Comprehensive Estate Planning & Business Structures: Definitions & Tax Implications

Sole Proprietorship

Business owned by one person with no legal separation between the owner and business. Advantages: easy and inexpensive to form, owner has full control, minimal regulation. Disadvantages: unlimited personal liability, limited ability to raise capital, business ends at owner's death unless transferred. Tax: pass-through taxation; income/loss reported on Schedule C with Form 1040.

General Partnership

Business owned by two or more people. Advantages: easy to form, shared management, shared skills/resources, pass-through taxation. Disadvantages: each general partner has unlimited personal liability and can be liable for debts/actions of other partners. Tax: partnership files Form 1065 and each partner receives Schedule K-1.

Limited Partnership

Partnership with at least one general partner and one limited partner. General partner manages and has unlimited liability. Limited partners usually do not manage and have liability limited to their investment. Tax: pass-through taxation, reported on Form 1065 with K-1s.

LLC

Limited Liability Company. Combines limited liability protection with flexible taxation and management. Advantages: owners generally not personally liable, flexible ownership, can choose tax treatment. Disadvantages: more paperwork than sole proprietorship, state fees/rules vary. Tax: usually pass-through by default, but may elect corporate taxation.

S Corporation

Corporation that elects pass-through tax treatment. Advantages: limited liability, avoids double taxation, income passes to shareholders. Disadvantages: ownership restrictions, generally limited to 100 shareholders, must usually be U.S. individuals. Tax: files informational return and shareholders receive K-1s.

C Corporation

Separate legal entity from owners. Advantages: limited liability, unlimited shareholders, easier to raise capital, perpetual existence. Disadvantages: more regulation and double taxation. Tax: corporation pays tax on income using Form 1120; shareholders also pay tax on dividends.

Double Taxation

Tax issue mainly with C corporations where corporate income is taxed once at the corporate level and again when distributed to shareholders as dividends.

Pass-Through Taxation

Business income is not taxed at the entity level; instead, income/loss passes to owners and is reported on their personal tax returns.

Limited Liability

Protection where an owner's personal assets are generally not at risk for business debts beyond the amount invested.

Unlimited Liability

Owner or partner can be personally responsible for business debts and legal claims.

Testate

Dying with a valid will. Property is distributed according to the will, subject to probate and state law.

Intestate

Dying without a valid will. Property is distributed according to state intestacy law, usually prioritizing spouse, children, then other relatives.

Statutory Will

A will created using a state-approved form. It is usually simple and valid if completed and executed according to state law.

Holographic Will

A handwritten will. Depending on state law, it may be valid without witnesses if signed and written by the testator.

Nuncupative Will

An oral will. Usually only valid in limited emergency situations and only recognized by some states.

Requirements to Execute a Will

The person must have testamentary capacity, intent to make a will, a written document, signature of the testator, and witnesses as required by state law, often two witnesses.

Testamentary Capacity

The mental ability to make a valid will. The person must generally understand what property they own, who their natural heirs are, and that they are creating a will.

Probate Estate

Assets that pass through probate court after death. Usually includes individually owned assets without beneficiary designations or survivorship rights.

Gross Estate

All property interests included for estate tax purposes, including probate and non-probate assets such as jointly owned property, life insurance owned by the decedent, retirement accounts, and revocable trust assets.

Probate vs Gross Estate

Probate estate means assets controlled by the probate court. Gross estate means assets included for estate tax calculation. An asset can avoid probate but still be included in the gross estate.

Joint Tenancy with Right of Survivorship

Ownership where property automatically passes to the surviving joint owner at death. Advantage: avoids probate. Disadvantage: may still be included in gross estate and can create gift/tax issues.

Tenancy in Common

Ownership where each owner has a separate fractional interest. At death, the owner's share passes by will or intestacy and usually goes through probate. No automatic survivorship rights.

Community Property

Marital property system used in some states where spouses generally own property acquired during marriage equally. Can provide favorable basis treatment at death.

Property Ownership and Probate

Assets owned individually generally go through probate. Assets with survivorship rights, beneficiary designations, or trust ownership may avoid probate.

Property Ownership and Gross Estate

Assets may be included in the gross estate if the decedent owned or controlled them at death, even if they avoid probate.

