Inherited Property: What is Step Up in Basis? Discussion with Cherie Williams, CPA of The Little CPA
Jennifer collaborated with Cherie Williams, CPA, founder of The Little CPA, on the topic of inheriting assets. Cherie created The Little CPA to empower purpose-driven professionals to make wise financial decisions that build diligent wealth.
Inherited Property: What is Step-Up in Basis? – The Little CPA
(The Little CPA empowers purpose-driven professionals to make wise financial decisions that build diligent wealth.)
Creating A Business Succession Plan
Starting and building a business is a work of a lifetime that requires making unsaid compromises and facing unknown hardships. Yet, when it comes to planning a future for their businesses, most business owners do not have a legal plan in place. The United States Small Business Administration reports that around 70 percent of privately owned businesses, with an estimated worth of $70 trillion, will change hands in the next 10–15 years. Yet, as reported by the National Association of Corporate Directors, only one in four private companies opt to have a formal succession plan in place. If you want to know more about creating a business succession plan for your business and about the legal process involved, consider contacting the experienced New York estate planning attorneys of Jennifer V. Abelaj Law Firm today by calling 212-328-9568.
What Is Business Succession Planning?
In simple words, business succession planning means preparing in advance for a change in the ownership of the business. This involves identifying the events that may cause the ownership change, establishing certain timelines and standard operating procedures, and identifying potential successors or key employees.
Unforeseen and unfortunate events, such as a family feud, death, severe illness, or disability, may require a sudden change in business ownership and management. Having a proper succession plan for a business is like having a will for a person. When a person prepares a will, that person decides what will happen to his or her wealth and property after he or she dies. Similarly, having a business succession plan in place ensures that the business has an exit or a transfer per the owner’s wishes.
Benefits of Having a Business Succession Plan
Creating a succession plan for one’s business has many benefits. Some of these benefits include:
- Smoothing the transition
- Maximizing value and minimizing loss
- Training future leaders or employees
- Identifying weaknesses
- Retaining key employees or creating roles
Smoothing the Transition
If the business is to be transferred to a family member, a succession plan enables a smooth and clear transition and avoids a potential family feud. Rather than leaving it to the court to decide what happens to the business, the decision is made by the business owner in advance when a plan is in place.
Maximizing Value and Minimizing Loss
If the business is to be sold or transferred to a third party, a pre-determined plan about how that transition will be handled helps to maximize the value of the business. Having a succession plan in place also helps to avoid a last minute or sudden sale below the market or fair value.
Training Future Leaders or Employees
Whether the business is to be transferred among family members or to a key employee, identifying the potential successor or successors allows time for sufficient training.
Identifying Weaknesses
While planning in advance, the owner may identify loopholes or inefficiencies in the business and will be able to make a plan to address those weaknesses.
Retaining Key Employees or Creating Roles
Certain employees are important to the success of the business. Further, a business owner may want to involve certain family members in the business. With succession planning, the business owner has the opportunity to retain those employees and create roles as needed for family members.
If you have been thinking about creating a business succession plan but are not sure about the best options for your business, a skilled estate planning attorney at Jennifer V. Abelaj Law Firm can help you better understand the steps involved in creating a sound business succession plan.
Steps To Create a Business Succession Plan
Creating a business succession plan involves considering multiple factors. Some of the most important steps involved in creating a business plan include the following:
- Identifying future goals
- Identifying potential successors
- Conducting a business valuation
- Completing estate and tax planning
- Making necessary changes to governing documents
- Selecting an exit option
- Selecting a team of professionals
Identifying Future Goals
While creating a business succession plan, the business owner needs to identify personal goals are and desires for the business. This includes retirement planning and, if the business is a family business, choosing whether to transfer the business to family members or opt for an exit strategy.
Identifying Potential Successors
A business owner must initiate an honest conversation with family members and identify who is most capable of running the business. Additionally, determine whether the family member is actually interested in running the family business in the future. Sometimes, however, a key employee may be best suited to run the business through an Employee Stock Ownership Plan. If there are no potential candidates, the business owner may consider selling the business.
Conducting a Business Valuation
Conducting a business valuation through an appraiser is important to the process of creating an appropriate business succession plan. A business valuation is done on the basis of revenues, potential incomes, debt, assets, pending litigation, and current market value.
Completing Estate and Tax Planning
Estate and tax planning is one of the most important steps in a business succession plan. Failing to plan these well can lead to unnecessary expenses. However, proper planning can minimize taxes.
