If you are like many homeowners, your home is likely your family’s most valuable and treasured asset. In light of this, you want to plan wisely to ensure your home will pass to your heirs in the most efficient and safe manner possible when you die or in the event you become incapacitated by illness or injury. 

Indeed, proper estate planning is as much a part of responsible homeownership as having homeowners insurance or keeping your home’s roof well maintained. When it comes to including your home in your estate plan, you have a variety of different planning vehicles to choose from, but for a variety of different reasons, putting your home in a trust is often the smartest choice. 

In part one, we explained how revocable living trusts and irrevocable trusts work, and we discussed the process of transferring the legal title of your home into a trust to ensure it’s properly funded. Here in part two, we will outline the key advantages of using a trust to pass your home to your loved ones compared to other estate planning strategies.

The Benefits Of Putting Your Home In A Trust
While both wills and trusts are the most commonly used estate planning vehicles to pass on wealth and other assets to your loved ones, putting your home in a trust has a number of distinct benefits compared to using a will.

Avoiding Probate

One of the primary advantages of using a trust to pass on your home to your heirs is the avoidance of the court process known as probate. Unlike a will, assets held in trust do not have to go through probate. During probate, the court oversees the will’s administration, ensuring your assets are distributed according to your wishes, with automatic supervision to handle any disputes.

However, probate can be a long and expensive process, which can be emotionally draining for your loved ones. Depending on the complexity of your estate, probate proceedings can drag out for months or even years, and your family will likely have to hire an attorney to represent them, which can result in costly legal fees that can drain your estate. Plus, probate is open to the public, which can make things risky for those you leave behind, especially if the wrong people take an interest in your family’s affairs.

Unlike a will, if your trust is properly set up and maintained, your family won’t have to go through probate to inherit your home. Instead, your home will immediately pass to your loved ones upon your death, without the need for any court intervention. Avoiding the delay of probate can be especially critical when it comes to a home to ensure the property is properly maintained, since the home may fall into disrepair while probate is being completed. 

Finally, unlike wills, trusts remain private and are not part of the public record. So, with a properly funded trust, the entire process of transferring ownership of your home can happen in the privacy of your Personal Family Lawyer®’s office, not a courtroom, and on your family’s time.

Protection Against Incapacity
In addition to passing on your home to your loved ones when you die, putting your home in a trust can also protect your home in the event you become incapacitated by serious illness or injury. In contrast, a will only goes into effect upon your death, so it would be useless for protecting your home in the event you become incapacitated.

If you do become incapacitated with only a will in place, your family will have to petition the court to appoint a conservator or guardian to manage your affairs related to homeownership, including paying your mortgage and property taxes, keeping up with your home’s general maintenance, and overseeing the sale of your home. Like probate, the process of petitioning the court to appoint a conservator or guardian can be costly, time-consuming, and stressful.

And there’s always the possibility that the court could appoint a family member as a guardian that you’d never want to manage your family home. Or the court might select a professional guardian, putting a total stranger in control of your family’s most precious asset and leaving it vulnerable to crooked guardians, who could potentially sell your home for their personal financial gain.

With a trust, however, you can include provisions in the terms of the trust that appoint someone of your choosing—not the court’s—as successor trustee to manage your home’s ownership and/or sale if you’re unable to do so yourself due to incapacity. For example, your trust could authorize your successor trustee to sell your home in order to pay for the costs of long-term care should you require it.

Control Over Asset Distribution
Because you can include specific instructions in a trust’s terms for how and when the assets held by the trust are distributed to a beneficiary, a trust can offer greater control over how your assets are distributed compared to a will. For example, you could stipulate in the trust’s terms that the assets can only be distributed upon certain life events, such as the completion of college or marriage, or when the beneficiary reaches a certain age.

In this way, you can help prevent your beneficiaries from blowing through their inheritance all at once, and offer incentives for them to demonstrate responsible behavior. And as we mentioned earlier, as long as the assets are held in trust, they’re protected from the beneficiaries’ creditors, lawsuits, and divorce, which is something else wills don’t provide. 

Avoiding Family Conflict
If you leave your home to your loved ones using a will and you designate more than one person to inherit the property, there’s a potential for conflict because each individual gets an undivided interest in the home. Given this, these individuals must agree on what to do with the home—keep it or sell it—and they may not see eye-to-eye, which can create unnecessary drama that can tear your family apart.

For example, if one of your children wants to keep the home and live in it, but the other prefers to sell it in order to pay off their debts, the child who wants to sell could go to court in order to force their sibling to sell the property. However, this potential for conflict can be avoided by putting your home in a living trust.

If you name more than one beneficiary for your home in your living trust, you can name a neutral third-party as successor trustee to decide what happens to the home, and then manage the distribution after a clear determination is made. For example, the trustee could allow one child to live in the home, while the other could receive other estate assets of equal value, or the trustee could come up with some alternative solution to stave off the potential for conflict. 

Transfer On Death Deed
In some states you can use what’s known as a Transfer On Death (TOD) deed in order to transfer ownership of your home to your heirs without the need for probate. Initially created as an inexpensive alternative to living trusts, a TOD deed allows named beneficiaries to assume ownership of your home without undergoing probate or trust administration.

However, TOD deeds come with some major drawbacks, and they may end up creating unintended problems for your loved ones. To this end, before you rely on a TOD deed as a cheaper alternative to passing your house via a trust, consider the following factors:

• If your property is held joint tenancy, your joint tenant becomes the sole owner upon your death and has full control of the property, and your TOD deed would be inapplicable.
• Unlike with a living trust, a TOD deed cannot be used to manage, sell, or borrow against the property during your incapacity. This means that if you become incapacitated, the beneficiary of your TOD deed would be unable to access your home in order to sell or refinance the property to pay for your care, as your trustee could if you had the property in a living trust.
• If the beneficiary of the TOD deed is a minor upon your death, a court-appointed guardian will need to be named to control your property until the child reaches legal age. With a living trust, however, the person you named as successor trustee can manage the property until your child reaches legal age.
• Using a TOD deed in order to transfer ownership of your home to try and lower the value of your assets doesn’t count as a Medicaid spend-down, so it will not help you qualify for the program. Plus, depending on the state, the property may even be subject to the Medicaid Estate Recovery Program (MERP) after you die. As mentioned earlier, if you want to qualify for Medicaid and protect your home from MERP, meet with your Personal Family Lawyer® to discuss creating an irrevocable trust. 

Given these potential complications, using a TOD deed to transfer ownership of your home as an alternative to a living trust is almost never a good idea. Instead, your Personal Family Lawyer®, can help you find better ways to transfer ownership of your home that will keep your family out of court and out of conflict.

Find The Solution That’s Right For Your Family
Although putting your home in a living trust can be an ideal way to pass your home to your loved ones, each family’s circumstances are different. This is why your Personal Family Lawyer® will not create any documents until we know what you actually need, and what will be the most affordable solution for you and your family—both now and in the future—based on your family dynamics, assets, and desires.

The best way for you to determine whether or not your estate plan should include a will, a trust, or some combination of the two is to meet with your Personal Family Lawyer® for a Family Wealth Planning Session, which is the first step in our Life & Legacy Planning Process. During this process, we’ll take you through an analysis of your assets, what’s most important to you, and what will happen to your loved ones when you die or if you become incapacitated.

Sitting down with a Personal Family Lawyer® will empower you to feel 100% confident that you have the right combination of estate planning solutions to fit with your unique asset profile, family dynamics, and budget. In fact, we see estate planning as so much more than planning for death, which is why we call it Life & Legacy Planning—it’s about your life and the legacy you are creating by the choices you make today. 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.

The constant whirlwind of excitement and activity surrounding the launch of your startup can leave you feeling overwhelmed. You can get so focused on the day-to-day tasks and responsibilities involved with getting your operation up and running that you neglect some of your company’s most vital legal components.

