Click here to print "Portability of Federal Estate Tax Exclusion Between Spouses Requires Form 706"

(Published in the Idaho Business Review)

By Kimbal L. Gowland 

          As many people may have read or heard by now, the Tax Relief Act of 2010 (the “2010 Act”) provides that the federal estate tax exclusion amount for a person who passes away in 2011 or 2012 is $5 million.  One of the most significant and unique aspects of the 2010 Act is the provision on spousal “portability”, which means that a surviving spouse can take advantage of the unused exclusion amount of his or her predeceased spouse by adding the unused exclusion amount to the exclusion amount of the surviving spouse.  In plain English that means, together, a married couple can transfer up to $10 million to children and other people without federal estate taxes being imposed, making portability (if it, and the $5 million exclusion amount, were here to stay – see discussion below) a very important consideration in effective estate planning, particularly for people owning construction businesses and other small businesses.   

          To take advantage of portability, the federal estate tax laws require that the unused exclusion amount must be transferred from the estate of the first spouse to die to the surviving spouse.  This transfer can only be done by the filing of a “timely and complete” federal estate tax return (Form 706) for the first spouse to die, even if there is no federal estate tax due and even if the executor of the estate of the first spouse to die is not otherwise obligated to file a Form 706.  All of the assets owned by the decedent at his or her date of death must be properly valued and listed on Form 706. 

           If Form 706 is not filed (or is not “timely and complete”), any unused exclusion amount that could have been transferred to the surviving spouse is lost forever and will not be available at the death of the surviving spouse to reduce the amount of his or her estate that may otherwise be subject to federal estate tax.  The need to timely file Form 706 appears to be a trap for the unwary.  Often, the value of the estate of the first spouse to die will be less than the amount required to file a Form 706.  Nevertheless, the executor is required to file a timely and complete Form 706 before the decedent’s unused exclusion amount will become portable to the surviving spouse.  

          It is important to recognize that portability and the $5 million exclusion amount are, under present federal estate tax law, only scheduled to last through 2012.  For deaths occurring after December 31, 2012, unless Congress legislates otherwise before then, the exclusion amount will be reduced to $1 million, the maximum federal estate tax rate will increase to 55% from the present 35%, and portability will no longer be part of the federal estate tax law.  What happens in 2013 and thereafter in regard to the transferred portion of the unused exclusion of a first spouse who died in 2011 or 2012 is unclear, but one would assume that it would still be available (but undoubtedly in a smaller amount, if everyone’s exclusion amount is reduced from the present $5 million).  

          There will certainly be changes proposed to the federal estate tax laws before 2013.  The Obama administration has already proposed a return to 2009 levels, with a $3.5 million exclusion amount and a 45% maximum estate tax rate.  Some Republications have called for an outright repeal of the federal estate tax laws, while others in Congress have urged continuation of the $5 million exclusion amount.  Unfortunately, given the current political environment of seemingly unresolvable deadlock and the recent failures of Congress (and its “supercommittee”) in regard to the debt ceiling and deficit reduction (which political environment and failures will likely continue during the upcoming election year), we could very well return to a $1 million exclusion amount and a maximum estate tax rate of 55% (to which federal law will automatically revert as of January 1, 2013, if Congress fails to act before then).  In my opinion, the best outcome we can expect is the continuation of present law, which I hope would be made permanent (instead of for a “patchwork” two-year period, like the 2010 Act), so that people can engage in more certain estate planning. 

          Thus, although nobody knows where federal estate tax laws are headed after 2012, in the event of any death in 2011 or 2012, where a benefit could be derived from a portability election with respect to a deceased spouse’s unused exclusion amount as explained above, it is critical that serious consideration be given to the filing of Form 706 for the first spouse to die.  Form 706 is due nine (9) months after the date of death (although a decedent’s executor may request an automatic 6-month extension of the due date for Form 706). 

 Kimbal Gowland is a partner with the law firm Meuleman Mollerup LLP, representing clients with legal concerns in real property matters including purchases, sales, leasing, lending, title and development issues, general business matters, and estate planning matters.  He can be contacted at 208.342.6066 or by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available online at www.lawidaho.com.

Click here to print:  Survivorship Life Insurance (Second-to-Die Policies)

By Jonathan R. Bauer

Life insurance has an important place in both construction businesses and estate planning for owners.  Second-to-die policies can be an important part of effective planning for both small business owners and anyone who is a parent.

Survivorship life insurance policies are sometimes known as “second-to-die” policies for an obvious reason: the coverage insures both spouses and the proceeds are payable only after both spouses have died.  The premiums on these policies are generally less than those for two single life policies.  Additionally, underwriting standards are generally more liberal for second-to-die policies, which means that someone who has been denied coverage under a single life policy, or who has medical conditions that make premiums extremely expensive, may be eligible for insurance, or less expensive insurance, under a second-to-die policy.  For these reasons, if a second-to-die policy fits your needs, it may be a perfect choice.

