Q&A: Maximize Your Legacy for Your Grandchildren

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You’re a financially successful grandparent who wants to leave a big legacy for your grandchildren. You would like to maximize the legacy you leave them while minimizing taxes. Here are some questions you’ll need to consider:

Q. Will the Generation Skipping Transfer Tax (GSTT) limit what I can give to my children?

The IRS imposes a transfer tax at each family generation:

  • If an asset passes from a parent to a child, and then from the child to a grandchild, estate tax is imposed in both the parent’s and the child’s estates.
  • If a parent passes the asset to the grandchild to try to bypass the child’s estate and avoid estate tax,  it may be subject to another transfer tax, the generation-skipping transfer tax.
  • This tax is particularly onerous because it is imposed in addition to the estate tax incurred in the parent’s estate and is assessed at a flat 45% rate.

As a result, when the GSTT applies, it may result in more than 75% of the assets passing to the grandchild being consumed in estate taxes and generation-skipping taxes.

Q. At what amount does the tax kick in?

The IRS provides each individual with a “GST exemption” of $5.25 million. In other words, each individual may engage in generation-skipping transfers of up to that amount without subjecting those assets to the GSTT.

Q. Can I leave even more without losing much to taxes?

Many individuals who might otherwise leave their entire estates to their children allocate their generation-skipping exemption – currently $5.25 million – to generation skipping trusts for the benefit of their children and grandchildren.

Q. Would a trust help if I don’t have that many assets?

The trust advantages go beyond tax savings. Using the generation-skipping tax exemption offers two important advantages:

  • The trust will escape all transfer taxes when the children die and will pass to the grandchildren tax-free.
  • The trust may be protected from the claims of creditors and, to some degree ex-spouses. (some states protect inheritance in divorce proceedings.)
  • Gift, estate and generation skipping tax laws are constantly changing. The exemption amount has been as low as $1 million and the tax, as high as 55%.

Historical Generation Skipping Transfer Tax Exemptions and Rates

Year GST Exemption GST Tax Rate
1997 $1,000,000 55%
1998 $1,000,000 55%
1999 $1,010,000 55%
2000 $1,030,000 55%
2001 $1,060,000 55%
2002 $1,100,000 50%
2003 $1,120,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 No generation skipping transfer tax N/A
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%

In view of the uncertainty in tax laws and of the erratic nature of lawmakers in the United States, any grandparent with assets totaling more than $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.25 million gift and GST tax exemptions. Even individuals with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.

Q. How Do I Set Up a GSTT Trust?

1. Establish a trust. Appoint a trustee

2. Fund it up to the GSTT exemption.

3. Leverage the trust assets through life insurance.

The example below provides a brief summary of what a Dynasty trust can do for you. Please note that states may limit the term of the trust:

dynasty_trust_l

Leverage Your Legacy

If you and your spouse are healthy and qualify for life insurance, the trustee can also purchase life insurance on you. The advantages:

  • The death proceeds go to your children and grandchildren, exactly according to your wishes.
  • The proceeds are generally received by the trust both income and estate tax free.
  • You can provide for multiple generations – including both children and grandchildren.

Speak With a Planner

Estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.

Takeaways

  • The uncertainty of tax laws means that any grandparent with assets over $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.2 million gift and GST tax exemptions.
  • Grandparents with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.
  • If you are healthy enough to qualify for life insurance, it can greatly multiply the amount that you leave to future generations.

Note: 2013 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

Under ATRA, the federal estate tax exemption has been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, but the estate tax rate for estates valued over this amount has increased from 35% in 2012 to 40% in 2013. In addition, the lifetime gift tax exemption has also been indexed for inflation and increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum gift tax rate has increased from 35% in 2012 to 40% in 2013. The generation skipping transfer tax exemption has also been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum generation skipping transfer tax rate has increased from 35% in 2012 to 40% in 2013.

Warning & Disclaimer: This is not legal advice.

Is There a Ready Market for Your Business?

small businesses for sale

According to The Complete Guide To Business Brokerage By Tom West, the number of small to mid-sized, privately owned businesses for sale in the United States is estimated to be approximately 1 million – or 20% of them at any given time. But only a small number of them get sold:

  • 1 in 5 small businesses sell
  • 1 in 4 small to mid size businesses sell
  • 1 in 3.5 mid-size companies sell
  • 1 in 3 large companies sell

Shut Happens

There may be no ready buyers for your business, and you may lose your most hard earned asset. Consider this example.


out of businessExample:
 You and your partner  are 50/50 partners.  Your partner dies, and his wife or child inherits his share of the business.

