Along with personal liability protection, record-keeping requirements, and how you plan to finance your operation, one of the main factors to consider when choosing an entity structure for your business is deciding how you want your company to pay taxes. Your choice of entity will not only determine the rate at which your business is taxed, as well as how and when you are required to file your taxes, but it can also impact a variety of other factors affecting both you and your company. 

Last week, in part one of this series, we covered the tax obligations associated with three entity structures: Sole Proprietorships, Partnerships, and Limited Liability Companies (LLCs). Here in part two, we’ll cover the tax treatment of the remaining two entity structures—C Corporations and S Corporations—along with discussing the benefits and drawbacks related to each one.

C Corporations

A C Corporation is a separate tax-paying entity that files its own tax return, Form 1120, to report its income, as well as claim deductions and credits. Corporations taxed as C Corporations currently pay taxes at the corporate tax rate of 21% on all net income. 

Post-tax profits are then distributed to the company’s shareholders as dividends. Dividends are then taxed on the shareholder’s personal income tax return at their individual tax rates. This means that the corporation itself gets taxed first, and then you get taxed again on your income from the corporation. 

To avoid this system of “double taxation,” the owner of a C Corporation may elect to have the C Corporation taxed as an S Corporation, which we will cover next.

Due to the expense and complexity of creating and maintaining a traditional corporation and dealing with double taxation, very few small businesses will choose to be taxed as a C Corporation. However, once your business begins to have annual profits over $200,000 or so annually (beyond your salary and retirement account contributions), it could be worth considering a C Corporation for your entity structure.

Once you get there, or if you are there now, talk with us, your Personal Family Lawyer® with business planning expertise to discuss whether a C Corporation entity structure might be an effective tax-saving strategy for your business.

S Corporations

An S Corporation is not a business entity in and of itself. Rather, the S Corporation is a special tax election made by the owner of a C Corporation or an LLC to notify the government that the Corporation should be taxed as a pass-through entity. As we wrote last week, unless you elect for your LLC to be taxed as an S Corporation, a single-member LLC is automatically taxed as a sole proprietorship, while multiple-member LLCs are taxed as a partnership.  

A C Corporations can also elect to be taxed as an S Corporation, thereby avoiding the double taxation issue discussed in the prior section. Instead, when your business entity elects S Corporation status, all profits of your business entity are passed through to the shareholders via a K-1, and each shareholder reports their share of the profits as income on their personal tax return.  

However, not all LLCs or C Corporations can elect S Corporation status. In order to file the S Corporation election, your business must meet the following requirements:

  • Must be filed as a U.S. corporation
  • Can maintain only one class of stock
  • Limited to 100 shareholders or less
  • Shareholders must be individuals, estates, or certain qualified trusts
  • Each shareholder must be a U.S. citizen or permanent resident alien, with a valid Social Security Number
  • All shareholders must consent in writing to the S Corporation election

As we mentioned previously, in addition to these requirements, for an S Corporation election to save taxes versus reporting all profits on a Schedule C, you’ll want to have at least $60,000 of net income per year. Furthermore, to prevent business owners from avoiding payroll taxes by taking disproportionately large profit distributions, the IRS requires S Corporation owners to pay themselves “reasonable compensation” in exchange for their services. 

What constitutes reasonable compensation is a highly subjective matter, and one that you should discuss with us, your local Personal Family Lawyer® with business planning experience, along with your CPA. This issue is particularly crucial for you to get right, because if the IRS determines that your compensation was not reasonable by its standards, your business could face serious consequences. 

For instance, the IRS could reclassify all of your S Corporation distributions as wage payments subject to employment taxes, which could leave you on the hook for a massive back tax bill. On top of that, you could face tax penalties of up to 100%, plus negligence penalties. Given such grave repercussions, consult with us to ensure your compensation satisfies the IRS requirements.

Choose the tax treatment best suited for your business

Choosing the entity structure that’s right for your business is something you shouldn’t try to handle on your own—there’s simply too much at stake should you get something wrong. As your Personal Family Lawyer® with business planning expertise, we will offer you trusted advice on selecting the entity that’s best suited for your particular company—not only for how it’s taxed, but for all of the other factors that affect your chosen entity as well. 

From personal liability protection and required administrative formalities to your ability to finance your company, we will offer you the support and guidance you need to choose the entity that’s most advantageous for every circumstance your company.

This article is a service of of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule your appointment at 907-312-5436, or find a time for us to call you

If you earn a good living now, but you worry about not having enough money for a future time when you cannot work due to illness or injury, disability insurance is your answer. However, you need to make sure you are getting an insurance policy that will meet your needs and not waste your money. This article covers 7 issues to consider when purchasing disability insurance.

Disability Insurance: Issues to consider 

The answers to these 7 questions can give you the best chance of finding a policy that is well-suited for your particular situation.

01 – What is disability insurance?

Disability insurance pays benefits when you are unable to work because you are sick or injured. Most policies pay a benefit that replaces a percentage of your income. But disability insurance is not the same as health insurance—it will not cover your medical bills. 

Instead, disability benefits replace a percentage of the income you lose due to your inability to work, so you can cover your basic financial needs, such as paying bills, covering daily living expenses, and providing for your family, until you can return to work. To begin your search for disability insurance, first you need to get clear about your minimum financial needs, or what we call your “minimum to thrive” number, should you become unable to work.

If you don’t currently know what your “minimum to thrive” number is, contact us for help calculating this number, and we can refer you to tools or an advisor who can support you.

02 – Should I get disability coverage? 

If you are the breadwinner in your family and your income would stop if you become ill or injured and could not work, you should look into disability insurance. According to U.S. government’s statistics, one in four 20-year-olds become disabled before reaching retirement age. Statistics like this make it all the more important that you consider protecting yourself and your family with disability coverage.

03 – What’s the difference between short and long-term disability insurance?

There are two primary types of disability insurance: short-term and long-term. Short-term disability insurance typically lasts between 3 to 6 months, and sometimes up to a year or more. These policies generally cover about 60% to 80% of your monthly gross income, and the premiums you pay generally range from 1% to 3% of your annual income. One major upside to short-term policies is that payouts usually happen within two weeks, which can be a lifesaver in an emergency.

Long-term disability insurance can pay benefits for a few years or until your disability ends, even if that’s when you retire. Most long-term  policies cover 40% to 60% of your monthly gross income, but policies that pay up to 70% do exist. Long-term disability policies also cost 1% to 3% of your yearly income, but based on the benefits, they tend to be more cost-effective in the long run.

That said, it can take up to 6 months to see a payout from a long-term policy, which may not be a realistic option if you need money immediately to cover your living expenses. Therefore, we recommend covering your short-term financial needs with emergency savings of 6 months, and then getting a long-term policy to cover your longer term needs.  

04 – What does ‘portability’ mean?

