Author: dsauder

God blesses all those who believe in him. May the light of faith in God grow each day; and may the miracle of Easter bring you renewed hope, faith, peace and joy. Wishing you a pleasant and blessed Easter!

May God Bless,

Sauder & Stoltzfus, LLC

Preface: Partnerships require vision, collaboration, trust, risk and effort. These business pillars lead to a long and strategic business relationship, e.g. a successful partnership.

Business Partnerships

Credit: Donald J. Sauder, CPA, CVA

Business partnerships are alike to a chorus; a key conductor is always required. Secondly, someone must study the scores. Thirdly, scheduling, auditions, and promotion of the concert(s) are par for the course. It requires a vision, planning, effort and energy. And the more experienced the conductor, the more pleasant it is for everyone – the choir and audience.

The probabilities of succeeding in business with a business partner are much greater, than the probabilities of succeeding without one. Yet, business partnerships may appear from a distance to be a easier and effortless climb to the pinnacle of entrepreneurial success. At the start, all you think about is the scenery from the top. Increasingly, studies show that the most successful companies are partnerships with more than one owner. In fact, supposedly less than 10% of today’s top performing entrepreneurial ventures are sole proprietorships. That says more than 90% of top companies have multiple owners, e.g. they are partnerships.

Knowing beforehand what a partnership venture involves can be helpful. Before entering any partnership agreement, you need to ask yourself “Why should I be partner?” You’ll need to share more than profits. You’ll need to share more than decisions. You’ll need to share emotions, risks, and the work. A partnership is like a business marriage – sometimes too easy to get into. So, if you’re planning a business and thinking about entering a business partnership, or you are working in business and can be an owner, being forewarned is being forearmed.

Are there better options than a true partnership? Often partnership provide opportunities that are not available as a sole proprietor, i.e. walking the path alone while developing a business venture. Collaboration has substantial, proven benefits with in strategy formation, specific delegation of performance in tasks, project and administrative responsibilities, and unique resource allocation, e.g. one partner provides the resources, i.e. property, or capital, and another partner the time or expertise to leverage those resources.

Partners share decisions and burdens, and strengths and weaknesses. The personal values of partners are most crucial to a business partnership. If your personal values do not align with your business partner, you’d be advised to be cautious. Partner conflict and disagreements are inevitable; even with success after success, you need common ground with similar values to succeed. If your personal values clash with your other partners, the business marriage will become too stressful to support sustained and successful collaboration.

Proper planning before entering partnership, even if it is with a family member, is advised. Talking with an experienced advisor who can guide and assess with your partnership decision cannot be over emphasized as prudent to appropriate partnership due diligence. You need to count the cost, assess risks – value conflict, or neglected agreements of sharing responsibility. Don’t enter a partnership blissfully. Be prepared for the risks and responsibility beforehand, and the potential conflicts that can arise.

It pays to invest in your business partnership early with a “hot seat” questions session. The more strategic your business, the more invaluable that planning. Just don’t get stuck in the planning process; you ultimately need to implement effectively. “We would estimate, very roughly, that a master has spent perhaps 10,000 to 50,000 hours staring at chess positions.” Outliers: Herbert Simon and William Chase.

 

Preface: Business tax and business tax planning require thorough analysis of all facts and special circumstances applicable to the factual tax details. Deference to appropriate tax planning expertise in all business tax scenarios is well-advised.

S-Corporation Basis Rules

Credit: Donald J. Sauder, CPA, CVA

Another tax risk to entrepreneurs is S-Corporation basis. Tracking basis in S-Corporation stock is not as easy as it may appear. Key to S-Corporation stock basis, is the amount of a pass-through losses from an S-Corporation to a stockholder from the K-1, that can be deducted from “at-risk” basis.

Consider the instance and the plight of a taxpayer who purchases S-Corporation stock in a sale transactions from a long-time friend. The stock is valued at $600,000 for a 100% interest. The taxpayer signs a note for a non-recourse 100% share of the $600,000 value on the corporation, in a leveraged stock purchase.

During the first year of stock acquisition, the taxpayer with the new ownership in the corporation decides to expand corporate activity. They borrow debt with a bank loan to invest in new trucks, equipment and machinery. The taxpayer applies the bonus depreciation rules applicable in the Tax Cuts and Jobs Act. This permits 100% expensing of the assets, i.e. new equipment purchased. A $325,000 loss results for the corporation from the bonus depreciation benefit to the immediate tax year. The Form 1120S K-1 pass-through loss is intended to be deducted against other non-passive income from the taxpayer’s multiple business interests on the taxpayers Form 1040 taxes.

