Month: January 2020

Preface: Key Lessons From This Story: Here are some important lessons we can learn from Mark’s story:

A Lesson Learned By An Executor—The Hard Way

Careful Planning Is Important. Mark’s mother (or her attorney) failed to ensure that her will and transfer-on-death accounts had consistent directions. If Mark had chosen to do so, he legally could have ignored the directions of the will and kept the 1/6^th share he received from investment account, as well as the entire balance of the “In Trust For” account. (This is also true when a parent and a child jointly own a bank account, and one of them passes away.) This could have led to conflict in the family if Mark had chosen to be greedy and keep the money. If you know you are named as an executor for someone, consider sitting down with them while they are still alive to talk through their expectations and desires. Also, make sure their documents (will, trust, beneficiary designations, etc.) reflect those desires and that their financial accounts are properly titled. It may be appropriate to have an estate planning attorney be part of that conversation.

It Is Easy to Overlook Important Requirements. For states like Pennsylvania that require payment of inheritance tax, filing the tax return can be easy to overlook if no estate is opened. It is not very difficult to avoid probate if a person plans carefully, but after the second spouse dies (and even sometimes at the death of the first one) an inheritance tax return is often required in Pennsylvania (and some other states). This is true even if no estate is opened. The failure to file will likely be noticed by the Department of Revenue at some point, and filing late often results in interest and penalties. Also, estate administration procedures in all states generally require doing things that the average person simply can’t be expected to know about, such as providing notices to beneficiaries, creditors, and certain government entities. What executors don’t know can come back to bite them because they can be held personally liable for mistakes in how an estate is handled.

It Pays to Seek Out Good Counsel. It is valid for executors to be concerned about the cost of having an attorney assist with administering an estate. Depending how an estate attorney charges, and the size and complexity of the estate, the bill can be sizable. But trying to settle an estate without at least some level of professional help is simply not an option for most people. Rather than risking mistakes or oversights that will cost even more to correct, if you are an executor you should seek professional help (usually an attorney) to ensure that things are handled correctly and that all exemptions and deductions are taken.

An executor does not need to use the attorney that drafted the will! This is a big misconception people have, and often it keeps them from shopping around for a competent and reasonably-priced attorney. This makes it too easy for attorneys who prepare a will to charge high fees when settling the person’s estate. Make sure that you talk about fees before hiring an attorney to do anything, but especially when asking for help to settle an estate. Fees can vary widely between attorneys so it is worth your time to ask. Often attorneys will charge the estate a percentage of the estate’s assets (this is permitted in many states, but it can result in unreasonably high fees). Some will charge a flat rate based on the estimated time required to settle the estate, which allows you to know the cost in advance. Some will charge an hourly rate, but they should at least be able to give you an estimate of the time necessary to do the work. (Because I feel that charging a percentage of an estate is often unfair to the client, I generally charge by the hour or a flat rate when settling estates.)

In conclusion, serving as an executor is an important role and it should be taken seriously. It pays to review plans before death when possible, and it is also important to seek out good counsel to ensure things are handled properly. As Mark learned, “little” oversights can have big consequences down the road.

Nevin Beiler is an attorney licensed to practice law in Pennsylvania (no other states). He practices primarily in the areas of wills & trusts, estate administration, and business law. Nevin is part of the conservative Anabaptist community and is committed to practicing law in a way that builds the Kingdom of God and is consistent with Anabaptist values. His office is in New Holland, PA, and he can be contacted by email at info@beilerlegalservices.com or by phone at 717-287-1688. More information can be found at www.beilerlegalservices.com.

 Disclaimer: This article is general in nature and is not intended to provide specific legal or tax advice. Please contact Nevin or another attorney licensed in your state to discuss your specific legal questions. In order to protect confidentiality and provide a better illustration, names in the above story have been changed and some facts may have been changed or added.

Preface: What executors don’t know can come back to bite them because they can be held personally liable for mistakes in how an estate is handled.

A Lesson Learned By An Executor—The Hard Way (Segment II)

Mark wanted to be fair and do the right thing, so when he received the money from the checking account and his share of the investment account, he gave all that money to his siblings. That left only the farm, which was supposed to be transferred to Mark. Mark wondered if he should file the will at the courthouse and open a probate estate for his mother. But he wasn’t sure how to handle all of steps of opening and closing an estate, and he had always heard that probate should be avoided because estate attorneys could be very expensive.