If you purchase your disability insurance through your workplace, ask if you can keep that insurance if you leave the company. If your insurance is non-portable, your coverage will end when you leave the job. Having a portable policy means that you will be covered no matter where you work. 

Although many disability policies purchased through an employer are not portable, it’s definitely something you should look into. If portability is important to you, consider purchasing disability insurance on your own, rather than through your employer.

05 – What are the renewal options for disability policies?

A “guaranteed renewal” policy allows you to renew, without making any changes to your coverage, but your premium can fluctuate. A “non-cancelable” policy means your coverage and your premiums cannot be changed, assuming you pay your premiums on time. Also, be sure to find out if premiums are waived during a qualified disability.

Given these considerations, the best policies will be non-cancelable and guaranteed renewable. Obviously, such policies will cost more, so consider what’s best for you, and if you need help making your decision, we’re happy to recommend a trusted insurance agent and then talk through the options with you.

06 – How do cost of living benefits work?

Cost of living benefits are not included in most policies, but adding this rider is definitely something to consider. Cost of living benefits are designed to provide financial stability by offering an increasing benefit to keep pace with an increased cost of living, which is especially important right now, when we are experiencing unprecedented levels of inflation.

When choosing cost of living benefits, consider choosing policies that increase on a compounding basis. Compound interest is earned on the principal and the interest. This additional rider can help your benefits keep pace through inflation, even after your disability ends.

07 – Do I need a ‘future increase’ rider?

A future increase rider is another option to consider adding to your disability coverage. It’s worth looking into particularly if you think your income may increase significantly over time. With this rider, you are able to increase the monthly benefit of your policy, regardless of your health status. 

Without it, your policy will not change to protect your future income, and your benefits will pay out according to your income when you first obtained coverage. That said, many insurance companies will limit the total supplementary coverage that can be implemented each year with a future increase rider, so even if you have this option in place, the benefits might not fully reflect your future salary.

Get help choosing your coverage

When shopping for a policy, it’s best to work with an insurance agent who can survey many different companies to help you choose the right policy for your budget, age, health, and other factors. And remember, you must have the policy in place before something happens—if you’re already sick or injured, you can’t buy disability insurance to make up for lost income. 

One of the ways we support our clients is by discussing matters like this with you during your Family Wealth Planning Session, or at your annual or 3-year review meetings after you’ve completed your Life & Legacy Plan with us. If you do not have an insurance agent you are already working with, we can connect you with an agent we trust, and then provide objective counsel to help you decide on the best coverage for you and the people you love.

If you are not already a client, contact us today to schedule your Family Wealth Planning Session. If you are, and you are ready for a review of your legal and financial choices, contact us for a plan review. We look forward to supporting your next step in Life & Legacy Planning.

This article is a service of Liz Smith, Personal Family Lawyer® in Juneau, Alaska. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Life & Legacy Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today at 907-312-5436 to schedule a Life & Legacy Planning Session and mention this article to find out how to get this $750 session at no charge; or book a time for our team to call you at a time you choose.

Along with personal liability protection, record-keeping requirements, and how you plan to finance your operation, one of the main factors to consider when choosing an entity structure for your business is deciding how you want your company taxed. Your choice of entity will not only determine the rate at which your business is taxed, as well as how and when you are required to file your taxes, but it can also impact a variety of other factors affecting both you and your company.

Some of these factors include how you pay yourself, your risk of being audited by the IRS, the type of tax deductions and tax credits available to your company, and the types of strategies you can use to reduce your tax bill. That said, each entity comes with its own rules and requirements governing its tax obligations. Moreover, depending on your company’s size, location, the number of owners and employees, and its revenue, certain entities won’t be practical from a tax-savings standpoint. Given this, when it comes to paying taxes, there’s no single entity that works best for every business.

On that note, here we’ll provide a brief overview of the tax obligations for each type of business entity, along with some of the advantages and disadvantages inherent to each structure. While this article can serve as a good starting point for helping you understand an entity’s tax benefits, you should always consult with us, your Personal Family Lawyer® with business planning expertise to get our advice before making your final decision.

Sole Proprietorships

As a sole proprietor, you and your business are legally one and the same from the IRS’s perspective. This means all of the business’s assets and liabilities are reported on your personal 1040 tax return. You report your business income and expenses on Schedule C, which becomes a line item on your 1040.

From a tax standpoint, the primary advantage of a sole proprietorship is that it’s simple—you don’t pay any separate taxes for your business, and you report all of your business income and losses on your personal tax return. It’s typically inexpensive (or no-cost at all) to set up a sole proprietorship, and your legal expenses are usually limited to obtaining the needed business licenses or permits, along with the necessary insurance. 

However, as a sole proprietor, outside of normal deductions for your business expenses, you will be taxed on all of your revenue, regardless of whether or not you actually withdrew the money from your bank account or took a paycheck. Additionally, the audit risk for sole proprietorships is three-time more likely than that for limited liability companies (LLCs) and corporations, according to the IRS. You are also required to pay your own self-employment taxes on a quarterly basis. These are contributions to Social Security and Medicare that regular employees usually have taken out of their paycheck, often called “payroll taxes.”

Partnerships

A partnership is basically a sole proprietorship with more than one owner. The partners typically share equal responsibility for the business’ assets and liabilities. Like a sole proprietorship, a partnership is not a separate entity from its owners from a tax perspective. 

The partnership reports its income, deductions, losses, and gains to the IRS by filing a Form 1065. However, all of the company’s profits and losses are “passed-through” to the individual partners, who report this information on their individual tax returns via Schedule K-1, and they pay taxes based on their individual tax rates.

Partnerships are generally inexpensive and simple to set up. Although because they have more than one owner, they can be more complex to set up than a sole proprietorship for the simple fact that each partner must agree on all decisions affecting the business. Like sole proprietors, owners of a partnership are required to pay self-employment taxes and submit quarterly estimated tax payments.

Limited Liability Companies

As a limited liability company (LLC), you have flexibility in choosing how you’ll be taxed, and your choices are based on how many owners (known as members) your LLC has. Unless you choose to be taxed as a corporation, single-member LLCs are automatically taxed as a sole proprietorship, while multi-member LLCs are taxed as partnerships. 

In either case, your company doesn’t pay any taxes directly. Instead, your share of the net business income is passed through to you, and reported and taxed on your personal tax return, and you’ll pay taxes based on your personal tax rate, as described above.

Alternatively, you may elect for your LLC to be taxed as an S Corporation. In this case, you will file a tax return on behalf of the corporation, reporting all income and expenses on that return. But the entity itself will not pay taxes. Instead, the business will issue you a K-1, indicating the net profit or loss, which will be taxed as ordinary income on your personal tax return. 