Making Necessary Changes to Governing Documents
Making corresponding changes in the organization’s governing documents will ensure that those documents align with the succession plan. Any contrary terms or clauses in the company’s partnership agreement or shareholder agreement may later create a hurdle if not changed accordingly.
Selecting an Exit Option
Typically, business owners select one of four modes of exiting their own business:
- Transferring to a family member
- Making a sale deal with a key employee or a business partner
- Selling the company to a third party
- Closing and liquidating the company
Selecting a Team of Professionals
A good business succession plan addresses the multiple factors that impact the value and longevity of the business. Therefore, it is important to select a team that can handle the many aspects of succession planning.
Contacting a Business Succession Planning Attorney
Creating a business succession plan is a challenging and multidisciplinary task. One needs to consider family relationships, personal future goals, taxes, and other legal matters involved while making a solid succession plan. To learn more about your legal options and how you can create a succession plan for your business, consider contacting an experienced New York estate planning attorney at Jennifer V. Abelaj Law Firm today by calling 212-328-9568 to schedule a consultation.
Valuation Of Hard To Value Assets
It is difficult to determine the value of hard to value assets, hence their name. Hard to value assets, also referred to as HTVAs, can make appraisals in estate planning and business valuation more complicated and time-consuming. There are different methods for valuing hard to value assets, but the appropriate methodology depends on the type of asset and the circumstances surrounding the valuation. A consultation with a knowledgeable estate planning attorney may be beneficial for a proper and accurate valuation of hard to value assets. At the Jennifer V. Abelaj Law Firm, we assist clients in New York with a wide range of estate planning needs. You can request more information by calling 212-328-9568 and scheduling a consultation.
Methods for Valuing Hard to Value Assets
The methods for valuing HTVAs differ from one case to another. Choosing the appropriate methodology requires a thorough understanding of appraisal regulations and available valuation approaches. When selecting the method for a valuation of hard to value assets, it is vital to consider the purpose of the valuation, the asset’s competitive properties, and the nature of the local market. When valuing HTVAs, appraisals need to apply a comprehensive framework, follow the accepted guidelines, use professional judgment, and consider all factors to ensure an accurate valuation.
A Guide to Valuation of Hard to Value Assets
As mentioned, the appropriate method for valuing hard to value assets depends on the type of asset and reason for the valuation. For example, is the valuation necessary as part of a sale, gift or death. What follows are general guidelines for valuing these HTVAs:
- Real estate and automobiles
- Stocks
- Bonds
- Life insurance
- Annuities
- Business
- Personal property
- Debts
Real Estate and Automobiles
Often, people seek the help of an experienced real estate agent to estimate the value of their real property. An agent who knows the local market will be able to provide a rough estimate. However, this approach may not work with hard to value real estate. Similarly, certain automobiles, such a collectibles or rare versions, may have a value which depends on whether it is part of a collection. If the asset requires a more thorough analysis, the owner of the property will most likely have to hire an appraiser and collect all available information about real estate and any automobiles in order to obtain an accurate valuation.
Stocks
Valuing closely-held stocks often involves computing the company’s price-to-earnings ratio. However, an amateur may not be able to determine the value of stocks accurately. If the owner of stocks dies, the personal representative of the decedent’s estate may choose to get in touch with the company that managed the decedent’s stocks or consult with a financial expert well-versed in stock valuation. Title 26 of the Code of Federal Regulations (CFR) § 20.2031-2 provides guidelines for the valuation of stocks and bonds based on selling, bid, and asked prices.
Bonds
The approach to valuing bonds is similar to the method for valuing stocks. Determining the value of a bond usually involves calculating the bond’s cash flow and face value. The individual or firm performing a valuation of a bond may also need to add accrued interest that has not been paid after the decedent’s death.
Life Insurance
When determining the value, the appraiser may calculate the policy’s face value and cash value. The policy’s face value is the amount of money beneficiaries of the policy receive upon the owner’s death. The cash value, on the other hand, is the accrued amount that can be accessed outside of the death benefit. For life insurance that is part of a gifting transaction, sometimes the value is based on the interpolated terminate reserve (ITR). The ITR is similar to the cash value, but the calculation is based on various other factors.
Annuities
A valuation of hard to value assets may also include valuing annuities if the decedent owned any. In order to determine the value of annuities, the personal representative of the decedent’s estate may need to contact the company that sold the annuities to valuate them as of the date of the owner’s death.
