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Mike Henning's Family Business News and Insights , July 2010

publication date: Aug 24, 2010
 | 
author/source: Mike Henning
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HENNING’S FAMILY BUSINESS NEWS & INSIGHTS

July, 2010

 

Since July 4th is fast approaching, I felt it appropriate to write a few words about Independence Day in the United States of America.  Following are a few pieces of history you may have been unaware of.

  • The legal separation of the American colonies from Great Britain occurred on July 2, 1776, when the Second Continental Congress voted to approve a resolution of independence.  Then Congress debated the Declaration and approved it on July 4. 
  • John Adams wrote to his wife Abigail, this accomplishment ought to be commemorated as the day of deliverance, by solemn acts of devotion to God Almighty. 
  • One of the most enduring myths about Independence Day is that Congress signed the Declaration of Independence on July 4, 1776.  However, most delegates actually signed the Declaration on August 2, 1776. 
  • A remarkable series of coincidences for both Adams and Jefferson, the two founding fathers of the United States and the only two to later become president, died on the same day: July 4, 1826, which was the United States 50th anniversary.
  • In 1779, July fell on a Sunday.  The holiday was celebrated on Monday, July 5. 

Please enjoy and celebrate this July 4th holiday with your family and friends.  Remember, independence and freedom are not free.  We currently have over 500,000 men and women fighting to protect our freedom and independence in foreign countries around the world.  Remember them in a special way on the fourth of July. 

 

Family was God’s idea and He does not make mistakes.

 

Estate Taxes—The Dilemma!

Was it a sin of omission?  Or was it legislative malpractice?  Possibly our Congress was focused on Health Care reform and taxation.  Nevertheless, specifically the Senate refused to address estate tax legislation before January 1, 2010.  The continuation of the 2009 rules ($3.5 million per person lifetime exemption, a 45% maximum tax rate, and the step-up in basis and generation-skipping tax) would have continued as in previous years.  However, the Senate and the House could not agree and now we have no estate tax, no step-up in basis, no generation skipping tax and 35% gift tax with a $1M exemption. 

Welcome to 2010, the “mystery” planning year.  The Bush estate tax in 2001 actually involved a gradual phase-out of the estate tax over time.  The exemption would increase from $600,000 to last year’s $3.5 Million, with complete repeal scheduled for this year.  Soon we discovered the legislation would sunset or expire if it was not made permanent prior to 2011.  In effect, next year the estate tax would reappear as if the legislation never passed.  The final result would be that the estate tax is repealed in 2010 and reinstated in 2011 with the former tax system in place.  This would result in zero estate tax in 2010 and a $1M exemption and 55% rates in 2011.  Some time soon I’m sure we will see another “all night” session of Congress working to re-make the estate laws to clip the last couple dollars from the estates of the dead.

 

Before you sign on to the family business, remember you give up some independence.

  Next January (2011), taxes of all sizes and shapes are going UP, UP, UP.

People are wondering why small and medium sized private companies are for the most part operating very
conservatively.  It is called uncertainty in the market and in Washington DC and with the certainty that
new taxes and fees are on the way. 

Here is an example of which I speak.  Next January the favorable 15% rate on dividends will expire, making them subject to
taxation as “ordinary income.”  At the same time the maximum rate is kicking up from 35% to 39.6%.  The third thing that will happen in 2011 is
the resurrection of a rule that ostensibly limits deductions but for the majority of taxpayers is nothing but a 1.2 % boost in their tax bracket.  In 2013 comes a fourth tax increase or 3.8%
surtax on investment income.  Add it up.  Dividends that used to be taxed at 15% are set to be taxed at 44.6%.  We can
only imagine what the tax increase surprises will be in the health care bill and the new financial overhaul bill.  We
seem to get new information every week how everyone is wrong about higher taxes.  Then those who have disciplined
themselves to read the full 2000 plus pages of these monster bills discovers tax increases unknown by most until the bills have passed into law. 
 Best friends make the  best spouses.  
Love is what you’ve been through with somebody.

 

Exploring Fairness in Estate Planning with a few Questions.

If you think meeting with an attorney to discuss plans for your last Will and Testament is challenging and difficult, wait until you begin tackling the issues of fairness in your estate plan.

Often when we sit down with members of the business owning family to discuss the topic of estate fairness, soon the discussion evolves into how can we be equal to all involved with the estate?  Then Mother and Dad pipe up and tell me how they were always equal with their children at Christmas, birthdays and graduations. 

Why can’t they be “fair and equal” with their estate?  

The primary obstacle is this, if you have four children of which one has the desire and talent to own and operate the family business into the next generation and three children not interested at all in the business and are well on their way to successful careers of their own, and 80% of your wealth is in your company how can you be equal?  That’s easy; just divide the stock in the business and all other assets equally between the four children.  Problem!  Now three of your uninterested in the business children own 75% of the family company and together they have majority control of the enterprise which the minority owner is willing to spend his/her life operating.  Somehow that does not sound equal to me.  Plus, it is likely to spurn multiple serious disagreements.  For example, one of the non-interested parties might comment on how disgusted they are because they are not getting a big enough distribution check to pay their taxes, let alone fund this year’s vacation to the mountains.  Wonder if someone is taking large bonuses again?  And on and on it goes! 

Following are some key questions to use when planning for fairness in estate planning.

 

  • Am I my children’s’ keeper?  What does it mean to be kind to my heirs?
  • How should I treat them?  Equally?  Fairly?  Equitable?
  • Is there a difference between passing on company shares and/or other material assets?
  • What exactly does equal treatment mean?  Give them an opportunity?  Give each the same thing?
  • What role does an individual need to play in these deliberations?  Happiness?  Success?  Growth?

 

Thank you for reading the July, 2010 issue of Mike Henning’s Family Business News & Insights e-newsletter.  It is our goal to keep you abreast of the latest information affecting business owning families and give you potential solutions to the problems and vision for your dreams. 



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