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If your family owns a vacation home, address it carefully in your estate plan
For many people, the disposition of a family home is an emotionally charged estate planning issue. And emotions may run even higher with vacation homes, which often evoke even fonder memories. So, it’s important to address your vacation home carefully in your estate plan.
Keeping the peace
Before you do anything, talk with your loved ones about the vacation home. Simply dividing the home equally among your children or other family members may be an invitation to conflict and hurt feelings. Some may care more about keeping the home in the family than about any financial benefits it might provide. Others may prefer to sell the home and use the proceeds for other needs.
One solution is to leave the vacation home to the family members who want it and leave other assets to those who don’t. Alternatively, you can develop a buyout plan that establishes the terms under which family members who want to keep the home can buy the interests of those who want to sell. The plan should establish a reasonable price and payment terms, which might include payment in installments over several years.
You also may want to create a usage schedule for nonowners whom you wish to continue enjoying the vacation home. And to help alleviate the costs of keeping the vacation home in the family, consider setting aside assets that will generate income to pay for maintenance, repairs, property taxes and other expenses.
Transferring the home
After determining who will receive your vacation home, there are several traditional estate planning tools you can use to transfer it in a tax-efficient manner. It may make sense to transfer interests in the home to your children or other family members now, using tax-free gifts.
But if you’re not yet ready to give up ownership, consider a qualified personal residence trust (QPRT). With a QPRT, you transfer a qualifying vacation home to an irrevocable trust, retaining the right to occupy the home during the trust term. At the end of the term, the home is transferred to your beneficiaries, though it’s possible to continue occupying the home by paying them fair market rent. The transfer is a taxable gift of your beneficiaries’ remainder interest, which is only a fraction of the home’s current fair market value.
You must survive the trust term, and the vacation home must qualify as a “personal residence,” which means, among other things, that you use it for the greater of 14 days per year or more than 10% of the total number of days it’s rented out.
Discussing your intentions
These are only a few of the issues that may be involved in passing on a vacation home. Estate planning for a vacation home may be complicated but it doesn’t have to be. The key is to sit down with your family to discuss the options. Only then can you put together a plan that meets everyone’s needs. Contact us with questions about the most tax-efficient way to proceed.
© 2023
What should you consider when choosing a guardian?
What’s arguably the most common reason people put off estate planning? It’s naming a guardian for their minor children. No doubt this is a difficult decision for parents to make. However, if you and your spouse don’t name a guardian for your minor children and you both die unexpectedly, a court will name one.
First steps
Begin by developing a list of potential candidates. Immediate family members are obvious choices but don’t limit yourself. Extended family members, friends, teachers, and childcare providers may also be good choices.
After compiling your initial list of candidates:
Identify the values that are important to you and your spouse. These may include religious and moral beliefs, parenting philosophy, educational values, and social values. Bear in mind that you’re not likely to find a perfect match, so you’ll need to prioritize your values.
List the intangibles. It’s important to consider potential guardians’ intangible qualities, such as their personalities and whether they’d be a good “fit” for your children.
Take the potential guardian’s age into consideration. If your children are very young, a grandparent or other older person may not have the energy to keep up with them. Choosing a younger guardian also reduces the risk that your kids will go through the trauma of losing another loved one.
Be practical. Consider factors such as where potential guardians live, whether they have other children, and if their homes are large enough to accommodate your kids. Ideally, your estate will include sufficient assets to provide your children with everything they need. But if it doesn’t, will the guardian have the resources to support them properly?
Once you narrow your list to a primary choice and one or two alternates, discuss your plans with them. You can’t force someone to act as your children’s guardian, so it’s critical to talk with all candidates to make sure they understand what’s expected of them and are willing to take on the responsibilities. If your children are mature enough, you may want to get their input as well.
Reaching a final decision
Keep in mind that your choice of guardian isn’t binding. In appointing a guardian, a court’s sole concern is the child’s best interest. But it’ll generally defer to your wishes unless it deems the person you choose to be unfit. To help ensure that your nominee is accepted, write a letter explaining the reasons for your choice. Contact FMD with any questions.
© 2023
Avoid succession drama with a buy-sell agreement
Recently, the critically acclaimed television show “Succession” aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession plan.
While there are many aspects to succession planning, one way to put some clear steps in writing — particularly if your company has multiple owners — is to draft a buy-sell agreement.
Avoiding conflicts
A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced, or deciding to leave the company.
If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. In addition, it helps ensure that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it.
A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value.
By facilitating the orderly transition of a deceased, disabled or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer.
This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention.
Funding the agreement
There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares.
However, there are potential complications with both options. That’s why many companies turn to life insurance and disability buyout insurance as funding mechanisms. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. There are two main types of buy-sells funded by life insurance:
1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest.
2. Entity-purchase agreements. In this case, the business buys life insurance policies for each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company.
A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies.
Getting expert guidance
Creating, administering, and executing a buy-sell agreement calls for expert assistance. The FMD team can help you identify, gather and organize the relevant financial information involved.