Because the loan is non-recourse, e.g. there is no “at-risk” basis under Sec. 465 of the Internal Revenue Code; therefore, the loss is a disallowed deduction. If the IRS audits the taxpayers personal tax filing, and the basis schedules are scrutinized along with loan documents the tax risk is substantial. Should the auditor disallow the S-Corporation loss from the K-1 because of the non-recourse feature, the corresponding tax on audit re-adjustment would likely not be lower than 35% of the planned tax deduction for federal tax purposes.

Next, consider the tax scenario where a family member loans $300,000 to finance a sale of family S-Corporation interest. The creditor family member owns 51% of the S-Corporation after the stock certificates are updated. The loan trips the “at-risk” rules with a disqualified interest clause under IRC Sec 465. from the related party definition in IRC Sec 267(b) of common control. If the business passes a loss to the new shareholder family member, they would not be “at-risk” to deduct any pass-through loss. Usually substance over form will govern the day during an IRS audit and scrutiny of the “at-risk” basis. If losses are deducted on the stock purchased with a personal family loan, or non-recourse, the taxpayer is subject to outlier tax risks. Debt basis rules on S-Corporations equip IRS auditors with opportunity from the narrow band of “at risk” IRS definitions. You likely never guessed what your tax accountant knows, and how valuable it can be to your business. Proper respect for more than “back of the napkin” tax planning pays.

S-Corporation basis is also applicable on sales of S-Corporation stock too. Appropriate tracking of stock basis schedules on all S-Corporation tax filings, not just the costs of purchases of additional shares of stock, are a rudimentary task on an accurate S-Corporation tax filing. Stock basis and “at risk” basis should be tracked closely for S-Corporation shareholders; it is relevant to the taxable implications on loss deductions, in addition to future sales of the S-Corporation stocks. Often taxpayers are unaware when S-Corporation basis is not tracked by their tax preparers. The fact is that accurately tracked S-Corporation basis is the responsibility of the stockholder or K-1 recipient, e.g. if you purchase CNH stock, neither the corporation nor your tax preparer are responsible to track your stock basis at purchase. Keeping records of adjustments to basis in S-Corporation stock will provide helpful detail for all future stock transactions and the applicability to calculating taxable gains and losses.

Business tax and business tax planning require thorough analysis of all facts and special circumstances applicable to the factual tax details. Deference to appropriate tax planning expertise in all business tax scenarios is well-advised. This blog is written for informational purposes only, and is not to be construed as tax or accounting advice. Talk with your experienced tax advisor when making any business tax decisions.

Donald J. Sauder, CPA is a founding member of Sauder & Stoltzfus, LLC, the entrepreneurs CPA firm in Ephrata, PA, providing clients with tax, accounting, business valuation, payroll, bookkeeping and peripheral CPA services. He has more than 9 years of public accounting experience, and has been certified as a public accountant (CPA) in the State of Pennsylvania since 2010. He is a member with the National Association of Certified Valuators and Analysts (NACVA) and holds the certified valuation analyst (CVA) credential. Donald can be reached by phone at 717-701-5368; or via email; dsauder@saudercpa.com.

Preface: Business tax and business tax planning require thorough analysis of all facts and special circumstances applicable to the factual tax details. Deference to appropriate tax planning expertise in all business tax scenarios is well-advised. 

Disguised Sales Rules with Partnerships

Credit: Donald J. Sauder, CPA, CVA

In tax planning, one of the gravest mistakes is to automatically assume that the factual situations of a similar tax plan are applicable to your specific tax situation. It is often unique from situation to situation, and business to business. With features like qualified liabilities determination, and contingent liabilities, tax rules have specific fact-patterns applicable to what most business owners considers as one word – debt. In this article, we would like to consider two often overlooked, and ambiguous tax risks 1) disguised sales rules (DSR) in partnerships, and 2) the S-Corporation K-1 rules of stock basis.