Because you are so busy and likely not generating much revenue during the startup phase, it may be tempting to try to handle everything on your own, and not seek out the support and advice of an experienced business lawyer. This is especially true today when you can access just about every conceivable legal document online for cheap from the countless online document services like LegalZoom and Rocket Lawyer.

However, taking the do-it-yourself (DIY) route can put your fledgling business—and your personal assets—at serious risk. Without the proper legal protections in place, your startup is just one accident, audit, or lawsuit away from ruin. Fortunately, with the advice of a trusted business lawyer, you can easily avoid the most common legal pitfalls and position your new company for rapid, sustainable growth.

While every business is different, and you should consult with your Family Business Lawyer™ early and often during the startup phase, here are four critical areas where our support can prove invaluable.

1. Entity Formation & Maintenance
Choosing the right business entity structure for your business is one of your first and most crucial decisions when launching a startup. In fact, the entity you choose for your business will affect everything from the amount of taxes you pay and what kind of records you are required to keep to how vulnerable your personal assets are to lawsuits incurred by your company.   

Whether you choose a sole proprietorship, partnership, limited liability company (LLC), or corporation, each entity comes with unique advantages and disadvantages, all of which must be carefully considered before you launch. As your Family Business Lawyer™, we will not only help you choose the correct entity for your business, but we can also support you in setting up and maintaining your entity over the life of your business.

In fact, we offer specially designed maintenance packages to help ensure certain business entities, such as LLCs and corporations, maintain the proper business records and adhere to the required administrative and corporate formalities. With our support and guidance, you can rest assured that your entity will remain in constant compliance and provide the maximum level of liability protection for your personal assets.

2. Creating Legal Agreements
Ultimately, your entire business is one vast series of agreements: agreements with investors and lenders, clients and vendors, employees and contractors, partners and customers. The success of your business depends on your ability to make agreements and seal the deal in a win/win manner in each and every one of these relationships.

Furthermore, your legal agreements are designed to govern and protect some of your company’s most essential elements: your personal liability, intellectual property, financial investments, and tax strategies, to name just a few.

Are you really going to trust generic, fill-in-the blank forms you find online to govern such crucial components of your business?

Whether you need new agreements created or want us to review agreements you already have—even those drafted by another lawyer—meet with your Family Business Lawyer™.  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.

3. Intellectual Property Protection

Whether you realize it or not, your intellectual property (IP) is one of your company’s most valuable assets. In fact,  studies show that up to 80% of the value of a typical business is IP. Problem is, most companies aren’t properly protecting these vital intangible assets.

You should start by trademarking your company’s name and registering for copyright protection for the copy on your website and in your advertisements. And to ensure your business owns all of the work you pay others to create, you will also need to make certain that all agreements you have with independent contractors and vendors include work-for-hire provisions, and that all agreements with clients and customers have limitations-on-use provisions.

Your Family Business Lawyer™ will not only help you secure the necessary IP protections and create airtight legal agreements, but we will also take the necessary steps to protect your IP to ensure your intellectual property rights aren’t infringed upon. Additionally, we will help you leverage and maximize the value of your IP assets, and support you with developing an ongoing strategy to build a winning brand.

4. Securing The Proper Business Insurance
While setting up your business entity can safeguard your personal assets from your company’s liabilities, that entity will not protect your business assets—that’s where business insurance comes in. And seeing that a single catastrophic event or lawsuit can wipe out your company, it’s crucial that you have the proper insurance coverage in place from the moment you open your doors.

The type and amount of coverage your company needs will largely depend on your particular company and its assets. That said, most businesses can benefit from several common forms of insurance, including general liability insurance, professional liability insurance, property insurance, and employment practices insurance. Additionally, you should also consider investing in umbrella insurance, which would cover you for any damages in excess of your other individual policies.

Before you sit down with an insurance agent, meet with your Family Business Lawyer™. We’ll evaluate your business assets and underlying risks to identify the optimal levels of coverage you should have in place to protect your business from all potential risks.

Build A Solid Legal Foundation

Launching a new business is difficult enough without having to worry about costly and potentially ruinous legal problems hanging over your head. Start your business off right by sitting down with your Family Business Lawyer™ to ensure your startup has the proper legal foundation in place.

As your Family Business Lawyer®, we are specifically trained to help you keep more money in your business, watch out for risks and pitfalls, handle sticky situations, and effectively tend to the parts of your business that are especially challenging, particularly those involving the legal, insurance, financial, and tax (LIFT) components of your operation.

By working with us to build a solid LIFT foundation for your startup, you can finally gain genuine confidence about your company’s long-term success. And armed with that clarity, you can devote all of your energy and passion into growing your business into something truly meaningful for yourself, your clients, and your family. Contact us today to get started.

This article is a service 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. 

As you likely already know, but may not have given much thought about, the most important inheritance you provide is so much more than the money you’ll leave behind, but also includes your values, insights, stories, and experience. And, while those things are being passed on happenstance on the daily, we know that intentionally creating a Family Wealth Legacy requires more than happenstance. That’s why as a Personal Family Lawyer®, part of our unique planning process is to capture your legacy in recorded form through something we call a Family Wealth Legacy Interview. 

What we’ve discovered is that we can learn so much more than expected — about ourselves and our loved ones – when we ask the right questions. 

So, this year, we invite you to ask your mother, father, and/or another loved one the 32 important questions below that can teach you valuable lessons about love, life, and what matters most. And, don’t just ask them, record their answers to create your own Family Wealth Legacy. Or, contact us to schedule time for a comprehensive Family Wealth Planning Session this month, and we’ll create a Family Wealth Legacy as part of your estate plan.

Use these questions as a springboard and an engaging activity during the holidays and discover what you didn’t know about your loved ones:

1. What comes to mind when you think about growing up in your hometown?

2. What did you love to do as a kid, before high school?

3. What did you love to do in high school?

4. What do you remember most about your teenage years?

5. What do you remember most about your mom (grandma)?

6. What was most important to her?

7. What do you remember most about your dad (grandpa)?

8. What was most important to him?

9. If Grandma and Grandpa had a message to pass along to the grandchildren, what would it be?

10. How did you meet your spouse? How did you know (s)he was the one?

11. How did you choose your career? What was your favorite part about it?

12. What made you successful?

13. What did you believe about yourself that helped you become successful and deal with hard times?

14. What times in your life truly “tested your mettle,” and what did you learn about yourself by dealing (or not dealing) with them?

15. What three events most shaped your life?

16. What do you remember about when I was born?

17. Were you ever scared to be a parent?

18. What three words would you say represented your approach to parenting and why?

19. When you think about [sibling] how would you describe him/her?

20. What message do you have for [sibling] that you want him/her to always keep in mind?

[Do the last two questions above for each sibling in your family]

21. When you think about [spouse], how would you describe her/him?

22. What message do you have for [spouse] that you want her/him to always keep in mind?

23. What three words would you say best describe who you tried to be in life? How would you like to be remembered?

24. What do you think your children and grandchildren should focus on professionally?

25. What have you learned about people in life?

26. What do you think the world needs more of right now?

27. What do you believe people want the most in life?

28. What were the three best decisions you ever made?

29. What are you most proud of?

30. What were five of the most memorable moments of your life?

31. What message would you like to share with your family?

32. What are you most thankful for?

These questions can reveal a wealth of valuable life lessons – family treasures to discuss and share with generations to come. But having this conversation is just a start. To preserve and protect your family assets and other things of value, you should create a comprehensive estate plan that will safeguard what you value most. And, we include a recorded Family Wealth Legacy Interview, which becomes a priceless family legacy piece for your loved ones, with every estate plan we create. Because we’ve discovered that estate planning is really a misnomer; when done right, it’s Life and Legacy Planning — planning for a life you love and a legacy worth leaving.

As your Personal Family Lawyer®, we can guide you to create a comprehensive estate plan — which we prefer to call and see as a Life and Legacy Plan because it’s about so much more than just your “estate” —  that protects and preserves your most valuable assets. Before the session, we’ll send you a Family Wealth Inventory and Assessment to complete that will get you thinking about what you own, what matters most to you, and what you want to leave behind. Contact us today to schedule your Family Wealth Planning Session.