Gifting

Transfer of property for less than full value. Gifts may have gift tax consequences and may need to be reported.

Taxable Gift

A gift that exceeds the annual exclusion or does not qualify for an exclusion. It may reduce the donor's lifetime gift/estate tax exemption and may require Form 709.

Gift Tax Return

IRS Form 709. Filed by the donor to report taxable gifts, certain split gifts, and gifts above the annual exclusion.

Gift Tax Donor Rule

The donor, not the recipient, is generally responsible for filing the gift tax return and paying any gift tax due.

Excluded Gifts

Gifts not subject to gift tax reporting/tax, such as annual exclusion gifts, qualified tuition paid directly to school, qualified medical expenses paid directly to provider, and qualifying gifts to a U.S. citizen spouse.

Annual Gift Tax Exclusion

Amount a donor can give per recipient per year without using lifetime exemption or filing Form 709, unless special rules apply.

Tuition Gift Exclusion

Tuition paid directly to an educational institution for someone else is excluded from gift tax. It must be paid directly to the school.

Medical Gift Exclusion

Medical expenses paid directly to a medical provider for someone else are excluded from gift tax.

Revocable Trust

A trust that the grantor can change, amend, or revoke. Advantages: flexibility, avoids probate, privacy. Disadvantages: generally no estate tax removal or asset protection. Included in gross estate.

Irrevocable Trust

A trust that generally cannot be changed or revoked easily once created. Advantages: may remove assets from gross estate, may provide asset protection. Disadvantages: loss of control, complexity.

Why Use a Revocable Trust

To avoid probate, maintain privacy, manage assets during incapacity, and allow flexibility because the grantor can change it.

Why Use an Irrevocable Trust

To remove assets from estate, protect assets, plan for taxes, or provide controlled transfers where the grantor gives up control.

Revocable Trust Estate Inclusion

Assets in a revocable trust are generally included in the grantor's gross estate because the grantor retained control.

Irrevocable Trust Estate Inclusion

Assets in a properly structured irrevocable trust may be excluded from the grantor's gross estate because the grantor gave up ownership/control.

Generation-Skipping Transfer

A transfer to someone two or more generations below the donor, such as a grandchild, or to certain unrelated people more than 37.5 years younger.

GST Tax

A tax on generation-skipping transfers designed to prevent families from avoiding estate tax at each generation.

When GST Transfers Are Taxable

GST may apply when transfers to skip persons exceed the GST exemption or are not otherwise excluded.

Ancillary Probate

Additional probate proceeding required in another state where the decedent owned property, usually real estate.

When Ancillary Probate Is an Issue

When a person dies owning real property outside their state of residence. The other state may require separate probate.

Basic Estate Planning Documents

Usually include a will, revocable trust, durable power of attorney, healthcare power of attorney, living will/advance directive, and beneficiary designations.

Will

Estate planning document that directs how probate assets are distributed and names an executor. Can also name guardians for minor children.

Trust

Legal arrangement where a trustee manages property for beneficiaries. Can help avoid probate and control distributions.

Durable Power of Attorney

Document authorizing someone to handle financial/legal matters if the person is incapacitated. "Durable" means it remains effective after incapacity.

Healthcare Power of Attorney

Document naming someone to make medical decisions if the person cannot.

Living Will / Advance Directive

Document stating medical treatment preferences, especially end-of-life care.

Beneficiary Designation

Form naming who receives assets such as life insurance, retirement accounts, and payable-on-death accounts. These usually avoid probate.

How Estate Planning Documents Are Used

They control asset distribution, appoint decision-makers, avoid probate, manage incapacity, reduce family conflict, and support tax planning.

How Long Estate Planning Documents Are Valid

Generally valid until revoked, replaced, expired by terms, or invalidated by state law. They should be updated after major life events.

Form 706

Federal estate tax return. Used to report a decedent's gross estate and calculate estate tax, if required.

Form 709

Federal gift tax return. Used to report taxable gifts and generation-skipping transfers during life.

Form 1040

Individual income tax return. Used by individuals to report income, deductions, credits, and tax owed.

Form 1041

Income tax return for estates and trusts. Used when an estate or trust has taxable income.

