Are You A Business Owner? Maybe You Should Know About Tax Bracket Planning!

6a017c332c5ecb970b01a73d75677c970d-320wiOwners of closely-held businesses have long understood the value of insurance as a funding tool for executive retention, transition planning, and enhanced retirement benefits; but, tax-brackets can have a significant impact on those solutions!

For example, a corporation in the 15% tax bracket gets to keep 85 cents of every taxable dollar it makes, while an individual in the 35% tax bracket gets to keep only 65 cents of every taxable dollar he or she makes. Since life insurance purchased to fund a buy-sell plan must be paid for with after-tax dollars, it may make more sense to pay the premiums with 85 cent dollars as compared to 65 cent dollars.

Impact of Tax Brackets on Buy-Sell Planning
  • Lower bracket corporation — If the corporation is in a lower tax bracket than the shareholders, a stock redemption buy-sell plan can be funded with enhanced dollars, since premiums are paid by the corporation.
  • Higher bracket corporation — If the corporation is in a higher tax bracket than the shareholders, a cross purchase buy-sell plan may be more cost effective since premiums are paid with enhanced dollars by each shareholder.

Conversely, the marginal tax brackets of the corporation and shareholder-employees can have an impact on the total cost of a selective benefit plan. Benefits provided to corporate employees on a selective basis generally are either tax-deductible by the corporation or are not currently taxable to the employee, but not both. As a result, the relative impact of tax brackets should be considered in selecting a selective executive benefit plan that produces the most advantageous overall tax results.

Impact of Tax Brackets on Executive Benefit Planning
  • Lower bracket corporation — When the corporation is in a lower tax bracket, selective benefits that are non-deductible by the corporation and non-taxable to the shareholder-employee generally produce the better overall tax results.
  • Higher bracket corporation — When the corporation is in a higher tax bracket, selective benefits that involve tax-deductible corporate payments are generally more advantageous, even if taxable to shareholder-employees.

Misconceptions About the Unlimited Marital Deduction:

The marital deduction eliminates both the federal estate and gift tax on transfers of property between spouses, in effect treating them as one economic unit.

The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer.

However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse, meaning that use of the unlimited marital deduction will NOT eliminate estate settlement costs.

Consider the following:

  • At best, the unlimited marital deduction will POSTPONE payment of the federal estate tax, not ELIMINATE it. If the estate of the surviving spouse exceeds the unified credit equivalent(1), federal estate tax will be payable at the second death. In fact, postponing payment of the tax may even result in a higher federal estate tax, if estate assets continue to grow.
  • The unlimited marital deduction does not eliminate the need for estate liquidity to pay administrative costs, such as funeral expenses, probate costs, legal fees and final expenses.
  • The unlimited marital deduction is NOT available to:

* Surviving spouses;
* Single or divorced people; or
* A married person who wants/needs to leave property to someone other than the spouse.

(1) The 2010 Tax Relief Act provided for “portability” of the maximum estate tax unified credit between spouses if death occurred in 2011 or 2012.  The American Taxpayer Relief Act of 2012 subsequently made the portability provision permanent.  This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a deceased spouse ($5 million as adjusted for inflation; $5,340,000 in 2014).  As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million (as adjusted for inflation) from the federal estate and gift tax without use of marital deduction planning techniques.

With proper advance planning, it may be possible to take full advantage of the marital deduction at both spouses’ deaths, reducing estate tax liability and increasing the size of the estate ultimately left to surviving family members.

Advance Directives

Advance Directives are a way to “have your say” about the type of care you receive (or don’t receive) in the event you suffer a catastrophic medical event, such as a stroke or an accident, that leaves you unable to communicate your wishes. Every adult should plan ahead by completing an Advance Directive that specifies his or her personal preferences in regard to acceptable and unacceptable medical treatments. There are two types of Advance Directives:

Living Will

A Living Will states your preferences regarding the type of medical care you want to receive (or don’t want to receive) if you are incapacitated and cannot communicate. You specify the treatment you want to receive or not receive in different scenarios.

Medical Power of Attorney

Also known as a durable power of attorney for health care or a health care proxy, a Medical Power of Attorney names another person, such as your spouse, daughter or son, to make medical decisions for you if you are no longer able to make medical decisions for yourself, or you are unable to communicate your preferences.

Note that a Medical Power of Attorney is not the same as a Power of Attorney, which gives another person the authority to act on your behalf on matters you specify, such as handling your financial affairs.

Important Points to Remember

  • Each state regulates Advance Directives differently. As a result, you may wish to involve an attorney in the preparation of your Advance Directive
  • You can modify, update or cancel an Advance Directive at any time, in accordance with state law.
  • If you spend a good deal of time in several states, you may want to have an Advance Directive for each state.
  • Make sure that the person you name to act for you – your health care proxy – has current copies of your Advance Directive.
  • Give a copy of your Advance Directive to your physician and, if appropriate, your long-term care facility.

You might find it worthwhile to consult with your tax professional as well as your attorney.  And, of course, I’m available to help in any way I can.



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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.