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 may be wondering why so many business owners choose January 1 as the start date for their company. Surely, it’s not because everyone has the same New Year’s resolution, right? 

The fact is, there are a number of distinct advantages to launching your Limited Liability Company (LLC) at the beginning of the new year, rather than during the middle or end of the year. And the good news is that in most states you don’t have to wait until the new year to actually file your paperwork to create your entity. 

In fact, one of the best times of the year to start the process of creating your new company is at the end of the previous year, which happens to be right now. This is made possible by what’s known as delayed effective filing. Here we’ll explain how such a filing works, and outline some of the key benefits of setting your entity’s launch date for the start of the new year.  

How Delayed Effective Filing Works

When you file to set up an LLC, the approval process normally begins right after you submit the paperwork. However, the effective date of incorporation, or the official start date of your business, can be difficult to predict. Often, this depends on state processing times, which can take anywhere from a few days to several weeks to process.

However, with a delayed effective filing, you gain control over the date when your LLC formally comes into existence. And you can file the paperwork weeks or even months in advance of that official start date and not have to wait until the new year.

Here’s how it works: To register your new company with the state, you must file articles of organization to set up an LLC within the state in which you plan to do business. When you file this document, you’ll typically be given the choice of whether the state should approve your entity when they receive the document or at a future date specified by you. 

To have your LLC start in the new year, you simply designate your company’s effective start date as of January 1, 2022 (or any other date) within your articles of organization. When the state receives the filing, it will be processed in the order it was received. This secures the exact date you want your company to officially start and minimizes the chance of a bureaucratic delay that you would encounter if you wait until the new year to file.

While filing these documents is relatively simple, mistakes or omissions can result in a delay of the documents getting processed and even additional fees. Moreover, a small handful of states do not allow businesses to use future effective start dates, so if you live in one of those states, this process won’t be available to you.

For these reasons, you should consult with us, your Family Business Lawyer™ to find out the laws in our state and enlist our support in creating and filing these documents for you to ensure everything is done correctly.

In addition to having control over your company’s official start date, choosing a delayed effective start date for the new year provides a number of additional benefits, including the following:

Streamline Tax Filing and Bookkeeping
Forming an LLC with a January start date offers you a clean state when it comes to bookkeeping and taxes. Your company can start earning revenue and tracking expenses in the new year, without the hassle of keeping your books for just a few weeks or months at the end of the year.

Plus, your first tax returns generally aren’t due until the year following your entity’s formation. By choosing a start date in January, you have more than a year to prepare and file your company’s taxes. On the other hand, if you form your entity in December, your company’s tax return is due within just a few months.

Simplify Administrative Compliance

Once formed, LLCs have to adhere to a number of administrative formalities in order to remain in compliance with state law and maintain the personal liability protection offered by the entity structure. If you fail to adhere to such formalities, a court could remove the protective barrier shielding your personal assets, known as “piercing the veil,” leaving you personally liable to creditors in the event of a judgment.

Although the formalities required vary depending on the state, some of the most common requirements typically include filing an annual report and paying filing fees. In most states, annual reports typically are not due until the year following business formation.

As with filing your tax returns, by choosing a January start date, you can avoid having to file your annual report within a few months of opening your doors. Along those same lines, if you file your LLC formation paperwork in late 2021, but request an effective date in January 2022, you will only have to pay a filing fee for 2021, rather than for both years.

Beat The Rush
Filing early can also help you get your company’s paperwork processed more quickly. January is usually the busiest time of the year for processing business applications at many Secretary of State offices, so if you want your LLC’s official launch to be in January, it makes sense to file at the end of the prior year with a delayed effective date. 

Typically, the earlier you file, the faster you’ll get your LLC’s paperwork processed. If you wait until January to file, it might take longer for the Secretary of State to process the paperwork—sometimes between 30 to 60 days—and you may not get the effective start date you want.

Don’t Go It Alone

Filing your initial paperwork and getting your LLC launched at the most advantageous time is an important first step, but it’s just the start. There are a number of additional steps involved with getting your LLC set up and maintained properly, and these tasks are far too important for you to try to handle on your own. From creating an effective operating agreement and holding regular member meetings to keeping detailed meeting minutes, there are numerous other responsibilities that come with running a successful LLC. 

The good news is that as your Family Business Lawyer™ we specialize in assisting business owners with all of these tasks. In fact, we offer specially designed maintenance packages to ensure your LLC meets all of its initial and ongoing legal requirements, so you have the maximum liability protection for your personal assets and your business is able to reach its true potential.  

Furthermore, in addition to setting up and maintaining your LLC, as your Family Business Lawyer™ we will help you build an unshakable legal, insurance, financial, and tax (LIFT) foundation for your business, to ensure your company is positioned properly for rapid, sustainable growth. We will support you in handling these tedious yet highly important parts of running your operation, so you can devote all of your energy and passion to growing your business into something truly meaningful for yourself, your clients, and your family.

Contact us, your Family Business Lawyer™ to learn more.

This article is a service 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 are like many homeowners, your home is likely your family’s most valuable and treasured asset. In light of this, you want to plan wisely to ensure your home will pass to your heirs in the most efficient and safe manner possible when you die or in the event you become incapacitated by illness or injury. 

Indeed, proper estate planning is as much a part of responsible homeownership as having homeowners insurance or keeping your home’s roof well maintained. When it comes to including your home in your estate plan, you have a variety of different planning vehicles to choose from, but for a variety of different reasons, putting your home in a trust is often the smartest choice. 

Although you should consult with us your Personal Family Lawyer® to identify the best estate planning strategies for your particular circumstances, in this two-part series we’ll discuss how trusts work (both revocable and irrevocable), and then outline the most common advantages of using a trust to pass your home to your loved ones compared to other planning strategies.

What Is A Trust?

In simplest terms, a trust is an agreement between the “Grantor” (the person who puts assets into the trust) and the “Trustee” (the person who agrees to hold those assets) to hold title to assets for the benefit of the “Beneficiary.” Now, when the trust is a Revocable Living Trust, this agreement is typically made between YOU as the Grantor, and YOU as the Trustee, for the benefit of YOU as the beneficiary.

Why would you want to make an agreement with yourself, to hold title to assets for yourself, for the benefit of yourself? Well, it’s because by doing so you remove those assets from the jurisdiction of the court in the event you become incapacitated or when you die, and instead, you give the power to transfer those assets to your successor Trustee to handle without government or court intervention and keep it all totally private. This saves your family significant time, money, and headache.

Types of Trusts

While there are numerous different types of trusts available, when it comes to passing your home to your heirs, the two most commonly used trusts are a revocable living trust and an irrevocable trust. 

Revocable Living Trust

When using a revocable living trust, or living trust, you are free to change the trust’s terms or even terminate the trust completely at any point while you are living, thus the term “living” trust. You typically act as your own trustee during your lifetime, and then you name someone (and ideally more than one someone in succession) as a successor trustee to take over management of the trust when you die or in the event of your incapacity.

At that point, your successor trustee will be responsible for managing the assets, and eventually distributing the trust assets to your chosen beneficiaries according to the instructions contained within the trust’s terms. Because you remain in control of the assets held by a living trust, the assets are still considered part of your estate for estate tax purposes, and assets held in a living trust are not protected from your creditors or lawsuits during your lifetime. This is a very important and often misunderstood point. 

A revocable living trust does not protect your assets from creditors or lawsuits, and it has no impact on your income taxes. That said, as long as the assets are held by a living trust, they can be protected from your beneficiaries’ creditors, lawsuits, and even a divorce settlement. More on this below.

The key benefit of a living trust is to pass your assets (including, and especially your home) without any need for court or government intervention, and to ensure your home (and other assets) pass in the way you want, to the people you want. 