The main advantage of choosing to have your LLC taxed as an S Corporation is that you only pay payroll taxes on your actual payroll, not on your profit distributions from the company. Whereas, if you are taxed as a sole proprietorship or partnership, all profits are considered payroll and subject to payroll taxes up to the payroll tax limits. Additionally, as mentioned earlier, the audit risk for an S Corporation is typically less than it is for companies taxed as sole proprietorships, where income and expenses are reported on your personal Schedule C.

If your LLC is taxed as an S Corporation, you will pay income taxes on your profit distributions, but you would save roughly 15% in payroll taxes on distributions taken as profits, rather than as payroll, since you don’t pay payroll taxes on income taken as a profit distributions. In contrast, when using an LLC taxed as a partnership or sole proprietorship, you will pay payroll taxes on all distributions to you from the LLC up to the payroll tax limits, and as discussed earlier, your risk of audit by the IRS will be higher as well.

That said, for an S Corporation election to make sense, you’ll want to have at least $60,000 or so of net income per year. If you are close to that amount and have not yet filed an S Corporation election, consult with us, so we can get you supported to do so.

Entities & Taxes: Choosing The Structure That’s Right For You

Next week, in part two of this series, we’ll cover the tax obligations for the remaining two entity structures—S Corporations and C Corporations—and discuss the benefits and drawbacks related to each one.

Until then, if you need guidance or advice on any issue related to your company’s entity structure—or any other matter affecting your business—meet with us, your Personal Family Lawyer® with business planning expertise to get the support you need. 

This article is a service of of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule your appointment at 907-312-5436, or find a time for us to call you.

If you have preferences about what happens to your digital footprint after your death, you need to take action. Otherwise, your online legacy will be determined for you—and not by you. If you have any online accounts, such as Gmail, Facebook, Instagram, LinkedIn, Apple, or Amazon, you have a digital legacy, and that legacy is yours to preserve or lose. 

Following your death, unless you’ve planned ahead, some of your online accounts will survive indefinitely, while others automatically expire after a period of inactivity, and still others have specific processes that let you give family and friends the ability to access and posthumously manage your accounts.

In part one and two of this series, we covered the processes that Facebook,  Google, Instagram, Twitter, and Apple offer to manage your digital accounts following your death. Here in part three, we’ll conclude this series by covering the most effective methods for including digital assets in your estate plan.

5 Steps For Including Digital Assets In Your Estate Plan

If you’re like most people, you likely own numerous digital assets, some of which may have significant monetary value, and others which have purely sentimental value. You may even have some digital assets that you’d prefer your family not access at all when you pass away.

To ensure these assets are managed in exactly the way you want, take the following five steps to include this digital property in your estate plan. While many of these tasks you can do yourself, you’ll definitely want to consult with us, your local Personal Family Lawyer® to ensure your estate plan is properly prepared and works exactly as you intend.

01 – Create A Detailed Asset Inventory, With Access Instructions

Start by creating a list of all digital assets you currently own. Then, for each asset, provide detailed information about where the asset is stored and how it can be accessed, including all of the relevant login information and passwords. If you have numerous different accounts, password manager programs, such as LastPass, can simplify this effort.

If you own cryptocurrency, it’s essential that you prepare detailed instructions about how to access it, and ensure that one or more people you trust are aware that you own crypto and know how to find your instructions. Additionally, accessing cryptocurrency often requires complex user identification data and private keys. 

Moreover, to effectively manage these assets.the person you choose to control your crypto after your death will need to know how to use a variety of digital tools, such as online wallets, digital exchanges, and other programs. Given this,  leaving a detailed “How To” guide can be an ideal way to ensure your loved ones can access your digital currency with minimal hassle. 

After you’ve created your inventory and access instructions, store these documents in a secure location, with your other estate planning documents, and ensure your fiduciary (executor or trustee) and lawyer know how to access these documents should something happen to you. Finally, back up any digital assets stored in the cloud to a computer, flash drive, or other physical device to make them easier to manage. And remember to update your digital asset inventory regularly to account for any new digital property you acquire or accounts you close.

02 – Add Your Digital Assets To Your Estate Plan 

The next step is adding your digital assets to your estate plan. As with other assets, you’ll typically pass your digital property to your loved ones through either a will or a revocable living trust. Meet with us, your Personal Family Lawyer®, to determine which estate planning vehicles are best suited for your particular assets and situation.

From there, specify in your will or trust the person, or persons, you want to inherit each asset, and include detailed instructions for how you’d like each asset managed after your death, if that’s something you’re interested in. On the other hand, some assets might have no value to your family or be something you don’t want them to inherit or even access, so you should specify that those accounts be closed or deleted by your fiduciary.

One thing you should NEVER do is provide the account information, logins, or passwords in your planning documents, where others might read them. This is especially true for wills, which become part of the public record upon your death. 

For maximum security, keep this sensitive information in a secure place, and let your fiduciary know how to find and use it. To make securing and managing your digital assets easier, consider using a digital management service, such as Directive Communication Systems, instead of trying to do everything yourself.

It’s also a good idea to include terms in your estate plan allowing your fiduciary to hire an IT consultant if necessary, especially if your fiduciary doesn’t have much technical experience, or if you have particularly valuable digital property. Having a consultant available can enhance your fiduciary’s ability to manage and troubleshoot any challenges that come up.

Alternatively, you can designate a separate co-fiduciary just to manage your digital assets. Known as a digital executor, this individual is specifically tasked with managing your digital assets upon your death. If you have a lot of digital property or you own highly encrypted digital assets, like cryptocurrency, this option can be an optimal solution for safeguarding your online property.

03 – Limit Access

Your estate plan also needs to include instructions for your fiduciary about the specific level of access you want him or her to have. For example, do you want your executor or trustee to be able to read all your emails, texts, and social media posts before deleting them or passing them to your heirs? 

If there are any assets you want to limit and/or restrict access to, we can help you add the necessary terms to your estate plan to ensure your wishes will be honored and your privacy protected.

04 – Include Relevant Hardware

Your estate plan should also include provisions for passing on any physical devices—smartphones, computers, tablets, flash drives—on which your digital assets are stored. Having this equipment will make it easier for your fiduciary to manage your online assets. And since the data contained on such hardware can be wiped clean, you can even leave this gear to someone other than the person who inherits the data stored on the devices.

05 – Check Service Providers’ Access Authorization Tools

Review the terms and conditions for each of your online accounts and web-based service providers for how they handle your data after death. As discussed in the first two parts of this series, some platforms have features allowing you to give your family and friends the ability to access, manage, and delete your accounts after your death.

If such functions are offered, use them to document the individual(s) you want to access and manage these accounts. Just make certain those you named to inherit your digital assets using the providers’ tools match the beneficiaries named in your estate plan. If not, the provider will probably give priority access to the person named with its tool, not your estate plan.

Adapt Your Estate Plan To The Evolving Digital Universe

As technology continues to evolve, it’s essential to adapt your estate plan to keep pace with these changes. As your Personal Family Lawyer®, we have the knowledge and experience to not only properly include your traditional assets in your estate plan, but all of your digital assets as well.

