon death of a member or sale of an interest, this ownership schedule should be updated.  Some LLC owners prefer to rely on the LLC tax returns and their CPA to keep track of the LLC ownership, but this is a mistake and it can lead to problems later if there is any inconsistency in the tax records versus the LLC documents.  The better practice is to update the LLC ownership schedule as needed and then send a copy of the updated schedule to the LLC’s CPA or tax professional for use in the income tax reporting.

Finally, one of the most important items for an LLC is to keep the annual reports current with the NC Secretary of State.  In North Carolina an LLC must file an annual report by April 15 of each year together with a $200 annual filing fee.  These reports require very basic information about the LLC and its managers or members and can be filed online.  From time to time the Secretary of State conducts audits of its LLC filings and initiates administrative dissolution of LLCs which don’t have their reports current.  If you receive a notice from the Secretary of State along these lines, be sure to give that filing attention.

It doesn’t take much to maintain an LLC, but it is easy to let some of these simple items fall through the cracks.  If it has been a number of years since you have focused on your LLC corporate records, you should dust them off and see what you have and what you may be missing.  And if all else fails join the thousands of happy peppy people…watch I Love Lucy and you’ll understand.


Gifts of your real estate can be a bad idea for taxes. What?????? Many of you have probably heard that you should give real estate to your kids to help minimize estate taxes….yes that is still true….but that is only applicable if you have a large estate that will be subject to estate tax.  For most people estate tax is not a real concern.   Thanks to Congress and its ability to get only politics done….we don’t know who is subject to estate tax at the moment. We’ll know that answer at least by the end of 2010 but for now let’s just assume that if you have less than $1,000,000 then you have no estate tax concerns. 

 So if you have no estate tax concerns, a gift of your real estate is not saving your family estate taxes; you are wasting your time and money.  Of course your kids may not feel that way…who doesn’t enjoy ownership in a beach house or mountain cottage. However they may be interested to learn that the gifts can be bad for their income taxes if they ever plan to sell the property.

If you make a gift of your real estate during life instead of passing the property at death, your kids will use the same cost basis you have in the property to determine their income tax if they ever sell the property.  Basically your kids step into your shoes with regard to the built in capital gain in the property.  Admittedly, with the recent real estate turmoil, appreciated property ain’t what it used to be, but there are still plenty of old family farms out there that have vast appreciation built in which has not yet been taxed.  If that property is passed at death, the cost basis is increased to the fair market value of the property and the capital gain is wiped out, at least to the extent the gain is below $1,300,000.  On the other hand, if you transfer the property through gift during life, you loose the benefit of this basis adjustment and your kids will have higher income taxes if they ever sell the property.  This rule is true for all kinds of property (stock, art, etc), but real estate is the most common application.

As with any area of tax law there are some exceptions and special facts which may dictate a different plan of action.  For example, if the real estate is a principal residence occupied by the child, or if the property is expected to appreciate substantially, or if the family is exploring planning to help with medicaid qualification, then these factors may justify a gift even in the face of the potential income tax detriments.  Also, the basis adjustment rules are in flux at the moment and are likely to change further as part of the resolution of the estate tax, whenever that happens.

If you are considering a gift of real estate, make sure you consult your tax advisor first to determine whether you are gaining or loosing any tax benefits.



George Bailey….you’re worth more dead than alive!

Remember poor George Bailey and his life insurance?  Ok that is not one of the high points of It’s a Wonderful Life….but that quote always reminds me of a common misunderstanding my clients have about counting their assets for estate tax planning purposes.  Life insurance is an often overlooked asset that greatly enhances the value of your estate.  Even if your life insurance is a term policy and has no cash value, we have to look at the potential death proceeds in determining the size of your estate and whether we need to worry about estate tax.

 That’s right…even though you’ve always heard that life insurance is not subject to tax; that is only partially correct.  Life insurance is generally not subject to income tax, but if you own a life insurance policy on your own life, the death proceeds are counted as part of your estate for estate tax purposes regardless of who gets those proceeds.  So if you add up all of your assets and then you lump the death proceeds from a big life insurance policy on top, you may find that you have an estate tax issue.  Although there is no estate tax at the moment, the tax will be automatically reinstated no later than January 1, 2011 and unless Congress gets it act together, the individual exemption will be $1,000,000 at that point (see my January 2010 Counselor’s Corner).  At that level life insurance will have a much bigger estate tax planning impact for numerous clients.

 If you have a large life insurance policy as part of your estate, what can you do?  If your adult children are the intended beneficiaries, you can transfer the policy to your children as a gift; if the policy has little or no cash value then this can be a very efficient way to reduce your future taxable estate.  On the other hand if you have minor children or if you wouldn’t trust your adult children to take care of your dog much less own and maintain a valuable insurance policy, then your planning may require the creation of a life insurance trust to own the policy.  In either case, you will have to consider a few important facts such as the current cash value and the continued premium payments for the policy.  If you plan to continue to make the premium payments to maintain the policy then those annual payments will be gifts, and your advisors will need to ensure that you properly use your gift tax exemptions to avoid any gift tax consequences.

 One more little trick the IRS has is the so-called 3 year rule.  If you read this article and decide that it sounds like a great idea and give that life insurance policy to your kids, please be sure to consult your attorney or other tax advisors first.  Second be sure to live at least three more years.  If you die within three years of gifting a life insurance policy then the gift is basically ignored and the death proceeds will be included in your estate.  As you might expect, enterprising attorneys have devised ways to avoid the three year rule, but these options can be pretty complicated and for that you’ll have to talk to you own counselor.

 Remember any day you don’t have to think about death or taxes…It truly is a Wonderful Life!


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