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Members of the “Sandwich Generation” Face Unique Estate Planning Circumstances
Members of the sandwich generation — those who find themselves simultaneously caring for aging parents while supporting their own children — face unique financial and emotional pressures. One critical yet often overlooked task amid this juggling act is estate planning.
How can you best handle your parents’ financial affairs in the later stages of life? Consider incorporating their needs into your estate plan while tweaking, when necessary, the arrangements they’ve already made. Let’s take a closer look at four critical steps.
1. Make cash gifts to your parents and pay their medical expenses
One of the simplest ways to help your parents is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion. For 2025, you can give each parent up to $19,000 without triggering gift taxes or using your lifetime gift and estate tax exemption. The exemption amount for 2025 is $13.99 million.
Plus, payments to medical providers aren’t considered gifts, so you can make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amounts.
2. Set up trusts
There are many trust-based strategies you can use to assist your parents. For example, if you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.
Another option is to set up trusts during your lifetime that leverage your $13.99 million gift and estate tax exemption. Properly designed, these trusts can remove assets — together with all future appreciation in their value — from your taxable estate. They can provide income to your parents during their lives, eventually passing to your children free of gift and estate taxes.
3. Buy your parents’ home
If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home’s equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses.
To avoid negative tax consequences, pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.
4. Plan for long-term care expenses
The annual cost of long-term care (LTC) can easily reach six figures. Expenses can include assisted living facilities, nursing homes and home health care.
These expenses aren’t covered by traditional health insurance policies or Social Security, and Medicare provides little, if any, assistance. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.
Don’t forget about your needs
As part of the sandwich generation, it’s easy to lose sight of yourself. After addressing your parents’ needs, focus on your own. Are you saving enough for your children’s college education and your own retirement? Do you have a will and power of attorney in place for you and your spouse?
With proper planning, you’ll make things less complex for your children so they might avoid some of the turmoil that you could be going through. Contact FMD for additional planning techniques if you’re a member of the sandwich generation.
EBHRAs: A Flexible Health Benefits Choice for Businesses
Today’s companies have several kinds of tax-advantaged accounts or arrangements they can sponsor to help employees pay eligible medical expenses. One of them is a Health Reimbursement Arrangement (HRA).
Under an HRA, your business sets up and wholly funds a plan that reimburses participants for qualified medical expenses of your choosing. (To be clear, employees can’t contribute.) The primary advantage is that plan design is very flexible, giving you greater control of your “total benefits spend.” Plus, your company’s contributions are tax deductible.
How flexible are HRAs? They’re so flexible that businesses have multiple plan types to choose from. Let’s focus on one in particular: excepted benefit HRAs (EBHRAs).
4 key rules
Although traditional HRAs integrated with group health insurance provide significant control, they’re still subject to mandates under the Public Health Service Act (PHSA), which was amended by the Affordable Care Act (ACA). This means you must deal with prohibitions on annual and lifetime limits for essential health benefits and requirements to provide certain preventive services without cost-sharing.
Because employer contributions to EBHRAs are so limited, participants’ accounts under these plans qualify as “excepted benefits.” Therefore, these plans aren’t subject to the ACA’s PHSA mandates. Any size business may sponsor an EBHRA, but you must follow certain rules. Four of the most important are:
1. Contribution limits. In 2025, employer-sponsors may contribute up to $2,150 to each participant per plan year. You can, however, choose to contribute less. You can also decide whether to allow carryovers from year to year, which don’t count toward the annual limit.
2. Qualified reimbursements. An EBHRA may reimburse any qualified, out-of-pocket medical expense other than premiums for:
Individual health coverage,
Medicare, and
Non-COBRA group coverage.
Premiums for coverage consisting solely of excepted benefits can be reimbursed, as can premiums for short-term, limited-duration insurance (STLDI). However, under certain circumstances, federal agencies may prohibit small employer EBHRAs in some states from allowing STLDI premium reimbursement. (Contact your benefits advisor for further information.)
3. Required other coverage. Employer-sponsors must make other non-excepted, non-account-based group health plan coverage available to EBHRA participants for the plan year. Thus, you can’t also offer a traditional HRA.
4. Uniform availability. An EBHRA must be made available to all similarly situated individuals under the same terms and conditions, as defined and provided by applicable regulations.
Additional compliance matters
An EBHRA’s status as an excepted benefit means it’s not subject to the ACA’s PHSA mandates (as mentioned) or the portability and nondiscrimination rules of the Health Insurance Portability and Accountability Act (HIPAA).
However, EBHRAs are subject to HIPAA’s administrative simplification requirements. This includes the law’s privacy and security rules unless an exception applies — such as for certain small self-insured, self-administered plans.
In addition, like traditional HRAs integrated with group health insurance, EBHRAs sponsored by businesses are generally subject to the Employee Retirement Income Security Act (ERISA). This means:
Reimbursement requests must comply with ERISA’s claim and appeal procedures,
Participants must receive a summary plan description, and
Other ERISA requirements may apply.
Finally, EBHRAs must comply with ERISA’s nondiscrimination rules. These ensure that benefits provided under the plan don’t disproportionately favor highly compensated employees over non-highly compensated ones.
Many factors to analyze
As noted above, the EBHRA is only one type of plan your company can consider. Others include traditional HRAs integrated with group health insurance, qualified small employer HRAs and individual coverage HRAs.
Choosing among them — or whether to sponsor an HRA at all — will call for analyzing factors such as what health benefits you already offer, which employees you want to cover, how much you’re able to contribute and which medical expenses you wish to reimburse. Let FMD help you evaluate all your benefit costs and develop a strategy for health coverage that makes the most sense for your business.
Factor in GST Tax when Transferring Assets to your Grandchildren
If you’re considering making asset transfers to your grandchildren or great grandchildren, be sure your estate plan addresses the federal generation-skipping transfer (GST) tax. This tax ensures that large estates can’t bypass a round of taxation that would normally apply if assets were transferred from parent to child, and then from child to grandchild.
Because of the complexity and potential tax liability, careful estate planning is essential when considering generation-skipping transfers. Trusts are often used as a strategic vehicle to allocate the GST tax exemption amount effectively and ensure that assets pass tax-efficiently to younger generations.
ABCs of the GST tax
The GST tax applies at a flat 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. “Skip persons” include your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you. There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.
Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $13.99 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.
3 transfer types trigger GST tax
There are three types of transfers that may trigger the GST tax:
A direct skip — a transfer directly to a skip person that is subject to federal gift and estate tax,
A taxable distribution — a distribution from a trust to a skip person, or
A taxable termination — such as when you establish a trust for your children, the last child beneficiary dies and the trust assets pass to your grandchildren.
The GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — allows you to transfer up to $19,000 per year (for 2025) to any number of skip persons without triggering GST tax or using up any of your GST tax exemption.
Transfers to a trust qualify for the annual GST tax exclusion only if the trust 1) is established for a single beneficiary who’s a grandchild or other skip person, and 2) provides that no portion of its income or principal may be distributed to (or for the benefit of) anyone other than that beneficiary. Additionally, if the trust doesn’t terminate before the beneficiary dies, any remaining assets will be included in the beneficiary’s gross estate.