Irrevocable Trust

Unlike a revocable living trust, an irrevocable trust is (as the name implies), irrevocable. This means that the terms of the trust 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 the assets, and the trustee you have named 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 they typically won’t be subject to estate taxes upon your death, and they eventually will not be vulnerable to creditors or lawsuits, as long as the trust is properly constructed.

Although avoiding estate taxes and gaining protection from creditors and lawsuits may sound like a huge benefit, irrevocable trusts come with some serious restrictions and can be quite complex to set up. Because you no longer own the assets held in an irrevocable trust and generally cannot change the trust terms or terminate the trust once it’s been executed, putting your home in this type of trust should only be done with very clear and specific legal guidance by a lawyer who specializes in asset protection.

In light of these factors, if you are looking to set up an irrevocable trust in order to qualify for Medicaid, lower your estate tax liability, or for some other reason, meet with us to discuss your options.

Putting Your Home Into A Trust

For a trust to function properly, it’s not enough to simply list the assets you want the trust to cover. When you create your trust, you must also transfer the legal title of your home and any other assets you want held by the trust from your name into the name of the trust. Retitling assets in this manner is known as “funding” your trust.

Funding your trust properly is extremely important because if an asset, such as your home, hasn’t been properly funded to the trust, the trust won’t work, and your family will have to go to court in order to take over ownership of the property. Given this, it’s critical to work with us, your Personal Family Lawyer® to ensure your trust works as intended. 

While many lawyers will create a trust for you, few will ensure your assets are properly funded. As your Personal Family Lawyer®, we will not only make sure your home and other assets are properly titled when you initially create your trust, we will also ensure that any new assets you acquire over the course of your life are inventoried and properly funded to your trust. This will keep your assets from being lost, as well as prevent your family from being inadvertently forced into court because your plan was never fully completed.

Next week, in part two, we’ll continue with our discussion of the benefits of putting your family home in a trust.

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.

NFTs, or “non-fungible tokens,” are the latest sensation in the cryptocurrency universe, or as we like to call it the “Cryptoverse.” And if you haven’t heard about NFTs yet, now is a great time to learn because they are likely to be a big part of our collective future. 

So what is an NFT?

In the most basic terms, an NFT is a cryptographic token that exists on a blockchain and is used to establish proof of ownership of digital artwork, videos, GIFs, collectibles, and other digital assets. While NFTs use the same blockchain technology that underpins cryptocurrency, NFTs themselves are not a traditional currency, though they can operate similarly to currency. Some people call them JPGs because they are literally graphic images, but they represent much more than just a simple JPG file.

NFTs have been generating a major buzz in the tech and art sectors for years now, but after Christie’s auction house sold a single NFT collage from the digital artist Beeple for a staggering $69.3 million this March, NFTs have begun making mainstream headlines.

Since then, a number of other big-money NFT sales have made the news, including Twitter co-founder Jack Dorsey’s first-ever tweet made into an NFT, which sold for $2.9 million; a video clip of a LeBron James slam dunk sold for more than $200,000; and a GIF of Nyan Cat (a flying cat with a Pop Tart for a body) went for $600,000.

At this point, you might be wondering why anyone would spend such vast sums on digital images that you can download from the Internet for free. Here, we’ll answer that question and explain the basics of what you need to know about NFTs, including how they work; what makes them so valuable; where you can get them; and why they have the potential to revolutionize the way in which we own, exchange, and consume both digital and real-world assets—along with how to ensure your estate plan covers them if you happen to own one.

What’s the Difference Between Cryptocurrency and NFTs?

While NFTs and cryptocurrencies like Bitcoin and Ethereum are all part of the Cryptoverse, cryptocurrency is a “fungible” asset, meaning it can be traded or exchanged with another identical unit of the same value. For example, one Bitcoin is equal in value and can be exchanged for another Bitcoin, just like one dollar is always worth the same as another dollar. 

However, NFTs are “non-fungible,” meaning each NFT is totally unique and not mutually interchangeable. Given this, no two NFTs are ever the same, and they cannot be replicated. Think of it in terms of traditional artwork: anyone can buy a Mona Lisa print, but only one person can own the original artwork. 

How Did NFTs Get Started?

Although primitive versions of NFTs, such as Colored Coins, have existed since 2012, the first NFTs to really become popular were CryptoKitties. Launched in 2017, CryptoKitties is a virtual game that allows players to adopt, raise, and trade virtual cats on the Ethereum blockchain. 

Each CryptoKitty has unique attributes, and they can even reproduce to generate entirely new offspring, which have different attributes and valuations compared to their parent kitties. CryptoKitties became immensely popular, and within a few weeks, fans of the virtual cats had spent $20 million worth of ETH (Ethereum token) on the game, with some virtual cats selling for over $100,000.

How Do NFTs Work?

As with cryptocurrency, a record of who owns each NFT is stored on a blockchain ledger.  The vast majority of NFTs reside on the Ethereum blockchain, though other blockchains like Bitcoin Cash and FLOW also support them. Whenever a new NFT transaction is verified, it’s added to the blockchain, where it cannot be changed, replicated, or forged.

The code embedded in NFTs can include specific information about the asset and its creator. For example, an artist can sign their digital artwork by including their signature in the NFT’s metadata. The unique information related to an NFT is stored in what’s known as a smart contract, which is one of the most unique and powerful features underpinning NFT technology. 

A smart contract is a digital contract in which the terms of the agreement are set in code. A smart contract can be programmed to execute a specific action when a set of predefined conditions are fulfilled. For example, a smart contact can be programmed to make royalty payments to an NFT’s creator whenever their digital art is sold to a new owner.

Why Do NFTs Have Value? 

Traditional pieces of art like paintings are valuable precisely because they are one of a kind, yet digital art can be easily duplicated an infinite number of times. With NFTs, digital art and other assets can be tokenized, which creates a digital certificate of ownership that allows the buyer to own the original item. 

The value comes from both the scarcity and collectibility of the asset, as well as its potential for future sale. NFTs work like any other speculative asset, in that you buy it and hope that the asset’s value increases over time, so you can sell it for a profit. 

NFTs typically increase in value for three reasons: 1) they are part of a series that gives you access to an exclusive club or community, 2) if they include licensable or brandable content that could be used to increase the value of the intellectual property, and 3) they can be used to “flex” or signal for status purposes (aka bragging rights).

Essentially, NFTs transform, or “tokenize,” digital art, videos, and other collectibles into one-of-a-kind, verifiable assets, which allows them to be easily bought, sold, or traded on the blockchain. NFTs are basically like any other collector’s item, such as a painting or a vintage baseball trading card, but instead of buying a physical item, you’re instead paying for a digital file and proof that you own the original copy. 

Yet it’s the intellectual property (IP) aspect of NFTs that make them most interesting. Once you own an NFT, you have ownership of the IP representing the content of the NFT. As the owner of this now licensable content, you can use the content for branding, or you can even develop an entire persona or creative pursuit around your NFT.

You can see this in action with some of the owners of NFTs from the Bored Ape Yacht Club (#BAYC) NFT Collection. Universal Music Group bought 4 Bored Apes, and has begun branding them as the newest band they’ll promote, called KINGSHIP.  KINGSHIP will release music and products, building a fan base around this collection of four digital apes.

Building upon the success of the BAYC series of NFTs (a collection of 107 Bored Apes recently sold for $24.4M in a Sotheby’s auction), other creators have begun to release sets of 10,000 NFTs with hopes of mimicking the success of the BAYC series.

What Else Are NFTs Being Used For?

Currently, the majority of the NFT market is focused on collectibles, such as digital artwork, GIFs, virtual trading cards, videos of sports highlights, digital music, virtual avatars, and video game skins. However, NFTs are now even attracting the attention of major brands, and we’re seeing a number of big-name companies capitalizing on the trend.

