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Small
Business Consulting Tips
Please note that
some of our Small Business Consulting Tips may be presented in PDF format. The Adobe Acrobat Reader is
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Small Business Consulting tips, please check back again
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Current Small Business Consulting Tip
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Avoiding Estate Tax of Life Insurance Proceeds
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Why buy life insurance? Very often, it's to protect your loved ones from financial hardship. You expect that all of the proceeds will go to your beneficiary. But did you know that life insurance proceeds are sometimes subject to federal estate tax?
Many people don't realize that life insurance proceeds are an asset that must be included in an estate for federal estate-tax purposes.* In 2004, the top federal estate-tax rate is 48%. In that bracket, nearly half of your insurance proceeds could go to Uncle Sam instead of your loved ones.
Of course, $1.5 million of estate assets generally escape taxes in 2004 and 2005, and this amount will gradually increase to $3.5 million by 2009. But, before you assume your estate is too small for you to worry about taxes, factor in your life insurance.
If you have a large life insurance policy, a relatively modest estate could actually rise above the threshold and be subject to estate taxes. Fortunately, there are ways to avoid taxation and still protect your family with life insurance.
Don't Own the Policy If you never own the life insurance policy, it can't be included in your estate. Instead, your beneficiary (or beneficiaries) may be able to buy and own a policy on your life. If your beneficiaries are your children and they can't afford the premiums, you can give them the money to pay the insurance company. Avoid paying the premiums directly, however, because it may indicate to the IRS that you have "incidents of ownership" in the policy.
Incidents of ownership are any specific ownership rights that you have in the policy. These include the right to change the beneficiary, assign the policy or pledge it for a loan, borrow against the policy's cash value, and surrender or cancel the policy. If the IRS determines that you retain any incidents of ownership in a life insurance policy, the proceeds will be included in your estate.
Transfer the Policy If you already own a life insurance policy, you could transfer it to someone else to avoid having the proceeds included in your estate. You can transfer it to a beneficiary, such as your spouse or a child, or to a life insurance trust. And, of course, you cannot retain any incidents of ownership in the policy after you have transferred it.
If you transfer the policy to a trust, it should be an irrevocable life insurance trust, and you should have no rights to the trust. One disadvantage of an irrevocable trust is that you cannot change its terms or terminate it once it is established.
There is one catch to transferring ownership of a life insurance policy. If you die within three years of the transfer, the proceeds will be treated as part of your estate. So, don't wait until you are ill or elderly to transfer your life insurance policy.
Name Your Spouse as Beneficiary If your spouse is the beneficiary of your life insurance policy, the proceeds will not be subject to federal estate taxes. This is a result of the tax law's unlimited marital deduction. As long as you die before your spouse, this strategy is effective.
If, however, your spouse predeceases you, then you're back to square one, and the life insurance proceeds could be subject to taxes unless you take further action. So, look closely at your personal situation before naming your spouse as beneficiary in an attempt to avoid estate taxes on your insurance proceeds.
Please contact us if you'd like to discuss your situation.
*While the federal estate tax is scheduled for repeal in 2010, the tax will return in 2011 unless Congress decides otherwise.
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Previous Small Business Consulting Tips
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Health Insurance - these times they are a changin'
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Is the cost of health insurance a major concern for your business and family? Are you seeing double-digit increases your premiums? Is your monthly health insurance premium more than your mortgage payment? If you’ve answered yes to any of these questions, you’ll want to pay attention to this article. Although many of you have considered dropping health insurance, the more logical approach is to minimize cost increases rather than try to eliminate them entirely.
Premium escalation can be traced to many factors, two of the biggest being aging baby boomers consuming more medical resources, and a steep rise in prescription drug usage. Both of these factors have hit the UP hard; thus, our region is experiencing increasing costs at a much higher rate than national averages.
For many years, especially in the UP, we’ve come to depend on the reliable services offered by Blue Cross Blue Shield: we’ve been used to small co-pays for prescriptions and office calls; the majority of services and lab expenses covered without question; coverage that is accepted by all regional doctors and hospitals.
While the traditional BCBS plan is still reliable and widely accepted, the cost may now be more than many of us can afford without tweeking the plan a bit. For example, following are some options you may want to consider:
–increase deductibles and co-pays
–offer tiered or self-insured prescription drug cards
–for employees eligible for coverage under a spouse’s plan, offer cash in lieu of enrolling in the company health plan
–offer a Flexible Benefit Premium Only Plan whereby employees pay their share of the health insurance premium with pre-tax dollars (creating a minimum savings of $.27 per each dollar spent)
–offer a Flexible Benefit Plan that also allows for payment of out-of-pocket medical expenses and day care costs with pre-tax dollars
–offer a Health Reimbursement Arrangement were employees are reimbursed by their employer for out-of-pocket costs
–move from a traditional plan to a PPO
–consider lowering the co-pay percentage for out-of-network services
–pay 100% of the employee premium, begin to pass on a larger portion of dependent coverage to the employee
–educate and provide resources for employees to be smarter health-care consumers
For those of you willing to make significant changes, there are many options for you to consider in addition to those listed above:
–Self insure your entire employee group (for larger groups of 100 or more employees)
–Change to a private insurance carrier - one that is a member of the PPOM network (All of the doctors and hospitals in the UP are now participating providers)
–Consider a Medical Savings Plan, which is especially attractive to small business owners, specifically S-Corporations
–Offer more than one health insurance option to employees
–Implement a voucher system: the employee uses an employer cash contribution to purchase individual coverage on the open market
As the future of health care changes, it is important to be aware of all the options available to you. Whatever strategy and/or mix of benefits a company adopts, we can assist our clients to consider the impact on the bottom line and on employee morale. We can play a key role in helping businesses actively manage health insurance costs. While such costs can be a volatile employee-relations issue, addressing them openly and proactively will bring better results than simply waiting for health care expenses to become unmanageable.
Please give us a call for assistance in designing a cost-effective, rewarding employee benefit package.
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Valuation Services
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Why is a Business Valuation Necessary? A brief discussion of business valuation.
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More information is available in PDF format. Click here. |
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Business Retention Schedule
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Here is a pdf file with a listing of selected records with suggested retention schedules for businesses and corporations.
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More information is available in PDF format. Click here. |
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Financial Statements
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I can’t help but be obvious and somewhat self promoting when drafting this, my first small business tip. I tend to want to start talking about business tips from the beginning, so whether you are a start up or going concern business my first tip would be this. Develop, if you haven’t already, adequate, relevant and accurate management information to run your business. The starting point to management information is to prepare, or have prepared for you, accurate internally prepared financial statements on a regular (monthly or quarterly) basis. These financial statements should include at the very minimum, a detailed balance sheet, income and expense statement and a statement of cash flows.
My next suggestion is for you, as a business owner, to learn to read, interpret and understand the financial statements - particularly amounts and percentages on the statements that are most relevant to operating your business. A consistent financial review of “how the business is doing” will, in a very short period of time, allow you to maintain a certain mental presence about the financial position of your company at all times. Inadequate or poorly prepared information will do just the opposite. It will distort your knowledge of how the business is doing and can lead to false perceptions as well as poor business decision making. Your accountant should be able to set up, adjust and work with you to prepare your company’s financial statements . That’s the self-promoting part.
In the future I’ll comment on start-up companies. If you have questions or just want to share some small business tips just email me at bruce@brucerukkila.com . If I can’t answer your questions, I’ll find someone that can.
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