© 2023
Why businesses may want to consider ESG in strategic planning
When engaging in strategic planning, business owners and their leadership teams must consider various factors. These commonly include the state of your industry, the national and local economies, the company’s financial position and cash flow, and opportunities in the marketplace.
However, in today’s world, where transparency is everything, another factor that may be important for some companies is a clearly defined approach to environmental, social, and governance (ESG) issues.
3 areas of focus
As a general concept, ESG (as it’s often called for short) focuses on three areas:
The environmental component considers your company’s impact on the environment, including the energy it uses, the waste it produces, and the resources it consumes.
The social element examines your business’s relationships with people, communities, and institutions. It includes fair labor practices; worker health and safety; diversity, equity, and inclusion; and your company’s impact on the people of the community or communities where it operates.
The governance portion includes policies, practices, and procedures your business adopts to govern itself. Considerations include ethics, transparency, legal compliance, executive compensation, supply-chain management, data protection, and product quality and safety.
The idea is that, to be a good “corporate citizen,” it’s important to recognize the impact of your company’s activities on the environment, the people it employs, and those it interacts with. And it’s equally important to implement business practices that minimize potentially adverse effects.
Who’s watching
Not everyone agrees on the importance of ESG. However, as mentioned, businesses of certain types or in certain areas may find themselves under pressure from various parties to implement ESG initiatives.
For starters, some customers are increasingly considering ESG — particularly environmental impact and fair labor practices — when making buying decisions. Similarly, certain investors are making ESG performance a priority when deciding whether and how to invest their capital. These stakeholders may be interested in not only how your company handles ESG, but also how your suppliers and other business partners do as well.
Moreover, many governing authorities at the global, national, state, and local levels are prioritizing ESG. A business could incur costly fines and reputational damage for not complying with laws or regulations related to:
Environmental issues such as pollution and carbon emissions,
Social issues such as labor relations, worker health and product safety, and
Supply-chain issues such as human rights violations and the use of conflict minerals.
In addition, public entities may impose ESG standards that go beyond the legal requirements on certain projects. This can seriously impact businesses that rely heavily on government contracts.
Changes in the labor force may also have an impact. Generally, younger workers tend to consider a potential employer’s ESG practices when deciding where to work. And employees of all ages are increasingly more attuned to whether a company mindfully handles the many issues involved. In short, ESG may affect hiring and employee retention.
Something to think about
As you and your leadership team check in on this year’s strategic goals and develop new ones, you may want to assess whether and how ESG might affect your company. It’s something that many businesses are focused on — and you just might discover some ways to differentiate yourself from the competition.
© 2023
What’s in the Fiscal Responsibility Act?
President Biden has signed into law the new debt ceiling agreement that he reached with U.S. House of Representatives Speaker Kevin McCarthy (R-CA). The Fiscal Responsibility Act (FRA) suspends — as opposed to raising — the debt ceiling until 2025, after the next presidential election.
The FRA also makes a variety of changes related to domestic spending, although it falls far short of the cuts included in the Republican bill that the House passed in April 2023, with no changes to the GOP’s long-time targets of Social Security and Medicare. Nonetheless, the Congressional Budget Office (CBO) projects the law will reduce the federal deficit by about $1.5 trillion over 10 years.
The main provisions
The new law primarily tackles discretionary spending. The notable provisions address:
IRS funding. The Inflation Reduction Act (IRA), which was enacted in 2022, included an additional $80 billion in funding for the tax agency, with much of it designated for heightened enforcement activity against wealthy taxpayers. The FRA immediately rescinds $1.39 billion and pares back the funding by about $10 billion each year for 2024 and 2025. However, White House officials have indicated that they expect the funding cuts to make little difference in the IRS’s pending expansion plans because the agency planned to spend the original funding over several years. It may be able to spend some of the funds earmarked for later years earlier and then return to Congress to request more funding in the future.
Spending caps. One of the more contentious focuses of the negotiations was non-defense discretionary funding for programs such as scientific research, domestic law enforcement, forest management, environmental protection, air traffic control, and nutritional assistance for mothers. The final result is a virtual freeze on this spending, facilitated in part by the reduced funding for the IRS. The spending will drop by about $1 billion in the 2024 fiscal year, compared to this fiscal year, with a 1% increase slated for the 2025 fiscal year. This amounts to a cut, as inflation is expected to grow at a rate greater than 1%. The final non-defense figures are $704 billion for 2024 and $711 billion for 2025.
Defense and veterans affairs spending. The FRA provides Biden’s budgeted funding for the military and veterans affairs for 2024, adjusted for inflation. Total defense spending will grow to $886 billion in 2024 and $895 billion in 2025.
Student loan debt. The new law codifies Biden’s previous announcement that the moratorium on student loan payments precipitated by the COVID-19 pandemic won’t be extended beyond this summer. His plan to cancel student loan debt for many borrowers — to the tune of $430 billion — isn’t part of the law. (However, the plan is currently under review by the U.S. Supreme Court.)