 As with many things in life, “a little later” can be a long time. About six years later, Mark was beginning to think about transferring the farm to his oldest son.

He had given all of the cash he received from his mother’s accounts to his siblings, and he didn’t like the idea of borrowing money or asking his siblings for money to pay an attorney to help settle the estate. Also, he didn’t see why it was necessary since all of his mother’s accounts had been distributed, and all his siblings agreed that the farm was his. He knew that at some point he should update the deed to the farm, but decided that he would take care of that “a little later.”

This was an unpleasant surprise for Mark. When his dad passed away there was no need to open an estate or file in inheritance tax return because Mark’s mother and father had owned all their assets jointly,

 As with many things in life, “a little later” can be a long time. About six years later, Mark was beginning to think about transferring the farm to his oldest son. He remembered that the deed to the farm was still in the names of his parents and decided that it was past time to deal with that issue. He contacted an attorney to draft a new deed for him, but the attorney said that to transfer the property into Mark’s name they would need to open a probate estate and have Mark appointed as the executor so that he would have legal authority to transfer the deed. Furthermore, the attorney informed Mark that an inheritance tax return should have been filed when his mother passed away.

But unfortunately, transferring the farm into Mark’s name would require a probate proceeding, and all of his mother’s assets were subject to inheritance tax when she died.

This was an unpleasant surprise for Mark. When his dad passed away there was no need to open an estate or file in inheritance tax return because Mark’s mother and father had owned all their assets jointly, and joint assets of spouses are generally not reportable for Pennsylvania inheritance tax purposes when the first spouse dies. But unfortunately, transferring the farm into Mark’s name would require a probate proceeding, and all of his mother’s assets were subject to inheritance tax when she died.

If that information wasn’t bad enough, Mark’s attorney told him that if he had properly filed an inheritance tax return by the original due date (nine months after his mother died), he could have claimed a specific exemption from paying inheritance tax on the farm, which would have saved him 4.5% of the value of the farm. Now, the Pennsylvania Department of Revenue would require him to pay that tax on the value of the farm, in addition to requiring his siblings to pay tax on the $350,000 that they had received. And not just 4.5% tax on those assets, but tax, penalties, and interest!

 Disclaimer: This article is general in nature and is not intended to provide specific legal or tax advice. Please contact Nevin or another attorney licensed in your state to discuss your specific legal questions. In order to protect confidentiality and provide a better illustration, names in the above story have been changed and some facts may have been changed or added.

Preface: If you know you are named as an executor for someone, consider sitting down with them while they are still alive to talk through their expectations and desires.

A Lesson Learned By An Executor—The Hard Way

Credit: Nevin Beiler, Attorney

In this article I will tell you the story of Mark, who was named as the executor for his deceased mother. This story is inspired by various true life accounts, but it (like all of my written stories) has been changed and adapted to protect people’s confidentiality and to provide a better lesson to learn from.

Mark was the oldest of six children. His parents were dairy farmers all their lives. When Mark came of age and got married he stayed on the family farm and helped his father. He also worked away some to help pay the bills. His father passed away unexpectedly when Mark was 48 years old, and Mark began working full time on the farm. Mark’s father and mother owned everything jointly, so when Mark’s father died there was no need to open a probate estate or to file in inheritance tax return.

The family discussed having Mark purchase the farm before their mother died. However, they decided as a family that to avoid disruption during their mother’s life, and to avoid capital gains tax, the farm transfer should wait until their mother died.

Mark’s mother continued to own and live on the farm for the next 5 years, and she drew an income from the farm. Mark eventually purchased all of the equipment and cows, but not the real estate. Mark and his wife also provided a significant amount of care for his mother in the later years of her life, which saved her from needing to enter a nursing home. The family discussed having Mark purchase the farm before their mother died. However, they decided as a family that to avoid disruption during their mother’s life, and to avoid capital gains tax, the farm transfer should wait until their mother died. Later, Mark’s mother and siblings also all agreed that since Mark had worked on the farm all his life and provided extensive care for his mother that he should receive the farm for a very low price, or perhaps for free.