Indeed, we are keenly aware of just how valuable your digital property can be, and our Life & Legacy Planning Process is designed to ensure all of your assets—digital or otherwise—are protected, preserved, and passed on seamlessly to your loved ones in the event of your death or incapacity. Furthermore, we can ensure you have the maximum level of privacy, and you stay in full compliance with the latest laws governing the ever-changing digital universe. Contact us today to get started.

This article is a service of Liz Smith, Personal Family Lawyer® in Juneau, Alaska. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Life & Legacy Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today at 907-312-5436 to schedule a Life & Legacy Planning Session and mention this article to find out how to get this $750 session at no charge; or book a time for our team to call you at a time you choose.

Agreements are the heart of your business. Indeed, your entire business is one vast series of agreements: agreements with investors and lenders, clients and vendors, employees and contractors, as well as partners and customers. Yet, despite the critical role they play in a company’s success, far too many business owners fail to take their agreements seriously.

Whether it’s winging it by creating your own agreements or using cheap, do-it-yourself (DIY) legal documents you purchase online, failing to treat your legal agreements with the respect they deserve can seriously cost you. In fact, just one poorly constructed agreement could end up costing you tens of thousands of dollars in attorney’s fees and court costs—or even put you out of business entirely. 

Last week, in part one, we covered the first 5 of 10 pitfalls that can put your company in serious jeopardy if you take the DIY route with your legal agreements. Here in part two, we’ll cover the five remaining pitfalls that you’re likely to encounter when going it alone with these vital documents.

06 | FAILURE TO GIVE YOURSELF AN OUT

In addition to terminating an agreement due to a breach, you need to consider how the relationship might end due to any number of other circumstances. By giving yourself a clear exit strategy, rather than being caught off-guard or surprised when things change, the relationship can successfully adapt to the transition with ease.

For example, when entering into an agreement with a new business partner, you should think about—and plan for—all of the ways each of you might potentially exit the business. What would happen in the event you decide to sell the business? What would happen if the business failed, and you had to close your doors? What will happen when one (or both) of you dies or if one of you becomes incapacitated? 

You need to get clear about all of these eventualities, and then document them in the appropriate agreements, including your operating agreement, bylaws, and/or buy-sell agreement. Moreover, it’s best to prepare these agreements—and your exit strategy—early on in the relationship, when you are still on good terms and have high hopes for the relationship’s future. 

Otherwise, it’s likely going to be much more difficult to agree on a solution, without dealing with unnecessary conflict—and in the worst cases, costly litigation—just to get yourself out of the relationship. As your Personal Family Lawyer® with business planning expertise, we can ensure that your agreements provide you with a clear exit strategy that will allow you to get out of the relationship with the least conflict, liability, and expense possible.

07 | FAILURE TO ADDRESS CONFLICT RESOLUTION

Along with having an exit strategy, your agreements should also address how to resolve any disputes that may arise—preferably without resorting to litigation, which ideally is a  last resort. To this end, consider adding terms to your agreements that require alternative dispute resolution processes, such as mediation and arbitration, before either party can file a lawsuit.

By including a clause requiring mandatory mediation or arbitration in your agreements, you can have better control of potential disputes before they occur, and you can help ensure contractual conflicts are handled in the most productive manner possible, without getting stuck battling one another in court.

08 | NOT PROTECTING YOUR INTELLECTUAL PROPERTY

Your intellectual property (IP)  is among your company’s most valuable assets, and as such, it needs to be fully protected in your legal agreements. This is especially important when working with independent contractors.

Unlike employees, with whom you generally own automatic copyrights to everything they produce while working for you, contractors typically retain full copyrights to their work—unless they’ve signed a written agreement stating otherwise. In fact, if you don’t have properly drafted agreements in place, you may not even own the work you’re paying someone to produce for you. 

To secure ownership of your IP, you need to include work-for-hire and copyright assignment clauses in every contractor’s agreement to ensure you actually own the work you are paying for. And yes, this means every single person, even those you may have worked with for years without a single problem.

Beyond contractors, it’s vital to ensure your IP is protected from all other potential threats, such as competitors, clients, and even partners. From filing for trademarks and copyrights on all of your IP to adding limitations-on-use provisions to your agreements with clients and customers and including clauses that assign ownership rights of IP brought into the company by partners to your business (rather than the partners themselves) in your operating agreements or bylaws, as your Personal Family Lawyer® with business planning expertise, we can ensure your agreements include the necessary terms to ensure your IP has the maximum protection possible

09 | AGREEING TO BROAD INDEMNITIES FAVORING THE OTHER PARTY

When you indemnify another party in an agreement, you are agreeing to compensate them for any losses they incur in specific circumstances. Such terms can also force you to compensate the other party, if something you do—or fail to do—causes the other party to experience a loss, damages, or a lawsuit from a third party. And often these indemnification provisions are buried in boilerplate that you aren’t reading, and wouldn’t even necessarily understand if you did read the terms.

In all but the rarest of cases, you should never agree to indemnify the other party against all possible claims related to the product or services you provide. To prevent this, be sure to have us, your Personal Family Lawyer® with business planning expertise review your agreements before signing to ensure you don’t get stuck paying for things the other party should be responsible for.

10 | BECOMING A PERSONAL PARTY TO AN AGREEMENT

Read this carefully, and then practice it without fail—never, ever sign a legal agreement for your business in your own name. Every legal agreement you enter into for your business should be signed in your company’s name, not yours. 

By signing an agreement in your own name, you are placing your personal assets at risk, even if you typically enjoy liability protection because your company is set up as a limited liability company (LLC) or corporation. As with mixing personal and business finances and failing to abide by administrative formalities, signing a company agreement in your name is one of the instances where your “corporate veil” can be pierced, allowing creditors to come after your personal assets to settle a claim against your business, even if you have an LLC or corporation set up.

Every legal agreement, no matter how seemingly minor or trivial it may appear, should be signed in your company’s name, rather than your own. And while you’re at it, make a commitment to never sign another legal agreement without having us review it first.

GIVE YOUR AGREEMENTS THE PROPER RESPECT

Just as you would never try to wire your office’s electrical systems yourself if you weren’t an experienced electrician, you shouldn’t try to do the same with your company’s legal agreements by acting as if you’re a lawyer. When it comes to such a critical component of your business, you should always consult with a licensed and experienced professional like us.

Whether you need new agreements created or want us to review agreements you already have—even those drafted by another lawyer—meet with us, your Personal Family Lawyer® with business planning expertise. We will support you to not only create clear concise agreements, but also implement an agreement process that will allow you to more effectively navigate the inevitable changes that take place in every relationship, while dealing with conflict in a way that’s both healthy and productive. Call us today to learn more.