Work requirements. Certain recipients of Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) benefits will face new work requirements, although Medicaid recipients won’t. Specifically, the FRA raises the top age at which adults without children living in their homes must work to receive SNAP assistance, from 49 to 54, phased in over three years. However, the law includes exemptions for the homeless, veterans and individuals age 24 or younger who were children in foster care. It also includes provisions that could increase the number of individuals who must satisfy work requirements to receive TANF benefits from their state programs. Yet, the CBO estimates that the various changes will actually result in more people receiving assistance.
COVID-19 clawback. Much of the remaining unspent COVID-19 relief funds, estimated to equal $30 billion to $70 billion, will be “clawed back.” Portions of that funding will be retained, though, including a certain amount for vaccines.
Permitting for energy projects. The FRA includes rules to make it easier for new energy projects, including fossil fuel projects, to obtain permit approval.
The leftovers
As noted, the original House debt ceiling bill was much more aggressive. Republicans sought larger spending cuts and tighter work requirements. They also aimed to repeal hundreds of billions in tax incentives in the IRA intended to increase the use of renewable energy and combat climate change.
On the other side of the aisle, Democrats hoped to raise taxes on corporations and taxpayers who earn more than $400,000. In addition, they wanted to institute measures to reduce Medicare spending on prescription drugs.
None of these priorities are included in the new law.
The bottom line
Experts have noted that the outcome of the latest debt ceiling challenge largely resembles the likely outcome of budget negotiations in a divided government, albeit with much more drama and more drastic potential implications for the global economy. Moreover, additional bills related to appropriations — what the parties have referred to as “agreed upon adjustments” — are expected in coming months, which could reduce the effects of some of the spending cuts.
© 2023
Is it time for a targeted marketing campaign?
If you’ve been in business a while, you might assume that you know exactly who your customers are. But, as the saying goes, “life comes at you fast.” Customer desires, preferences, and demographics can all shift before you know it.
One way to avoid getting caught off guard is to regularly conduct a targeted marketing campaign. This is an analytical approach to studying a company’s market, breaking it up into segments and focusing marketing efforts on the most potentially profitable ones.
Gather demographic data
The first step is to collect as much customer demographic information as possible. As mentioned, your customer base may have slowly shifted over the years and you’re still reaching out to people who, for whatever reason, have become a smaller proportion of buyers. Examples of straightforward demographic variables that you can gather for analysis include:
Age bracket,
Gender,
Income level,
Education, and
Location (home and work).
For instance, if you cater to people who live near your business, the reason for a shift in your customer base could be as simple as a turnover in neighborhood demographics. Such a shift could account for a slow loss of business because you’ve failed to reposition or modify your product or service to better connect with the new demographic.
Look at the big picture
Next, review the purchasing patterns of different demographic groups in your existing customer base. Who are your most and least profitable customers? Monitor buying patterns over time, including which segments are growing and shrinking.
Also evaluate demographic trends in the broader market to determine whether any shifts you’re seeing in customer base are consistent with broader demographic trends. The answer will hold important implications for your marketing strategy.
For example, if you’re operating in a demographic area that’s bucking trends in the wider market, you’ll probably want to shift your marketing focus as the trends catch up with your locale. Or, if you’re looking to aggressively grow your business, you may need to expand your marketing efforts to a broader audience than your current customer base.
Consider cluster analysis
When conducting a targeted marketing campaign, many companies choose to group similar people into “clusters” to more effectively market products or services to them. Commonly referred to as “cluster analysis,” this approach is helpful when basic demographic criteria might not be strong indicators of whether someone is likely to be interested in the product or service being offered.
Once you’ve identified the market segments that you want to target, figure out how to best connect with them. Personalize your market segmentation strategy to each cluster’s preferred mode of communication. This is sometimes referred to as using “emotional intelligence when communicating with customers.”
Finally, keep in mind that you also need to supplement your demographic research with competitive intelligence. If competitors are miles ahead of you in reaching a demographic that you intend to target, you’ll need to factor that into your strategy. Indeed, you might decide not to try to expand into that segment if the effort would require a huge investment with a low likelihood of success.
Use the data wisely
To be clear, this has been just a general overview of targeted marketing campaigns. There are many different approaches you could apply and a variety of metrics to potentially track. FMD can help you review your financials to determine how to budget for an optimal targeted marketing campaign, as well as how to best use the data gathered.
© 2023
Ease the burden of being a member of the Sandwich Generation with these action steps
If you’re currently taking care of your children and elderly parents, count yourself among those in the “Sandwich Generation.” Although it may be personally gratifying to help your parents, it can be a time-consuming and financial burden.
How can you best handle the financial affairs of parents in the later stages of life? Incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they’ve already made. Here are some critical action steps to take to better manage your situation:
Identify key contacts. Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.
List and value their assets. If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. Keep a list of their investment holdings, IRAs and other retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits.
Execute the proper estate planning documents. Develop a plan incorporating several legal documents. If your parents already have one or more of these documents, the paperwork may need to be revised. Some elements commonly included in an estate plan are:
Wills. Your parents’ wills control the disposition of their possessions and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one providing financial assistance, you may be the optimal choice.
Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.
Powers of attorney for health and finances. These documents authorize someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.
Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies so they can act according to their wishes.
Beneficiary designations. Undoubtedly, your parents have completed beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it’s important to keep them up to date.
Spread the wealth. If you decide the best approach for helping your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $17,000 (for 2023) without paying any gift tax. Plus, payments to medical providers aren’t considered gifts, so you may make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amount.
If you’re part of the Sandwich Generation, you already have a lot on your plate. Please contact the FMD team if you have questions regarding your parents’ estate plans or your own. We’d be pleased to help during this challenging time.
© 2023
If you’re married, ensure that you and your spouse coordinate your estate plans
Estate planning can be complicated enough if you don’t have a spouse. But things can get more difficult for married couples. Even if you and your spouse have agreed on most major issues in the past — such as child rearing, where to live and other lifestyle choices — you shouldn’t automatically assume that you’ll both be on the same page when it comes to making estate planning decisions.
A worst-case scenario is when one spouse moves forward with his or her estate plan without the knowledge or approval of the other, to the eventual detriment of the family. Thus, it’s critical for both spouses to clearly communicate their estate planning goals to each other.
Where to begin?
Start with the basic premise that state law generally governs estate matters. Therefore, state law determines if your property is community property, separate property or tenancy by the entirety. For instance, California is a community property state. That means half of what a resident owns is his or her spouse’s property and vice versa. There’s no circumventing this law when planning for a joint estate.
Next, consider your family’s dynamics. Emotions can run high and tensions may result, for example, if a family includes children from a prior marriage. If these issues aren’t addressed beforehand, it could lead to legal squabbles.
Don’t forget about the tax implications. Currently, married couples can take advantage of a record-high federal gift and estate tax exemption that shelters most estates from tax. However, if you and your spouse are high earners (or otherwise have large estates) ensure that you incorporate estate tax minimization techniques into your coordinated plans.
Finally, decide together on distributions of assets to designated beneficiaries. You may intend, for example, for expensive jewelry to go to one child, but your spouse might have other ideas.
Keep lines of communication open
Indeed, clear communication is essential for married couples when developing estate plans. The FMD team can help ensure that you and your spouse both have plans that work in harmony.
© 2023
What is the difference between Prevailing Wage Act and Davis-Bacon Act?
Prevailing Wage requires employers working on Michigan state-funded projects to pay employees on those projects wages and fringe benefits similar to union-level wages and benefits. This applies to both contractors and subcontractors. With the exception of lease build-outs, if a project greater than $50,000 involves employing construction mechanics (e.g., asbestos, hazardous material handling, boilermaker, carpenter, cement mason, electrician, office reconstruction and installation, laborer including cleaning debris, scraping floors, or sweeping floors in construction areas, etc.) and is sponsored or financed in whole or in part by State funds, state contractors must pay prevailing wage.
Here are some helpful links:
The Michigan Department of Technology, Management, and Budget Frequently Asked Questions link (Please note the reference to year 2022 is the latest on this site)
Michigan Labor and Economic Opportunity - Bureau of Employment Relations - Wage and Hour Division website has additional information on prevailing wage requirements
The Davis-Bacon Act requires the payment of prevailing wage rates, which are determined by the US Department of Labor (DOL), to all laborers and mechanics on federal government construction projects in excess of $2,000. Generally, Michigan’s minimum wage rates exceed the DOL wage rates. Here is a link to the Davis-Bacon Act and Frequently Asked Questions.
The Prevailing Wage Act is ENROLLED HOUSE BILL No. 4007 now known as Act No. 10 Public Acts of 2023.
It requires prevailing wages and fringe benefits on state projects; to establish the requirements and responsibilities of contracting agents and bidders; to make appropriations for the implementation of this act; and to prescribe penalties.
Sec. 2. (1) Every contract executed between a contracting agent and a successful bidder as contractor and entered into pursuant to advertisement and invitation to bid for a state project which requires or involves the employment of construction mechanics, other than those subject to the jurisdiction of the state civil service commission, and which is sponsored or financed in whole or in part by the state shall contain an express term that the rates of wages and fringe benefits to be paid to each class of mechanics by the bidder and all of its subcontractors, shall be not less than the wage and fringe benefit rates prevailing in the locality in which the work is to be performed. Contracts on state projects which contain provisions requiring the payment of prevailing wages as determined by the United States Secretary of Labor pursuant to 40 USC 3141 to 3148 or which contain minimum wage schedules which are the same as prevailing wages in the locality as determined by collective bargaining agreements or understandings between bona fide organizations of construction mechanics and their employers are exempt from the provisions of this act.
(2) A contractor or subcontractor shall pay to its construction mechanics wages and fringe benefits at the rates required under an applicable contract for a state project.