If you wish to make substantial gifts, either outright or in trust, to your grandchildren or other skip persons, allocate your GST tax exemption carefully. Turn to FMD for answers regarding the GST tax.
How Companies Can Spot Dangers by Examining Concentration
At first glance, the word “concentration” might seem to describe a positive quality for any business owner. You need to concentrate, right? Only through laser focus on the right strategic goals can your company reach that next level of success.
In a business context, however, concentration can refer to various aspects of your company’s operations. And examining different types of it may help you spot certain dangers.
Evaluate your customers
Let’s start with customer concentration, which is the percentage of revenue generated from each customer. Many small to midsize companies rely on only a few customers to generate most of their revenue. This is a precarious position to be in.
The dilemma is more prevalent in some industries than others. For example, a retail business will likely market itself to a relatively broad market and generally not face too much risk related to customer concentration. A commercial construction company, however, may serve only a limited number of clients that build, renovate or maintain offices or other facilities.
How do you know whether you’re at risk? One rule of thumb says that if your biggest five customers make up 25% or more of your revenue, your customer concentration is generally high. Another simple measure says that, if any one customer represents 10% or more of revenue, you’re at risk of having elevated customer concentration.
In an increasingly specialized world, many businesses focus solely on specific market segments. If yours is one of them, you may not be able to do much about customer concentration. In fact, the very strength of your company could be its knowledge and attentiveness to a limited number of buyers.
Nonetheless, know your risk and explore strategic planning concepts that may help you mitigate it. If diversifying your customer base isn’t an option, be sure to maintain the highest level of service.
Look at other areas
There are other types of concentration. For instance, vendor concentration refers to the number and types of vendors a company uses to support its operations. Relying on too few vendors is risky. If any one of them goes out of business or substantially raises prices, the company could suffer a severe rise in expenses or even find itself unable to operate.
Your business may also be affected by geographic concentration. This is how a physical location affects your operations. For instance, if your customer base is concentrated in one area, a dip in the regional economy or the arrival of a disruptive competitor could negatively impact profitability. Small local businesses are, by definition, subject to geographic concentration. However, they can still monitor the risk and explore ways to mitigate it — such as through online sales in the case of retail businesses.
You can also look at geographic concentration globally. Say your company relies solely or largely on a specific foreign supplier for iron, steel or other materials. That’s a risk. Tariffs, which have been in the news extensively this year, can significantly impact your costs. Geopolitical and environmental factors might also come into play.
Third, stay cognizant of your investment concentration. This is how you allocate funds toward capital improvements, such as better facilities, machinery, equipment, technology and talent. The term can also refer to how your company manages its investment portfolio, if it has one. Regularly reevaluate risk tolerance and balance. For instance, are you overinvesting in technology while underinvesting in hiring or training?
Study your company
As you can see, concentration takes many different forms. This may explain why business owners often get caught off guard by the sudden realization that their companies are over- or under-concentrated in a given area. FMD can help you perform a comprehensive risk assessment that includes, among other things, developing detailed financial reports highlighting areas of concentration.
Mitigate the Risks: Tips for Dealing with Tariff-Driven Turbulence
President Trump’s “Liberation Day” announcement of global tariffs caught businesses, as well as foreign countries and worldwide financial markets, off guard. While the president has long endorsed the imposition of tariffs, many businesses expected him to take a targeted approach. Instead, Trump rolled out a baseline tariff on all imports to the United States and higher tariffs on certain countries, including some of the largest U.S. trading partners. (On April 9, Trump announced a 90-day pause on some reciprocal tariffs, with a 10% baseline tariff remaining in effect for most countries and a 145% tariff on imports from China.)
The tariff plan sent businesses, both large and small, scrambling. Even companies accustomed to dealing with tariffs have been shaken because this round is so much more extensive and seemingly subject to change than those in the past.
Proponents of tariffs say they can be used as a negotiating tool to get other countries to lower their tariffs on U.S. imports, thereby leveling the global trade playing field. They also argue that if domestic and foreign companies relocate to the United States, it’ll create jobs for Americans, fuel construction industry growth and provide additional tax revenue.
Since more changes are expected as countries and industries negotiate with the administration for reduced rates and exemptions, some degree of uncertainty is likely to prevail for at least the short term. In the meantime, businesses have several areas they should focus on to reduce the tariff hit to their bottom lines.
1. Financial forecasting
No business should decide how to address tariff repercussions until they’ve conducted a comprehensive financial analysis to understand how U.S. and retaliatory tariffs will affect costs. You might find, for example, that your business needs to postpone impending plans for capital asset purchases or expansion.
Modeling, or scenario planning, is often helpful during unpredictable periods. Begin by identifying all the countries involved in your supply chain, whether you deal with them directly or through your suppliers, and the applicable tariffs, whether you’re importing or exporting goods.
You can then develop a model that projects how different sourcing scenarios might play out. The model should compare not only the costs of foreign vs. domestic options but also the resulting impact on your pricing, labor costs, cash flow and, ultimately, profitability. This information can allow you to build contingency plans to help reduce the odds of being caught flat-footed as new developments unfurl.
Modeling can provide valuable guidance if you’re considering reshoring your operations. Of course, reshoring isn’t a small endeavor. Moreover, U.S. infrastructure may not be adequate for your business needs.
Manufacturers also should note the shortage of domestic manufacturing workers. According to pre-tariff analysis from the National Association of Manufacturers, the U.S. manufacturing industry could require some 3.8 million jobs by 2033, and more than 1.9 million may go unfilled.
2. Pricing
Perhaps the most obvious tactic for companies incurring higher costs due to tariffs is to pass the increases along to their customers. It’s not that simple, though.
Before you raise your prices, you must take into account factors such as your competitors’ pricing and how higher prices might affect demand. The latter is especially critical for price-sensitive consumer goods where even a small price jump could undermine demand.
Consumers have already been cutting back on spending based on rising fears of inflation and a possible recession. Price increases, therefore, are better thought of as a single component in a more balanced approach.
3. Foreign Trade Zones
You may be able to take advantage of Foreign Trade Zones (FTZs) to minimize your tariff exposure. In these designated areas near U.S. ports of entry, a company can move goods in and out of the country for operations (including assembly, manufacturing and processing) but pay reduced or no tariffs.
Tariffs are paid when the goods are transferred from an FTZ into the United States for consumption. While in the zone, though, goods aren’t subject to tariffs. And, if the goods are exported, no tariff applies.
Note: Trump already has narrowed some of the potential benefits of FTZs, so avoid making them a cornerstone of your tariff strategy.
4. Internal operations
If your company’s suppliers are in high-tariff countries, you can look into switching to lower-cost suppliers in countries that have negotiated lower tariffs.
You may not be able to escape higher costs stemming from tariffs, but you can take steps to cut other costs by streamlining operations. For example, you could invest in technologies to improve efficiency or trim worker hours and employee benefits. You also should try to renegotiate contracts with suppliers and vendors, even if those relationships aren’t affected by tariffs. Such measures might make it less necessary to hike your prices.