This article is a service of of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule your appointment at 907-312-5436, or find a time for us to call you

If you have preferences about what happens to your digital footprint after your death, you need to take action. Otherwise, your online legacy will be determined for you—and not by you. If you have any online accounts, such as Gmail, Facebook, Instagram, LinkedIn, Apple, or Amazon, you have a digital legacy, and that legacy is yours to preserve or lose. 

Following your death, unless you’ve planned ahead, some of your online accounts will survive indefinitely, while others automatically expire after a period of inactivity, and still others have specific processes that let you give family and friends the ability to access and posthumously manage your accounts.

Last week, in part one of this series, we covered the processes that Facebook and Google have in place to manage your digital accounts following your death. Here in part two, we’ll continue our discussion, covering how Instagram, Twitter, and Apple’s collection of online platforms handle your accounts once you log off for the final time.

INSTAGRAM

Given that Instagram is owned by Facebook, the photo and video-sharing social media platform’s processes for handling your account after your death are similar—but not entirely the same—as Facebook’s. As a reminder, Facebook allows you to name a legacy contact to handle your death, and Instagram gives you two options for managing your account after death: You can either have your account memorialized, or you can have it deleted. 

However, it’s your family—not you—that has the final say. This makes it all the more important that your loved ones are well-aware of your wishes for how you’d like this digital asset managed when you die. 

In order to have your account memorialized, Instagram requires a family member or friend to submit a special request form, along with proof of your death, such as your obituary or death certificate. Once your account is memorialized, the word “Remembering” appears next to your profile name, and your account will basically be frozen, appearing exactly as you left it before your death.

All posts shared on your memorialized Instagram account will be preserved and shared with the same audience they were before your death. No one can log into your memorialized account, make changes to your posts, profile information, or settings. Additionally, your memorialized account will no longer appear in public Instagram forums, such as its Explore page.

Alternatively, Instagram allows your account to be permanently deleted after your death. According to Instagram’s policy, only family members can have your account deleted, and this requires a bit more effort than memorialization. 

To have your Instagram account permanently erased from cyberspace, your loved ones must not only submit a special form, but they must also supply your birth certificate, proof of death, as well as proof that they are your lawful representative under local law, the latter of which can take the form of a power of attorney document, a will, or an estate letter.

TWITTER

Twitter’s policies regarding the management of your account after death are fairly simple. In fact, the company only gives you one option: the deactivation of your account. Llike Instagram, Twitter leaves the decision as to what happens to your account after your death up to your family. Twitter’s Help Center offers a page with the specific details about deactivating a deceased person’s account. 

If your family has your login and password information when you die, it’s  fairly easy. Whoever has your login and password (plus 2fa access, if you have 2fa turned on) can login to your account on their own, and select the “deactivate my account” option. From there, the account will be deleted after 30 days of inactivity. That said, the account can be reactivated, simply by someone logging back into your account before 30 days expires.

If your family doesn’t have your login information, Twitter offers an alternate option for your account’s deactivation. However, Twitter notes that this option is only available to verified family members and estate executors. 

The process starts by having a family member or your executor fill out a special form requesting the removal of your account. Following the request, Twitter will email instructions asking the person for additional details, including information about your death, a copy of their ID, and a copy of your death certificate.

From there, Twitter will review each request individually, but as long as the  proper information is provided, Twitter notes that the vast majority of these requests are granted. Keep in mind that such requests will result in the account’s permanent deletion, so make sure your loved ones carefully consider their decision, since once deleted, the process cannot be reversed.

APPLE DEVICES & SERVICES

As you likely know well, all  Apple devices and services require an Apple ID. This ID is used for everything from logging on to your iCloud files and making ‌App Store‌ purchases to tracking and finding your lost iPhone with the ‌FindMy app. 

Like Facebook, Apple lets you select a “Legacy Contact” to manage the data and devices connected to your Apple ID after your death. Your Legacy Contact can be anyone you choose, and you can even designate more than one Legacy Contact.

The data your Legacy Contact(s) can access and manage includes items, such as photos, videos, messages, notes, files, contacts, calendar entries, downloaded apps, and backups of any devices stored in iCloud. Your Legacy Contact(s) will also be able to remove the Activation Lock from your devices, so they can personally use them, give them away, or sell them.

However, your Legacy Contact(s) will NOT have access to your login or password information, your payment information, your iCloud email accounts, or any of your licensed media. This means that you can’t pass on your collection of music, movies, or apps, unless that media already exists on one of the devices you own.

Before providing access, Apple reviews all requests made by your Legacy Contact(s). To gain access, your Legacy Contact(s) will need the access key provided when they were first nominated, as well as a copy of your death certificate and your date of birth. This makes it vital for your Legacy Contact(s) to print out a physical copy of their access key and safely store it, rather than relying on it being saved in your messages app or password manager. 

Once access is approved, your Legacy Contact(s) receives a special Apple ID to access your account. From then on, your old Apple ID and password will no longer work, and Activation Lock is removed from all devices using your Apple ID. From the time the first legacy account request is approved, your Legacy Contact(s) has three years to access your data and devices, after which your account is permanently deleted.

WE’RE HERE TO HELP

Although you can manage many of the processes described here on your own, when it comes to preparing your estate plan, you should always work with us, your Personal Family Lawyer®. Using our Life & Legacy Planning Process, we’ll ensure that all of your digital assets, along with your more traditional forms of property and wealth, are preserved and passed on seamlessly to your loved ones in the event of your death or incapacity. And we will accomplish all of this while ensuring you have the maximum level of privacy possible. 

With this in mind, check back next week for part three, where we’ll conclude this series by offering an easy, five-step process for including digital assets in your estate plan.

This article is a service of Liz Smith, Personal Family Lawyer® in Juneau, Alaska. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Life & Legacy Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today at 907-312-5436 to schedule a Life & Legacy Planning Session and mention this article to find out how to get this $750 session at no charge; or book a time for our team to call you at a time you choose.

Agreements are the heart of your business. Indeed, your entire business is one vast series of agreements: agreements with investors and lenders, clients and vendors, employees and contractors, as well as partners and customers. Yet, despite the critical role they play in a company’s success, far too many business owners fail to take their agreements seriously.

Whether it’s winging it by creating your own agreements or using cheap, do-it-yourself (DIY) legal documents you purchase online, failing to treat your legal agreements with the respect they deserve can cost you significantly. In fact, just one poorly constructed agreement could end up costing you tens of thousands of dollars in attorney’s fees and court costs—or even put you out of business entirely. 

Given this potential risk, having an experienced business lawyer like us prepare—or at least review—your agreements is absolutely essential in protecting you and your business. To demonstrate how complex legal agreements can be and how ill-prepared you are to draft your own, here are 10 pitfalls that can put your company in serious jeopardy if you take the DIY route with such important legal documents. 