What does the Prevailing Wage law mean?
a. Michigan has reinstated its prevailing wage law, which requires the payment of wages to employees working on state-funded projects at the “prevailing wage in the locality.” This requirement was previously in place from 1965 to 2018.
b. The “prevailing wage” is a level set by the state that is similar to the union-level wages and fringe benefits that all employers performing state-funded projects in the locality are required to pay to employees. State-funded projects include the construction, alteration, repair, installation, demolition, or improvement of public buildings, schools, works, bridges, highways, or roads.
c. The prevailing wage requirement will apply to contracts entered into or bids made after the law goes into effect (90 days after the end of the current legislative session, which is expected to be mid to late March 2024). Contracts that require payment of prevailing wages established by the U.S. Secretary of Labor or which contain minimum wage schedules as set forth in local collective bargaining agreements or understandings between bona fide organizations of construction mechanics and their employers are exempt from the provisions of this act.
d. After the law is in effect, the Commissioner of the Michigan Department of Labor and Economic Opportunity will be responsible for establishing the prevailing wage rates for all classes of employees required to perform a state-funded construction project prior to accepting bids from contractors.
e. Contractors awarded a project will be required to post the prevailing wages at the construction site and maintain accurate records of the actual wages and benefits paid to employees.
f. Contractors that fail to pay prevailing wages may have their contract terminated, be required to pay any excess costs incurred by the state for contracting with a new employer, and be fined up to $5,000.
g. Contractors and their subcontractors are jointly and severally liable for costs associated with a violation.
h. Contractors are also prohibited from discharging or discriminating against a skilled or unskilled mechanic, laborer, worker, helper, assistant, or apprentice working on a state project who reports or was about to report a violation or suspected violation.
What is the Davis-Bacon Act?
a. The Davis-Bacon Act requires the payment of prevailing wage rates, which are determined by the US Department of Labor (DOL), to all laborers and mechanics on federal government construction projects in excess of $2,000.
b. The act is named after its sponsors, James J. Davis, a Senator from Pennsylvania and a former Secretary of Labor under three presidents, and Representative Robert L. Bacon of Long Island, New York. The Davis-Bacon act was passed by Congress and signed into law by President Herbert Hoover on March 3, 1931.
c. In Michigan as of January 2022, a contractor must pay all covered workers at least $11.25 per hour (or the applicable wage rate, if it is higher) for all hours spent performing on a federal government construction contract.
If you have further questions please contact your advisor at FMD.
Addressing pay equity at your business
Businesses today are under increased pressure to fully understand and thoroughly respond to the issue of pay equity. And neither of these two broad undertakings is particularly easy.
First, fully understanding what pay equity is and whether and how it’s played out at your company calls for research, analysis, and perhaps some difficult discussions. The second part, responding to it in practical and effective ways, can entail changing long-standing employment processes and investing in additional training and communications initiatives.
Philosophy and practice
Simply defined, pay equity is the philosophy and practice of “equal pay for equal work.” That doesn’t mean everyone receives the same amount of pay. It means compensation is free of unjust biases historically related to demographic factors such as age, race, gender, disability, national origin, and sexual orientation. Employees’ pay, both upon hire and as adjusted through raises, should be determined on the basis of objective, relevant factors such as education and training, experience, skills, performance, and tenure.
As mentioned, determining whether pay inequities exist within your business will entail a careful and honest assessment. Many companies conduct a formal pay equity audit. This is a thorough statistical analysis of compensation history, policies and structure. The audit’s objective is to identify any inconsistencies, gaps and incongruities that can’t be rationally explained.
Best prevention practices
To prevent instances of inequitable pay at your company, here are some best practices to consider:
Use only initials or random ID numbers during early screenings of job candidates. Minimizing the ability to distinguish candidates by ethnicity or gender can reduce the likelihood of biases in hiring and initial compensation decisions.
Refrain from asking candidates their pay histories. Women and people of color are more likely to have been paid less in their previous positions. Using historical compensation to set their current salaries only compounds pay disparities.
Generate objective criteria for recruiting, hiring, compensating, evaluating and promoting employees. Implement standard pay ranges that reflect each position’s value to the business.
Limit the ability of managers or supervisors to singlehandedly adjust pay for specific individuals. Such one-off decisions can lead to pay inequities.
Help managers and supervisors understand pay equity. Training will help them recognize how to best develop a culture that embraces pay equity and discuss the issue with their employees.
Communicate openly and regularly with staff. Let employees know how you set compensation and reassure them that they can discuss pay with their supervisors without fear of retaliation. More transparency tends to foster greater pay equity.
Tough questions
Make no mistake, pay equity is a tricky issue that can raise a lot of tough questions. Dealing with it won’t be a “one and done” activity. However, establishing your business as one that pays equitably will bolster your “employer brand” in today’s competitive labor market. Our firm can help you conduct a pay equity audit as well as better understand all aspects of your compensation structure.
© 2023
You’ve received a sizable inheritance: Now what?
If you’ve received, or will soon receive a significant inheritance, it may be tempting to view it as “found money” that can be spent freely. But unless your current financial plan ensures that you’ll comfortably reach all your goals, it’s a good idea to have a plan of action for managing your newfound wealth.
Take time to reflect
Generally, when you receive an inheritance, there’s no need to act quickly. Take some time to reflect on the significance of the inheritance for your financial situation; consult with a team of trusted advisors (including an attorney, accountant, and financial advisor); and carefully review your options.