You can control your overall costs as well by breaking down departmental silos so the logistics or procurement department isn’t making tariff-related decisions without input from others. Your finance and tax departments need to weigh in to achieve the optimal cost structures.
5. Tax planning
Maximizing your federal and state tax credits is paramount in financially challenging times. Technology investments, for example, may qualify for Section 179 expensing and bonus depreciation (which may return to 100% in the first year under the upcoming tax package being negotiated in Congress). Certain sectors may benefit from the Sec. 45X Advanced Manufacturing Production Credit or the Sec. 48D Advanced Manufacturing Investment Credit. Several states also offer tax credits for job creation, among other tax incentives.
This may be a wise time to consider changing your inventory accounting method, if possible. The last-in, first-out (LIFO) method assumes that you use your most recently purchased materials first. The cost of the newer, pricier items is charged first to the cost of goods sold, boosting it and cutting both your income and taxes. Bear in mind, though, that LIFO isn’t permitted under the International Financial Reporting Standards and is more burdensome than the first-in, first-out method.
6. Compliance
Regardless of the exact percentages of U.S. and retaliatory tariffs, you can count on tighter scrutiny of your compliance with the associated rules and requirements. These probably will become more complicated than they’ve been in the past.
For example, expect greater documentation requirements and shifting rules for identifying an item’s country of origin. The higher compliance burden alone will ramp up your costs — but the costs of noncompliance could be far greater.
Stay vigilant
The tariff landscape is rapidly evolving. You need to monitor the actions by the Trump administration, the responses of other countries and how they affect your business operations. You may have to pivot as needed to keep costs low (by reshoring or switching to suppliers in low-tariff countries). If you don’t have the requisite financial expertise on staff to keep up with it all, we can help. Contact FMD today about how to plan ahead — and stay ahead of the changes.
Undoing an Irrevocable Life Insurance Trust is Possible
Life insurance can be a powerful estate planning tool. Indeed, it creates an instant source of wealth and liquidity to meet your family’s financial needs after you’re gone. And to shield the proceeds from potential estate taxes, thus ensuring more money for your loved ones, many people transfer their policies to irrevocable life insurance trusts (ILITs).
But what if you have an ILIT that you no longer need? Does its irrevocable nature mean you’re stuck with it forever? Not necessarily. You may have options for pulling a life insurance policy out of an ILIT or even unwinding the ILIT entirely.
Benefits of an ILIT
An ILIT shields life insurance proceeds from estate tax because the trust, rather than the insured, owns the policy. Note, however, that under the “three-year rule,” if you transfer an existing policy to an ILIT and then die within three years, the proceeds remain taxable. That’s why it’s preferable to have the ILIT purchase a new policy, if possible, rather than transfer an existing policy to the trust.
The key to removing the policy from your taxable estate is to relinquish all “incidents of ownership.” That means, for example, you can’t retain the power to change beneficiaries; assign, surrender or cancel the policy; borrow against the policy’s cash value; or pledge the policy as security for a loan (although the trustee may have the power to do these things).
Reasons to undo an ILIT
Generally, there are two reasons you might want to undo an ILIT: 1) you no longer need life insurance, or 2) you still need life insurance but your estate isn’t large enough to trigger estate tax, and you’d like to eliminate the restrictions and expense associated with the ILIT. Although your ability to undo an ILIT depends on the circumstances, potential options include:
Allowing the insurance to lapse. This may be a viable option if the ILIT only holds a term life insurance policy that you no longer need. You simply stop making contributions to the trust to cover premium payments. Technically, the ILIT continues to exist, but once the policy lapses it owns no assets. It’s possible to allow a permanent life insurance policy to lapse, but other options may be preferable, especially if the policy has a significant cash value.
Swapping the policy for cash or other assets. Many ILITs permit the grantor to retrieve a policy from the ILIT by substituting cash or other assets of equivalent value. If allowed, you may be able to gain access to a policy’s cash value by swapping it for illiquid assets of equivalent value.
Surrendering or selling the policy. If your ILIT holds a permanent insurance policy, the trust might surrender it, which will preserve its cash value but avoid the need to continue paying premiums. Alternatively, if you’re eligible, the trust could sell the policy in a life settlement transaction.
Distributing the trust assets. Some ILITs give the trustee the discretion to distribute trust funds (including the policy’s cash value, other trust assets or possibly the policy itself) to your beneficiaries, such as your spouse or children. Typically, these distributions are limited to funds needed for “health, education, maintenance and support.”
These are some, but by no means all, of the strategies that may be available to unwind an ILIT. Contact FMD for additional details.
Need to Modify an Existing Irrevocable Trust? Decant It
“Decanting” an irrevocable trust allows a trustee to use his or her distribution powers to transfer assets from one trust into another with different — often more favorable — terms. Much like decanting wine to separate it from sediment, trust decanting “pours” assets into a new vessel, potentially improving clarity and control.
While the original trust must be irrevocable, meaning its terms typically can’t be changed by the grantor, decanting offers a lawful method for trustees to update or adjust those terms under certain conditions.
Decanting Q&As
There are several reasons a trustee might consider decanting. For example, the original trust may lack flexibility to deal with changing tax laws, family circumstances or beneficiary needs. Decanting can allow for the removal of outdated provisions, the addition of modern administrative powers or even a change in the trust’s governing law to a more favorable jurisdiction. It may also provide a way to correct drafting errors, protect assets from creditors or introduce special needs provisions for a beneficiary who becomes disabled.
However, decanting laws vary dramatically from state to state, so it’s important to familiarize yourself with your state’s rules and evaluate their effect on your estate planning goals. Here are several common questions and answers regarding decanting a trust:
Q: If your trust is in a state without a decanting law, can you benefit from another state’s law?
A: Generally yes, but to avoid any potential complaints by beneficiaries it’s a good idea to move the trust to a state whose law specifically addresses this issue. In some cases, it’s simply a matter of transferring the existing trust’s governing jurisdiction to the new state or arranging for it to be administered in that state.
Q: Does the trustee need to notify beneficiaries or obtain their consent?
A: Decanting laws generally don’t require beneficiaries to consent to a trust decanting and several states don’t even require that beneficiaries be notified. Where notice is required, the specific requirements are all over the map: Some states require notice to current beneficiaries while others also include contingent or remainder beneficiaries. Even if notice isn’t required, notifying beneficiaries may help stave off potential disputes in the future.
Q: What is the trustee’s authority?
A: When exploring decanting options, trustees should consider which states offer them the greatest flexibility to achieve their goals. In general, decanting authority is derived from a trustee’s power to make discretionary distributions. In other words, if the trustee is empowered to distribute the trust’s funds among the beneficiaries, he or she should also have the power to distribute them to another trust. But state decanting laws may restrict this power.
Decanting can be complicated
Because of its complexity, decanting an irrevocable trust should be approached with careful legal and tax guidance. When used appropriately, it can be a strategic way to modernize an inflexible trust and better serve your long-term goals as well as your beneficiaries. Consult FMD before taking action.
There’s No Time like the Present to have Your Will Drafted
When a person considers an “estate plan,” he or she typically thinks of a will. And there’s a good reason: A well-crafted, up-to-date will is the cornerstone of an estate plan. Importantly, a will can help ease the burdens on your family during a difficult time. Let’s take a closer look at what to include in a will.