Facts and circumstances of the tax rules applicable to disguised sales occur if a transfer of property by a partner to a partnership occur, followed with a subsequent transfer of money or other consideration by the partnership transferred back to the contributing partner. This is the tax definition of a disguised sale in whole, or in part. Applicable to facts and circumstances are following Internal Revenue Code (IRC) rules:

1. The timing and amount of subsequent transfer are determinable with reasonable certainly at the time of an earlier transfer
2. The transferor has a legally enforceable right to subsequent transfer
3. The partners right to receive the transfer of money or other consideration is secured in any manner, considering the period during which it is secured
4. That any person has made or is legally obligated to make contributions to the partnership in-order to permit the partnership to make the transfer of money or other consideration
5. That any person has loaned or has agreed to loan the partnership the money or other consideration required to enable the partnership to make the transfer.
6. That the partnership hold money or other liquid assets beyond the need of business to make transfers
7. That the partner has no obligation to return or repay the money or other consideration to the partnership.

 

Consider the facts of real estate entrepreneurs Amos and Ulrich. They decide to start investing in farm land and organize a partnership coined “Farm Land Plains.” Amos transfers 50 acres in the “North Farm Property” that he owns personally to the partnership, in exchange for a 45% ownership interest. At the time of the transfer the “North Farm Property” has a fair market value of $400,000, and adjusted basis of $120,000. Immediately after the transfer of the “North Farm Property” to the partnership, Farm Land Plains distributes $300,000 cash to Amos, financed by a recourse loan. The Farm Land Plains partnership, next borrows $500,000 to purchase additional crop acreage. With the partnership cash distribution, Amos has an immediate taxable capital gain of $210,000. It is disguised sale, with tax implications, often unbeknownst to many partners.

When Ulrich takes the partnership books to the tax accountant for the annual tax filing preparation, the cash distribution is never scrutinized. In the following months, Ulrich receives an IRS tax notice with regards to the partnership. At the initial meeting the IRS auditor inquiries about the initial year filing of Form 1065, and property contributions and corresponding cash distributions. The IRS auditor asks Ulrich if he is familiar with the IRS disguised sales rules (DSR). Ulrich responds that they had a tax accountant prepare the partnership tax filing, and he is unaware of any reason they have a tax risk with an appreciated capital asset.

Now let’s consider a different factual tax scenario. Amos and Ulrich organize a partnership AU Real Estate. Amos transfers undeveloped land to AU Real Estate with the partnership intent of developing the property. The land Amos transfers and contributes to AU Real Estate holds a fair market value of $2,000,000 and tax basis of $1,000,000. The partnership agreement provides that at the completion of a triple net lease building on the new property, AU Real Estate will distribute $1,800,000 to Amos, financed from a construction loan. Should the distribution occur with-in two years of the contribution of land, the partnership has a disguised sale; and serious tax implications. These are examples of the types of tax traps that catch the unwary.

This is only a partial list of factual items relevant to disguised sales rules (DSR). Typically, the rules of general distributions from partnerships will be subject to the disguised sales rules (DSR) if the transactions meet the definition of a “sale”. Especially applicable in the context of partnership liquidations and subsequent contribution of assets to a new partnership, i.e. LLC, the disguised sales rules (DSR) are only item, that can create substantial disruptive risks in what appears to say be an easy real estate partnership tax filing.

Preface: This blog is intended to address tax audit concerns regarding the IRS’s continuing campaign to identify and shut down tax shelters, many of which involve transfers of rights or property to foreign entities. In recent years, offshore asset reporting has become one of the IRS’s primary areas of focus as it seeks to increase tax revenue.

The Inherent Risks with Dubious Tax Practices

In 2010 Congress addressed the significant issue of international tax compliance, enacting the Foreign Account Tax Compliance Act (FATCA). FATCA imposes more stringent reporting requirements and, in many cases, increased tax liability on U.S. taxpayers—many of whom are corporations—with investments in offshore accounts.  Since then, the Treasury Department and the IRS have issued new regulations to implement FATCA and its reporting and disclosure regime.

The IRS is cracking tax shelters in other ways as well. Many employees of publicly traded companies are taking advantage of the tax whistleblower provisions of the Tax Relief and Health Care Act of 2006, which often enable the IRS to provide a hefty reward to those who report tax evasion.  Additionally, the Treasury Inspector General for Tax Administration has recommended that the IRS improve its audits of small corporations, meaning that corporations with assets of $10 million or less may begin to feel a squeeze from examiners in upcoming tax years.

FATCA

In addition to requiring certain U.S. taxpayers holding financial assets outside the United States to report them to the IRS, FATCA generally require foreign financial institutions to report certain information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. Non-compliant foreign financial institutions could be subject to a 30% withholding tax on all U.S. sourced payments.