For example, Nike has patented its own blockchain-based NFT sneakers, which it calls CryptoKicks. Marvel Comics has released its own NFT collectibles based on Spider Man and Captain America. Even Taco Bell has jumped on the NFT bandwagon with a collection of taco-themed images and GIFs.

In collaboration with the NFT marketplace VeVe, Disney released its Golden Moments NFT collection, which features digital statues inspired by some of the most beloved characters and moments from Disney, Pixar, Marvel, Star Wars, and other Disney franchises. And in September 2021, Hollywood got in on the action, when the film Zero Contact became the first feature-length movie to be released as an NFT.

Musicians have also been releasing NFT-based songs, albums, and other music-related items with major success. For example, pop stars like Kings of Leon, Grimes, and Steve Aoki have all created NFTs. Moreover, Rolling Stone reports that NFTs could revolutionize how musicians connect and market their music to fans by including not only songs and albums as NFTs, but also videos, artwork, 3D avatars, wearable accessories, and even tickets that give fans a chance to have a virtual meet-and-greet with the artist.

How Can You Buy An NFT?

If you are looking to get in on the NFT Cryptoverse, you’ll need to access the proper technology—and load up on cryptocurrency to fund your purchase. 

First, you’ll need to get a digital wallet that allows you to store your crypto and NFTs. Metamask is a popular option because it connects directly to marketplace platforms, such as OpenSea, where you can buy and display your NFTs. 

Then you’ll need to purchase cryptocurrency to make the purchase, and since the most popular blockchain for NFTs is currently Ethereum, your best bet is to get their version of digital coins, which are called ether (ETH).  

From there, you’ll want to visit the NFT marketplace where the NFTs are sold. Some of the most popular NFT marketplaces include OpenSea, Mintable, Nifty Gateway, Axie Marketplace, and Rarible. 

Additionally, there are also niche marketplaces for more specific types of NFTs, including NBA Top Shot for basketball video highlights; Valuables auctions off famous autographed Tweets like Dorsey’s; and Autograph, which is a platform launched by NFL superstar Tom Brady that offers a variety of NFT collectibles from sports icons like Tiger Woods, Simone Biles, Wayne Gretzky, and Tony Hawk.

Due to the high demand for certain NFTs, the tokens are often released in batches, known as “drops,” much like when batches of concert tickets are released at specific times. As with any other popular event, there’s often a rush of fans eager to snatch up the most in-demand NFTs when the drop starts, so you’ll need to pre-register and have your wallet full of crypto and ready to buy.

What Are the Future Potential For NFTs?

While buying a virtual cat may sound like an extremely trivial venture, the future potential for NFTs and how they can be used has more serious implications, especially in business and finance. For example, NFTs have already been used in a real estate transaction, in which a millennial from Silicon Valley purchased an NFT that gave him ownership of a studio apartment and a piece of art by the famous local street artist Chizz.

By allowing for the digital representation of physical assets, NFTs offer the potential to reinvent the way we own, exchange, and consume just about any asset. Perhaps the most obvious benefit of NFTs is increased market efficiency. The conversion of a physical asset into a digital asset streamlines the process of identifying IP, removes intermediaries, and creates entirely new markets.

Obviously, the digital representation of physical assets is not exactly new or novel. However, when you combine this concept with the benefits of the trustworthy and tamper-proof nature of blockchain-powered smart contracts, NFTs stand to become a potent force for change.

While many see NFTs as merely another passing fad and expect the NFT bubble to burst any day now, skeptics said exactly the same thing about Bitcoin. With this in mind, we remain cautiously optimistic about the future of NFTs, and only time will tell how this new technology pans out as the future unfolds.

Safeguard Your Digital Assets

As with cryptocurrency, if you currently own or plan to acquire NFTs, the first and most important step in securing these assets is to let your family, trusted partners, and of course, your lawyer, know you own it. If no one knows you own these assets, they will be lost forever when you die. You can document ownership of these assets by including your NFTs and cryptocurrency in your Family Wealth Inventory (a key component of our Life & Legacy Planning Process) listing all of your assets and liabilities.

Along with the amount of cryptocurrency and number of NFTs you own, you should also include detailed instructions about where these assets are located and how to find the instructions to access them, including the encrypted passcodes needed to unlock your account. Just make sure to keep these instructions in an absolutely secure location because anyone who has them can take your crypto and NFTs. As part of our Life & Legacy Planning Process, we’ll work with you to ensure that your cryptocurrency and NFTs are properly documented, as well as secure.

As technology continues to evolve and our lives become increasingly digitized, it’s vital that you adapt your estate planning strategies to keep pace with these changes. As your Personal Family Lawyer®, we can assist you in updating your estate plan to include not only your traditional wealth and property but all of your digital assets, as well. 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.

When you first realize that your biggest personal and business expense—bar none—is taxes, it can come as quite a shock. Seeing so much of your hard-earned money wind up in the government’s hands can feel like a shakedown. That said, focusing a relatively small amount of time and effort into strategically reducing your taxes can pay major dividends.

Some people resist implementing creative tax strategies because they’re worried it’s going to get them in trouble with the IRS. However, as long as you do things properly, there’s absolutely nothing illegal—or even risky—about strategizing to pay the least amount of taxes possible.

On the other hand, it is illegal to evade taxes. As the late Martin Ginsburg, Georgetown Law professor and husband of the recently deceased Supreme Court Justice Ruth Bader Ginsburg, used to say, “Pigs get fat; hogs get slaughtered.” In other words, you want to be smart when it comes to saving on your taxes, but not greedy.

As we head into the final weeks of 2021, we’re entering into the most critical time of the year for your company’s tax strategy, and here we’ll outline how you can get fat, without getting slaughtered.

Prepare Your Foundation

To save on your 2021 taxes, your first step should be either building or rekindling your relationship with your team of financial professionals. These are the individuals who will support you in establishing the foundation for developing and implementing your tax-saving strategies. At the very least, this team should include a Family Business Lawyer™, a bookkeeper/financial manager, and a tax advisor, which should be either a Certified Public Accountant (CPA) or an Enrolled Agent (EA).

If your bookkeeper’s job is more about data entry than financial management, you should look for someone new—or quickly get your current team member trained and up to speed. An effective bookkeeper will be managing your books on a week-to-week basis (if not daily, depending on your business). Note I said “week-to-week,” not just “month-to-month” or “quarter-to-quarter.”

Your bookkeeper’s primary responsibilities should include daily/weekly cash-flow management, monthly review of reports and categorization of expenses, and quarterly updates of your forecast and projections. Again, if your bookkeeper isn’t providing these types of services for you, your business is missing an essential part of its financial foundation. 

Outside of your bookkeeper, your tax advisor is the person who actually files your taxes. Ideally, you should meet with your tax advisor at least twice a year: once in May/June (after tax season) and once approaching year’s end in October/November. Obviously, it’s already quite late in the year to start your year-end tax planning, but you still have time if you act immediately.

The May/June meeting is a general catch-up, mid-year review that lets your tax advisor know what you’re financially on track to do for the year. Based on that information, your advisor can consider the most effective tax strategies for the coming year.

When you meet again in October/November, that’s when you’ll really get down to business. This is when you’ll project cash flow through the end of the year and get a tax estimate using a couple different assumptions, both with and without tax-saving strategies included.

If your tax advisor cannot provide this level of service and is merely a tax filer, it’s time to get a new advisor. As your Family Business Lawyer™, we can help you find a tax professional that offers these kinds of services, so contact us today if you need to find a creative tax advisor who’s capable of handling such matters.

Additionally, as a Family Business Lawyer™ we meet regularly with many of our clients and their team of financial professionals throughout the year to ensure your financial and tax-saving strategies are supported with the legal implementation necessary to tie it all together and ensure it works properly. To find out if we are available to support you in this way, contact us today.

Create Your Tax Projections

Once you’ve got your LIFT (legal, insurance, financial, and tax) team in place, you should meet monthly with your bookkeeper—within the first 10 days of the month—to review your profit and loss statement (P&L). You should review the categorization of your income and expenses each month, rather than scrambling to get your receipts to your CPA in February or March just before taxes are due. Your bookkeeper should have your books reconciled, including all bank accounts and credit card expenses, prior to this meeting.