Conventional wisdom has been that second-to-die policies were good for two main purposes: to cover estate taxes after the second spouse dies and to provide for a “special needs” child.  Although often estate tax planning can avoid taxes when the second spouse dies, sometimes, for a variety of reasons, such planning is not done (or is not done properly) and the second spouse’s estate is hammered with a huge estate tax bill.  This can be devastating, particularly when a family business is involved. 

Often, a family business is created by a husband and wife who, in their older years, hand the management of the business over to their children.  However, the parents maintain a controlling ownership interest in the business to make sure that things continue to run smoothly.  Often, this business is the couple’s most significant asset (sometimes worth several million dollars).  Without appropriate planning, when the second of the two parents dies, the children may have to sell all or part of the business just to pay the estate tax bill.  This often means the end of the business and the parents’ legacy.  A second-to-die policy can help pay the estate taxes and allow the children to keep the business.

Parents with a disabled child often believe that so long as one of them is alive, they can care for that child.  However, if both parents were to pass away, both income streams are gone and the disabled child may have no financial resources.  A second-to-die policy can be an affordable way to alleviate these problems and provide money for the disabled child after the parents’ death.  This can be particularly effective if the policy proceeds are placed in a “special needs trust” which is designed to allow the disabled child to remain eligible for government assistance while still making the insurance proceeds available to be used for the disabled child’s benefit. 

One potential scenario for second-to-die policies that is often overlooked is when a couple has minor children.  This situation calls for planning similar to that seen with a disabled child and a second-to-die policy (particularly a term policy) can be invaluable for the parents.

Often, families with young children don’t have significant discretionary income to put towards life insurance premiums.  Also, often both parents work and are capable of earning a living in the event the one spouse dies.  For these reasons and others, parents often feel that they may be able to “get by” without a significant amount of life insurance.  However, what if both parents were to die while their children were young?  They may have appointed guardians for their children in their wills, but what if they have not properly planned to provide those guardians with the assets needed to raise their children?

A second-to-die policy can be a perfect and relatively inexpensive way to give parents peace of mind.  Parents can buy a term policy which is in effect for what they deem is an appropriate period of time (until their kids are 18, 21, 30, etc.).  Then, when their children are grown and responsible for themselves (hopefully) the policy is simply terminated.

For many people, business and estate planning is geared towards avoiding catastrophe.  Those seeking this peace of mind should at least consider including life insurance as part of their planning.  However, not everyone can afford the perfect life insurance policy.  Those people, in particular, should consider a second-to-die policy that may provide that peace of mind at a price they can afford.

Click here to print: Developing a Proactive Business Succession Plan

by Jason G. Dykstra

(as published in the Idaho Business Review, February 2011)

Those who plan do better than those who do not plan even though they rarely stick to their plan.

- - Winston Churchill.

Particularly in a volatile business climate, the owners of many closely-held construction businesses often find their time monopolized by addressing the crisis of the moment, whether rushing to finish a current project on time or bidding on the next project. 

Such “management by crisis” is often critical to the continued success of a business.  Nonetheless, it is just as important to occasionally take a deep breath and gaze out the window or the windshield and think about the future, for both you and your business.  Decide where you would like to see yourself and your business in both the relative short term and in the decades that lie ahead.  Set some goals and objectives that can become the cornerstone of a business succession plan.  From these goals and ideas you can begin to develop a planned exit strategy from your business.  

Sooner or later, everyone wants to retire.  For business owners, what will happen to their business when they retire presents the paramount issue for business succession planning.  This takes more than just an estate plan.  In the United States, less than half of all small businesses survive to a second generation of ownership.  In the construction industry, the statistics are even lower.  Crafting and implementing a well-considered business succession plan can help ensure a smooth transition of your business into the future. 

The process of creating a business succession plan can provide a great opportunity to reflect on what has made your business a success and to consider how to address the challenges faced by your business.  Moreover, implementing your plan can give you the peace of mind of knowing that while there will be challenges; your business is prepared to transition into the future.   

Ideally, your plan should facilitate a smooth transition between your ownership to the future owners and managers of your business.  This might seem pretty straightforward.  A business succession plan could entail your children taking over the business, a core group of key employees buying the business, or selling the business to a third party.  But even a seemingly straightforward plan can quickly prove challenging and complex. 

First, you must seek to insure the security of your own financial future as part of your plan.  Many business owners’ single largest investment is their business.  Therefore, a business succession plan should seek to minimize post-transition financial risks to the former owner of the business.  For example, an owner would not want to retire and subsequently learn that the new owners cannot make their promised payments under the buy-sell agreement for the purchase of the business.   