The IRS has stressed its intent that FATCA be a reporting regime rather than a penalty regime, and that it is eager to work with industry professionals and experts into ease the law into implementation. Nevertheless, the effect of FATCA on corporate offshore tax shelters is meant to be severe on the numerous abusive tax shelters that take advantage of lower or non-existent corporate income tax rates abroad through the dubious transfer or licensing of assets.

Other Initiatives

The whistleblower rules encourage individuals to report any tax abuses or corporate fraud through generous reward offers. In 2012, the IRS paid out its largest award, more than $100 million, to an individual who disclosed tax evasion by a foreign bank.

The IRS has also maintained its campaign against dubious accounting and law firms that design or promote tax shelters. The “anything goes” attitude of past years ago is a long faded memory. And while the IRS has been enforcing the law, Congress is looking to close as many dubious loopholes as possible to prevent tax evasion. IRS examiners are still directed to look for the checklist of characteristics common in abusive corporate tax shelters. These include:

• A reported transaction has no business purpose or economic substance other than to minimize taxes;
• Investments made late in the tax year that indicate there may be deductions for prepaid expenses that are not allowable.
• A large portion of the investment made in the first year indicates the transaction may have been entered into for tax purposes rather than economic motivation.
• A loss exceeding a taxpayer’s investment indicates the possibility of a nonrecourse note.
• If the burdens and benefits of ownership have not passed to the taxpayer, the parties have not intended for ownership of the property to pass at the time of the alleged sale.
• A sales price that does not relate comparably to the fair market value of the property indicates the value of the property has been overstated.
• If the estimated present value of all future income does not compare favorably with the present value of all the investment and associated costs of the shelter the economic reality of the investment may be questionable.

Entrepreneurs should be concerned that the IRS’s focus on dubious  tax shelters will mean increasing scrutiny of other aspects of their business operations as well. Others want to undertake internal protective audit steps to set up a strategy against IRS involvement before the IRS sends out audit letters. If you would like a further analysis of how the IRS targets on tax shelters may affect you and your business, directly or indirectly, please do not hesitate to call. You are now aware that dubious tax practices are increasingly subject to audit risk.

What Employment Risks Entrepreneurs Should Be Aware of With Minors Onsite.

Preface: This week a memo from Jeff Worley of GKH, with regards to Child Labor Laws in Pennsylvania.

A Partner a GKH, Jeff practices in the areas of employment law, business law and general litigation. Jeff is a member of the firm’s Advocacy Group and Corporate Practice Group.

In the area of employment law, Jeff has extensive experience counseling employers in the context of employment–related litigation as well as general employment counsel and litigation avoidance. Representative matters include employee discipline and termination, workplace harassment, disability accommodations, FMLA leave and drafting employment policies and employment agreements.

Jeff is a graduate of Lancaster Mennonite High School and lives in East Hempfield Township with his wife and two children.

 

Click the following link to access the memo

Child Labor Laws 2.23.18

Preface: With tax season in progress, entrepreneurs want to maximize tax deductions.  The tax treatment of deductible meal expenses varies, and proper categorization of bottled water or those chicken nugget expenses makes your tax filing more accurate. Consider discussing with your accountant sooner rather than later what meal expenses you have, and how to categorize them for financial reporting, because this blog is only an introduction to expensing business meals:

Subway Expenses: And Say Can You Deduct Business Meals?

Credit: Jacob Dietz, CPA

Does your business buy meals for employees and customers? The tax law treats meals differently, depending on the circumstances, and the new tax reform law changes treatment for some meals. This blog explores the treatment for certain meals.

Meals on Premises for Convenience of Employer

An employer may deduct 50% of the cost of meals provided on its premises for the convenience of the employer. For example, suppose ABC Store, LLC runs a huge sale for a week, and their peak sales time is 11 AM to 1 PM. The store wants to have its employees take a short lunch so that the employees can maximize their time on the floor selling to customers. ABC brings in pizza each day of the sales week so that the employees can get back to work in 15 minutes. ABC provided the meals on its premises for its own convenience, and they will deduct 50% of the cost on its tax return. In the past the expense was 100% deductible, but starting in 2018 it is only 50% deductible.

Meals while Traveling

Meals while travelling are generally 50% deductible. For example, suppose there is a 2-day product show in another state, and you send employees to the show with your product. They buy some food while at the show. You deduct 50% of the cost of those meals.