01 | NOT USING ANY LEGALLY DOCUMENTED AGREEMENTS AT ALL

As we’ve covered before, agreements can actually be created verbally, without any written agreement at all. Whether you think you can go without legally documented agreements because you only do business with people you trust, or because you think agreements are something only big companies need, or because you think agreements are simply a way for lawyers to make money, you are setting yourself up for major costs down the road.

Such beliefs are a serious misunderstanding of the role legally documented agreements play in your business. In reality, your agreements are among your company’s most crucial tools—and these tools offer your company more than just legal protection. Agreements don’t just protect your assets, they give your relationships the greatest chance of success; they protect your intellectual property, your time, your energy, and your attention; and they let you know upfront, whether or not you are going to want to work with a particular vendor, client, or partner. 

For example, documented agreements force both parties to work through important issues—and potential sticking points—inherent to the success of the relationship before any work begins. This not only saves time and money by preventing unnecessary future litigation to unwind a relationship, but it gives you early insight into how well you and the other party deal with conflicting viewpoints and desires, which is a vital part of any relationship. 

Ultimately, having well-drafted legal agreements can enhance just about every aspect of your business—whether it’s boosting revenue, expanding your operation, hiring the most talented team, or improving your relationships—and you simply cannot afford to go without these crucial legal documents.

02 | SIGNING WITHOUT READING (OR UNDERSTANDING) AN AGREEMENT

Every agreement you enter into is likely to contain complex terms and legal jargon that can be tedious to read all the way through. But it’s vital that you not only read—but fully understand—all of an agreement’s terms before you sign, since these terms can have a major impact on both you and your business, if and when you ever have to go to court to enforce the agreement.

Before you sign any agreement, you should have your Personal Family Lawyer® with family business planning expertise review the agreement with you to ensure you completely understand exactly what you are agreeing to and the full implications of your agreement. And be sure to seek our counsel before you sign, because once you sign, it’s too late—you’ve already entered into an agreement and are legally bound by its terms, regardless of whether you understood them or not. 

03 | FAILURE TO INCLUDE (OR NEGOTIATE) KEY TERMS 

One of the biggest mistakes you can make when entering into an agreement is letting the other party convince you that a key term or clause doesn’t need to be included because it’s something that’s “assumed,” “unnecessary,” or that a key term is just “standard.”

In legal agreements, there are no standard terms, or terms that are assumed or unnecessary. If you have an agreement, and it’s not written into the terms of a legally documented agreement that you have signed, that term will not stand as a term of the agreement, if later on, you ever need to enforce the agreement. Moreover, all terms in an agreement are negotiable.

In addition to helping ensure you fully understand an agreement’s terms, making sure your agreements include the necessary terms is another area where an experienced business lawyer can prove invaluable. To this end, you should have trusted legal counsel like us review every agreement before you sign to make certain that all of the necessary terms have been included—and the terms are documented clearly enough that anyone could understand them.

04 | FAILURE TO ESTABLISH A CLEAR PERFORMANCE STANDARD

It’s fairly easy to enforce an agreement with a vendor who doesn’t pay or a contractor who misses a deadline—the facts are clear in these situations. However, things get trickier when it comes to more subjective areas of an agreement, such as poor performance or “for cause” termination. 

To address this, your agreements must be as specific as possible about the goals, objectives, and deliverables of the relationship to ensure your vendors, employees, and contractors are clear on what success looks like, and that those success terms are outlined within the agreement. If not, you may get stuck with a shoddy product or a poorly performing team member, while still being required to pay for the work. 

When you hire a new employee, for example, you should establish clear, measurable outcomes for the role, with specific metrics for success, along with time frames for specific goals and objectives to be achieved. Then, include this information in the employment agreement, so it’s abundantly clear what the expectations for the position are for the team member and for you.

05 | NOT DEFINING WHAT CONSTITUTES A BREACH

Along with establishing clear expectations for performance, it’s also vital to consider all of the things that can go wrong in a business relationship before work starts, and then establish a clear process for addressing each issue in the agreement.

For example, in the above scenario, you need to think about how you’d deal with the new team member if things didn’t work out as expected. What would happen if the individual needs to leave, can’t perform, or isn’t performing for some reason? What is each of you entitled to in the event the relationship needs to end? All of these scenarios need to be thought through and clearly addressed in the agreement.

Next week, in part two of this series, we’ll cover the five remaining pitfalls you’re likely to encounter when going it alone with your company’s agreements.

DON’T DO-IT-YOURSELF

For now, make the commitment to never sign another legal agreement until it’s been reviewed by us, your Personal Family Lawyer® with family business planning expertise. This is a wise and invaluable business practice, and it’s one we support every client with. Whether you have existing agreements that need to be reviewed or you need new agreements drafted, we’re here for you. In the end, elisting our support with your agreements could be the make-it-or-break-it difference for your business. Call us today to schedule your visit.

This article is a service of of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule your appointment at 907-312-5436, or find a time for us to call you.

If you have preferences about what happens to your digital footprint after your death, you need to take action. Otherwise, your online legacy will be determined for you—and not by you. If you have any online accounts, such as Gmail, Facebook, Instagram, LinkedIn, Apple, or Amazon, you have a digital legacy, and that legacy is yours to preserve or lose. 

Following your death, unless you’ve planned ahead, some of your online accounts will survive indefinitely, while others automatically expire after a period of inactivity, and still, others have specific processes that let you give family and friends the ability to access and posthumously manage your accounts.

Because social media and other digital platforms are such a ubiquitous part of our daily routine, and they can offer intimate snapshots of your life, these digital assets can serve as a key part of your legacy—one you may want to protect after your death. Alternatively, you may prefer to keep your online history private and have it permanently deleted once you’re gone. 

Whether you want to preserve your digital footprint or erase it entirely, you need to plan ahead to ensure your wishes are properly carried out. With this in mind, here we’ll discuss how some of the most popular digital platforms handle your account once you log off for the final time. From there, we’ll cover how to include these digital assets in your estate plan to ensure they are properly accounted for, managed, and passed on in the event of your incapacity or death.

FACEBOOK

Unless you choose to have your account deleted, Facebook offers what’s known as a “Legacy Contact” for managing your profile after death. Using a Legacy Contact, you can choose someone to control your account’s operation and functionality after you pass away.

Following your death, Facebook first memorializes your account. Once memorialized, the word “Remembering” is added to your profile name, and only confirmed friends can view your profile or find it in a search. Depending on your privacy settings, friends and family members can post content and share memories on your memorialized timeline. 

However, memorialized accounts are locked, so your original content cannot be altered or deleted, even if someone has your password. Your Facebook account can be memorialized regardless of whether or not you select a legacy contact. To have your account memorialized, Facebook simply requires your family or friends to provide proof of your death using a special request form and evidence of death, such as an obituary.

If you’ve chosen a Legacy Contact, that individual can manage your memorialized account based on the permissions you’ve granted him or her. Some of the actions your legacy contact can perform include writing pinned posts, choosing who can view and post tributes on your profile, responding to new friend requests, updating your cover and profile images, and requesting your account’s closure. 