Start with the basics
Typically, a will begins with an introductory clause identifying yourself and where you reside (city, state, county, etc.). It should also state that this is your official will and replaces any previous wills.
After the introductory clause, a will generally explains how your debts are to be paid. The provisions for repaying debt typically reflect applicable state laws.
You may also use a will to name a guardian for minor children. To be on the safe side, name a backup in case your initial choice is unable or unwilling to serve as guardian or predeceases you.
Make bequests
One of the major sections of your will — and the one that usually requires the most introspection — divides up your remaining assets. Outside your residuary estate, you’ll likely want to make specific bequests of tangible personal property to designated beneficiaries. For example, you might leave a family heirloom to a favorite niece or nephew.
When making bequests, be as specific as possible. Don’t simply refer to jewelry or other items without describing them in detail. This can avoid potential conflicts after your death.
If you’re using a trust to transfer property, identify the property that remains outside the trust, such as furniture and electronic devices. Typically, these items won’t be suitable for inclusion in a trust.
Appoint an executor
Name your executor — usually a relative or professional — who’s responsible for administering your will. Of course, this should be a reputable person whom you trust.
Also, include a successor executor if the first choice can’t perform these duties. If you’re inclined, you may use a professional as the primary executor or as a backup.
Follow federal and state laws
Be sure to meet all the legal obligations for a valid will in the applicable state and keep it current. Sign the will, putting your initials on each page, with your signature attested to by witnesses. Include the addresses of the witnesses in case they ever need to be located. Don’t use beneficiaries as witnesses. This could lead to potential conflicts of interest.
Keep in mind that a valid will in one state is valid in others. So if you move, you won’t necessarily need a new will. However, there may be other reasons to update it at that time. Contact FMD with any questions regarding your will.
Businesses Considering Incorporation should Beware of the Reasonable Compensation Conundrum
Small to midsize businesses have valid reasons for incorporating, not the least of which is putting that cool “Inc.” at the end of their names. Other reasons include separating owners’ personal assets from their business liabilities and offering stock options as an employee incentive.
If you’re considering incorporation for your company, however, it’s essential to be aware of the associated risks. One of them is the reasonable compensation conundrum.
How much is too much?
Let’s say you decide to convert your business to a C corporation. After completing the incorporation process, you can pay owners, executives and other highly compensated employees some combination of compensation and dividends.
More than likely, you’ll want to pay your highly compensated employees more in compensation and less in dividends because compensation is tax deductible and dividends aren’t. But be careful — the IRS may be watching. If it believes you’re excessively compensating a highly compensated employee for tax avoidance purposes, it may challenge your compensation approach.
Such challenges typically begin with an audit and may result in the IRS being allowed to reclassify compensation as dividends — with penalties and interest potentially tacked on. What’s worse, if the tax agency succeeds with its challenge, the difference between what you paid a highly compensated employee and what the tax agency considers a reasonable amount for the services rendered usually isn’t deductible.
Of course, you can contest an IRS challenge. However, doing so usually involves considerable legal expenses and time — and a positive outcome is far from guaranteed.
Note: S corporations are a different story. Under this entity type, income and losses usually “pass through” to business owners at the individual level and aren’t subject to payroll tax. Thus, S corporation owners usually prefer to receive distributions. As a result, the IRS may raise a reasonable compensation challenge when it believes a company’s owners receive too little salary.
What are the factors?
There’s no definitive bright-line test for determining reasonable compensation. However, over the years, courts have considered various factors, including:
The nature, extent and scope of an employee’s work,
The employee’s qualifications and experience,
The size and complexity of the business,
A comparison of salaries paid to the sales, gross income and net worth of the business,
General economic conditions,
The company’s financial status,
The business’s salary policy for all employees,
Salaries of similar positions at comparable companies, and
Historical compensation of the position.
It’s also important to assess whether the business and employee are dealing at an “arm’s length,” and whether the employee has guaranteed the company’s debts.
Can you give me an example?
Just a few years ago, a case played out in the U.S. Tax Court illustrating the risks of an IRS challenge regarding reasonable compensation.
The owner of a construction business structured as a C corporation led his company through tough times and turned it into a profitable enterprise. When the business recorded large profits in 2015 and 2016, primarily because of the owner’s personal efforts and contacts, it paid him a bonus of $5 million each year in addition to his six-figure salary. The IRS claimed this was excessive.
The Tax Court relied heavily on expert witnesses to make its determination. Ultimately, it decided against the business, finding that reasonable amounts for the bonuses were $1.36 million in 2015 and $3.68 million in 2016, respectively. (TC Memo 2022-15)
Who can help?
As your business grows, incorporation may help your company guard against certain risks and achieve a greater sense of stature. However, there are tax complexities to consider. If you’re thinking about it, please contact FMD for help identifying the advantages and risks from both tax and strategic perspectives.
In Certain Situations, Filing a Gift Tax Return is Required or Recommended
Thanks to the annual gift tax exclusion, you can systematically reduce your taxable estate with little effort. And while you typically don’t have to file a gift tax return, in some situations, doing so may be required or recommended.
Know when a return is required
The annual gift tax exclusion amount for 2024 is $18,000 per recipient. (It’ll increase to $19,000 per recipient beginning in 2025.)
So, for example, if you have three children and seven grandchildren, you can give up to $180,000 in 2024 ($18,000 x 10) without gift tax liability. Under this scenario, you aren’t required to file a gift tax return.
If your spouse consents to a “split gift,” you can jointly give up to $36,000 per recipient in 2024. When making split gifts, you must file a gift tax return (unless you reside in a community property state). If your gift exceeds the annual gift tax exclusion amount, the federal gift and estate tax exemption may shelter the excess from tax if a gift tax return is filed. In 2024, the exemption amount is an inflation-adjusted $13.61 million. In 2025, the exemption amount increases to an inflation-adjusted $13.99 million.
Avoid a filing penalty
Failing to file a required gift tax return may result in a penalty of 5% per month of the tax due, up to 25%. Bear in mind that you might file a gift tax return even if you’re technically not required to do so. The return establishes the value of assets for tax purposes and provides a measure of audit protection from the IRS.
If you file a gift tax return and honestly disclose the value of the gifts, a safe-harbor rule prohibits audits after three years. However, the safe-harbor rule doesn’t apply in the event of fraudulent statements or inadequate disclosure.
Mind the filing deadline
The due date for filing a gift tax return for 2024 is April 15, 2025, the same due date for filing an individual income tax return. If you file for an extension, the filing due date is October 15, 2025. Contact FMD if you have questions about whether a gift requires filing a gift tax return.
Sharing Your Estate Plan’s Details with Family has Pros and Cons
When it comes to estate planning, one important decision many people struggle with is whether to share the details of their plans with family members. There’s no one-size-fits-all answer — it largely depends on your goals and your family’s dynamics. However, thoughtful communication can go a long way in reducing confusion and conflict after your death. Let’s take a closer look at the pros and cons of sharing your estate planning decisions with your family.