Business
Often, determining the value of a business is the most challenging part of valuing hard to value assets because businesses may include both tangible and intangible assets and liabilities. A business is also difficult to value if the deceased person was not the only owner of the business. In this case, the personal representative of the estate may need to contact a certified public accountant to estimate the value of the deceased person’s interest. However, business and other valuations may be easier if planned in advance. At the Jennifer V. Abelaj Law Firm, we offer estate planning and business succession planning services tailored to each client’s needs.
Personal Property
Certain types of personal property may be considered hard to value assets. Common examples of HTVAs among personal property include cryptocurrency, digital assets, works of art, jewelry, and antiques. While many people choose to visit eBay and similar platforms for estimating how much personal property is worth, it may be necessary to reach out to an auction house, art museum, gemologist, or other expert who specializes in valuing antiques, artworks, and jewelry.
Debts
According to the Federal Trade Commission, the personal representative of the estate is responsible for settling the deceased person’s debts. Once the valuation of hard to value assets is complete, it is essential to identify all debts that the debtor owes and determine their value. Common types of debt include mortgages, credit cards, loans, and debts associated with the deceased person’s medical treatment prior to the death.
Is an Appraisal Necessary for a Valuation of Hard to Value Assets?
An appraisal may be necessary for some of the hard to value assets mentioned above. Usually, people choose to hire a professional appraiser for an accurate appraisal. It is recommended to request the appraisal as soon as possible after the decedent’s death. A valuation of hard to value assets can become even more difficult if a significant amount of time has passed after the owner’s death. The Date of Death Appraisal is necessary for several purposes, including taxes. The appraisal will be used to establish whether an estate tax should be paid to the Internal Revenue Service (IRS) and to determine the amount of estate tax if any.
Contacting an Estate Planning Attorney
For assistance with the valuation of hard to value assets, consider seeking legal guidance from an estate planning attorney at the Jennifer V. Abelaj Law Firm. We help executors and personal representatives of estates in the efficient settling of the decedent’s affairs, including valuation of the assets. We also assist people with creating a comprehensive estate plan that takes into account the hard to value assets in order to protect them and minimize taxes. To schedule a case review, call 212-328-9568.
In the News: Jennifer V. Abelaj, Interviewed by US News, published online August 26, 2021
Jennifer was interviewed by US News about the (cumbersome) process and status of remote notarization in New York State.
During the Covid-19 pandemics, many states (including New York and New Jersey) enacted temporary measures allowing remote notarization and signing of estate documents. Unlike other states, New York no longer allows remote notarization or signing of estate documents.
Check out the full article and Jennifer’s comments: What Is a Notarized Document – and Where Can I Get Something Notarized? | Family Finance | US News
Basics of Estate Planning
Estate planning is a broad term for preparing your assets and your family’s needs in the event of your disability of death. The type of planning appropriate for you will depend on the composition of your assets, your family structure and dynamic, the value of your estate, or your country of residence.
Estates Come in all Shapes and Sizes
What do you think about when you hear the term “estate” planning? It’s possible you may be thinking that an estate exists only if there is significant wealth, multiple assets, or many family members. But an estate exists as soon as you have any asset in your name, regardless of the value.
Smaller estates may only require very basic planning, such as a Will, Health Care Proxy and Living Will, and Power of Attorney. A larger estate may benefit from additional estate and income tax planning, creation of trusts, or structuring the sale or distribution of a family business.
The estate planning is tailored for your needs. Although it may seem simple enough, the process to consider who receives your assets is as unique as you are.
Take Action During Family of Financial Milestones
A good time to prepare an initial estate plan or review your existing plan is when there is a family or financial milestone in your life. Common milestones include marriage, birth of a child, divorce, purchase of a home, retirement or increase in wealth.
Prepare a Will
Individuals sometimes ask me if they REALLY need a Will. As a trust and estates lawyer for over 10 years, I can unequivocally say the answer is YES!
If you die without a Will, the State (or country) of your primary residence will determine who receives your estate and in what portions. This does not mean that the State gets your assets – only that your estate will be distributed according to their rules. You may not like the default distribution. A Will or Trust allows you to override the default distribution in accordance with your wishes.
Distribution without a Will (Intestacy)
Generally, spouses cannot be disinherited (unless there is a pre- or post-nuptial agreement). Statutory intestacy rules may provide that the remainder of your Estate must be distributed to equally to your children, grandchildren, or your parents. This may not be the best distribution for your family.
