In This Issue:• Plan Early to Protect Your Family Business.• Announcing our new Partner, Paige P. Baker.• The Debt Ceiling Debate and the Estate Tax,

Pets, Guns, and Alimony.

Volume 2, Issue 2 May 2013

Remarkably, only 15 percent of family businesses pass to the next generation, and even fewer survive to the third (according to a global study conducted by U. S. Trust, Bank of America Private Wealth Management, Prince and Associates and Camden Research).

Odds Are Your Family Business Will Not Pass to the Next Generation Plan Early to Protect It for Your Children and Grandchildren

The MendenFreiMan A Report on Legal Issues Affecting Privately Held Businesses and Personal Wealth

What is even more disappointing is families that believe their business will survive the death of the found-er discover the truth too late. How is it possible that the hard work it takes to build a successful business can be gone in a nanosecond?

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The MendenFreiMan advisorpage 2

Death taxes and creditors can make or break the survivability of your business for the next generationThe federal estate tax, referred to by some as the death tax, can lead to the demise of small businesses. That is because busi-nesses must often be sold to raise the money necessary to pay estate taxes. The toll is especially heavy on first-generation entrepreneurs and minority- and women-owned businesses.These business owners may not be aware of the way death taxes will impact the business – and therefore the family’s standard of living – after the owner’s death.

What death taxes mean to your family business and your legacyThe federal estate tax (death tax) is a tax applied to the transfer of a person’s assets at death. That tax is levied by the IRS on the total value of assets held at the time of death, less an “exclu-sive amount” defined by the tax code.1 Curently, the death tax rate is 40 percent. As staggering as that percentage may be, that is not the whole story. The death tax is also applied at each succeeding generation. For example, a family with $25M subject to death tax, after three generations taxed at an average of 40 percent, only $5.4M of this value would be available to heirs.2

Wealth of Parents $25,000,000 Death Tax (10,000,000) Wealth Transferred to Children 15,000,000 Death Tax (6,000,000) Wealth Transferred to Grandchildren 9,000,000 Death Tax (3,600,000) Wealth Transferred to Great Grandchildren 5,400,000

A succession plan can position the business to surviveMany families have experienced signifi-cant turmoil as a result of a failure to put a succession plan in place. Power struggles and rifts within the family, stemming from decisions about the estate, are often difficult to resolve and can create distrust and ill will among even the closest family members. Most everyone has already seen this play out in the family of someone they know or even in their own family.

The next step is choosing the best tax exclusion, exemption and trust strategyThere are a number of ways to proceed. For example, the gift tax exclusion can be used for outright gifts or for “seed capital” to create leveraged business transactions. The generation skipping tax (GST) exemption can facilitate death-tax free transfers for multiple genera-tions. There is also a type of trust that is disregarded for income tax purposes but respected for death tax calculations. This trust provides protection from future generations’ creditors. These are all extraordinarily powerful tools for in-creasing the likelihood that the business can be passed on to future generations.

Two more tools complete the planning processReduced consumer spending and the credit crisis have impacted business values. A potentially lowered valuation for the business makes this an excep-tional time to plan with business assets. In addition, many planning techniques involve loans to or from related parties. Interest rates used for these transactions are at historical lows, making the benefits of these succession-planning techniques even more impactful.

Planning is worth the effortIf time is money, that is especially true when applied to succession planning. The financial benefit of investing time now to protect a family business for children and grandchildren is a legacy that will touch generations to come.

MendenFreiMan llp 2013

1 In 2013, the exclusion amount is $5,250,000.2 The illustration assumes income and appreciation is distributed to beneficiaries at each generation with principal subject to death tax..

Announcing our neW PArTner,

PAige P. BAker!

We are pleased to announce that Paige P. Baker has become a partner in the firm. A former tax accountant, Paige is an attorney

in the firm’s business, estates and trusts practice groups, where she focuses on the areas of business succession planning, business

transactions and governance (with a particular emphasis on McDonald’s

franchises), estate and trust planning, and estate administration.

Please join us in congratulating Paige!

voluMe 2, issue 2 page 3

Actually, they have something very important in common: your estate plan.

what the debt ceiling debate can tell us about the estate taxThe recent debt ceiling debate showed us a lot about how Congress works. There is public posturing and blaming, to be sure; but there is also negotiation behind closed doors. There are a variety of elements constantly shifting and being discussed until things finally do come together, but there is not a deal until the last piece falls into place. Usu-ally the end result is not something anyone could have predicted, nor what either side wanted from the beginning. No matter how much time there is to make the deal, it seems to always come down to the last minute. We have seen the same kind of thing in recent estate tax legislation. In April 2013, the President delivered his 2014 proposed budget to Congress. If approved, the proposal would overturn the estate tax provisions of the January 2013 deal struck in the American Taxpayer Relief Act of 2012, which “permanently” set the estate and gift tax rates for the highest tax bracket at 40 percent with a $5 million per- person exemption indexed for inflation. Specialized trusts can take advantage of the estate and gift tax laws currently in place. Trusts designed to solve particular estate planning problems include trusts for pets, registered firearms and alimony.

pet trustsMany who have pets have a very real sense of responsibility to care for them, even after their own deaths. Most states, like Georgia, have adopted some form of pet trust legislation that assures the

owner’s wishes regarding pets will be carried out. When setting up a pet trust, think about the owner’s desires, the pet’s needs and how best to accomplish these goals. Consider the following:• Make sure the pet is clearly identified

to prevent a different animal from benefiting from the trust. This is espe-cially important if the pet is valuable or a large sum of money is involved. This can be accomplished with pho-tos, veterinary records, a microchip, even DNA testing.

• One may want to name a different per-son as trustee (to manage the funds) and a caretaker. One person may have both responsibilities, but it may be good to divide them and have one person be accountable to the other.