While you’re planning, park any cash or investments in a bank or brokerage account. If you’re married, consider holding the assets in an account in your name only. An inheritance is usually considered your separate property in the event of a divorce, but it may lose that status if it’s commingled with marital property in a joint account.
Avoid making quick financial commitments
If your loved one’s estate is still being administered, don’t start spending — or make any financial commitments based on your inheritance — until you understand what your net proceeds from the estate will be. Once all fees and taxes are accounted for, the final settlement may be less than you expect.
If you’re receiving your inheritance through a trust, talk with the trustee, familiarize yourself with the trust’s terms, and be sure you understand the timing and amount of distributions and any conditions that must be satisfied to receive them.
Beware of income and estate tax consequences
An inheritance generally isn’t subject to income tax, but depending on the types of assets you inherit, they may have an impact on your tax situation going forward. For example, certain income-producing assets — such as those from real estate, an investment portfolio or a retirement plan — may substantially increase your taxable income or even push you into a higher tax bracket.
Depending on the size of the inheritance, it may also have an impact on your estate plan. If it increases the value of your estate to a point where estate tax becomes a concern, talk with your advisor about strategies for reducing those taxes and preserving as much wealth as possible for your heirs.
Review and revise your financial plan
Treating an inheritance separately from your other assets may encourage impulsive, unplanned spending. A better approach is to integrate inherited assets into your overall financial plan.
Consider using some of the inheritance to pay down credit card or other high-interest debt (if you have it) or to build an emergency fund. The rest should be available, along with your other assets, for funding your retirement, college expenses for your children, travel or other financial goals.
Have a plan
If you receive a sizable inheritance, there’s nothing wrong with taking a small portion of it and splurging a bit. But for the most part, you should treat inherited assets as you’d treat the assets you’ve earned over the years and incorporate them into a comprehensive financial plan. You’ll also want to address any inherited assets in your estate plan. Contact us for more information.
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Don’t overlook these two essential estate planning strategies
When it comes to estate planning, there’s no shortage of techniques and strategies available to reduce your taxable estate and ensure your wishes are carried out after your death. Indeed, the two specific strategies discussed below should be used in many estate plans.
1. Take advantage of the annual gift tax exclusion
Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).
For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receive $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).
What if the same amounts were transferred to the recipients upon Jim’s or Joan’s death instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer (GST) tax exemption was available, the tax hit would be at the current 40% rate. So making annual exclusion gifts could potentially save the family a significant amount in taxes.
2. Use an ILIT to hold life insurance
If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.
However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).
An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.
The right strategies for you?
Bear in mind that these two popular strategies might not be right for your specific estate plan. The FMD team can provide you with additional details on each and help you determine if they’re right for you.
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Addressing guns in an estate plan requires special knowledge
When it comes to estate planning, not all assets are created equal. If you own one or more guns, careful planning is required to avoid running afoul of complex federal and state laws. Without proper planning, there’s a risk that the government will confiscate your guns or that the executor of your estate, your trustees or your beneficiaries will inadvertently commit a felony.
Follow federal, state and local laws
Guns are unique among personal property because federal and state laws prohibit certain persons from possessing firearms. For example, under the federal Gun Control Act, “prohibited persons” include convicted felons, fugitives, unlawful drug users or addicts, mentally incompetent persons, illegal or nonimmigrant aliens, persons dishonorably discharged from the armed forces, persons who have renounced their U.S. citizenship, and persons convicted of certain crimes involving domestic violence or subject to certain domestic violence restraining orders.
Other persons may be prohibited from receiving firearms under state or local laws. These restrictions apply not only to your beneficiaries, but also to executors or trustees who come into possession of firearms.
Under federal law, certain firearms — such as short-barreled rifles, shotguns and fully automatic machine guns — must be registered (with the Bureau of Alcohol, Tobacco, Firearms and Explosives) to a transferee by the transferor. And additional steps must be taken when transporting these firearms across state lines. For other types of firearms, states may require registration and may impose mandatory background checks, permits and other requirements for firearms transported across state lines.
Consider a gun trust
Given the complexity of federal and state gun laws, and the stiff penalties for violating them, it’s critical to consult knowledgeable advisors when providing for guns in your estate plan. You might also consider creating a gun trust — with a trustee who has expertise on gun laws, safety and storage protocols, and transfer requirements — to facilitate the process.
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State of Michigan Exempts Delivery and Installation Charges from MI Sales Tax
The State of Michigan has passed new laws (Public Acts 20 and 21) that exempt delivery and installation charges from Michigan sales tax. Sales after April 25, 2023, can exclude sales tax on delivery and installation charges if those items are separately stated on the invoice. The State will also be retroactively canceling sales tax on delivery and installation charges for any tax not currently paid to the State.
Click here to access the State of Michigan's guidelines regarding these laws and how they will impact your business. Reach out to the FMD team with any questions you might have.
Businesses, be prepared to champion the advantages of an HSA
With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.
Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.
The basics
An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).
In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.
Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.
3 major advantages
There are three major advantages to an HSA to clearly communicate to employees:
1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.