The pros
Sharing the details of your estate plan provides many benefits, including:
Explaining your wishes. When they design their estate plans, most people want to treat all their loved ones fairly. But “fair” doesn’t always mean “equal.” The problem is that your beneficiaries may not understand that without an explanation.
For example, suppose you have adult children from a previous marriage and minor children from your second marriage. Treating both sets of children equally may not be fair, especially if the adult children are financially independent and the younger children still face significant living and educational expenses. It may make sense to leave more of your wealth to your younger children. And explaining your reasoning upfront can go a long way toward avoiding hurt feelings or disputes.
Obtaining feedback. Sharing your plans with loved ones allows them to ask questions and provide feedback. If family members feel they’re being treated unfairly, you may wish to discuss alternatives that better meet their needs while still satisfying your estate planning objectives.
Streamlining estate administration. Sharing details of your plan with your executor, trustees and any holders of powers of attorney will enable them to act quickly and efficiently when the time comes. This is particularly important for people you’ve designated to make health care decisions or handle your financial affairs if you become incapacitated.
The cons
There may be some disadvantages to sharing the details of your plan, including:
Strained relationships. Some loved ones may be disappointed when they learn the details of your estate plan, which can lead to strained relationships. Keeping your plans to yourself allows you to avoid these uncomfortable situations. On the other hand, it also deprives you of an opportunity to resolve such conflicts during your lifetime.
Encouragement of irresponsible behavior. Some affluent parents worry that the promise of financial independence may give their children a disincentive to behave in a financially responsible manner. They may not pursue higher education, remain gainfully employed and generally lead productive lives. Rather than keeping your children’s inheritance a secret, a better approach may be to use your estate plan to encourage desirable behavior.
Don’t forget to factor in your state’s laws
As you think over how much you wish to disclose to your loved ones about your estate plan, be sure to consider applicable state law. The rules governing what a trustee must disclose to beneficiaries about the terms of the trust vary from state to state. Some states permit so-called “quiet trusts,” also known as “silent trusts,” which make it possible to keep the trust a secret from your loved ones.
Other states require trustees to inform the beneficiaries about the trust’s existence and terms, often when they reach a certain age. For example, trustees may be required to provide beneficiaries with a copy of the trust and an annual accounting of its assets and financial activities. However, many states allow you to place limits on the information provided to beneficiaries.
Sharing is caring
Ultimately, a well-crafted estate plan should speak for itself. But open communication, when done thoughtfully, can support your plan’s success and give your loved ones clarity and peace of mind. Contact FMD with questions.
If Your Estate Includes IP, Consider these Planning Strategies
Over your lifetime, you’ve likely accumulated various tangible assets. These may include automobiles, personal property or art. It’s relatively easy to account for such assets in your estate plan, but what about intangible assets, such as intellectual property (IP)? These assets behave differently from other types of property, so careful planning is required to preserve their value for your family.
What is IP?
IP generally falls into one of four categories: patents, copyrights, trademarks and trade secrets. Let’s focus on only patents and copyrights, creatures of federal law intended to promote scientific and creative endeavors by providing inventors and artists with exclusive rights to benefit economically from their work for a certain period.
In a nutshell, patents protect inventions. To obtain patent protection, inventions must be novel, “nonobvious” and useful. The two most common patent types are utility and design patents:
A utility patent may be granted to someone who “invents or discovers any new and useful process, machine, manufacture or composition of matter, or any new useful improvement thereof.”
A design patent is available for a “new, original and ornamental design for an article of manufacture.”
Under current law, a utility patent protects an invention for 20 years from the patent application filing date. A design patent lasts 15 years from the patent issue date. For utility patents, it typically takes at least a year to a year and a half from the date of filing to the date of issue.
When it comes to copyrights, they protect the original expression of ideas that are fixed in a “tangible medium of expression,” typically in the form of written works, music, paintings, sculptures, photographs, sound recordings, films, computer software, architectural works and other creations. Unlike patents, which the U.S. Patent and Trademark Office must approve, copyright protection kicks in as soon as a work is fixed in a tangible medium.
For works created in 1978 or later, an author-owned copyright lasts for the author’s lifetime plus 70 years. A “work-for-hire” copyright expires 95 years after the first publication date or 120 years after the date the work is created, whichever is earlier. More complex rules apply to works created before 1978.
What are the estate planning considerations?
For estate planning purposes, IP raises two important questions:
What’s the IP worth?
How should it be transferred?
Valuing IP is a complex process. So it’s best to obtain an appraisal from a professional with experience valuing this commodity.
After you know the IP’s value, it’s time to decide whether to transfer it to family members, colleagues, charities or others through lifetime gifts or bequests after your death. The gift and estate tax consequences will likely affect your decision. However, you also should consider your income needs and who’s in the best position to monitor your IP rights and take advantage of their benefits.
For example, if you continue to depend on the IP for your livelihood, hold on to it until you’re ready to retire or no longer need the income. You also might want to sell or retain ownership of the IP if your children or other transferees lack the desire or wherewithal to take advantage of its economic potential and monitor and protect it against infringers.
Whichever strategy you choose, it’s important to plan the transaction carefully to ensure your objectives are achieved. There’s a common misconception that when you transfer ownership of the tangible medium on which IP is recorded you also transfer the IP rights. IP rights are separate from the work and are retained by the creator — even if the work is sold or given away.
Turn to a professional
Having your assets distributed according to your wishes after your death is a primary reason for having an estate plan. And whether artistic or scientific endeavors are the source of your wealth or simply meaningful diversions, it’s likely that you care deeply about who ultimately possesses your works and enjoys their benefits. Contact FMD to help ensure your estate plan correctly accounts for your IP.
Is Your Business on Top of its Tech Stack?
Like many business owners, you’ve probably received a lot of technology advice. One term you may hear frequently is “tech stack.” Information technology (IT) folks love to throw this one around while sharing their bits and bytes of digital wisdom.
Well, they’re not wrong about its importance. Your tech stack is crucial to maintaining smooth operations, but it can be a major drain on cash flow if not managed carefully.
Everything you use
For the purpose of running a business, a tech stack can be defined as all the software and other digital tools used to support the company’s operations and IT infrastructure. It includes assets such as your:
Accounting software,
Customer relationship management platform,
Project management tools,
Cloud storage, and
Communication apps.
Note: In a purely IT context, the term is widely defined as the set of technologies used to develop an application or website.
For businesses, a tech stack’s objective is to streamline workflows and promote productivity while maintaining strong cybersecurity. Unfortunately, as it grows, a tech stack can leave companies struggling with overspending, inefficiencies and employee apathy.
Case in point: For its 2025 State of Digital Adoption Report, software platform provider WalkMe surveyed nearly 4,000 enterprise leaders and employees worldwide. The data showed that about 43% of enterprise tech stacks are currently more complex than they were three years ago. Disturbingly, the report found the average large enterprise lost $104 million in 2024 because of underused technology, fragmented IT strategy and low employee adoption of tech tools.
Although these results focus on larger companies, small to midsize businesses face the same risks. Over time, companies often layer technologies upon technologies, sometimes introducing redundant or extraneous tools that are largely ignored.