  • Do you have the right or the obligation to buy them out? 
  • If so, for how much and on what terms?  
  • Can you strike out on your own, or are you stuck with the baggage of the old one? 

What if you die instead of your partner?

  • Will your partner pay your family a fair price for your share of the business?
  • Will he just walk away and start up a new business on his own?

The 3 Problems of Business Continuation


1. No buyers offering a fair price
 – There may not be a ready market for your business in even the best of economic times, and unforseen events like death or sickness can force a fire sale. You may work hard all your life to build a business, but have nothing to leave your family.

owner's son2. Forced Partnership with a spouse or child – If you don’t have the cash to buy out your partner’s interest,  you may find yourself in business with a spouse or child who may actually be a drag on the profits and viability of your business.

3. Can you leave a family legacy? - If you die before your partner, what assurance do you have that your surviving partner will pay your family a fair price for your share of the business?

Robert W. Wood, who writes about taxes and litigation issues for Forbes, sums up why a  buy-sell agreement is so important for anyone who owns any kind of business:

Without it, a closely held or family business faces a world of financial and tax problems on an owner’s death, incapacitation, divorce, bankruptcy, sale or retirement…A buy-sell agreement can ward off infighting by family members, co-owners and spouses, keep the business afloat so its goodwill and customer base remain intact, and avoid liquidity problems that often arise on these major events.

Creating a Market for Your Business

Business-succession specialists and financial planners often recommend an insured buy-sell agreement to ensure that your family can receive a fair value for the business you worked so hard to build, and allow you to buy out your partner’s share and continue the business as a going concern. It does two things:

  1. It creates an immediate market for your business (your partner or a successor employee.)
  2. It  can create immediate funds for a fairly valued buyout through insurance.

The 5 Guarantees of A Properly Structured Agreement

buysell.png

A properly-structured agreement will guarantee the following:

  1. guaranteed purchaser
  2. guaranteed sale
  3. guaranteed price
  4. guaranteed time
  5. guaranteed funding

1. Guaranteed Purchaser

Who will buy?

  • the surviving partners must buy

2. Guaranteed Sale

Who will sell?

  • the estate of the deceased partner must sell

3. Guaranteed Price

What is the price?

  • have a formula or outside valuation

4. Guaranteed Time

When to transact?

  • automatically at time of
    • disability
    • retirement
    • death

5. Guaranteed Funding

How to pay?

Implementing A Simple and Cost Effective Solution

Cross Purchase vs. Redemption:  One type of agreement is a cross-purchase:  If you or your partner/successor dies, becomes disabled, goes bankrupt, etc., the other can buy his share.  With a redemption style agreement, the business itself would make the purchase so the owners don’t individually go out of pocket.

With either type of buy-sell, there’s lots of flexibility.  The price might be fixed, determined by appraisal or formula.  The price might be paid in cash or installments over time.  There can be different terms for different events, one price and terms for retirement, one for disability, one for death.

Insurance:  Insurance features prominently in many buy-sell agreements.  You don’t have to use insurance, but it can ensure there’s cash available when the time comes.  For example, whether you or your partner/successor dies first, a life insurance policy on each of you can fund the buyout so your business stays afloat and the spouse/heirs are bought out as agreed.  A buy-sell agreement is funded with life insurance on the participating owners’ lives can guarantee that there will be money when the buy–sell event is triggered. Using insurance to fund the buy/sell agreement has these advantages

  • funds are available when needed
  • least expensive solution
  • new owner does not incur debt when buying the business

Reciprocal Planning:  While you may find it difficult to face these issues and to make some of the decisions, any buy-sell agreement is better than none.  The best thing about buy-sell agreements are that they are reciprocal.  No one knows for sure if you or your partner will be the first to go by death, disability, retirement, or for other reasons, and this reciprocal nature makes negotiating and agreeing on these issues easier to do.

How to Get Started

You’ll need a business or tax lawyer experienced in buy-sell agreements to draft it.  However, these agreements can be surprisingly simple and cost effective. Whatever you pay for it and the insurance premiums on an insured arrangement will be small in comparison to what it can save you. 

One of the best starting points is a financial planner or insurance specialist. They may have prototype documents to recommend to your attorney, but, more important, they may have invaluable experience and can give you guidance in thinking out the key decisions before you meet with an attorney to get it done, which will save you time and money.

Additional Resources:

 

losing_contact

NewLink Consulting, Toronto found: 29% of U.S. life policyholders lost contact with the agent/financial planner who had sold them the policy, and 41% if the policy was purchased from an agent/broker.