To be most effective, your bookkeeper needs to understand all of the ways you earn revenue and know the expenses required to fulfill the delivery of your product and/or service. Using this knowledge, your bookkeeper should update a daily forecast each week, and produce your monthly P&L, so you can stay regularly apprised of your company’s financial health and make strategic decisions on that basis.

Each month, when you review your P&L, you’re looking for variances from the prior month as well as expenses that are improperly categorized or not categorized at all. It’s crucial to properly categorize all expenses, so you can measure trends in your business and write off as many deductions as possible against your taxable income.

In late October or early November, your bookkeeper should send a year-to-date profit and loss (P&L) statement to your tax advisor, along with projections of income and expenses for the remainder of the year. Your tax advisor will then use that data to create tax projections based on your current earnings versus expenses and how much you expect to bring in over the remainder of the year.

Using these projections, you can put strategies in place to minimize your tax liability. That said, most of these strategies need to be in place BEFORE the end of the year, so ideally you should make sure you’ve started this process by the final weeks of November.

If your tax projections indicate that you’re going to owe money, meet with your CPA and us, your Family Business Lawyer™ to strategize the best year-end tax strategies to implement. And if you haven’t run your tax projections yet because you don’t have a qualified bookkeeper or tax advisor, we can refer you to the professionals we trust most.

Put Your Strategies Into Play

Once you have your tax projections ready, you want to look at whether you’re likely to be in a higher tax bracket this year compared with future years. Determining this will allow you to save on your taxes by managing when you receive your year-end income and pay your year-end expenses.

After reviewing that data, if you’re likely to be in a higher tax bracket this year than in the future, it makes sense to push taxes off into the year(s) when your tax rate will be lower. Even if your tax bracket will be higher in future years, it still might be worthwhile to push your taxes off into the future. This way, you’ll be able to use those funds, which would otherwise be in the hands of the government.

This is the question to ask yourself: Can I make more money with those funds now than I’d pay in higher taxes by pushing those tax payments off until later?

If you can make more money now, you can decrease this year’s taxes by pushing income into the future and accelerating expenses that you’d otherwise pay next year into this year, or even use additional available cash to fund tax-deferred retirement plans like a 401(k) or IRA.

If you’d prefer to pay taxes this year because you’re currently in a significantly lower tax bracket than you are likely to be in future years—or you have losses that will be expiring to offset your income—you should increase this year’s income. One way you can generate more revenue now is by offering year-end discounts on products and services that may not need to be delivered until next year.

Plan Ahead To Maximize Savings

Managing when your company receives income and pays expenses in this manner can save you big money on your taxes, not just for 2021, but every year. And this type of creative tax planning is just one small part of an effective tax-saving strategy.

There are countless other ways you can strategize to keep more of the money you earn working for you, rather than giving it to the government. To learn about all of the potential ways you can save on your 2021 taxes and beyond, contact us, your Family Business Lawyer™ today.

This article is a service 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. 

Some people assume that because they’ve named a specific heir as the beneficiary of their IRA in their will or trust that there’s no need to list the same person again as beneficiary in their IRA paperwork. Because of this, they often leave the IRA beneficiary form blank or list “my estate” as the beneficiary.

But this is a major mistake—and one that can lead to serious complications and expense.

IRAs aren’t like other estate assets
First off, your IRA is treated differently than other assets, such as a car or house, in that the person you name on your IRA’s beneficiary form is the one who will inherit the account’s funds, even if a different person is named in your will or in a trust. Your IRA beneficiary designation controls who gets the funds, no matter what you may indicate elsewhere.

Given this, you must ensure your IRA’s beneficiary designation form is up to date and lists either the name of the person you want to inherit your IRA, or the name of the trustee of your trust, if you want it to go to a revocable living trust or special IRA trust you’ve prepared. For example, if you listed an ex-spouse as the beneficiary of your IRA and forget to change it to your current spouse, your ex will get the funds when you die, even if your current spouse is listed as the beneficiary in your will.

Probate problems
Moreover, not naming a beneficiary, or naming your “estate” in the IRA’s beneficiary designation form, means your IRA account will be subject to the court process called probate. Probate costs unnecessary time and money and guarantees your family will get stuck in court.

When you name your desired heir on the IRA beneficiary form, those funds will be available almost immediately to the named beneficiary following your death, and the money will be protected from creditors. But if your beneficiary has to go through probate to claim the funds, he or she might have to wait months, or even years, for probate to be finalized.

Plus, your heir may also be on the hook for attorney and executor fees, as well as potential liabilities from creditor claims, associated with probate, thereby reducing the IRA’s total value.

Reduced growth and tax savings
Another big problem caused by naming your estate in the IRA beneficiary designation or forgetting to name anyone at all is that your heir will lose out on an important opportunity for tax savings and growth of the funds. This is because the IRS calculates how the IRA’s funds will be dispersed and taxed based on the owner’s life expectancy. Since your estate is not a human, it’s ineligible for a valuable tax-savings option known as the “stretch provision” that would be available had you named the appropriate beneficiary.

Typically, when an individual is named as the IRA’s beneficiary, he or she can choose to take only the required minimum distributions over the course of his or her life expectancy. “Stretching” out the payments in this way allows for much more tax-deferred growth of the IRA’s invested funds and minimizes the amount of income tax due when withdrawals are made. 

However, if the IRA’s beneficiary designation lists “my estate” or is left blank, the option to stretch out payments is no longer available. In such cases, if you die before April 1st of the year you reach 70 ½ years old (the required beginning date for distributions), your estate will have to pay out all of the IRA’s funds within five years of your death. If you die after age 70 1/2, the estate will have to make distributions over your remaining life expectancy.

This means the beneficiary who eventually gets your IRA funds from your estate will have to take the funds sooner—and pay the deferred taxes upon distribution. This limits their opportunity for additional tax-deferred growth of the account and requires him or her to pay a potentially hefty income tax bill.

A simple fix
Fortunately, preventing these complications is super easy—just be sure to name your chosen heir as beneficiary in your IRA paperwork (along with a couple alternate beneficiaries). And remember to update the named beneficiary if your life circumstances change, such as after a death or divorce.

With us as your Personal Family Lawyer®, we can help you select the ideal beneficiary for your IRA and other estate assets. What’s more, we have systems in place that will ensure your designated beneficiary form is always up-to-date with the correct heir listed should your life circumstances dictate a change. Call 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.

Although paying taxes is a largely unavoidable part of running a business, you might be pleasantly surprised to learn that there is one common type of tax you can often avoid paying—capital gains taxes. That said, the only way you can avoid paying capital gains taxes (at least legally) is if you plan in advance.

Since we are only a few weeks away from the end of the year, it might seem like it’s too late to save on capital gains taxes in 2021, but you may still have time if you act immediately. And if it does end up being too late to avoid paying capital gains this year, at least you’ll be prepared for next year and beyond.

The first step in avoiding capital gains tax is understanding exactly how this tax works. With this in mind, here we’ll outline everything you should know about capital gains taxes, so you can put a plan in place to reduce and/or totally eliminate your tax liability on any ongoing or future sales of appreciated assets.

What Is Capital Gains Tax?

Generally speaking, you have a “capital gain” whenever you sell a capital asset for more money than you paid for it. In other words, a capital gain is the profit you make on the sale of a capital asset. Conversely, if you lose money on the sale of a capital asset, it’s considered a “capital loss.”

And while the term “capital asset” most often refers to real estate, stocks, bonds, and other types of securities, as the IRS points out below, just about any type of property you own can be considered a capital asset:

“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments,” according to the IRS Topic 409 Capital Gains and Losses.