Next, a business succession plan may need to address the future management and ownership of the business, which can involve minimizing the potential for future family discord and minimizing the taxable consequences of the business transition.  Accountants and attorneys can provide invaluable advice on how to best value and structure the transition.  For transfers to family members there are many strategies that can minimize the taxes related to the transfer of the ownership of a business.  For sales to key employees, an Employee Stock Ownership Plan (“ESOP”) can provide a business owner with a good way to sell all or a portion of a business.

By Jonathan R. Bauer
(Published in the Idaho Business Review)

Print Estate Planning - Not Just for "Rich Folks" Anymore!

Whether or not you own your own business, there are many good reasons to create an estate plan.  Parents with minor children should choose a guardian for their children (in the event the parents unexpectedly pass away).  People with charitable inclinations must plan appropriately so that their special charity receives the desired contributions.  Some people have children with special needs and others have one child who works in the “family business” and another that doesn’t.  Also, as explained in more detail below, more families are likely to find that they have enough assets to subject their estates to estate tax.  For these reasons, and others, almost everyone should have some form of an estate plan.

In 2001, a federal act was passed that gradually reduced the maximum rate of the federal estate tax from 55% to 45%.  It also gradually increased the amount of property that you could pass free of federal estate tax from $675,000 per person in 2001 to $3.5 million per person in 2009.  We can call this amount an “estate tax allowance.” This means that with fairly straightforward estate planning, a married couple would have a $7,000,000 estate tax allowance if they both died in 2009.  Most people would agree that $7,000,000 is a significant amount of money, and whether or not you think there should be any tax on assets passed at someone’s death, the majority of people didn’t personally have to worry about it.

In 2010 only, the 2001 tax act repeals the estate tax.  However, that act replaced the estate tax with rules that in most cases increase the income tax on assets inherited.  The laws related to estates in 2010 are complicated and beyond the scope of this article.  We will all hope to make it through 2010 and focus on why planning is so important for 2011 and beyond.

After December 31, 2010, the estate tax will increase to 55% and the estate tax allowance for a deceased individual will only be $1,000,000.  Also, without estate planning, the $1,000,000 allowance belonging to the first deceased spouse is effectively lost because all of the assets will be left to the surviving spouse and included in the surviving spouse’s estate.  Although $1,000,000 is a significant amount of money, you might be surprised when you look at your financial condition and learn a bit more about what assets are part of an estate, how close you are to exceeding the estate tax allowance.

The value of your estate for estate tax purposes is generally the fair market value of your assets at the date of your death.  If you are a business owner, this will include the value of your business.  Also, your IRA, 401k and other retirement assets are included as part of the valuation even though they might pass directly to designated beneficiaries.  Finally, if you have life insurance, all the proceeds from any policies insuring your life are included in calculating the value of your estate.  If these, together with all of your other assets, add up to $1,000,000 or more, you likely need an estate plan to avoid estate tax.

If you have fewer assets, your estate planning will probably be more simple, but it is no less important.  If parents with minor children do not name a guardian in their wills, a court will decide who raises their children in the event of an unexpected death of both parents.  Also, people can have provisions in their wills appointing a trustee to hold and distribute assets for the benefit of their children.

Many people, even those without significant amounts of assets, have charitable inclinations.  They may want to leave some money to their college, a religious organization, or some other charitable organization with special meaning to them.  With proper estate planning, you can meet these goals without having to donate the money now, and you can even provide that the money is to be donated after your children have reached an age where they are more likely to be financially independent.

It is very important to plan for children with special needs; those needs can be the result of physical or mental disabilities, substance abuse problems or simply immaturity and irresponsibility.  Estate planning can also help protect the assets you leave to your children and/or grandchildren from claims in a divorce and legal disputes arising out of an accident, business breakup or other unpredictable event.

Small business owners often have some children that participate in the family business and others that do not.  Often these businesses are the parents’ most significant asset.  It may be best for the long term health of the business and the family to keep the non-active children out of the family business.  With proper estate planning, parents can treat all of their children equally without risking the success of their business and the relationships among their children.

There are very few people who can’t benefit from an estate plan.  Most of us spend significant time earning a living and taking care of our families.  Without an appropriate estate plan, all of that hard work and care can vanish in a blink.

Jonathan R. Bauer is a partner with the law firm Meuleman Mollerup LLP.  He focuses his practice in the areas of business law (mergers/acquisitions/sales, financing, general corporate counseling), real estate law, and estate planning and probate.  Mr. Bauer can be contacted at 208.342.6066 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available at www.lawidaho.com.

