Pre-Retirement Planning Guide Estate Plan

5 min read

Pre-Retirement Planning Guide - Step 5: Estate PlanStep 5: Estate Plan

The value of an estate plan is twofold. Yes, you want to pass your assets on to heirs in a seamless and tax-efficient manner. But it is also a roadmap to help your heirs understand the full breadth of your assets, where they are located, and how they should be disseminated according to your wishes.

Two important components of your estate plan come into play before you pass away. The first is a Power of Attorney. This document appoints someone you trust – a relative, a friend or a custodial like a bank – to handle your finances on your behalf should you become incapacitated. The second is a Health Care Directive, in which you name someone to make medical decisions for you when you no longer can. To accompany this document, you also may want to complete a living will, generally a boilerplate form that lets medical providers know if you want to forgo life-saving procedures and treatments if you’re in a terminal condition, a coma or near the end of life. Also known as a DNR (do not resuscitate), this document dictates your wishes rather than placing the burden on someone else.

Write a Last Will and Testament

The more complex the estate, the more likely you will need an estate attorney to help you. However, in many cases, an individual can create a will on his own using state-provided forms. The most important thing to remember is that each state has its own requirements regarding wills, such as whether it can be handwritten or even digital and who and how it should be witnessed and possibly notarized. Every time you move to another state throughout your lifetime, you’ll need to update or replace your will to reflect your new home state’s rules.

Your will should name an executor or personal representative in charge of executing the will’s instructions. If you are not married and have minor children, you’ll need to name a guardian for them once you’re deceased. Note that while the age of majority is generally 18, this can vary by state or jurisdiction. Your will should instruct how your assets should be disseminated and to whom, including contingent beneficiaries (should your first choice die before you), and specifically name anyone whom you don’t want to receive proceeds. For example, without a will as a guide, a probate judge may decide that a step-brother should receive your assets instead of your best friend since he is technically a relative.

Be aware that the beneficiary designations on your accounts (e.g., bank, investment, insurance policies) supersede instructions in your will. For example, if you want your second wife to be the sole beneficiary of your assets but forget to change her as the beneficiary on your 401(k) account, your ex will get the payout. That’s the same for all of your accounts with a named beneficiary, so every time you remarry or experience other life-altering events, be sure to review your account beneficiaries and estate plan documents.

Also, make it easy for your executor to find the documents needed to liquidate and/or transfer assets. A simple way to do this is to keep a three-ring binder or file drawer that houses documents/statements for each of your assets, including banking and investment accounts, former and current employer retirement plans, life insurance policies, annuities, real estate property records, etc. If you have a home or property that needs to be sold with proceeds split among your heirs, you should keep records to help establish the property’s cost basis. This includes the sale price and closing expenses from when you purchased the home, as well as the cost of any major repairs or renovations (e.g., new roof, HVAC, additional rooms). When the house is sold, the amount of the sale price minus the cost basis will determine whether or not capital gains need to be paid. Note that taxes on property and investments will need to be paid before assets can be disseminated to your heirs.

Your will is designed to guide a probate judge so that your estate can be settled quickly. However, if you want your heirs to have access to your assets without being subject to probate, consider naming them as joint account owners on your bank and investment accounts as well as the deeds to your properties.

With larger or more complex estates, you might want to consider a trust. Estate planning trusts vary by the type of beneficiary, payout structure, and tax benefit. A trust avoids probate and can help minimize the tax burden on your accumulated assets. Bear in mind that there are dozens of different types of trusts for different circumstances, so it’s important to work with an experienced estate attorney to determine what works best for your situation.

Remember, your estate plan should be a living document that is reviewed and updated every few years to incorporate any new changes in your life, including marriage, children, divorce, and death.

Important Update on New Company Reporting Laws CTA – BOI

4 min read

Corporate Transparency Act (CTA), Beneficial Ownership Information (BOI)On Jan. 1, 2024, the U.S. government debuted the Corporate Transparency Act (CTA). This legislation established the requirement for the majority of private companies, both big and small, to file information with the Financial Crimes Enforcement Network (FinCEN).

As with most new laws, the initial guidance and interpretations have been both challenged and questioned. In response, FinCEN recently turned out new FAQs, which we review below.

Big Question First: To Report or Not

Reporting is generally required by all private, for-profit entities. This includes corporations, LLCs, S-Corps, etc., whenever the company was created by filing a document with the office of the Secretary of State. Entities formed under the laws of jurisdictions outside the United States are also likely subject to reporting if they are registered to do business in the United States.

To help visualize the above, you can take a look at this flowchart published on the FinCEN website.

Screenshot from FinCEN website

While the general rules seem (and are) broad in construction, there are 23 specific exemptions, including publicly traded companies, nonprofits, and certain large operating companies. The FinCEN’s Small Entity Compliance Guide checklist can help in determining if you fall under an exemption.

