Growing companies often choose to create a board of directors or an advisory board to bring in outside influence and perspective. While the two kinds of boards have similar responsibilities, differences in how the boards are managed influence which type of board should be used. Most companies bringing in outside advisors for the first time start with an advisory board because it is less formal and less constricting.

Starting your own business is no easy task. There is lots of risk involved and the resulting stress can become overwhelming to handle while navigating hundreds of business decisions a day. If you add a spouse into the ownership arrangement, things only become more complex. Here’s what you should know before starting a business with your spouse.

We don’t mean to paint a bleak picture – but what would happen to your company in the event of your own disability or death? No one likes to think about these things, but it’s extremely important to have a succession plan of who, what, why, when, how just in case. If you want your business to survive in your absence, don’t let it suffer from a lack of planning like 30% of small businesses do.

Estate tax planning looks much different than it did in the past. In prior years, estate planning often focused on minimizing taxpayer’s estates as exemptions were low and federal estate tax rates were as high as 77%. Today, the top marginal federal estate rate is 40%. The American Taxpayer Relief Act of 2012 (ATRA) made permanent the generous $5,000,000 federal transfer tax exemption, which is indexed yearly for inflation. This means an individual can die with $5,430,000 in assets and owe no federal estate tax. ATRA also made “portability” permanent. Portability permits a married couple to fully utilize both a taxpayer and a spouse’s combined exemption ($10,860,000 in 2015) by letting the surviving spouse claim any unused portion of the deceased spouse’s exemption as long as an estate tax return is filed. With these permanent changes, the Tax Policy Center projects that only .14% of adult deaths will result in federal estate tax.

At the same time, federal income tax rates are at higher levels – top rates are 39.6% for ordinary income items, 20% for capital gain items, plus the potential of an additional net investment income tax of 3.8%. Given the changing tax environment, one must now carefully consider the estate and income tax rate differentials when putting together an estate plan.

An important concept to understand when discussing estate and income tax planning is the “step-up” in basis. When a person dies their heirs receive a step-up in the tax basis of most inherited assets. The new tax basis is equal to the fair market value of the assets held by the decedent at the date of death. For example, if the decedent owned 1,000 shares of stock that they purchased for $10,000 in 1983 but was worth $100,000 when they died in 2015, the basis to the heirs is stepped up to $100,000. (Note that the decedent would also be subject to estate tax on the $100,000, if applicable). When the heirs sell the stock a few months later they will likely recognize little gain or loss, as compared to the $90,000 gain the decedent would have realized if they sold the stock right before they died. If the decedent were to have given the stock to the heir before he died, the heir would have to take on the basis of the donor, resulting in a $90,000 gain to the heir.

Planning for achieving the maximum step-up in basis of family assets at death has become more important than ever especially considering that most estates will not be subject to estate tax. It would make sense to hold onto highly appreciated assets, such as stock and fully depreciated real estate investments in order to obtain the basis step-up. An important item to note – step-up does NOT apply to many retirement accounts, such as IRA’s and 401(k)’s.

State estate tax considerations are just as important. For example, Illinois has an income tax rate of 3.75%. The estate tax rate is 8-16%; however, there is a lower estate tax exemption than the federal exemption – $4,000,000. Therefore, individuals with assets more than $4,000,000 and less than $5,430,000 will be subject to Illinois estate tax yet not to federal estate tax. As the estate tax rate will be less than the combined federal and state income tax rate in such a case, it would make sense for Illinois decedents in this asset range to maximize the value of their estates and minimize their income tax.

For married couples who will be comfortably below the $10,860,000 combined estate exemption amount, it would be wise to revisit existing trust agreements. Assets in a typical bypass trust (a staple in estate planning pre-ATRA) will not get a step-up in basis at the death of the second spouse. However, if you live in Illinois a bypass trust may make sense since Illinois does not honor portability. In addition, unless trust income is always distributed, the tax on the trust can be dramatic, as trusts reach the highest tax rate at $12,300 of income. While trusts may offer creditor protection and can offer protection in the event of a divorce of an heir, these benefits should be weighed with the potential tax consequences.

With the large federal estate tax exemption, the permanence of portability and the increase in income tax rates all brought about by ATRA, it is important to revisit your estate plan in light of income tax considerations. If you would like to discuss your estate plan, or have any questions on the information presented, please contact our office.

One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. You can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation.

How to Set Your Salary

While there’s not a one-size-fits-all formula for determining how much to pay yourself as a business owner, here are three factors to consider:

Personal expenses. Tracking your business and personal expenses separately makes it easier to track the firm’s cash flow, and lets you know how much salary you can realistically draw without hurting profitability.

Start with your household budget, then determine how much you’re willing to draw from personal savings to keep your household afloat as the company grows. For a start-up company, owner compensation may be minimal. Beware, however, of going too long without paying yourself a reasonable salary. Be sure to document that you’re in business to make a profit; otherwise the IRS may view your perpetually unprofitable business as a hobby – a sham enterprise aimed at avoiding taxes.

The market. If you were working for someone else, what would they pay for your skills and knowledge? Start by answering that question; then discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites. In the early stages of your business, you probably won’t draw a salary that’s commensurate with the higher range of salaries, but at least you’ll learn what’s reasonable.

Affordability. Review and continually update your firm’s cash flow projections to determine the salary level you can reasonably sustain while keeping the business profitable. As the company grows, that level can be adjusted upward.

If you’re not sure how to set your salary, please contact Cray Kaiser today. We’re here to help!