• One may also want to require that the caretaker sign an agreement to pro-vide proper care and relinquish care to a successor if the promised care is not provided.

• Name successors in case the initial choices become unable or unwilling to act. Include a sanctuary or shelter of last resort if none of the chosen caretakers survives the pet or is able to serve.

• The trust should define what proper care is. For example, expenses could include food, housing, veterinary and dental care, toys, exercise routines, grooming, compensation for persons caring for the pet and burial/crema-

tion fees. Farm animals, race horses and other large or valuable animals could require a full-time caretaker.

• Liability insurance should be consid-ered to cover any potential damage caused by the pet to persons and/or property.

• If the caretaker is subject to additional taxes as a result of distributions from the trust, one may want to increase the distributions to offset the addi-tional tax liability.

• Consider carefully how much money will be needed to fund the trust to provide for this care. If there are no assets, a life insurance policy on the owner’s life may be the way to pro-vide the needed funds.

• Will the trust end when the pet dies, or will it continue for the pet’s de-scendents? In some states, that is not an option. What does the owner want to happen to any remaining funds? Does the owner want them to go to family members or to a charity?

nfa or “gun” trusts As of May 2013, there are five million members of the National Rifle Associa-tion (NRA) and an estimated 300 million firearms in this country. Many families also have guns and other weapons as heirlooms that they would like to keep in the family and pass down from gen-eration to generation.

But weapons present some unique challenges. The National Firearms Act (NFA) as well as state and local laws strictly regulate possession of certain weapons and may affect the transfer of permissible weapons. For example, convicted felons, those with a history of mental illness, persons convicted of misdemeanor domestic violence of-fenses, convicted users of illegal drugs,

pets

The Debt Ceiling Debate and the Estate Tax, Pets, Guns, and Alimony... What Could They Possibly Have in Common?

guns

dishonorably discharged veterans, and persons who have renounced their U.S. citizenship are not allowed to own or possess certain weapons. When an estate includes firearms or other weapons, the executor must be careful to avoid violating these laws. Transferring a weapon to an heir to ful-fill a bequest could subject the executor and/or the heir to criminal penalties. Just having a weapon appraised could result in its seizure. An out-of-state heir creates even more problems. A revocable living trust designed specifically for the ownership, transfer and possession of weapons (commonly known as a gun, NFA or firearm trust) can avoid some of the problems or at least make them manageable. A cor-poration or LLC can also be used to own weapons, but trusts do not require annual filing fees, public disclosure or a separate tax return. Here are some of the main points:• The trust is the owner of the weapons. • The trust document must be carefully

written to account for the different types of weapons held and comply with the applicable laws.

• The name of the trust, once es-tablished, should not be changed. Because the regulated weapon is reg-istered in the trust’s name, a change in the name of the trust would require that it be re-registered and a transfer tax paid.

• The trust can name several trustees, each of whom may lawfully pos-sess the weapon without triggering transfer requirements. (Persons not allowed by law to own or have access to the weapons in the trust are not eligible to be a trustee.)

• Weapons can be purchased by a trustee to avoid having to pay a transfer tax.

• Once a weapon becomes a trust asset, any beneficiary (including a minor child) may use it. However, the trust-ee is still responsible to determine the capacity of the beneficiary to use it.

• Unlike a traditional revocable living trust which can be revoked at any time by the grantor, the Bureau of Alcohol, Tobacco, Firearms and Explosives (BATFE) must approve the termination of a gun trust and the distribution of its assets to the beneficiaries.

• No regulated weapons held in the trust may be transported across state lines without prior BATFE approval.

• Also, since weapon laws vary from state to state, gun trusts may not be valid from one state to another as a traditional revocable living trust would be.

alimony trustsThese trusts are often set up to provide income to an ex-spouse under a written dissolution or separation decree/agree-ment. Here are some of the key points:• Assets are transferred to the trust as

part of the settlement. • The trust’s income is typically paid

to the former spouse for a speci-fied length of time, until a specified amount has been paid or until the ex-spouse remarries or dies.

• The payee (the ex-spouse receiving the payments) pays income tax on the income received.

• After the former spouse’s interest has ended, the trust can continue for the benefit of the children (from the marriage) or terminate.

• The trustee can be a neutral third party who can act as an intermediary between the former spouses.

Planning Tip: An alimony trust may be useful for a business owner who cannot or does not want to sell an interest in the family business to make payments to his former spouse or if the business lacks the liquidity to redeem the stock of the for-mer spouse. It can also protect the payee (ex-spouse receiving the income) in the event the payor should die or become financially insolvent before all payments have been made. One downside is that the trust can become under or over funded, so care should be taken when creating and funding the trust.

conclusionThese are just a few of the specialty trusts available to us for estate planning. We are living in interesting times. We currently have an exceptional window of opportunity available to us in estate planning, and we can help make the most of them. Call us and let’s get started. Regardless of what Congress does or does not do, control and protection of assets, improving the predictability of the future, and doing good rather than harm with accumulated assets remain the principal reasons for estate planning.

MendenFreiMan llp 2013

Business can be complicated. Life can be complicated. Simplifying the “complicated” is what makes MendenFreiMan llp distinctively different. Our attorneys have strong tax, accounting and financial backgrounds which create an opportunity to analyze each client situation from a number of points of view. We not only relish the opportunity to apply what we know to solving complex client problems, but to do that in a caring and supportive way. Services include Business Representation and Transactions, Mergers and Acquisitions, Estate Planning, Wills and Trusts, and Estate Administration.

Two Ravinia Drive, Suite 1200, Atlanta, GA 30346 www.mendenfreiman.comPhone: (770) 379-1450 | Fax: (770) 379-1455

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