Meals with Clients

If you take a customer to lunch to discuss business, that is still 50% deductible. For example, suppose you take a customer to the local diner and finalize some details of what they will purchase from you. The diner invoice is $30. You deduct $15 on your tax return. This deduction stays the same as it was in the past.

Holiday Banquets and Company Picnics

Some companies enjoy a holiday banquet, such as for Thanksgiving or Christmas. The food for those banquets is 100% deductible. The food for company picnics is also 100% deductible.

The tax treatment of food varies, and proper categorization of food expenses makes your tax filing more accurate. Consider discussing with our  firm sooner rather than later what meal expenses you have, and how to categorize them for financial reporting.

Preface: Featuring Nevin Beiler, Esquire this week, a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. In a three segment series, you have the opportunity to learn how competent legal counsel can lead to more rewarding decision making, e.g. applied to estate planning counsel.

Seven Common Mistakes in Estate Planning—And How You Can Avoid Them (Segment III)

#5. Failing to Properly Fund a Living Trust

Revocable living trusts are a popular estate planning tool that can provide significant benefits for some (but not all) people. Potential benefits include (1) simplifying the probate process, especially for a person who owns real estate in more than one state; (2) possibly saving money on legal fees and probate costs; (3) allowing for easier property management if the grantors of the trust become incapacitated; and (4) avoiding having all the details about the grantors’ estate being filed as a public record (as is done with a will).

Living trusts, while often beneficial, require extra steps to properly document and implement. Something that is commonly missed after an attorney prepares a living trust is the essential step of transferring assets into the living trust (called “funding” the trust). For example, to transfer a home or business property into a trust, a deed must be executed. Failing to fund a living trust means the trust will not function like it was supposed to.

If you have created a living trust in the past, or decide to create one in the future, it is very important that all assets that are supposed to be in the trust are actually transferred into the trust. Some attorneys do a good job of ensuring this is done. Others seem content to collect a fee for drafting the trust without following up to ensure that the trust is properly funded. Make sure you confirm with your attorney that all assets have been appropriately transferred, and if you purchase a major asset (such as real estate) in the future, you should consider putting it directly into the trust.

#6. Not Considering How an Inheritance May Affect Those Who Receive It

Professionals working in the estate planning field generally assume people want to leave all their assets to their children, with perhaps a small amount left to charitable purposes. There is great emphasis given to preserving and passing along family wealth. This might seem like the normal thing to do, but is it the right thing? Obviously, the answer is not going to be the same for everyone. Many people would probably agree that winning millions, or even several hundred thousand, in the lottery can be harmful to a person’s work ethic and spiritual well-being. But those same people may not think twice about leaving a multi-million dollar estate to their adult children who are already financially self-sufficient.

For Christians who seek to follow the teachings of the Bible, failing to give any thought to “how much is too much” when leaving behind a sizable estate to their children can perhaps be the biggest financial mistake of their lives—because it can have eternal significance. The Bible clearly does not encourage heaping up wealth, but instead warns of the dangers of riches (e.g. Matt. 6:19-20; Mark 10:23-25; Luke 16:13; 1 Tim. 6:9-10). While a reasonable amount of inheritance may be a blessing to children, too much can potentially cause serious harm. Take the time for careful thought and prayer about who should receive your assets when you are gone. Consider getting counsel from other people such as trusted friends or church leaders, not just your attorney or financial advisor.

#7. Not Obtaining Good Legal and Tax Counsel

Many of the above mistakes can be avoided by seeking trusted and competent legal and tax counsel to assist in the estate planning process. Unfortunately, with the availability of low cost or free will templates and other legal documents, “doing it myself” becomes a tempting option. Some people with small, simple estates have been able to successfully draft and sign their own wills that ended up working just fine. But many others that tried to do it themselves ended up costing their family much more (in money and headaches) than it would have cost to do it right the first time.

Unfortunately, going to an attorney for assistance does not always mean that everything will be done right. Some attorneys offer estate planning services, but know little more than the basics of estate planning. Others are so busy that they fail to take the time necessary to work with clients before and after the estate plan is signed, which may result in substandard work. When hiring an attorney to assist with estate planning, make sure that at least a significant part of that attorney’s legal practice involves estate planning. This will increase the likelihood that the attorney has more than a basic understanding of the estate planning process.