However, there are certain actions your Legacy Contact will not be able to perform. This includes logging into your account as you, viewing your direct messages, removing your friends, or making new friend requests. For more in-depth coverage of Facebook’s legacy contact service and how it fits in with your estate planning, read our previous article, Managing Your Digital Afterlife: A Guide To Facebook’s Legacy Contact.

GMAIL, GOOGLE, & YOUTUBE

The Internet titan Google owns several of the most popular web services, including Gmail, YouTube, Google Drive, Google Photos, and Google Play. In order to request how you want these accounts managed after your death, Google offers a function called Inactive Account Manager.

Using this function, you must first choose the amount of time—3, 6, 12, or 18 months—that must pass without any activity before the Inactive Account Manager service is triggered. The service lets you select up to 10 different people, who can access your account once Inactive Account Manager goes into effect. You can specify the data those individuals will be allowed to access, including things like photos, contacts, emails, documents, and other content.

With Inactive Account Manager, you can also opt to have your account deleted. If so, you can have Google simply delete all of your content, or you can share your content with your designated contacts before deletion. If you share your content, your contacts will be able to access and download data from your account for 3 months before it’s deleted. 

Should you choose to have your account deleted, your Gmail messages will be permanently deleted, and all data and content in all of your other Google-based accounts like YouTube, Google Drive, and Google Photos will also be deleted. If you die without setting up Inactive Account Manager, Google will automatically delete your account following two years of inactivity. 

Finally, because Google owns YouTube, and YouTube videos have the potential to earn revenue indefinitely, it’s vital that you use the Inactive Account Manager to protect this potentially lucrative asset following your death. Additionally, you’ll also want to include these intangible assets in your estate plan, so they can be protected and passed on to your loved ones in the most beneficial way possible. 

On that note, be sure to check back next week, to read part two of this series. In that article, we’ll continue our discussion about how the most popular internet platforms deal with your account after your death. From there, we’ll conclude the series by covering the most effective methods for including these accounts—and other types of digital assets—in your estate plan.

Until then, if you need support or advice on the best ways to protect and pass on your assets—digital or otherwise—reach out to your Personal Family Lawyer® to discuss your options. Our Life & Legacy Planning Process is designed to ensure that all of your tangible and intangible assets, including your family legacy, are preserved and passed on seamlessly in the event of your death or incapacity. Contact us today to learn more. 

This article is a service of Liz Smith, Personal Family Lawyer® in Juneau, Alaska. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Life & Legacy Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today at 907-312-5436 to schedule a Life & Legacy Planning Session and mention this article to find out how to get this $750 session at no charge; or book a time for our team to call you at a time you choose.

You’ve most likely dedicated significant time and energy to creating a vision for your business, executing that vision, and even writing up a detailed business plan for the growth of your business. Yet far fewer business owners put the same effort into planning for their company’s continued success following their retirement, incapacity, or death.

However, not planning for the future of your business once you are no longer around to run the company could have disastrous consequences for you, your team, your clients/customers, and your family. And of all the potential risks facing your business, the two that are impossible for you to avoid are your incapacity and death—indeed, every one of us is immune to old age, illness, or death

Given this liability, creating an estate plan for the continued success of your business should you become incapacitated or when you die is just as critical as any other planning you do for your business, if not more so. The best part is that when you create an estate plan for your business, or a succession plan, it makes your company more resilient, less dependent on you overall, and can greatly improve your ability to take vacations, and have the freedom from your business you probably desire. 

WHAT IS A BUSINESS SUCCESSION PLAN? 

A business succession plan is an estate plan for your business. And that plan will include several strategies, such as life insurance for liquidity, a buy-sell agreement (covering the buyout of partners or other shareholders), and it should also include a trust to spell out the future management of your business. Without a trust in place, your business will likely be stuck in a totally unnecessary court process called probate (described more below), which could interrupt your company’s continued operation and even cause the loss of everything you’ve worked so hard to build.

A WILL ALONE IS NOT ENOUGH

When it comes to creating an estate plan, most people typically think of a will. While it’s possible to leave your company to someone in your will, it’s far from the ideal option. That’s because, upon your death, all assets passed through a will must first go through the court process known as probate. And the cost, time, and complexity involved when the court makes decisions about your business assets is completely unnecessary.

During probate, the court oversees your will’s administration to ensure your assets (including your business) are distributed according to your wishes. But probate can take months, or even years, to complete, and it can be quite expensive, which can seriously disrupt your cash flow and your company’s operation. What’s more, probate is a public process, potentially leaving your business affairs open to your competitors.

Furthermore, a will only goes into effect upon your death, so it would do nothing to protect your business should you become incapacitated by illness or injury before your eventual death. In fact, if you only have a will in place (or have no estate plan at all), in the event of your incapacity, your family would have to petition the court for guardianship in order to manage your business as well as your other personal and financial affairs.

Like probate, the court process associated with guardianship in the event of your incapacity can be long and costly. And in the end, whether it’s a family member or professional guardian agency, there’s no guarantee the individual the court ultimately names as guardian would be the best person to run your company.

TRUSTS PROTECT YOUR BUSINESS & FAMILY

Given the drawbacks associated with a will, a much better way to ensure your business’ continued success is by placing your company in a revocable living trust. A living trust is not required to go through probate, and all assets placed within the trust are immediately transferred to the person, or persons, of your choice in the event of your death or incapacity, without the need for any court intervention.

Upon your death or incapacity, having your business held in trust would allow for the smooth transition of control of your company, without the time, expense, and hassle associated with probate or guardianship. And using a trust, you can choose the individual(s) you think will be best suited to run your company in your absence, whether that absence is permanent (your death) or temporary (your incapacity). And within the trust, you can create a business succession plan, which would not only name your successor, but also provide him or her with detailed—and legally binding—instructions for how you want the business run when you are gone.

Finally, trusts are not open to the public, so your company’s internal affairs would remain private, and the transfer of ownership would take place in your lawyer’s office, not a courtroom, and on your family’s time.

Although the majority of business owners will get suitable protection for their business using a living trust, for the most airtight asset protection, you may want to consider setting up a specialized irrevocable trust. Such irrevocable trusts are quite complex, and they are not the right choice for everyone, so ask us, as your Family Business Lawyer™ to find out if an irrevocable trust would be suitable for your particular company.

A COMPREHENSIVE SUCCESSION PLAN

While placing your business in a trust is an effective way to protect your company upon your death or incapacity, it’s merely one part of a comprehensive business succession plan, which as mentioned earlier typically includes other estate planning strategies, such as business insurance, life insurance, and a buy-sell agreement. For the maximum level of protection, meet with us, your Family Business Lawyer™ to ensure your business has all of the necessary legal protections in place.

