Category: Business Planning

Being self-employed is no easy task. You are the owner, and in some cases, the only employee. While you may have more freedom than the average worker, a lot of responsibilities lie on your shoulders. Working together, we can craft a comprehensive estate plan that will help you address three important concerns you may have.

Protecting Your Financial Future

You are your own boss, and you have your own business. That means it is your responsibility to obtain the important things we associate with employment, such as retirement accounts and insurance. To properly plan for your financial future and the future of your business and loved ones, it is important to have a comprehensive plan and an experienced advisor team. The right advisor team can educate you about the available retirement plan options and the best investment strategies based on your unique situation. You can also discuss the different types of insurance you may need to protect the important aspects of your life, such as disability, life, and business insurance. An experienced advisor team can help you determine how much insurance you need to ensure that you and your loved ones are protected no matter what, as well as how best to protect what you have worked so hard for.

Protecting Your Business Endeavors

As a self-employed individual, your business activities are likely to support most if not all of your financial needs. It is important that these activities are protected to ensure that you can support yourself and your loved ones no matter the circumstances. By working with an experienced planning team, we can address some important considerations that may be keeping you up at night:

• Are you the only person making money for the business, or are there employees?
• What will happen to the business if you become incapacitated? Can the business continue without you, or does all work halt?
• What will happen if or when you decide to retire? Will you need a different source of income, or will you have some aspect of your business that you can sell?
• What will happen to the business and your loved ones when you die? What will be left to support your loved ones?

Limiting Liability

Everything in life comes with a certain amount of risk—being self-employed is no different. From a business standpoint, a self-employed person may be personally susceptible to the business’s creditors or other lawsuits involving the business’s activities. As an individual, you may also be concerned about personal creditor claims, potential divorces, and other lawsuits. Although we cannot eliminate all risks, we can take steps to help minimize them. With respect to the business, it is important for you to work with an experienced attorney and tax preparer to ensure that the business is formed or organized in a way that limits liability for some of the potential risks. Personally, you can take the first steps toward protecting yourself and your business by adequately insuring both. If you are concerned about protecting what you leave behind to your loved ones, there are special types of trusts that can be used to help ensure that your loved ones can benefit from their inheritance while minimizing the likelihood that it will be taken and used for a different purpose.

We understand that you have a lot on your plate. Let us take part of the burden off of your shoulders by crafting a plan that is unique to your personal circumstances. Give us a call so we can schedule your first meeting and get you on the path to a protected future for you, your business endeavors, and your loved ones.

One of the many challenges of owning a small business is determining the appropriate tax classification of the business. When an individual owns a business entity that is classified either entirely or partially as an S corporation, it is important to seek the guidance of an experienced estate planning attorney and tax advisor when planning for death. Depending on your estate planning goals, the advice provided by these professionals may be very different from the advice given to another business owner.

For example, upon your death,

• Do you intend to pass on your business as an ongoing business entity that will produce income for your spouse or loved ones?
• Is it important that the business continue to operate for years after your death to provide employment for your employees?
• Or would you prefer to sell the company to the other owners in exchange for cash, which can easily be distributed among your beneficiaries?
• Alternatively, do you intend to simply have the business shut down and have the assets sold? 
• Is it important that your beneficiaries be protected from lawsuits, divorce, or bankruptcy once they receive their inheritances?

As you can see, there are various scenarios that should be considered by a business owner when it comes to estate planning with a viable business. And because of certain federal laws, your estate planning must carefully address a business that is taxed as an S corporation.

What is an S corporation?

The Internal Revenue Service (IRS) describes S corporations as “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” This election is allowed under § 1362 of subchapter S of the Internal Revenue Code (I.R.C.), which is where S corporations get their name. Unlike a C corporation, which is first taxed on profits when earned and then taxed again to the shareholders when those profits are distributed, an S corporation offers the tax advantage of being able to pass income to the shareholders without first being taxed at the corporate level. The shareholders report their share of the S corporation’s profits and losses on their individual tax returns and are assessed tax at their individual income tax rates.

Under the Internal Revenue Code, an entity must meet the following criteria to qualify for taxation as an S corporation:

• It is incorporated within the United States.
• It has only one class of stock.
• It does not have more than one hundred shareholders.
• The entity’s shareholders are individuals, specific types of trusts and estates, or certain tax-exempt organizations. Partnerships, certain corporations, and nonresident aliens cannot be shareholders of an S corporation.
• It is not one of the types of corporations ineligible for S corporation taxation, such as certain financial institutions, insurance companies, and domestic international sales corporations.

What types of trusts can own stock in an S corporation?

As stated above, only specific types of trusts may be shareholders of an S corporation. The three most common types of trusts used to hold S corporation stock or membership interests are a grantor trust, a qualified subchapter S trust (QSST), and an electing small business trust (ESBT). (A voting trust may also be used but is beyond the scope of this article.)

Grantor Trust

In general, a grantor trust is a trust in which the grantor (also called the trustmaker) retains certain powers over the trust, which causes the trust income to be taxable to the grantor. The commonly used revocable living trust is one type of grantor trust. Because of some of the disadvantages of QSSTs and ESBTs (discussed below), a grantor trust is often the preferred type of trust for owning an S corporation. However,  grantor trusts (as well as testamentary trusts) may generally hold S corporation stock for only two years after the death of the grantor, at which point the trust must either qualify as a QSST or ESBT or distribute the stock to an eligible shareholder. Otherwise, the corporation’s S election will terminate.

QSST

A trust may qualify as a QSST if it meets several criteria:

• The trust has only one current beneficiary who is a US citizen or resident.
• All trust income is distributed to that sole beneficiary.
• The income beneficiary files an election with the IRS.