Also, make sure the attorney takes the time to understand your goals and values, so that the plan drafted by your attorney is consistent with those goals and values, and so that the attorney’s advice does not lead you astray. Finally, consider involving your tax adviser in the estate planning process so that you can avoid unpleasant tax surprises. While the best estate planning attorneys have a strong understanding of relevant tax issues, many attorneys do not. Having your trusted legal and tax advisors work together can add an extra layer of protection and quality for your plan.

Conclusion

The foundation of estate planning is good stewardship and love for people. It is being responsible and caring for those we leave behind. It is also, for many of us, a lifelong process. Take time to plan. Update your plan as your life changes. Communicate. Organize your affairs. Seek counsel. Learn from the mistakes of others. And may God bless you in your journey.

Nevin Beiler is a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. Nevin is part of the conservative Anabaptist community and is passionate about practicing law in a way that builds the Kingdom of God and is consistent with the Anabaptist faith. He lives and works in Lancaster County, PA, and can be contacted by email at nevin@beilerlegalservices.com or by phone at 717-287-1688.

Preface: Featuring Nevin Beiler, Esquire this week, a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. In a three segment series, you have the opportunity to learn how competent legal counsel can lead to more rewarding decision making, e.g. applied to estate planning counsel.

Seven Common Mistakes in Estate Planning—And How You Can Avoid Them (Segment II)

By Nevin Beiler

“You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” – Samuel Levenson.

#3. Not Organizing Records Prior to Passing Away

We all live with varying levels of organization in our lives. Some people can live quite happily in a rather disorganized state. They can mostly remember what things are stored where, and can usually find a bank statement or deed without too much paper shuffling. The problem arises when a completely new person suddenly has to manage all the affairs of a disorganized person. This is essentially what happens in many cases for executors. A disorganized estate can be a major headache for an executor, and can significantly increase legal fees if an attorney is needed to assist with more of the administration. Even if organizing your records does not seem worth it to you personally, consider those who are coming after you.

As you get older, consider consolidating your financial accounts. Do you have multiple bank accounts, investment accounts, or IRA accounts with different companies? Consider consolidating them. If there is the possibility of adverse tax or management issues, consult with tax or legal counsel prior to the consolidations. Leave written instructions for your executor explaining where all your financial accounts are held and where your important records are located.

Ensure that your executor has access to important your records. If you have financial records on a computer that is password protected, make sure your executor can obtain the password. The same goes for online accounts. Make sure your executor knows about any safe deposit box you might have, and how to access it. If you have made private loans to other individuals, make sure there is adequate documentation for all those loans, including the current balance. If you want any of those loans to be forgiven upon your death, ensure the loan documentation or your will specifies this (don’t relay on just verbal agreements!). Taking a few hours to organize your records will likely save your executor many times that amount of time, and perhaps hundreds or thousands in legal fees.

#4. Not Coordinating Non-Probate Assets with the Overall Estate Plan

Many people believe that a will is to be carried out exactly as written, but wills have limitations when it comes to controlling the distribution of assets. For example, a will can only direct who gets assets that go through the probate process. Examples of assets that typically do not go through the probate process include the following:

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1. Real estate that is held in joint tenancy with a right of survivorship (with anyone), or as tenants by the entirety (with a spouse).
2. Assets that have a valid “payable on death” or “transfer on death” designation.
3. Financial accounts such as IRAs, 401(k)s, or life insurance policies, that have a valid beneficiary designation.
4. Jointly owned bank accounts.
5. Property held in a revocable living trust.If a will tries to direct that an asset from the list above be given to a certain person, that attempted gift will usually fail. Instead, the asset will go to the joint owner or designated beneficiary. For example, consider a married man who owns a rental property jointly with his brother, with a right of survivorship (meaning the property will avoid the probate process and go directly to the joint owner). If the man dies first, his brother will automatically become the sole owner of the rental property, even if the man’s will directs that his share of the rental property should go to his wife. This is also a common problem with IRA or other retirement accounts, where the will might try to divide the account equally among certain heirs, but a beneficiary designation on the account leaves it all to one person (such as the oldest child or a sibling who is the executor). This would defeat the intent of the will, causing the named beneficiary to end up with an unintended share of the inheritance. Some IRA accounts contain hundreds of thousands, even millions, of dollars. Even if the beneficiary decided to “do the right thing” and voluntarily shared the account with the intended heirs as stated in the will, the tax consequences could be unpleasant. To avoid this problem, review your estate plan to ensure that your property ownership and beneficiary designations are all consistent with your overall estate plan, and that your non-probate property will end up where you want it upon your death.

