Recently several shareholders, directors and/or officers of corporations have received a notice stating that Oregon requires that this form be completed giving details of the names of the shareholders and directors of the corporation and mailed it together with $125.00 in the enclosed envelope. It looks quite official. Only it is not. Oregon does not require a coporation file annual minutes.
Oregon requires every entity to file an Annual Report and pay a fee of $100. This Annual Report is mailed to the Registered Agent of the entity directly from the Corporation Division.
At the begining a new year is an excellent time to think about the changes in your situation over the past year. As you think about those changes, consider that some of them may affect your estate plan. For example, the following events may change the provisions of your will without any action of your part:
If any of these changes have occurred in your life, you should discuss what, if any, changes to your Will you should make so that your wishes are correctly and accurately known.
The American Taxpayer Relief Act of 2012, continues the undification of the gift and estate tax. By unifying the gift and estate tax, Congress has kept the two exemptions the same along with the generation-skipping exemption. In 2013, due to indexing, that exemption is $5,250,000.
The way the exemption works is that the unused portion of the exemption is available to the estate at the death of the decedent. For example, if the decedent dies in 2013 and made gifts in 2012 of $5,000,000 anticipating that the exemption would disappear, the decedent's estate has $250,000 of unused exemption to apply to the transfers to the decedent's heirs or beneficiaries.
The unused exemption is calculated by "clawing back" into the decedent's taxable estate the value of all the lifetime taxable gifts made by the decedent. The formula for calculating the tax liability is then applied to the gross taxable estate (which includes the clawed back gifts).
When are those taxes due? Nine months from the date of the decedent's death.
Many of you made gifts in 2012 to avoid losing the expiring $5 million exemption and the 35% tax rate.
With the American Taxpayer Relief Act of 2012, it seems this rush to make gifts was unnecessary in some cases. However, if you look at the tax benefits you achieved by making these gifts, you will find it was a good thing to do. Because neither Oregon nor Washington tax lifetime gifts, your estate avoided an estate tax imposed on these assets at your death. You also transferred at a lower tax rate – 35% vs.
40%. The benefit to your family may be more profound in allowing them to enjoy the gift during your lifetime and to allow you to train them in the stewardship of the wealth transferred.
Due to indexing of the annual exclusion (amount a donor may transfer tax free per year per donee) for 2013 is $14,000 which is an increase of $1,000 from the $13,000 annual exclusion in 2012. Here are some ways (by no means exhaustive) the annual exclusion is being used:
In the Estate of Emilia W. Olivo, TC Memo 2011-163, the tax court held that an estate could not deduct as a claim against the estate a large amount supposedly owed by the decedent to her son for caretaking services the son rendered to the decedent for many years. The claim was based on an alleged agreement that had not been reduced to writing. The only evidence was the son's testimony which the court found to be "improbable, self-serving, and uncorroborated."
The son, Mr. Olivo, cared for his parents from 1994 until his mother's death in 2003 (his father died in 1995). He was unable to continue his law practice because of the need to care for his mother. His siblings asked him to continue caring for their mother. When she died, Mr. Olivo claimed the estate owed him $1,240,000 for the care he provided. Mr. Olivo claimed that his mother agreed to pay him $200 per day for his caretaking and he suggested she defer payment until her death. But this agreement was never reduced to writing. The Tax Court denied the deduction.
This is a cautionary tale that acts as a reminder that agreements between family members should be reduced to writing if they are to be enforced.
In Albuquerque recently, I presented this materials to owners of agribusinesses. In the next several blogs, I share that presentation.
In choosing an entity there are seven key factors to consider:
Next post: Basic Governance Structure
Generally, the Legacy Family has four capital accounts which it attempts to keep in balance. Those accounts are:
1. Financial Capital. This is the money earned as well as the investments under management. This account also includes wealth transfer strategies, family business operations, financial parenting and understanding the psychology of money.
2. Intellectual Capital. This is the family's experiences, its know-how and general knowledge. It includes education, career choices, mentoring/coaching, governing the family (how rules are made for future generations).
3. Human Capital. This is general parenting and grand-parenting skills, communication skills, values, morals, ethics, collaborative decision making and conflict resolution. This account will also contain leadership training and team building so necessary to the Legacy Family.