2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.
3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.
An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.
Explain the upsides
Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact FMD for help evaluating the concept and assessing the costs of health care benefits.
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Avoiding challenges to your estate plan
A primary goal of estate planning is to ensure that your wishes are carried out after you’re gone. So, it’s important to design your estate plan to withstand potential will contests or other challenges down the road.
The most common grounds for contesting a will are undue influence or lack of testamentary capacity. Other grounds include fraud and invalid execution.
There are no guarantees that your plan will be implemented without challenge, but you can minimize the possibility by taking these actions:
Dot every “i” and cross every “t.” The last thing you want is for someone to contest your will on grounds that it wasn’t executed properly. So be sure to follow applicable state law to the letter. Typically, that means signing your will in front of two witnesses and having your signature notarized. Be aware that the law varies from state to state, and an increasing number of states are permitting electronic wills.
Treat your heirs fairly. One of the most effective ways to avoid a challenge is to ensure that no one has anything to complain about. But satisfying all your family members is easier said than done.
For one thing, treating people equally won’t necessarily be perceived as fair. Suppose, for example, that you have a financially independent 30-year-old child from a previous marriage and a 20-year-old child from your current marriage. If you divide your wealth between them equally, the 20-year-old — who likely needs more financial help — may view your plan as unfair.
Demonstrate your competence if you’re concerned about a challenge. There are many techniques you can use to demonstrate your testamentary capacity and lack of undue influence. Examples include:
Have a medical practitioner conduct a mental examination or attest to your competence at or near the time you execute your will.
Choose witnesses you expect to be available and willing to attest to your testamentary capacity and freedom from undue influence years or even decades down the road.
Videotape the execution of your will. This provides an opportunity to explain the reasoning for any atypical aspects of your estate plan and will help refute claims of undue influence or lack of testamentary capacity.
Consider a no contest clause. Most, but not all, states permit the use of no contest clauses. In a nutshell, it will essentially disinherit any beneficiary who challenges your will or trust.
For this strategy to be effective, you must leave heirs an inheritance that’s large enough that forfeiting it would be a disincentive to bringing a challenge. An heir who receives nothing has nothing to lose by challenging your plan.
Use a living trust. By avoiding probate, a revocable living trust can discourage heirs from challenging your estate plan. That’s because without the court hearing afforded by probate, they’d have to file a lawsuit to challenge your plan.
If your estate plan does anything unusual, it’s critical to communicate the reasons to your family. Indeed, explaining your motives can go a long way toward avoiding misunderstandings or disputes. They may not like it, but it’ll be more difficult for them to contest your will on grounds of undue influence or lack of testamentary capacity if your reasoning is well documented. Contact FMD’s estate planning experts for additional details.
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Strengthen strategic planning with competitive intelligence
Business owners and their leadership teams are rightly urged to engage in regular strategic planning to move their companies, thoughtfully and consciously, in a positive direction.
However, no matter how sound a set of strategic objectives might be, it’s always important to bear in mind that your competitors have plans of their own. That’s why you should consider integrating competitive intelligence into your strategic planning efforts.
What to look for
The term “competitive intelligence” generally refers to the process of legally and ethically gathering and analyzing information about competitors to better anticipate market trends, analyze industry developments and compare business practices. It can help you collect valuable data and analytics about each competitor’s:
Financial performance,
Products and services,
Market position,
Focus or business direction (or related changes),
Growth or expansion plans,
Mergers and acquisitions activity, and
Joint ventures or strategic alliances.
You should also be looking for signs of weakness in competing companies. Have they closed offices or facilities? Do they seem to be desperately looking for employees? Are they embroiled in one or more legal disputes?
How to do it
Putting competitive intelligence into practice may conjure dramatic images of ethically dubious cloak-and-dagger corporate espionage. But there are a multitude of perfectly above-board ways to collect the massive amount of data often available about other businesses.
For starters, simply chatting with customers and prospects, bankers and insurance reps, professional advisors, and other business contacts at trade shows, conferences and other networking events can help keep you in the know.
Back in the office, you can designate an employee (or several) to scan major daily newspapers, community news sources, and trade and other business publications for pertinent stories about your competition and industry. In addition, make sure you’re on the mailing lists for competitors’ brochures, catalogs, press releases, annual plans and other print collateral.
And, of course, there’s the internet. Obviously, you or someone on your team needs to be very familiar with your biggest competitors’ websites and blogs. What are they focused on? What changes are they making — or failing to make?
If competing companies are active on social media, follow those accounts and take note of major announcements, sales and so forth. You may also want to join online discussion groups or forums related to your industry where you might pick up news or clues about competitors.
Additionally, explore harnessing the powerful search engines and resources offered by various third-party providers. For example, Dun & Bradstreet provides industry, market and company-specific intelligence and analytics about both public and private businesses. Meanwhile, the U.S. Securities and Exchange Commission provides free public access to the filings of public companies via its EDGAR database.
Many ways
As you can see, there are many ways to gather competitive intelligence legally and ethically. And what you learn can strengthen your existing strategic planning or even inspire you to go in a new and better direction. Contact us for help integrating relevant financial data and projections into your strategic objectives.