A QSST may work well in many circumstances; however, its requirements can also be unfavorable in certain situations. For example, the requirement that there is only one current beneficiary means that the beneficiary’s children cannot also be beneficiaries of the trust. In addition, the requirement that all income is distributed to the beneficiary means that the income must be distributed regardless of the beneficiary’s need, potential taxable estate, or troubling behavior. Further, that distributed income would be exposed to the beneficiary’s creditors, lawsuits, and divorcing spouse. Some practitioners create multiple trusts to isolate subchapter S stock in a trust that meets the criteria and allow other assets to be held in a trust with different terms.

ESBT

In general, a trust may qualify as an ESBT if it meets the following criteria:

• The trustee of the trust files an election with the IRS within a certain time frame.
• The beneficiaries of the trust are all permissible beneficiaries under the Internal Revenue Code

Advantages of an ESBT are that they are not subject to the single beneficiary and mandatory distribution requirements of a QSST. In addition, because of certain phaseout deduction limitations that apply to individuals but do not apply to an ESBT, holding S corporation stock in an ESBT could result in income tax savings. However, the general rule is that all of an ESBT’s income is taxed at the highest federal income tax rate, so if not all trust beneficiaries are in the highest tax bracket themselves, the overall tax could be higher when using an ESBT to hold S corporation stock. If the trust beneficiaries are not in the highest income tax bracket, some practitioners use careful drafting to cause the beneficiaries to be treated as grantors or owners under I.R.C. § 678, which takes precedence over the regulations governing ESBT income taxation. 

When dealing with S corporation stock, it is essential to follow the S corporation requirements to ensure that the corporation’s S election does not terminate and result in disastrous tax consequences. If you currently own shares of stock in a business being taxed as an S corporation, call us to start forming a plan about what will happen to your business at your passing. Your loved ones and employees will thank you.

A family office provides management services to a family whose businesses and wealth have become too complex and significant to manage by themselves. A family office often combines investment, legal, and tax services along with lifestyle and administrative services, such as making travel arrangements or coordinating the use of the family’s private aircraft. In addition to supporting and simplifying a high-net-worth family’s lives, here are seven more reasons for considering a family office.

Reason 1: Passing Lessons and Values On to the Next Generation

With the structure and support processes of a family office in place, families are more likely to create an overall mission and cohesive vision for the legacy they would like to build. A family’s long-term vision will likely include more than just accumulating additional wealth; it will also include such things as charitable giving or making a social impact on the world in other ways. A family office can coordinate projects and plans that can help the next generation understand their potential role in executing the family’s long-term vision, as well as provide education and training to ensure that younger family members are ready to step into management or ownership roles that contribute to the family’s overall mission.

Reason 2: Comprehensive Investment Solution with Higher Returns

Families often think of their wealth in terms of separate silos: the family’s primary operating business is separate from its investment portfolio, which is separate from its real estate, which is separate from its charitable efforts. However, this disconnected mindset often inhibits a coordinated planning strategy that includes all of the family’s assets and liabilities.

Because a family office provides a centralized and comprehensive investment solution tailored to the family’s unique values, goals, and competencies (such as industry expertise or networks), family offices can often lead to higher returns without creating additional risk.¹ Further, because families who use a family office are more likely to have conversations about investment decisions and performance, there is a greater likelihood that they will reach their financial goals. Finally, a family office, with its built-in reporting and feedback, allows a family to respond quickly when a change in investment strategy is needed.

Reason 3: Comprehensive Legal and Tax Planning Solutions

As a family grows and develops, so does its need for comprehensive legal and tax planning. Life events such as marriage, retirement, divorce, and death require planning ahead to establish the right tax, insurance, and legal strategies. A family office, with legal and tax experts who understand the family and its internal dynamics, ensures that the proper plans will be in place to minimize disruptions to achieving the family’s goals when unexpected life events occur.

Reason 4: Efficiency

A family office can avoid duplication of effort and thus be more efficient and economical. By delegating the management of certain activities to a family office, family members are free to use their time and energies as they choose. Family members can also benefit from economies of scale because investing a single large pot of funds is more cost effective than having many small accounts. In addition, for many activities, adding more family members only marginally increases the activity’s cost. 

Reason 5: Increased Information Flow

A family office can serve as the center for gathering and summarizing information related to the family’s businesses, investments, property, and charitable endeavors and then circulating it to the family at large. Families with family offices report that they are more informed about family matters, which promotes a feeling of transparency among all family members and in turn increases trust within the family.²

Reason 6: Maintain Privacy and Relationships

Working with a private family office instead of several different service providers minimizes both the number of people who have confidential and sensitive information about the family as well as the disruption that comes with change at the service provider level. By limiting the sharing of private information to a need-to-know-basis in the family office, the family can better minimize the risk of, and protect itself from, external threats such as extortion or fraud.

Reason 7: Create Career Opportunities

Not every family member who wants to work in the family business will have the opportunity to do so. A family office, with its array of investment, development, managerial, and charitable activities, provides additional career opportunities for family members to participate in and enables them to contribute to the family’s greater mission, even when opportunities within the primary family business may not be available or the right fit.

While creating a family office may seem overwhelming, there are many good reasons to begin exploring the idea if your family’s wealth is becoming increasingly too complex to continue managing alone. Start with implementing the services for which your family has the greatest need and build over time. Given the many reasons to consider a family office, not having one could be more costly to your family in the long run. To learn more about a family office and how it could help your family, please call us.

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Footnotes

1. Marius A. Holzer & Courtney Collette, The Value of a Family Office: A Deep Dive into the Benefits and Services a Family Office Can Provide to a Family, Cambridge Family Enterprise Group, https://cfeg.com/insights_research/the-value-of-a-family-office (last visited May 27, 2022).
2. Id.