Just like the federal government levies a tax on any income you earn during a given year, the IRS also expects a cut whenever you make a profit on the sale of a capital asset. This is where capital gains tax comes in: Capital gains tax is the federal tax you pay on the profit made from the sale of capital assets. 

Capital Assets

As noted earlier, just about anything you own can be considered a capital asset, even artwork, and jewelry. But in the majority of cases, capital assets are assets that you buy and sell as an investment. A few of the most common examples of a capital asset include:

• Stocks
• Bonds
• Real estate
• Businesses
• Jewelry
• Vehicles
• Collectibles

Exclusions To Capital Gains Tax
As a business owner, it’s important to note that not every capital asset you sell qualifies for capital gains tax. If your business sells products, your profits from these sales are considered—and taxed as—business income, not capital gains. This is because capital gains taxes are not intended to apply to the sale of assets in the normal course of a business’ operation. 

For example, if you are in the business of selling smartphones, the profits you make on the sale of smartphones are not subject to capital gains tax. Instead, your profits on the sale of your smartphones are taxed as ordinary business income.

Other assets that are excluded from the capital gains tax include certain “non-capital assets” which are often intangible assets, such as intellectual property. Specifically, the Tax Cuts and Jobs Act excludes patents, inventions, models, designs, and secret formulas sold after Dec. 31, 2017, from being treated as capital assets for capital-gains tax purposes. 

However, there are certain instances when the sale of intangible assets used in a business can be treated as either capital gains or ordinary income. Given this, always consult with us, your Family Business Lawyer™, and your certified public accountant (CPA) before you sell or license any intangible asset, especially intellectual property, such as copyrights, patents, and trademarks. 

Capital gains on the sale of a primary residence: Since a home is often one of the most valuable assets most families own, capital gains taxes on the sale of your primary residence are taxed differently from the sale of other real estate. Due to a special exclusion, as long as you have occupied the residence for at least two of the last five years, a single taxpayer can exclude up to $250,000 of the gain, while married taxpayers filing jointly can exclude up to $500,000 of the gain.

To be exempt, the home must be considered a primary residency based on IRS rules, and this exemption is only allowed once every two years. Capital gains on the sale of investment properties and other real estate are taxed at the normal short-term or long-term capital gains rates described below.

How The Capital Gains Tax Works

As noted earlier, the capital gains tax applies to profits you make on the sale of capital assets. When you are subject to the capital gains tax, the amount of tax you owe will be based on several factors, including the type of asset you sold, your overall income, how long you owned the asset, and how much money you made on the sale. 

Adjusted basis: The IRS uses what’s known as an “adjusted basis” to determine whether or not there’s been a capital gain on the sale of an asset. In most cases, the adjusted basis of an asset is simply the amount it costs you to purchase the asset.

Included in the basis are any additional expenses you incurred during the purchase or sale of the asset, such as title fees, transfer fees, commissions, shipping, and sales tax. Adding these expenses to the original purchase price of the asset results in a higher adjusted basis, reducing the amount of capital gains taxes owed at the time of sale.

Simply put, you have a capital gain—and will owe capital gains tax—if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. 

Taxes are due upon sale of the asset: It’s important to note that you only owe capital gains tax when you sell the asset. For example, if you own a share of stock and it increases in value while inside your portfolio, but you don’t sell it, you don’t owe any capital gains tax. But once you sell the stock, any profit you make on the sale must be reported as a capital gain on your tax return.

This factor makes the timing of your sale extremely important, as many of the strategies you have to avoid paying capital gains taxes can only be implemented before you sell the asset. Once you’ve sold the asset, your options for reducing capital gains tax become very limited. We’ll address this more below.

Short-Term vs. Long-Term Capital Gains Tax

In addition to the above factors, the amount of capital gains tax you owe also depends on how long you own the asset before selling it. The sale of assets you’ve owned for a year or less are considered short-term capital gains or losses, while a long-term capital gain or loss occurs when you sell an asset after owning it for more than one year.

Again, the timing of the sale is extremely important, since short-term capital gains are typically taxed at significantly higher rates than long-term capital gains. The IRS makes this difference to discourage short-term trading and encourage long-term investment. Note: there are a few exceptions to the one-year rule, but in general, you’ll owe far less capital gains taxes by holding onto an asset for longer than a year before selling it.

Capital Gains Rates for 2021 

The following are the capital gains tax rates for 2021:

Short-term capital gains tax rate: Short-term capital gains are taxed at ordinary income tax rates. For 2021, the ordinary income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on your taxable income and tax filing status, as illustrated below:

Tax Rate	Income (single filers)	Income (Married filing jointly)
10%	$9,950	$19,900
12%	$9,950	$19,900
22%	$40,525	$81,050
24%	$86,375	$172,750
32%	$164,925	$329,850
35%	$209,425	$418,850
37%	$523,600	$628,300

Long-term capital gains tax rate: Long-term capital gains are taxed at basic capital gains tax rates. For 2021, those rates are 0%, 15%, and 20%, depending on your taxable income and tax filing status, as illustrated below. Note: since the lowest capital gains tax rate is 0%, in some cases—if your income is low enough—you may end up paying no capital gains tax at all.

Filing status	Income for 0% tax rate	Income for 15% tax rate	Income for 20% tax rate
Single	Up to $40,400	$40,401 – $445,850	$445,851+
Head of Household	Up to $54,100	$54,101 – $473,750	$473,751+
Married Filing Jointly	Up to $80,800	$80,801 – $501,600	$501,601+
Married Filing Separately	Up to $40,400	$40,401 – 250,800	$250,801+

Legislative update: In September 2021, the House Ways and Means Committee proposed an increase in the top capital gains tax rate from its current 20% to 25%. If the provision passes as currently written, it will apply retroactively to transactions made after Sept. 13, 2021. Sales that are finalized prior to that date will be eligible for the current tax rates up to 20%, while sales that occur after that date will be subject to the new tax rates up to 25%. However, as of mid-November 2021, none of the proposed increases have been passed into law. Stay tuned to this blog for updates on the proposed legislation.

How To Avoid Capital Gains Taxes

As we mentioned at the beginning of this article, with the proper pre-planning, you can often significantly reduce or totally eliminate the amount of capital gains taxes you owe on the sale of appreciated assets, including the sale of your business. While many of the strategies for reducing capital gains taxes are quite complex and will require the guidance and support of your Family Business Lawyer™ and CPA, here are a few of the most simple options for avoiding capital gains tax.

1. Don’t wait until the sale to act: The most important factor in avoiding capital gains tax is to plan ahead, and take action before you make the sale. This point cannot be stressed enough, as most of the strategies for avoiding capital gains tax are only available if they are implemented prior to the asset being sold. Once the sale happens, it’s too late, and you’ll be left with few tax-saving options, most of which will merely reduce the amount of capital gains tax you owe, rather than completely eliminating it.

2. Hold onto the asset: Given the big difference between short-term capital gains tax rates and long-term rates, you should obviously do your best to hold onto the asset for at least one year. In some cases, if your income is low enough, you can qualify for a rate of 0% on the sale. And by living in your home for at least two years before you sell it, you can take advantage of the hefty primary residence exemption of $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly.

3. Take advantage of tax-deferred retirement plans: By investing in tax-deferred retirement plans, such as a 401(k), 403(b), or IRAs, your money can grow without being subject to immediate taxation. Plus, you can also buy and sell other investments within your retirement account, and those transactions won’t trigger capital gains tax, either.

4. Offset capital gains with capital losses: If you experience a capital loss on one of your investments, you can use that loss to offset your capital gains on other investments, along with a portion of your ordinary income. Specifically, a married couple filing jointly can use up to $3,000 per year in realized capital losses to offset capital gains tax or taxes owed on ordinary income. Any amount left over after that can be carried over to future years.

5. Sell when your income is lowest: Since the amount of capital gains tax you owe depends on your overall income, it makes sense to wait and sell your investments and other appreciated assets when your income is at its lowest. And since you typically have a higher income while you are working, you may want to wait until you retire to sell certain assets. 