Guest blogger Mark Weishaar

An orphan can be defined as “One who lacks support, supervision or care”.
How many do you have in your CRM database? How many customers have simply become dormant and shuffled into an inactive or unassigned category?

In a recent conversation with my client from a major life insurance carrier, I was appalled to learn that her company had well over 100,000 orphaned policyholders. In insurance-speak, these are folks who originally purchased a policy from an agent, but were never re-assigned after that agent left the company.

Many industries have a similar category in their database. Inactive bank accounts, infrequent flyers, one-time visitors… the list goes on. It gets me thinking: how many organizations could use a shot in the bottom-line? This category represents a huge untapped asset:

  1. Orphans are never contacted. You have forgotten about them, and they have forgotten about you. How likely are they to ever upgrade or buy another product or service from you? 
  2. If your competition is effectively marketing – and you know they are – how many competing offers can your orphans resist? Retention rates suffer when customers are ignored. 

The ROI of Marketing to Orphaned Policyholders

Let’s put some dollars and sense behind a simple illustration exercise: 

With the potential for this scope of increased revenue, it makes no sense to me that so many insurance companies do not devote any attention to their orphaned policyholders. Political turf issues over account re-assignment? Possibly. “Don’t rock the boat” and “Let sleeping clients lie” mentality? Maybe. Inertia? Most likely. 

Case Study: A short while back, I worked with a major hotel chain to develop a multi-pronged marketing campaign. Our objective was to revitalize their “dormant” clients: those who had not booked a room within the previous 24 months. Of the many successful initiatives we launched, the highlight was going back to the dormant customers.

After modeling their data against the frequent guests and re-soliciting a predictive-modeled group with an offer, we generated an ROI of 1,090%!

Unheard of? Yes. But true. And I could predict similar successes in your own organization.

So take a look at your entire customer file. Find those pockets of orphaned customers who have been ignored for whatever reason. Develop a strategy to solicit them with a product offering using a predictive model-driven approach. The incremental revenue generation and low acquisition costs are likely to amaze you, and will demonstrate once again the truism that:

Your Best Customer is Your Current Customer.

Mark Weishaar is a veteran financial services direct marketer and senior executive delivering broad range of leadership responsibility, experience and accomplishment across brand strategy, marketing, loyalty programs, customer data analytics, distribution, CRM, and social media on a worldwide basis.  He has directed the sales & marketing of a wide variety of financial services products and programs and held senior level roles in start-ups and  Fortune 100 companies in direct marketing environments, and  traditional agent/advisor companies. He has a unique ability to analyze and develop actionable marketing and sales programs with measurable ROI improvements.
Want to chat with Mark? Reply to him here or leave a comment on the blog.

advisor-trust-chart2

Who Do You Trust?

 notes in HealthLifePro, that Americans’ trust in advisors has declined. A study by Hearts & Wallets, Hingham, Mass titled “Trust-Building Practices: Updated Empirical Analysis of What Drives Trust,” gauged trust on a scale of one to ten (one signifies very little trust and ten very high trust.) The study’s findings:

  • Just one in five Americans fully trusted their financial advisor in 2012 – a four-point decline since 2010.
  • Those awarding their advisors 9 points declined from 18% in 2010 to 13% in 2012.
  • Those awarding their advisors 8 points declined from 21% in 2010 to 17% in 2012.

The most trusted advisor practices are full-service brokerage and insurance practices versus self-service brokerages and banks:

  • 74% rate  insurance and full-service brokerages a 9 or a 10 (37% each.)
  • Only 60% rate self-brokerages and banks a 9 or a 10.

What Drives Advisor Trust?

The top trust drivers of trust were ranked as follows:

  • improving investor understanding of how the provider earns its money (by a wide margin)
  • the perception that an advisor is unbiased
  • clear and understandable fees
  • responsive
  • understands and shares the client’s values
  • has made money for the client
  • has produced a “positive experience” for friends and family members.

Takeaway:

Transparency, responsiveness, understanding the client’s values and putting the client’s interests above one’s own are all core to trust in an advisor.

Bri Bauer  of iMedia Connection provides some interesting tips on how to get customers to open emails and act on them.

Understanding the ROI

An effectively implemented email marketing program can drive significant traffic, According to the 2012 Channel Preference Survey, conducted by the digital marketing group ExactTarget, email is the preferred permission-based marketing and service channel:

  • 76% prefer email over all other channels for customer service messages.
  • 66% of teens (ages 15-17) prefer email over all other channels for permission-based marketing.
  • 96 percent of online consumers use email at least weekly.