5 factors to consider
Balancing functionality and innovation without overspending is the key to staying on top of your tech stack. Here are five factors to focus on:
1. Composition. Many business owners lose track of the many complex elements of their tech stacks. The best way to stay informed is to conduct regular IT audits. These are formal, systematic reviews of your IT infrastructure, which includes your tech stack. Audits often reveal redundant software subscriptions and underused or forgotten software licenses.
2. Integration/compatibility. When tech tools don’t play well together — or at all — data silos spring up and redundant work drags everyone down. This leads to more errors and less productivity. When managing your tech stack, choose solutions that integrate well across your operations. As feasible, replace those that don’t.
3. Price to value. Choosing IT tools primarily based on cost is risky. Although you should budget carefully, opting for cheaper solutions can ultimately increase technology expenses because of greater inefficiencies and the constant need to add tools to fill functionality gaps. Stay mindful of getting good value for the price and make choices that align with your strategic objectives.
4. Scalability. Generally, as a business grows, its technology needs expand and evolve. That doesn’t mean you always have to buy new software, however. Look for solutions that can scale up with growth or down during slower periods. Shop for assets that offer flexibility along with the right functionality.
5. Adoptability. Your company could have the most powerful software tool in existence, but if it sits unused, that item is just a wasted expense taking up space in your tech stack. Add new technology cautiously. Consult your leadership team, survey the employees who’ll be using it and ask for vendor references. When you do buy something, roll it out with an effective communication strategy and thorough training.
A technological tree
Like a tree, a tech stack can grow out of control and become a nuisance or even a danger to everyone around it. Properly pruned and otherwise well-maintained, however, it can be a powerful and functional business feature. Let FMD help you identify all your technology costs and assess the return on investment of every component of your tech stack.
How Companies Can Better Control IT Costs
Most small to midsize businesses today are constantly under pressure to upgrade their information technology (IT). Whether it’s new software, a better way to use the cloud or a means to strengthen cybersecurity, there’s always something to spend more money on.
If your company keeps blowing its IT budget, rest assured — you’re not alone. The good news is that you and your leadership team may be able to control these costs better through various proactive measures.
Set a philosophy and exercise governance
Assuming your company hasn’t already, establish a coherent IT philosophy. Depending on its industry and mission, your business may need to spend relatively aggressively on technology to keep up with competitors. Or maybe it doesn’t. You could decide to follow a more cautious spending approach until these costs are under control.
Once you’ve set your philosophy, develop clear IT governance policies and procedures for purchases, upgrades and usage. These should, for example, mandate and establish approval workflows and budgetary oversight. You want to ensure that every dollar spent aligns with current strategic objectives and will likely result in a positive return on investment (ROI).
Beware of shiny new toys! Many businesses exceed their IT budgets when one or two decision-makers can’t control their enthusiasm for the latest and greatest solutions. Grant final approval for major purchases, or even a series of minor ones, only after carefully analyzing the technology you have in place and identifying legitimate gaps or shortcomings.
Also, remember that overspending on technology is often driven by undertrained employees. Teach and remind your users to adhere to your IT policies and follow procedures. Doing so can help prevent costly operational mistakes and cybersecurity breaches.
Conduct regular audits
You can’t control costs in any business area unless you know precisely what they are. To get the information you need, regularly conduct IT audits. These are formal, systematic reviews of your IT infrastructure, policies, procedures and usage. IT audits often reveal budget drainers such as:
Redundant subscriptions for software or other tech services,
Underused or forgotten software licenses, and
Outdated or abandoned hardware.
You may discover, for instance, that you’re paying for several different software products with overlapping functionalities. Choosing one and discarding the others could generate substantial savings.
As you search for overspending, also look for examples of IT expenditures delivering a good ROI. You want to be able to refine and repeat whatever decision-making process led you to those wins.
Keep an eye on the cloud
One specific type of IT expense that plagues many businesses relates to cloud services. Like many companies, yours probably uses a “pay as you go” subscription model that includes discounts or rate reductions for lower usage. However, if you don’t monitor your actual cloud usage and claim those discounts or cheaper rates, you can wind up overpaying for months or even years without realizing it.
To avoid this sad fate, ensure that at least one person within your business is well-acquainted with your cloud services contract. Assign this individual (usually a technology executive) the responsibility of making sure the company claims all discounts or rate adjustments it’s entitled to.
One best practice to strongly consider is setting up weekly cloud cost reports that go to the leadership team. Also, be prepared to occasionally renegotiate your cloud services contract so it’s as straightforward as possible and optimally suited to your business’s needs.
Don’t give up
To be clear, controlling IT costs should never mean cutting corners or scrimping on mission-critical technology expenses — particularly those related to cybersecurity. That said, you also should never give up on managing your IT budget. FMD can help you develop a tailored cost-control strategy that keeps your technology current and supports your business objectives.
Stepped-Up Basis Rules Can Ease the Income Tax Bite of an Inheritance
With the federal gift and estate tax exemption amount set at $13.99 million for 2025, most people won’t be liable for these taxes. However, capital gains tax on inherited assets may cause an unwelcome tax bite.
The good news is that the stepped-up basis rules can significantly reduce capital gains tax for family members who inherit your assets. Under these rules, when your loved one inherits an asset, the asset’s tax basis is adjusted to the fair market value at the time of your death. If the heir later sells the asset, he or she will owe capital gains tax only on the appreciation after the date of death rather than on the entire gain from when you acquired it.
Primer on capital gains tax
When assets such as securities are sold, any resulting gain generally is a taxable capital gain. The gain is taxed at favorable rates if the assets have been owned for longer than one year. The maximum tax rate on a long-term capital gain is 15% but increases to 20% for certain high-income individuals.
Conversely, a short-term capital gain is taxed at ordinary income tax rates as high as 37%. Gains and losses are accounted for when filing a tax return, so high-taxed gains may be offset wholly or partially by losses.
The amount of a taxable gain is equal to the difference between the basis of the asset and the sale price. For example, if you acquire stock for $10,000 and then sell it for $50,000, your taxable capital gain is $40,000.
These basic rules apply to capital assets owned by an individual and sold during his or her lifetime. However, a different set of rules applies to inherited assets.
How stepped-up basis works
When assets are passed on through inheritance, there’s no income tax liability until the assets are sold. For these purposes, the basis for calculating gain is “stepped up” to the value of the assets on the date of your death. Thus, only the appreciation in value since your death is subject to tax because the individual inherited the assets. The appreciation during your lifetime goes untaxed.
Securities, artwork, bank accounts, business interests, investment accounts, real estate and personal property are among the assets affected by the stepped-up basis rules. However, these rules don’t apply to retirement assets such as 401(k) plans or IRAs.
To illustrate the benefits, let’s look at a simplified example. Dan bought XYZ Corp. stock 10 years ago for $100,000. In his will, he leaves all the XYZ stock to his daughter, Alice. When Dan dies, the stock is worth $500,000. Alice’s basis is stepped up to $500,000.
When Alice sells the stock two years later, it’s worth $700,000. She must pay the maximum 20% rate on her long-term capital gain. On these facts, Alice has a $200,000 gain. With the 20% capital gains rate, she owes $40,000. Without the stepped-up basis, her tax on the $600,000 gain would be $120,000.