4. Social Capital. This is the philanthropy of the Legacy Family whether it is a donor advised fund or a family foundation.
A Legacy Family will engage in activities that build each of the four capital accounts so that the accounts are in balance. The Legacy Family will develop activities that provide for:
The following reading list will help in developing useful activities to build deposits in the capital accounts:
Eileen Gallo, PH.D. and Jon Gallo, J.D., Silver Spoon Kids: Communicating about money in healthy ways. Teaching strong values and compassion. Preventing a feeling of entitlement, 2001, Contemporary Books.
Eileen Gallo, PH.D. and Jon Gallo, J.D, The Financially Intelligent Parent, 8 steps to raising successful, generous, responsible children, 2005, Penguin Books.
Joline Godfrey, Raising Financially Fit Kids, 2003, Ten Speed Press.
James E. Hughes Jr., Family Wealth, Keeping it in the Family: how family members and their advisers preserve human, intellectual and financial assets for generations, 2004 Bloomberg.
Thayer Willis, Navigating the Dark Side of Wealth, A life guide for inheritors, 2005, New Concord Press.
Like most families, financially successful families hope that each of their members in this generation and the next will be successful, happy, healthy, and content. To break cycle of rags to riches to rags in 3 generations will require intention and attention.
It is important to remember that yesterday’s wealth is no guarantee of tomorrow’s success. The adage “shirtsleeves to shirtsleeves in three generations” is not unique to thos living in the United States. Here and elsewhere there are many families who have been able to perpetuate their success for many generations. Their progeny have become new titans in business; assumed leadership roles in public service, etc. all by effectively developing their individual talents. Their extended families enjoy each other. Each new generation seems to build on the shoulders of those who preceded them. These special families are called “Legacy Families”.
What is it that differentiates a Legacy Family from all the rest? Legacy cannot be mandated or guaranteed. It is thoughtfully designed, carefully implemented, and perpetually nourished. It is also quickly lost and easily broken. Not all those for whom the legacy was created accept or appreciate their gift. For many it is not even a gift, but perhaps an unwanted burden.
A Legacy Family has four characteristics:
Parents should be transparent to their children about their wealth and their plans. This may not mean opening all of the parent's financials, but the children should be aware of the extent of the wealth and the parent’s intentions for distribution during life and at death. The parents do not and should not allow their children to dictate the estate plan; however, there are opportunities to involve the children in the process without a parent losing control of their funds. Parents should begin raising financially fit kids at young ages by communicating and demonstrating health behaviors about money, teaching strong values and compassion. Some examples are providing allowance to children and setting the expectation that a portion will be set aside for long-term savings, a portion for charitable gifting and remainder for discretionary spending.
If parents want to have their children support charitable endeavors, then parents must support charitable endeavors and make your behavior known to your children. Parents should talk to their children about why charity is important to the family, why you have chosen the charities that you wish to support, and how you should choose a charity.
If a parent requires that a portion of the allowance be given to charity, the child should participate in choosing the charity. It works best if the parent is open to a variety of ways that the child can be charitable – not just giving to the parents’ charity, but actually allowing the child to choose how and when so that they are vested in the process. For children, the link between giving to a charity and the charity, will be the opportunity for volunteerism. Parents find their kids more involved with giving when the child can also volunteer their time rather than just providing financial support.
For older children, parents may encourage and allow children to manage a portion of the family’s donations. This can include involvement in the investment decisions, researching the charities that will be supported by the donations, being part of the decision-making process for making decisions, follow-up with charities on the use of the funds with a report back to the family.
Everyone learns through doing and through failure. These children may fail, but that failure can lead to education and an opportunity for learning. Whether it is an 8 year old with an allowance or an 18 year old with a small fund to manage, the donations to charity and the investment of the assets could lead to failure – failure to grow or choosing a charity that doesn’t use the funds for the intended purpose. If parents use these failures as teaching moments, then it is not really a failure because the intended purpose for the allowance or fund management was to teach the children about fund management and charitable giving. The whole purpose of these endeavors is to teach financial responsibility, the value in having money serve others and the value of that service. Successfully raising involved and charitable children will go a long way to reducing the fear parents have about transferring wealth to their children and children have about what, when and how they are going to inherit.