It’s also highly effective:

  • 66 percent have made a purchase after receiving an email marketing message
  • Email marketing drives more consumers to make a purchase than Facebook and text messaging combined.

Once people have signed up to hear from your brand, they want to be kept informed. You want to provide them with communication that gets opened and drives them to take action. Here are 5 practices that drive results.

1. Refresh Your Address List

A recent Experian survey found that more than 90 percent of companies suspected that up to 25% of their data is inaccurate. Look at the number of bounce-backs or routinely un-opened emails.

2. Create An Engaging Title

To avoid getting preempted by a spam filter, avoid spam filter-friendly language such as “free,” “act now” and “limited time”.

3. Develop User-Friendly Design

Make the communication responsive and scalable to  multiple platforms, allowing users to take action, whether they are viewing it on their mobile device or desktop computer. “Avoid the sophistication trap – email marketers see the most success with layouts that have  little noise (graphics, photos, video and scrolling)  with a clearly visible call to action.

4. Understand Their Motives for Signing Up

Knowing what motivated people to sign up for your emails in the first place will help you understand them as a community and facilitate delivering what they want:

  • Are they looking for discounts?
  • Do they want something to do?

Based these insights, you can provide them with relevant content to inspire their curiosity.

5. Provide Value

Your emails should offer relevant substance and value to your readers, including news, brand insights, and customer survey information and spare body copy.

happiness

Outstanding FB Page

Proving that Marketing isn’t about creating messages, but embodying them, Sivana (meaning Oasis of Enlightenment) is based in the yoga beach culture of Encinitas Ca., rooted in Eastern spirituality, and providing support for yoga and higher living. Their products include such goods as Yoga Clothing, Active Wear, Yoga Equipment and Accessories, Bags, Incense, Statues, and Malas.  They have an amazing Facebook page.

Most Hated Advertising Slogan:

smuckers slogan

Best Selling Jam!

jamSmucker now owns the No. 1 brands in coffee, jams and jellies, peanut butter, and cooking oil.

According to Fortune, the secret of Smucker’s success is keeping it in the family.  Contributing editor Marc Gunther fills in the blanks: here’s a synopsis of Marc’s article:

Since Ohio farmer James Monroe Smucker began selling apple butter from the back of a horse-drawn wagon in In 1897, the company has had five chief executives, all named Smucker.

Sales have skyrocketed from $632 million in fiscal year 2000 to $4.6 billion in 2010, as the company acquired iconic brands Jif, Crisco, and Folger’s and profits grew from $36 million to $494 million. Shareholders have received a total return of 309% over the past 10 years, compared with -15% for the S&P 500.

Their secret ingredient? Al Yeagley, a vice president who has been with Smucker for 36 years says:

“The real secret is the family. They treat people the way you want to be treated. It’s the old golden rule.

In fact, Smucker ranked No. 1 on Fortune’s list of Best Companies to Work For in 2004.

Brand Integrity

According to Richard Smucker:

We’re really all about managing and marketing brands.

Smucker’s family-friendly values are its brand, its philosophy and its practice. Smucker won’t buy TV commercials on shows with violent or prurient content. It sponsors the birthday greetings for centenarians on NBC’s Today show. And, moreover, Smucker spends more than industry rivals on advertising and promotion. Its slogans are as iconic as its brands:

  • “With a name like Smucker’s, it has to be good”
  • “The best part of wakin’ up is Folger’s in your cup”

Ascending the Brand Pyramid

Smucker wasn’t always as brand-centric. It originally focused on buying jam and jelly companies in Brazil, Britain, and Australia and producing fruit for products like Dannon yogurt and Kellogg’s Pop-Tarts.

The company undertook a sweeping strategy review in the mid-1990s, involving top executives, middle managers and factory workers, and shifted its focus to brands. Smucker understood that “real money in supermarkets is made in the middle of the store, where processed foods and well-known brands reign supreme.” Richard Smucker summarizes Smucker’s brand-focused strategy:

To own and market No. 1 brands, sold in the center of the store, in North America

This drove the company to numerous acquisitions including:

  • Jif
  • Crisco
  • International Multifoods (including Pillsbury and Hungry Jack)
  • Folger’s

Businesses that were inconsistent with the company’s core were sold, including its ingredient businesses, overseas operations, and weaker brands. For instance, on the theory that Smucker can have an impact on what Americans eat for breakfast and lunch (PB&J), but not at dinner, it kept Hungry Jack pancakes and syrups , but sold off dried potatoes. Coffee has become the company’s biggest segment.

And now you know why with a name like Smucker’s, it has to be good.

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