Nevin Beiler is a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. Nevin is part of the conservative Anabaptist community and is passionate about practicing law in a way that builds the Kingdom of God and is consistent with the Anabaptist faith. He lives and works in Lancaster County, PA, and can be contacted by email at nevin@beilerlegalservices.com or by phone at 717-287-1688.

Preface: Featuring Nevin Beiler, Esquire this week, a a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. In a three segment series, you have the opportunity to learn how competent legal counsel can lead to more rewarding decision making, e.g. applied to estate planning counsel.

Seven Common Mistakes in Estate Planning—And How You Can Avoid Them (Segment I)

By Nevin Beiler, Esquire

“You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” – Samuel Levenson.

We all appreciate when we can learn from the mistakes of others, because avoiding those same mistakes can save us a great deal of money and heartache. It is no different when it comes to estate planning. It pays to learn from those who have gone before us.

To help you get started on your estate planning journey, or to assist with your current plans, let’s look at some of the common mistakes people make when it comes to estate planning, and what you can do to avoid these mistakes.

#1. Failing to Plan

Doing nothing is probably the most common mistake people make when it comes to estate planning. Everyone should have a plan, not just the old or wealthy. Doing nothing is easy and cheap—until you are gone and your heirs are left with a mess to sort out. If a person dies without a will, the law provides a court-supervised process to distribute assets, and a judge appoints someone to administer the estate and someone to be a guardian for minor children, but what a judge chooses is not always what the deceased would have chosen.

Consider the following scenario: A middle-aged man dies and leaves a wife and three young children. He did not have a will, but he always told his wife that if he died she could sell his business and live off of the proceeds of the sale until she finds a way to make a living. The business eventually sells for a liquidation price of $400,000, but the widow discovers that under the laws of Pennsylvania she is entitled to only $215,000. The children equally split the remaining $185,000, and a guardianship is established to manage the children’s inheritance until they turn 18. Also, the husband had purchased the family home before they were married, and the wife’s name had never been added to the deed. This means that the children are also entitled to own a portion of the home, rather than the widow owning it outright. A simple estate plan can avoid this complicated result, and ensure that the husband’s wishes are carried out.

Even if a married couple owns all assets jointly, and therefore the surviving spouse can receive everything, some simple planning is still important. In the event both parents pass away, a plan can ensure their children will be cared for by trusted caregivers, not whomever a judge decides to appoint as guardian. Also, a plan can reduce the chance of siblings, children, or in-laws fighting in court about what should happen to children or assets. Furthermore, having a plan in place usually means that administering an estate after death requires less work and is less expensive.

Discussing your goals with a trusted estate planning attorney can help you think through the unique challenges of your situation and adopt a plan that will be a blessing both to your heirs and to your peace of mind. And then, don’t forget to periodically review and update your plan as necessary. Remember, failing to plan is planning to fail.

#2. Not Communicating About Plans While Living

Adopting an estate plan early in life, and then updating that plan throughout life as circumstances change, is a great first step. But don’t forget to communicate your plan to your heirs and key people like executors and guardians. This can avoid surprises and hurt feelings later on.

Prior to naming someone to serve as guardian of your minor children, it is important to discuss this appointment with them to ensure they are able and willing to serve. Also, talk to your executors to ensure they feel comfortable in that role, and that they know where to get help if they need it. If the people you name are not able or willing to serve, then naming them in your will is useless.

Also, consider having a family meeting with all your heirs to discuss your plans for your estate. If you are not comfortable sharing all the details, you do not need to, but be as open and detailed as you can. Discussing your plans with your heirs can avoid unpleasant surprises and conflict down the road. It can help reduce misunderstandings that can arise after you are gone, and might raise some issues that you missed in your plans that can then be addressed before you pass away.

Many people are raised in a setting where estate plans, and money matters in general, are not often discussed and perhaps take on an air of secrecy. However, this can be harmful to relationships if it results in disagreements or unmet expectations later on. Make the effort to communicate.

Nevin Beiler is a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. Nevin is part of the conservative Anabaptist community and is passionate about practicing law in a way that builds the Kingdom of God and is consistent with the Anabaptist faith. He lives and works in Lancaster County, PA, and can be contacted by email at nevin@beilerlegalservices.com or by phone at 717-287-1688.