© 2023
Have you planned for long-term health care expenses?
No matter how diligently you prepare, your estate plan can quickly be derailed if you or a loved one requires long-term home health care or an extended stay at an assisted living facility or nursing home. Long-term care (LTC) expenses aren’t covered by traditional health insurance policies or Medicare. So it’s important to have a plan to finance these costs, either by setting aside some of your savings or purchasing insurance. Let’s take a closer look at three options.
1) LTC insurance
An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, transferring (getting in and out of a bed or chair) and maintaining continence.
LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. To qualify, a policy must:
Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.
It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium tax deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.
2) Hybrid insurance
Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have advantages over standalone LTC policies.
For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.
3) Employer-provided plans
Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.
Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.
Think long term
Given the potential magnitude of LTC expenses, the earlier you begin planning, the better. The FMD team can help you review your options and analyze the relative benefits and risks.
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5 valuation terms that every business owner should know
As a business owner, you’ll likely need to have your company appraised at some point. An appraisal is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. You can even use a business valuation to help kickstart or support strategic planning.
A good way to prepare for the appraisal process, or just maintain a clear big-picture view of your company, is to learn some basic valuation terminology. Here are five terms you should know:
1. Fair market value. This is a term you may associate with selling a car, but it applies to businesses — and their respective assets — as well. In a valuation context, “fair market value” has a long definition:
The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
2. Fair value. Often confused with fair market value, fair value is a separate term — defined by state law and/or legal precedent — that may be used when valuing business interests in shareholder disputes or marital dissolution cases. Typically, a valuator uses fair market value as the starting point for fair value, but certain adjustments are made in the interest of fairness to the parties.
For example, dissenting shareholder litigation often involves minority shareholders who are “squeezed out” by a merger or other transaction. Unlike the “hypothetical, willing” participants contemplated under the definition of fair market value, dissenting shareholders are neither hypothetical nor willing. The fair value standard helps prevent controlling shareholders from taking advantage of minority shareholders by forcing them to accept a discounted price.
3. Going concern value. This valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a company that’s expected to continue operating in the future. The intangible elements of going concern often include factors such as having a trained workforce; an operational plant; and the necessary licenses, systems and procedures in place to continue operating.
4. Valuation premium. Sometimes, because of certain factors, an appraiser must increase the estimate of a company’s value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a “premium.” For example, a control premium might apply to a business interest that possesses the requisite power to direct the management and policies of the subject company.
5. Valuation discount. In some cases, it’s appropriate for an appraiser to reduce the value estimate of a business based on specified circumstances. The reduction amount is commonly referred to as a “discount.” For instance, a discount for lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect that interest’s inability to be converted to cash quickly and at minimal cost.
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Breathe new life into a trust by decanting it
Building flexibility into your estate plan using various strategies is generally advised. The reason is that life circumstances change over time, specifically evolving tax laws and family situations. One technique that provides flexibility is to provide your trustee with the ability to decant a trust.
Define “decanting”
One definition of decanting is to pour wine or another liquid from one vessel into another. In the estate planning world, it means “pouring” assets from one trust into another with modified terms. The rationale underlying decanting is that, if a trustee has discretionary power to distribute trust assets among the beneficiaries, it follows that he or she has the power to distribute those assets to another trust.
Depending on the trust’s language and the provisions of applicable state law, decanting may allow the trustee to:
Correct errors or clarify trust language,
Move the trust to a state with more favorable tax or asset protection laws,
Take advantage of new tax laws,
Remove beneficiaries,
Change the number of trustees or alter their powers,
Add or enhance spendthrift language to protect the trust assets from creditors’ claims, or
Move funds to a special needs trust for a disabled beneficiary.
Unlike assets transferred at death, assets that are transferred to a trust don’t receive a stepped-up basis, so they can subject the beneficiaries to capital gains tax on any appreciation in value. One potential solution is to use decanting.
Decanting can authorize the trustee to confer a general power of appointment over the assets to the trust’s grantor. This would cause the assets to be included in the grantor’s estate and, therefore, to be eligible for a stepped-up basis.
Follow your state’s laws
Many states have decanting statutes, and in some states, decanting is authorized by common law. Either way, it’s critical to understand your state’s requirements. For example, in some states, the trustee must notify the beneficiaries or even obtain their consent to decanting.
Even if decanting is permitted, there may be limitations on its uses. Some states, for example, prohibit the use of decanting to eliminate beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t authorize decanting, or if its decanting laws don’t allow you to accomplish your objectives, it may be possible to move the trust to a state whose laws meet your needs.
Beware of tax implications
One of the risks associated with decanting is uncertainty over its tax implications. Let’s say a beneficiary’s interest is reduced. Has he or she made a taxable gift? Does it depend on whether the beneficiary has consented to the decanting? If the trust language authorizes decanting, must the trust be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for the marital deduction? Does distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?
Decanting can breathe new life into an irrevocable trust. The FMD Team is pleased to help you better understand the pros and cons of decanting a trust.
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