What happens if an asset declines in value after the deceased acquired it? The adjusted basis of the asset the individual inherits is still the value on the date of death. This could result in a taxable gain on a subsequent sale if the value rebounds after death, or a loss if the asset’s value continues to decline.
Turn to us for help
Without the stepped-up basis rules, your beneficiaries could face much higher capital gains taxes when they sell their inherited assets. If you have questions regarding these rules, please contact FMD.
Growing the Business Means Supporting your Managers
Many different shortcomings can hold back the growth of a company. Some are obvious, such as poor cash flow management or flawed strategic plans. Others aren’t so easy to see.
Take, for example, disjointed or under-supported managers. If you don’t dedicate the time and resources to strengthening the bonds of your management team, and provide the support they need, your company may struggle with slower growth as a consequence.
Follow a collaborative approach
A good place to start is by making sure you’re following a collaborative approach to running the business. Develop strategic goals with your management team’s input and buy-in so everyone is pulling in the same direction. From there, actively work to keep managers engaged in meeting department-specific objectives related to strategic goals.
Collaboration has other benefits, too. More individuals participating in decision-making can mean more creative and well-thought-out solutions. A collaborative approach also distributes the burden of strategic planning so it doesn’t fall on only your shoulders. Sharing responsibility for key decisions — particularly as a business grows — is vital to facilitating progress and seizing opportunities.
Build an accessible knowledge base
Involving managers in decision-making calls for developing a robust, accessible knowledge base about your company’s product or service lines, organizational structure, market, customer base and operating environment. Your management team must be able to view, in real time, the information they need to contribute to strategic planning and guide their departments.
The good news is that today’s technology allows you to create a centralized platform for authorized users to share and access critical data so everyone is on the same page. For example, you can use enterprise resource planning software to gather, store and analyze business intelligence related to core processes such as human resources, financial management and reporting, and supply chain management. You can integrate customer relationship management software to track and share data related to customers, prospects and key contacts.
When in doubt, conduct an assessment
If you’re unsure where your management team stands, you may want to perform a formal assessment. This entails undertaking a thorough and confidential review of every manager to identify issues — whether cultural, technical or interpersonal — that may be detracting from team performance.
To help ensure objectivity, many businesses engage outside consultants specializing in executive or leadership development to perform such assessments. The assessments generally consist of live or virtual interviews, sometimes in group settings, and written or online evaluations. The goal is to gain insights into:
Individual and group strengths and weaknesses,
Team dynamics,
Barriers to success,
Areas of improvement, and
Untapped opportunities.
Assessment providers typically issue results in written reports and debriefing sessions. Most will help you create an action plan to make use of the information gathered.
Consider an annual retreat
To take management team building to the next level, you may want to hold annual retreats. Doing so can be particularly important following one of the aforementioned assessments.
Management retreats typically follow a more intense format than company-wide team-building events. Ways to structure each retreat are limited only by budget, creativity and perhaps team members’ physical limitations. The goal is to break down functional silos and communication barriers and build up a greater sense of trust and unity.
However, to fully realize the potential value of a retreat, you must follow up. That means harnessing the experiences and breakthroughs that occur during the event and using them to create an action plan for improving management performance back at the office. (If you’ve also conducted a management team assessment, you can combine the two action plans.)
Give them support
It’s all too easy for managers to get caught up in their respective departments’ day-to-day trials and travails. That’s how growth inhibitors such as knowledge silos and leadership conflicts happen. Give your management team the encouragement and support it deserves. FMD can help you identify and analyze all the costs of performance development at every level of your business.
Business Owners Should Get Comfortable with their Financial Statements
Financial statements can fascinate accountants, investors and lenders. However, for business owners, they may not be real page-turners.
The truth is each of the three parts of your financial statements is a valuable tool that can guide you toward reasonable, beneficial business decisions. For this reason, it’s important to get comfortable with their respective purposes.
The balance sheet
The primary purpose of the balance sheet is to tally your assets, liabilities and net worth, thereby creating a snapshot of your business’s financial health during the statement period.
Net worth (or owners’ equity) is particularly critical. It’s defined as the extent to which assets exceed liabilities. Because the balance sheet must balance, assets need to equal liabilities plus net worth. If the value of your company’s liabilities exceeds the value of its assets, net worth will be negative.
In terms of operations, just a couple of balance sheet ratios worth monitoring, among many, are:
Growth in accounts receivable compared with growth in sales. If outstanding receivables grow faster than the rate at which sales increase, customers may be taking longer to pay. They may be facing financial trouble or growing dissatisfied with your products or services.
Inventory growth vs. sales growth. If your business maintains inventory, watch it closely. When inventory levels increase faster than sales, the company produces or stocks products faster than they’re being sold. This can tie up cash. Moreover, the longer inventory remains unsold, the greater the likelihood it will become obsolete.
Growing companies often must invest in inventory and allow for increases in accounts receivable, so upswings in these areas don’t always signal problems. However, jumps in inventory or receivables should typically correlate with rising sales.
Income statement
The purpose of the income statement is to assess profitability, revenue generation and operational efficiency. It shows sales, expenses, and the income or profits earned after expenses during the statement period.
One term that’s commonly associated with the income statement is “gross profit,” or the income earned after subtracting cost of goods sold (COGS) from revenue. COGS includes the cost of labor and materials required to make a product or provide a service. Another important term is “net income,” which is the income remaining after all expenses — including taxes — have been paid.
The income statement can also reveal potential problems. It may show a decline in gross profits, which, among other things, could mean production expenses are rising more quickly than sales. It may also indicate excessive interest expenses, which could mean the business is carrying too much debt.
Statement of cash flows
The purpose of the statement of cash flows is to track all the sources (inflows) and recipients (outflows) of your company’s cash. For example, along with inflows from selling its products or services, your business may have inflows from borrowing money or selling stock. Meanwhile, it undoubtedly has outflows from paying expenses, and perhaps from repaying debt or investing in capital equipment.
Although the statement of cash flows may seem similar to the income statement, its focus is solely on cash. For instance, a product sale might appear on the income statement even though the customer won’t pay for it for another month. But the money from the sale won’t appear as a cash inflow until it’s collected.
By analyzing your statement of cash flows, you can assess your company’s ability to meet its short-term obligations and manage its liquidity. Perhaps most importantly, you can differentiate profit from cash flow. A business can be profitable on paper but still encounter cash flow issues that leave it unable to pay its bills or even continue operating.
Critical insights
You can probably find more exciting things to read than your financial statements. However, you won’t likely find anything more insightful regarding how your company is performing financially. FMD can help you not only generate best-in-class financial statements, but also glean the most valuable information from them.
Family Business Focus: Taking it to The Next Level
Family businesses often start out small, with casual operational approaches. However, informal (or nonexistent) policies and procedures can become problematic as such companies grow.
Employees may grumble about unclear, inconsistent rules. Lenders and investors might frown on suboptimal accounting practices. Perhaps worst of all, customers can become disenfranchised by slow or unsatisfying service. Simply put, there may come a time when you have to take it to the next level.