Even if you have an existing estate plan, you should have us review it to make sure you’ve covered all of your bases, and your plan has been properly updated. As your Family Business Lawyer™, we use a 50-point assessment to analyze your estate plan, which needs to be consistently updated to account for changes in your life, assets, and the law. 

In our assessment, we will review your business and its assets, and discuss all of the different tools available to ensure the company and wealth you’ve worked so hard to build will survive—and thrive—no matter what happens to you. Taking these actions will not only help shield your company and family from unforeseen tragedy, but it will give you the peace of mind needed to take your business to the next level. Schedule your appointment today to get your plan handled.

This article is a service of of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule your appointment at 907-312-5436, or find a time for us to call you

People often come to us curious — or confused — about the role trusts play in saving on taxes. Given how frequently this issue comes up, here we’re going to explain the tax implications associated with different types of trusts in order to clarify this issue. Of course, if you need further clarification about trusts, taxes, or any other issue related to estate planning, meet with us, your Personal Family Lawyer® for additional guidance.

TWO TYPES OF TRUSTS

There are two primary types of trusts — revocable living trusts and irrevocable trusts — and each one comes with different tax consequences.

REVOCABLE LIVING TRUST

A revocable living trust, also known simply as a living trust, is by far the most commonly used form of trust in estate planning. And as long as you are living, there is absolutely no tax impact of creating a living trust. 

A living trust uses your Social Security Number as its tax identifier, and this type of trust is not a separate entity from you for tax purposes. However, a living trust is a separate entity from you for the purpose of avoiding the court process called probate, and this is where the confusion regarding taxes often comes from. But before we explain the tax implications of a living trust, let’s first describe how a living trust works. 

A living trust is simply an agreement between a person known as the grantor, who gives assets to a person or entity known as a trustee, to hold those assets for the benefit of a beneficiary(s). In the case of a revocable living trust, the reason there are no tax consequences is because you can revoke the trust agreement or take the assets back from the trustee at any time, for any reason. In fact, as long as you are living, you can change the terms of the trust, change the trustee, change the beneficiaries, or terminate the trust altogether.

The revocable living trust becomes irrevocable if you become incapacitated or when you die. At that point, the trustee you’ve named will step in and take over management of the trust assets, and one of the first things that your trustee will do is to apply for a tax ID number for the trust. At this point, the trust becomes a taxable entity, and any income earned inside of the trust that is not distributed in that year would be subject to income taxes, at the taxable rates of the trust (or at the tax rates of the beneficiaries, if income is distributed to the beneficiaries). 

IRREVOCABLE TRUSTS

An irrevocable trust is created when you make a gift to a trustee to hold assets for the benefit of the beneficiary, and you cannot take back the gift you’ve made to that individual.

When you create an irrevocable trust, either during your lifetime, or at death through a testamentary trust (a trust that arises at the time of your death through your will), or through a revocable living trust creating during your lifetime, the trust is a separate tax-paying entity, and it is either subject to income tax on the earnings of the trust at the rates of the trust or at the rates of the beneficiaries.

Unlike a revocable living trust, an irrevocable trust is (as the name implies) irrevocable. This means that the trust’s terms cannot be changed, and the trust cannot be terminated once it’s been executed. When you transfer assets into an irrevocable trust, you relinquish all ownership of those assets, and your chosen trustee takes total control of the assets transferred into the name of the trust. Because you no longer own the assets held by the trust, those assets are no longer considered part of your estate, and as long as the trust has been properly maintained, the assets held by the trust are also protected from lawsuits, creditors, divorce, serious illness and accidents, and even bankruptcy. 

However, as mentioned earlier, irrevocable trusts also come with tax consequences. As of 2022, the income earned by an irrevocable trust is taxed at the highest individual tax bracket of 37% as soon as the undistributed taxable income reaches more than $13,450. To avoid this high tax rate, in some cases, an irrevocable trust can be prepared so that the tax consequences pass through to the beneficiary and are taxed at his or her rates, which are typically much lower. 

We often set up a trust in this way when creating a Lifetime Asset Protection Trust for a beneficiary. When set up like this, the trust can provide the beneficiary with protection from common life events, such as serious debt, divorce, debilitating illness, crippling accidents, lawsuits, and bankruptcy, without being taxed at such a high rate on such little income.

If you have a trust set up, and would like us to review its income tax consequences for your loved ones upon your death, meet with us, your local Personal Family Lawyer®.

THE ESTATE TAX: WHAT IT IS & WHO PAYS IT

The estate tax is a tax on the value of a person’s assets at the time of their death. Upon your death, if the total value of your estate is above a certain threshold amount, known as the federal estate tax exemption, the IRS requires your estate to pay a tax, known as the estate tax, before any assets can be passed to your beneficiaries.

As of 2022, the federal estate tax exemption is $12.06 million for individuals ($24.12 million for married couples). Simply put, if you die in 2022, and your assets are worth $12.06 million or less, your estate won’t owe any federal estate tax. However, if your estate is worth more than $12.06 million, the amount of your assets that are greater than $12.06 million will be taxed at a whopping 40% tax rate. 

You can reduce your estate tax liability—or even eliminate it all together—by using various estate planning strategies. Most of these strategies are fairly complex and involve the use of irrevocable trusts, but such strategies are without question worth it, if you can save your family such a massive tax bill. To learn how to save your family from such a major tax burden, meet with us, your Personal Family Lawyer® to discuss your options.

And please note, we are only speaking about the federal estate tax here. Currently 12 states have their own estate tax, which are separate from the federal estate tax. We’ll cover the specifics of what happens in our state regarding your estate tax, when we have a Family Wealth Planning Session. Give us a call to schedule yours, if you have not yet had a Planning Session with us.

THE FUTURE ESTATE TAX

The current $12.06 million estate tax exemption is set to expire on Jan. 1, 2026, and return to its previous level of $5 million, which when adjusted for inflation is expected to be around $6.03 million. Here’s one thing we know for sure: We don’t know what the estate tax exemption will be at the time of your death, and we also don’t know what the value of your assets will be at the time of your death. Because of this, when you plan with us, we will ensure that we put in place planning strategies to protect your estate from estate taxes, regardless of the amount of the estate tax exemption or the size of your assets.

WE’RE HERE FOR YOU

If you are trying to decide whether a revocable living trust, irrevocable trust, Lifetime Asset Protection Trust, or some other estate planning vehicle is the right solution for you and your family, meet with us, as your Personal Family Lawyer®. We will support you in making that decision, so your estate can provide the maximum benefit for the people you love most, while paying the least amount of taxes possible. Call us today to schedule your visit.

This article is a service of Liz Smith, Personal Family Lawyer® in Juneau, Alaska. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Life & Legacy Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today at 907-312-5436 to schedule a Life & Legacy Planning Session and mention this article to find out how to get this $750 session at no charge; or book a time for our team to call you at a time you choose.