In particular, if you have minor children, it is preferable to have their share held in a trust until they reach a certain age. Without a Will or Trust, you would be unable to do this and the child would receive the entire distribution at age 21. The risk of a full distribution at age 21 is that the child may splurge it all at one. Most parents prefer that the child’s assets be held for their benefit until a later age – 35, 40 or even longer – so that the child has access to funds at various milestones.
Additional Benefits of a Will or Trust: You call the shots!
A testamentary document, such as a Will or Trust, allows you to decide who will manage the administration of your Estate by appointing an Executor or Trustee. By clearly identifying an individual, your family members will not have to decide who should (or shouldn’t) be in charge.
You can also provide that the Executor or Trustee may serve without filing a bond. The default in many States requires that the Administrator file a bond, which can be costly for the estate and create delays in collecting the assets. By avoiding a bond, your assets can be collected sooner and distributed to your beneficiaries without the expense of a bond.
If you have minor children, you can designate a preferred guardian if both parents are deceased. During such a difficult time, your children would benefit from having the security of a designated guardian without having relatives argue over who is best suited to care for the child.
Estate Taxes
Federal law allows an individual a lifetime estate and gift tax exemption of $13,610,000 (for 2024). New York law provides an exemption of $6,940,000. These are historically high exemption amounts. Although the values usually increase annually, there have been instances where these values went down.
If your estate is near either of these values, you should consider various estate planning strategies now to reduce your estate tax exposure. This may include creating lifetime trusts, making gifts to your heirs during life, or giving a portion to charity.
Next Steps
A skilled estate planning attorney can provide tailored options for your assets and family structure.
Do not hesitate to contact me if you need assistance with your estate planning.
Cryptocurrency, Digital Assets and Estate Planning
Did you hear about the cryptocurrency-exchange founder who was the only person with the password to a digital wallet worth $190m of client funds, and suddenly died without having shared the password with anyone? Well – if you didn’t, here is an article (one of many): Crypto exchange customers can’t access $190 million after CEO dies with sole password – MarketWatch He essentially has locked out all these customers from ever accessing their money – possibly until someone can identify and crack his password with future technology.
Cryptocurrency. Non-fungible tokens (NFTs). Blockchain. Digital Wallet.
Until the recent past, these terms did not exist in mainstream conversations. Although they have been around for quite a long time — and this is old news to many individuals who are trailblazers in the tech sphere or who are early adopters — most individuals did not have to think about digital assets when planning their estates.
Today, you may own digital assets or know someone who does. In fact, if you have a Facebook account, PayPal account or a website, you have a digital account and possibly digital assets.
If you own any of these assets, they are part of your estate and all the same rules of descent and distribution apply to them. This means that you must plan for their collection and distribution accordingly.
Definitions Guided by RUFADAA (Revised Uniform Fiduciary Access to Digital Assets Act)
The RUFADAA was enacted to provide a mechanism for fiduciaries to access your digital information, whether the assets are in a Will, a Trust instrument, or pass via intestacy. Prior to its passage, neither common law nor statutory law (in most states) clearly authorized a fiduciary to collect digital assets, close digital accounts or make an inventory of either.
Digital assets include cryptocurrency and non-fungible tokens (NFTs). They may be held in digital accounts, such as a digital wallet, or the password may be held on a digital device, such as a USB drive or a laptop’s hard drive.
It is essential to understand the three distinct categories (i.e, digital asset, digital account, and digital device) in order to properly plan for collection and distribution of your digital assets.
Estate Taxes
Estate and gift taxes are based on the value of the property transferred at the set point in time, whether at death or upon the date of the gift. Digital assets and accounts –- whether cryptocurrency, NFTs or otherwise –- would be valued in the same way to determine whether the estate is subject to State or Federal estate taxes.
Established cryptocurrency or other digital assets that are tied to a price index may be easier to value in real time. However, assets that are not tied to a price index – whether emerging cryptocurrency or NFTs – may be more difficult to accurately value for tax purposes. For such assets, any estate or gift tax valuation may require an appraiser who has expertise in digital assets to provide an accurate valuation.
Planning for Distribution of Digital Assets
You should clearly identify the type of digital assets that you own, how they are accessed and the approximate value. The RUFADAA does not direct distribution of your digital assets, digital accounts or digital devices; it is up to you to decide who receives your digital assets and provide for each as part of your estate planning.
It is important to discuss this information with your attorney to include the proper language in your estate documents, whether your Will or a Trust, to make proper distribution of such assets.