AREAS OF EXPERTISE

BUSINESS LAW / LITIGATION

• Business transactions including new business formation
• Commercial transactions including drafting, review and negotiation of letters of intent, asset sale and purchase agreement
• Litigation of business and insurance claims
• Bankruptcy, creditor's rights and workouts
• Intellectual property rights including copyright, trademark and trade dress infringement

EMPLOYMENT LAW

• Employment Issues including non-compete agreements, employment contracts and non-disclosure agreements

ESTATE PLANNING

• Business Succession Planning
• Wills, trusts, power of attorney healthcare directives, and living wills   
• Probate of estates

PROFESSIONAL EXPERIENCE

2007 - Present:  Associate, Meuleman Mollerup LLP

1995 – 2006:  Business law and commercial litigation practices in Idaho and Montana

Licensed to practice law in Idaho and Montana

BUSINESS & INDUSTRY ACTIVITIES

• Idaho State Bar
• State Bar of Montana
• U.S. District Court, District of Idaho
• U.S. District Court, District of Montana
• United States Court of Federal Claims

COMMUNITY INVOLVEMENT

• Permanent Elite Roster Member, Boise Development Cycling Team (Bode)
• Paris Gibson Square Museum of Art, former member of the Board of Trustees, President 2001
• Great Falls Housing Authority, Board of Commissioners (former member), Chairman 1999

EDUCATION

• University of Montana School of Law, J.D.
• University of Montana (Dufresne Foundation Scholar),
  B.S., Business Administration-Financial Management

PROFESSIONAL RECOGNITION

• Leadership Boise Program, Boise Metro Chamber of Commerce
• Forty Accomplished Under Forty, Idaho Business Review 2009

AREAS OF EXPERTISE

BUSINESS LAW

• Formation and operation of corporations, partnerships, joint ventures, limited liability companies and limited liability partnerships
• Mergers, acquisitions and sales of businesses
• Business planning and financing
• General corporate counseling and associated contract drafting

ESTATE PLANNING

• Drafting a variety of estate planning vehicles including wills, trusts, power of attorney healthcare directives, and living wills   
• Probate of estates
• Business Succession Planning

REAL ESTATE LAW

• Drafting and negotiating purchase and sale transactions, leases, easements and other real property documents
• Development financing 

PROFESSIONAL EXPERIENCE

2008 - Present    Partner, Meuleman Mollerup LLP  

2004 - 2007:  Associate, Meuleman Mollerup LLP

Licensed to practice law in Idaho and Massachusetts  

Three years as an associate at an international law firm in Boston with a focus on complex business transactions and general business counseling;  drafting and negotiating documents for acquisitions and sales of businesses on behalf of private equity companies, and advising businesses on general legal matters.    

Four years experience owning/managing small businesses  

One year as a marketing analyst assisting clients with creating marketing strategies to increase business   

BUSINESS AND INDUSTRY ACTIVITIES 

• Member of the Idaho State Bar
• Member of the Massachusetts Bar Association
• Member of the Idaho State Bar Sections on: Business & Corporate Law, Real Property, and Taxation, Probate & Trust Law
• Wealth Counsel - a national group of estate planning attorneys

COMMUNITY INVOLVEMENT

• Idaho Botanical Garden, 2010/2011 Board of Directors
• Ted Trueblood Chapter of Trout Unlimited

EDUCATION

• Benjamin N. Cardozo School of Law, New York, J.D., cum laude, 2001
• Washington University, St. Louis, Missouri, B.A., Economics and Psychology, 1994

The attorneys at Meuleman Mollerup believe that effective estate planning takes knowledge and experience. Many people have a basic understanding of estate planning and what it entails, but eventually questions arise that need specific attention. Many times people make decisions based on preliminary understanding of estate planning and key terms and definitions that explain general concepts of estates, wills, probate, etc., without having all the pieces to the puzzle. 

The attorneys at Meuleman Mollerup believe a well thought out estate plan concerns itself with the creation of an estate where none would otherwise exist, the increase of an existing estate to meet the needs of the owner and his or her family, and the preservation and protection of the estate from unnecessary taxes and costs. With every client, our objective is to ascertain the client’s individual needs and circumstances and create an estate plan that provides for the best utilization of assets during the client’s lifetime, while also providing for the disposition of assets on death in such a way that the estate being passed on is maximized, and is left in accordance with the wishes of the decedent and the needs of the family. In carrying out this goal, we strongly believe that this task cannot be accomplished unless we first ascertain, in a very careful manner, the client’s objectives. We also work closely with other professionals such as insurance agents, financial planners and accountants that make up the estate planning team to take advantage of the expertise of each professional that will contribute to the client’s estate plan.

 Meuleman Mollerup is a member of WealthCounsel.  WealthCounsel is a national group of estate planning attorneys.  WealthCounsel provides excellent, up to date legal education and information so that its members can provide their clients with the highest quality estate plans and estate planning documents.

Whether you require a simple will, protective trusts for your children, disabled persons, or protection from federal estate taxes, Meuleman Mollerup has the knowledge, experience and tools to achieve your personal estate planning objectives. 

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