Wills, Trusts, and Estate Planning
By John Chakan

Q: The value of my business is more than the federal estate tax exemption under current law ($2,000,000 for 2006 through 2008; $3,500,000 for 2009. The federal estate tax is repealed for 2010, but the tax comes back in 2011, with an exemption limited to $1,000,000). How can I minimize the tax my heirs will have to pay?

A: If you’re married, you and your wife should have coordinated estate plans, designed to take advantage of both your estate tax exemptions. Without careful planning, it is possible to lose the benefit of one exemption. Regardless of whether you are married, it may be advantageous to give a significant share of your business to your children now, so that any post-gift appreciation will escape tax. Further, you may wish to begin (or continue) a program of giving a relatively small interest in your business to each child each year, taking advantage of the annual gift tax exclusion. Where post-gift control of the business is an issue, it may be appropriate to change the form of your business, as for example: from an “S-Corporation” to a “Limited Liability Company” or a “Family Limited Partnership.”

Q: My friend and I own equal shares in our business. Do we need a buy-sell agreement?

A: Yes. Without one, you or your friend may end up sharing ownership with un-friendly strangers. Usually, the buy-out is financed with life insurance on the co-owners, but there are alternative ways to own the insurance: the business might own policies on each principal in the business, or each principal might own a policy on the other. The choice of alternatives has multiple consequences which should be considered before a final decision is made.

Q: I’m the owner of a corporation that holds several rental properties. Should I have a separate corporate entity for each property?

A: Yes! You do not want to have a liability in connection with one property reach the value represented by the other properties.

John Chakan, of Kantrowitz, Goldhamer, and Graifman, specializes in wills, trusts and estates, estate planning, tax, elder Law and related matters, especially in techniques for estate tax minimization. Find out more about John at www.gkgcpa.com.

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Mortgage Advice
By Dave Heinrich

A: It would depend on how much liquid operating capital and reserves you already have in place. The number one reason why many small or new businesses fail within the first 5 years is the lack of capital. So, all other things being equal, I strongly suggest you discuss the particulars of your situation with the rest of your business/financial team to see what makes the most sense for your plans. Robert Kiyosaki says: “Business and investing are TEAM sports.” How strong is your team? How ‘deep’ is your ‘bench’ of advisors? You will go faster and much farther with a very strong team of advisors.

Q: My friend told me that I should get a balloon mortgage on a property I would like to buy. How does that work?

A: A balloon mortgage may have a term (in which to pay it off) of 30 years or less, but at some point - say, perhaps 5 years - the entire balance is due and payable. Balloon mortgages generally have a slightly lower interest rate than other similar loans. Again, it all depends on your overall financial agenda, which is something you may want to consider building and strengthening with the help of financial professionals.

Q: I was told by my CPA to set up a home equity line of credit, even though I don’t need it right now. Why would I do that?

A: You should open a line of credit because it’s important to always have the most access to the equity in your home. For most people, a Home Equity Line of Credit (a H.E.L.O.C.) is the easiest and most inexpensive way to do this. A Home Equity Line of Credit gives you four real benefits:
1) Fast access to the equity in your home for that ‘rainy day’ or ‘cushion’ money.
2) Flexibility in your monthly payment. Like a credit card (which is an unsecured line of credit) you have the choice of making the minimum monthly interest payment, or you can pre-pay your debt down as much as you wish.
3) Possible income tax deductions.
4) When you really need it, it will already be there.

Dave Heinrich is the President of Smart Money Mortgage Center in West Nyack and this year’s recipient of the RBA’s Pinnacle Award for Service to the RBA.