When Mark’s mother died she owned two assets in addition to the farm: (1) an investment account with a balance of about $300,000 and (2) a checking account containing about $50,000. The investment account had a transfer-on-death designation that left the account equally to her six children. Her checking account contained an “In Trust For” (ITF) designation naming Mark as the beneficiary of the account. This meant that the bank was supposed transfer the checking account directly to Mark after his mother’s death (this is sometimes done so an account can avoid probate). Mark’s mother left a will naming Mark as the executor and stating that the farm should be given to Mark. The will also stated that all her other assets should be split equally among her other five children (not including Mark).

Mark recognized that the will and the way his mother’s financial accounts were titled contradicted each other. The will indicated that, because he was receiving the farm for free, only the other five children should get the investment account. However, the transfer-on-death instructions on the investment account gave him 1/6^th of the account. Also, the will indicated that the other five children should equally share the checking account, but the bank told him that all the money in the account was legally his because it was titled “In Trust For” his benefit. (In cases like these, how accounts are titled and their transfer-on-death instructions or beneficiary designations override the directions of a person’s will.)

To be continued….

 Disclaimer: This article is general in nature and is not intended to provide specific legal or tax advice. Please contact Nevin or another attorney licensed in your state to discuss your specific legal questions. In order to protect confidentiality and provide a better illustration, names in the above story have been changed and some facts may have been changed or added.

Preface: “How do we value all that obsolete inventory and keep on track with our earnings guidance? No worries, we can value it at a fair price and call it ‘collectors edition’ stock.” — From a business ethics discussion.

Valuing your Business – A Calculation of Value or Conclusion of Value  Valuation 

Credit: Donald J. Sauder, CPA | CVA (2015)

Business valuation is a complex field with multiple aspects in the determination of a business interest’s value. Whether you’re selling a business, buying a business interest, involved in court actions, estate planning, or filing gift taxes, a business valuator can assist you in achieving a realistic and fair valuation.

There are two types of business valuations – a conclusion of value and calculation of value.

A conclusion of value or full valuation begins when a client and valuation analyst determine the valuation approach with an engagement letter. This letter outlines the extent of the valuation with a full report according to the professional standards of the business valuations.

For a CPA certified in business valuation this would be the standards set for by the American Institute of Certified Public Accountants (AICPA). Individual appraisal organizations have their own set of professional standards. An AICPA valuation includes a client request to value a business interest, and an estimate in value according to Statements on Standards for Valuation Services No. 1, The valuation applies any needed valuation methodology as prescribed by the valuator. The valuator then publishes a conclusion of value report. A full valuation report could exceed 45 pages with defensible proofs for the determined value of the business.

A calculation of value is much more limited in scope and nature and does not require any specific methodology beyond those agreed to by the valuator and client. So a calculation of value could overlook important characteristics in valuing your business accurately. With a calculation of value, a detailed value report, providing more depth on valuation numerics, is not prepared. A calculation of value is performed with only an agreement between the valuator and client on the methodology and procedures performed on the business interest, a calculation of the business value according to the agreed upon procedures, and an opinion provided by the valuator to the client on the calculated value, such as a verbal report.

Because of the savings in cost, a calculation of value may be adequate in some instances for determining a business value, depending on why the client needs the valuation.

Calculations of value are less expensive than a comprehensive conclusion of value, but you should have an experienced business valuator advise you on what valuation option will work for your business. The thoroughness of a valuation requires that you provide the valuator with all relevant documents and financial statements to determine an accurate value for your business.

If financial statements are deficient or records inadequate, you may need to choose a calculation of value because the necessary records are not available for a conclusion of value report. Yet, with a full valuation report, there is little room for question on the thoroughness of value, and the report will be defensible in more circumstances.

In summary, business valuation is a field where you are well advised to get an expert to work with you in valuing your business interest. You understand the value of hiring an expert to file taxes for business entities; it’s the same with business valuation. If you need a valuation of your business, for a transaction, for giving, or for estate planning, talk with your CPA or attorney to obtain a trusted referral to a valuation expert.