4 critical areas
Has your family-owned company reached the point where it needs to expand its operational infrastructure to handle a larger customer base, manage higher revenue volumes and capitalize on new market opportunities? If so, look to strengthen these four critical areas:
1. Performance management. Family business owners often get used to putting out fires and tying up loose ends. However, as the company grows, doing so can get increasingly difficult and frustrating. Sound familiar? The problem may not lie entirely with your employees. If you haven’t already done so, write formal job descriptions. Then, provide proper training to teach staff members how to fulfill the stated duties.
From there, implement a formal performance management system to evaluate employees, give constructive feedback, and help determine promotions and pay raises. Effective performance management not only helps employees improve, but also contributes to motivation and retention. It’s particularly important for nonfamily staff, who may feel like they’re not being evaluated the same way as working family members.
In addition, if you don’t yet have an employee handbook, write one. Work with a qualified employment attorney to refine the language and ask everyone to sign an acknowledgment that they received and read it.
2. Business processes. Think of your business processes as the pistons of the engine that drives your family-owned company. We’re talking about things such as:
Production of goods or services,
Sales and marketing,
Customer support,
Accounting and financial management, and
Human resources.
The more you document and enhance these and other processes, the easier it is to train staff and improve their performances. Bear in mind that enhancing business processes usually involves streamlining them to reduce manual effort and redundancies.
3. Strategic planning. Many family business owners keep their company visions to themselves. If they do share them, it’s impromptu, around the dinner table or during family gatherings.
As your company grows, formalize your approach to strategic planning. This starts with building a solid leadership team with whom you can share your thoughts and listen to their opinions and ideas. From there, hold regular strategic-planning meetings and perhaps even an annual retreat.
When ready, share company goals with employees and ask for their feedback. Keeping staff in the loop empowers them and helps ensure they buy into the direction you’re taking.
4. Information technology. Nowadays, the systems and software your family business uses to operate can make or break its success. As your company grows, outdated or unscalable solutions will likely inhibit efficiency, undercut competitiveness, and expose you to fraud or hackers.
Running a professional, process-oriented business generally requires integration. This means all your various systems and software should work together seamlessly. You want your authorized users to be able to get to information quickly and easily. You also want to automate as many processes as possible to improve efficiency and productivity.
Last but certainly not least, you must address cybersecurity. Growing family businesses are prime targets for criminals looking to steal data or abduct it for ransom. Internal fraud is an ever-present threat as well.
Change and adapt
Perhaps the most dangerous thing any family business owner can say is, “But we’ve always done it that way!” A growing company is a testament to your hard work, but you’ll need to be adaptable and willing to change to keep it moving forward. FMD can help you reevaluate and improve all your business processes related to accounting, financial management and tax planning.
Incentive Trusts: Use Them to Pass your Wealth and Values on to Beneficiaries
If your estate planning goals include distributing your wealth while also encouraging specific behaviors or achievements among your heirs, using an incentive trust might be right for your plan.
Unlike a traditional trust, which distributes assets according to a set schedule or upon a beneficiary reaching a certain age, an incentive trust includes specific conditions that must be met before distributions are made. These conditions can align with your values, such as pursuing higher education, maintaining gainful employment, engaging in charitable work or avoiding destructive behaviors like substance abuse.
Setting guidelines
Essentially, an incentive trust sets guidelines for how a beneficiary becomes eligible to benefit from the trust. Distributions can, for instance, be contingent on a beneficiary graduating from high school, earning certain grades, or enrolling in or graduating from college.
Then again, perhaps you’re more concerned about a beneficiary’s physical well-being than his or her intellectual one. In this case, you might structure an incentive trust to disallow payouts if the beneficiary indulges in harmful or illegal behavior, such as abusing alcohol or using illegal drugs. Going this route will, however, require that you appoint a trustee who knows the issues and who can monitor the beneficiary’s activities and enforce the provision.
From a business perspective, an incentive trust can include provisions that reward your beneficiary for becoming involved in the family business or mapping out a career path of his or her own. Build in matching charitable donations and you can help the beneficiary develop an appreciation for community service and volunteerism.
Minding the risks
Incentive trusts come with some inherent risks. If the provisions are too restrictive, or simply don’t suit the beneficiary in question, the incentive may backfire.
For instance, say Jane, a 20-year-old college dropout, learns that her Aunt Lucy has provided her with $500,000 in trust. However, Jane can withdraw the trust funds only if she returns to college and earns a bachelor’s degree.
The problem is, Jane never really liked Aunt Lucy, who often scolded her for making bad choices and meddled in her life. And Jane didn’t really like college either. As a result, the trust only furthers Jane’s resolve to never return to college — no matter how much money she loses.
In other cases, the beneficiary may force him- or herself to complete a degree but wind up living an unfulfilled life because he or she had other dreams in mind. Or you might end up “motivating” a beneficiary to work for the family business when he or she really doesn’t want to, which, in turn, could hurt the company.
Communicating with clarity
A big part of making sure an incentive trust will work is clearly communicating with your trustee. He or she should generally have broad discretionary powers because, as time passes, a beneficiary’s circumstances might change. For example, a student might develop learning or other disabilities that prevent him or her from achieving the academic goals set by the incentive provisions.
In general, the trust should provide enough of a safety net that, if the beneficiary fails to achieve the trust’s goals, he or she will still be able to support him- or herself. The incentive provisions can apply to only a part of the trust assets. The trust should also provide for giving some or all the funds to a secondary beneficiary, in case the primary beneficiary fails to meet the stated goals or dies.
Contact FMD if you have questions regarding an incentive trust.
Estate planning Q&A: Guardianship
If you’re the parent of a newborn, toddler or older child, you may be thinking about naming a guardian for him or her. This can be a difficult decision, especially if you have many choices or, on the other hand, no one you can trust.
The following are answers to common questions about guardianship:
Q. How do I choose a guardian for my child?
A. In most cases involving a single parent or a parenting couple, you designate the guardian in a legally valid will. This means the guardian will raise your child if you (or you and your partner) should die unexpectedly. A similar provision may address incapacitation issues.
Choose the best person for the job and designate an alternate in case your first choice can’t fulfill the duties. Parents frequently name a married couple who are relatives or close friends. If you take this approach, ensure both spouses have legal authority to act on the child’s behalf.
Also, select someone who has the necessary time and resources for this immense responsibility. Although it’s usually not recommended, you can name different guardians for different children.
In addition, consider the living arrangements and the geographic area where your child would reside if the guardian assumed legal responsibilities. Do you really want to uproot your child and send him or her to live somewhere far away from familiar surroundings?
Q. Do I have to justify my decision?
A. No. However, it can’t hurt — and it could help — to prepare a letter of explanation for the benefit of any judge presiding over a guardianship matter for your family. The letter can provide insights into your choice of guardian.
Notably, the judge will apply a standard based on the child’s “best interests,” so you should explain why the guardian you’ve named is the optimal choice. Focus on aspects such as the child’s preferences, who can best meet the child’s needs, the moral and ethical character of the potential guardian, and the guardian’s relationship to the child.
Whether you’re naming a guardian for a child in your will or you’re attempting to become a guardian yourself, you must adhere to the legal principles under state and local law. Fortunately, FMD can provide any necessary guidance.