Now, let’s move on to more specific questions.

Who is a beneficial owner?

An individual who either directly or indirectly exercises substantial controls or owns 25 percent or more of the reporting company.

What constitutes substantial control?

There are four (separate) ways to exercise substantial control:

  • The individual is a senior officer
  • Has the authority to appoint or remove officers or a majority of directors
  • An important decision-maker (regarding strategic, business, or finance)
  • They have any other form of substantial control as per the FinCEN’s Small Entity Compliance Guide.

Who is a company applicant for a reporting company?

Another of the more perplexing questions revolves around exactly who a company applicant of a reporting company is.

First, only reporting companies created or registered on or after Jan. 1, 2024, need to concern themselves with the company applicant rules; companies formed before are exempt.

There are two possible individuals who could be considered company applicants. One is the person who directly files the documents to create and register the company. This person will always exist and be an applicant of the reporting company. In the case where there were multiple people involved in the filing or registration, the individual who primarily controlled the filing is also considered an applicant.

Thankfully, FinCEN created another handy flowchart to help navigate through this rather confusing decision.

Screenshot from FinCEN website

What about sole proprietorships?

It depends. Sole proprietorships only have to report if the entity was created by filing a document with a secretary of state or similar office. In other words, if you just start freelancing and don’t file anything with a secretary of state office, you are not subject to the reporting requirements. Basically, if you didn’t form an LLC, you don’t need to report. For example, obtaining an employer identification number, a fictitious business name, or a professional or occupational license does not subject you to the FinCEN reporting requirements.

What if my company ceased to exist before the CTA requirements went into effect?

If a company ceased to exist on or before Jan. 1, 2024, then they are NOT subject to the reporting requirements.

Do I have to report more than once?

No, you only have to file an initial report once. There is NOT an annual report. You do, however, need to amend your original filing to update pertinent changes or corrections within 30 days of their occurrence.

What happens if I don’t file a report?

Willful violation can subject one to a fine of up to $500 per day until the violation is resolved. Criminal penalties could also be imposed, resulting in up to two years imprisonment and a fine of up to $10,000.

Conclusion

The FinCEN released its guidance to clarify uncertainties around the new CTA-created reporting requirements. The goal is to ensure full and accurate compliance without undue burden on companies and individuals.

Looking at the Expanded Accounting Equation

3 min read

Expanded Accounting EquationWhether it’s a private equity transaction or an institutional or retail investor, analyzing a company’s financial statements is an important part of fundamental analysis. One important but basic way to analyze whether a company is worth investing in is through the expanded accounting equation. The most straightforward equation to analyze a business’s balance sheet is:

Assets = Liabilities + Shareholder’s Equity

However, there are more detailed equations that analysts can employ to more closely examine a company’s financial situation. One way to look at it is by more comprehensive equations that break down net income and the transactions related to the equity owners (dividends, etc.).

This equation is a building block of accounting because it focuses on double-entry accounting – or that each occurrence impacts the bifurcated accounting equation – requiring the correct solution to always be in balance. This system is used for journal entries, regardless of the type of transaction. Looking at this equation in greater detail, here’s a more granular example:

Assets = Retained Earnings + Liabilities + Share Capital

Assets are the capital that give a business the ability to benefit from projected, increased productivity and hopefully increased gains. Whether it’s short-term (less than 12 months) or long-term (more than 12 months), it can take the form of real estate, cash, cash-equivalents, pre-paid expenses, accounts receivable, etc.

Liabilities are the amounts owed to lenders due to past agreements. This is related to the sum of liabilities, which is the total of current (up to 12 months) liabilities, plus long-term (more than 12 months) debt and related obligations. This takes the form of loans, accounts payable, owed taxes, etc. Shareholder’s equity is how much the company owners may assert ownership on after accounting for all liabilities.

Another way this equation can be expressed is as follows:

Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue + Expenses + Dividends

Depending on the financial outcome of the company, dividends and expenses may be negative numbers.

To further explain, these variations on the equation help analysts break down shareholder’s equity. Revenues and expenses illustrate the delta in net income over discrete accounting/earning periods from sales and costs, respectively. Stockholder transactions are able to be accounted for by looking at what capital the original stockholders provided to the business and dividends, or earnings distributed to the company’s stockholders. Retained earnings are carried over from a prior accounting period to the present accounting period. Despite being elementary, the information is helpful for business managers and investors to develop a higher level of analysis.

When it comes to evaluating bankruptcy, it can help investors determine the likelihood of receiving compensation. When it comes to liabilities, should debts be due sooner or over longer periods of time, these debts always have priority. When it comes to liquidated assets, these are then used to satisfy shareholders’ equity until funds are exhausted.  

While this is not a comprehensive look at how to analyze a company, it provides internal and external stakeholders with a way to build a strong financial analytical foundation.