Enlist Our Support To Maximize Your Tax Savings
The above five strategies are just a few of the numerous options available to avoid capital gains tax. However, many of the alternative options are complex and will require the support of us, your Family Business Lawyer™ and CPA working together to strategize and implement on your behalf. But if you are going to have a big tax bill, it’s likely worth it. And it’s imperative that you take action as quickly as possible to ensure that whatever actions need to be taken can be planned and executed before you make the sale—and before the end of the year.

If you are planning to sell any assets this year that will result in significant capital gains or loss, don’t wait—contact us, your Family Business Lawyer™ immediately to discuss your options. Capital gains tax is one of the few taxes that you can avoid paying, but only if you plan ahead and plan wisely. Contact us today to schedule your appointment.

This article is a service 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. 

Our nation’s population is aging at a faster rate than ever before, and collectively we are living much longer than in the past. In fact, by 2034, seniors (age 65 and older) will outnumber children under age 18 for the first time in U.S. history, according to Census Bureau projections.

With the booming aging population, more and more seniors will require long-term healthcare services, whether at home, in an assisted living facility, or in a nursing home. However, such long-term care can be extremely expensive, especially when it’s needed for extended periods.  

Moreover, many people mistakenly believe that their health insurance or the government will pay for their long-term care needs. But the fact is, traditional health insurance doesn’t cover long-term care. And though Medicare does pay for some long-term care, it’s typically limited (covering a maximum of 100 days), difficult to qualify for, and requires you to deplete nearly all of your assets before being eligible (unless you use proactive planning to shield your assets, which we can support you with if that’s important to you and your family).

To address this gap in healthcare coverage, long-term care insurance was created. Since such insurance is fairly new, here we’ll answer some of the most frequently asked questions about these policies to help you determine whether you (or your loved ones) could benefit from investing in long-term care insurance coverage as part of your estate plan.

Q: What is long-term care?

A: Long-term care is a general term that describes the type of care or support you need when you are no longer able to handle activities of daily living (ADLs) on your own. ADLs include things, such as getting dressed, bathing, eating, and using the bathroom.

In some cases, long-term care might simply mean that you have someone assist you in your own home with getting ready in the morning and before bed at night. In other cases, long-term care might mean you move into a nursing home to recover from surgery or manage a chronic medical condition.

Some common activities of daily living (ADLs) include:

• Ambulating (walking or getting around)
• Feeding
• Bathing
• Dressing and grooming
• Using the restroom
• Continence management
• Getting in and out of bed or a chair

Q: What are the different types of long-term care?

A: Long-term care services typically fall into two categories: personal care and skilled care. Personal care, also known as custodial care, is for people who require assistance with non-medical activities, including the following: 

• ADLs such as dressing, grooming, bathing, and eating.
• Instrumental activities of daily living (IADLs), such as grocery shopping, meal prep, and laundry 
• Companionship
• Supervision
• Transportation

Skilled care, or skilled nursing care, is for people who require skilled medical care or rehabilitation services, including:

• Medication management
• Vital sign monitoring
• IV treatments or feedings
• Occupational, physical, and speech therapy
• Wound care
• Mobility assistance

Q: What is long-term care insurance?
A: First introduced as “nursing home insurance” in the 1980s, long-term care insurance is designed to cover the expenses related to your long-term care in the event you are no longer able to handle your own ADLs. 

These policies cover the cost of both personal care and skilled care services whenever and wherever you plan to receive care, whether in your own home, an assisted living facility, a nursing home, or a community care facility.  Some policies even cover modifications to make your home more accessible, such as adding wheelchair ramps or grab bars to your bathroom.

Q: How does long-term care insurance work?

A: Before your coverage kicks in, most policies require that you demonstrate you have lost the ability to engage in at least two or three ADLs. Most policies also have a deductible, or “elimination period,” which is a set number of days that must elapse between the time you become disabled (eligible for benefits) and the time your coverage kicks in.

Many policies offer a 90-day elimination period, but others can be longer, shorter, or even have no elimination period at all. Of course, the shorter the elimination period, the more expensive the premium. Additionally, long-term care policies typically come with a predetermined benefit period, which is the number of years of care it will pay for.

For example, a benefit period of three to five years is a quite common duration for such policies. Most policies also come with a cap on the dollar amount of coverage that will be paid for care on a daily basis, known as a Daily Benefit Amount.

Q: When should you purchase long-term care insurance?
A: Obviously, the younger and healthier you are when you buy the policy, the cheaper the premiums will be, so the sooner you invest in coverage, the better. In fact, most policies exclude certain pre-existing conditions, so if you wait until you become ill, it can be impossible to find coverage.

For example, if you have any of the following conditions, it generally disqualifies you from obtaining coverage:

• You already need help with ADLs
• You have AIDS or AIDS-Related Complex (ARC)
• You have Alzheimer’s Disease or any form of dementia or cognitive dysfunction
• You have a neurological disease, such as multiple sclerosis or Parkinson’s Disease
• You had a stroke within the past year to two years or have a history of strokes
• You have metastatic cancer
• You have kidney failure

According to the American Association for Long-Term Care Insurance (AALTCI), the best age to apply for coverage is before you reach your mid-50s. Beyond that age, your health is unlikely to improve significantly, so waiting longer will typically increase your premiums, or you may even become ineligible before acquiring a policy. 

Q: How do I purchase coverage?

A: If you are looking to purchase long-term care insurance, you should speak with multiple insurance providers and compare their benefits, care options, and premiums. Different companies may offer the same coverage and benefits, but they can vary dramatically in price. Always ask about the insurance company’s history of rate increases, including the amount of the most recent increase.

For the best chances of success when shopping for a policy, get help from a fee-only planner, who is not compensated based on your choice of coverage. Or, if you are working with a commissioned agent, consult with your Personal Family Lawyer®, who has experience in elder law, and we can review the policy terms to ensure it’s a good fit for you before you sign on the dotted line.

Q: What are the most important elements in a long-term care policy?

A: When meeting with an insurance provider, you must get answers to the following three questions about your policy: 

1. How long is the elimination period before the policy begins paying benefits?
2. What capacities, or ADLs, must you lose before coverage kicks in?
3. How many years of care are covered?

These are the most important elements in a long-term care policy, and as such, they will make the biggest difference in the quality of coverage and the amount of your premiums. 

Q: Can I buy coverage for my parents?

A: Yes, you can buy long-term care insurance for your parents. You will pay for the policy, and then have your parent(s) listed as the beneficiary. If you know you are going to be the primary caregiver for your aging parents, investing in a policy for them can help offset the expenses related to their long-term care. 

Furthermore, buying long-term care insurance should always be a family affair, because you are going to need your family members to advocate for you and file a claim for the policy when you need to use it. Given this, make sure your family knows what kind of policy you have, who your agent is, and how to make a claim.

What’s more, you should pre-authorize the right person to speak to the insurance company on your behalf, and not just rely on a medical power of attorney. That said, you should definitely have a well-drafted, updated, and regularly reviewed medical power of attorney on file as well.

Q: Once I have a policy, how often should I review my coverage?

A: Once you are in your 50s, your long-term care policy should be reviewed annually to evaluate new insurance products on the market and update your policy based on your changing needs. Whatever you do, once you have a policy in place, make sure you don’t miss a premium payment. If you fail to pay, even for a short period of time, you’ll lose all of the money you invested and will have no access to the benefits when you need them.

A Key Component In Your Estate Plan

Meet with your Personal Family Lawyer® for guidance and support in finding the right long-term care insurance policy for your particular situation. In addition to life insurance, a long-term care insurance policy is a key component in your estate plan. When combined with the right estate planning strategies, you can rest assured that your loved ones will be protected and provided for no matter what happens to you.

As your Personal Family Lawyer®, we view estate planning as much more than just planning for death, which is why we call it Life & Legacy Planning. Ultimately, it’s all about your life and the legacy you are creating by the choices you make today. 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.