Form 1120

C corporation income tax return. Used by C Corps to report income and pay corporate tax.

Form 1065

Partnership information return. Used by partnerships to report income/loss; partners receive K-1s.

Schedule C

Attached to Form 1040. Used by sole proprietors to report business income and expenses.

Schedule K-1

Reports a partner's, shareholder's, or beneficiary's share of income, deductions, credits, etc. Used for partnerships, S Corps, trusts, and estates.

Special Needs Planning

Estate/financial planning for a disabled dependent that aims to provide support without disqualifying them from government benefits.

Primary Concerns for Special Needs Planning

Preserve eligibility for SSI, Medicaid, housing, and other benefits; avoid direct inheritance; choose reliable trustees/caregivers; provide lifetime care.

Adverse Effects of Income to Special Needs Dependent

Income or assets received directly may reduce or eliminate SSI/Medicaid eligibility and other needs-based benefits.

Special Needs Trust

Trust designed to support a disabled beneficiary without disqualifying them from public benefits if properly drafted/administered.

First-Party Special Needs Trust

Funded with the disabled person's own assets. Preserves benefits but usually requires Medicaid payback at death.

Third-Party Special Needs Trust

Funded with someone else's assets, such as parent/grandparent. No Medicaid payback requirement if properly structured.

ABLE Account

Tax-advantaged savings account for eligible individuals with disabilities. Funds can be used for qualified disability expenses.

Advantages of Special Needs Trust

Can hold larger amounts, protect benefits, allow trustee oversight, and pay for supplemental needs.

Disadvantages of Special Needs Trust

Complex to create/administer, may require attorney/trustee fees, spending must follow benefit rules.

Advantages of ABLE Account

Tax-advantaged, easier to use, beneficiary may have more control, can pay qualified disability expenses.

Disadvantages of ABLE Account

Contribution limits, eligibility requirements, account balance limits may affect SSI, Medicaid payback may apply.

What Happens to First-Party SNT Money After Death

Remaining funds usually must reimburse Medicaid before passing to other beneficiaries.

What Happens to Third-Party SNT Money After Death

Remaining funds can pass to named remainder beneficiaries without Medicaid payback if properly drafted.

What Happens to ABLE Money After Death

Remaining funds may be subject to Medicaid payback depending on state rules and timing.

ABLE Qualified Disability Expenses

Expenses related to disability, including education, housing, transportation, employment training, assistive technology, healthcare, financial management, legal fees, and basic living expenses.

Effect of Improper ABLE Spending

Non-qualified spending may cause taxes, penalties, and possible negative effects on public benefits.

Letter of Intent

Non-binding document giving guidance to caregivers/trustees about a dependent's needs, routines, preferences, medical care, education, and family wishes.

What to Include in a Letter of Intent

Daily routine, medical history, doctors, medications, therapies, education, behavior supports, food preferences, social preferences, benefits information, emergency contacts, and long-term wishes.

QDRO

Qualified Domestic Relations Order. A court order used in divorce to divide certain retirement plan assets.

How QDRO Is Used

The order instructs a qualified retirement plan to pay a portion of benefits to an alternate payee, usually an ex-spouse.

Advantages of QDRO

Allows division of retirement assets without early withdrawal penalty, clarifies rights, and allows direct transfer/payment under plan rules.

QDRO and ERISA Plans

QDROs are generally required for dividing ERISA-qualified retirement plans, such as many 401(k) and pension plans.

Prenuptial Agreement

Agreement made before marriage that defines property rights, debt responsibility, and financial terms if divorce or death occurs.

Postnuptial Agreement

Agreement made after marriage that defines property rights, debt responsibility, and financial terms if divorce or death occurs.

Prenuptial vs Postnuptial Agreement

Key difference is timing: prenup is before marriage; postnup is after marriage. Both can address asset division and financial rights.

Common Divorce Mistake: Ignoring Taxes

Failing to consider tax effects of asset division, alimony, retirement accounts, home sales, or investment gains.

Common Divorce Mistake: Improper Asset Valuation

Failing to correctly value retirement accounts, businesses, real estate, pensions, or investments.

Common Divorce Mistake: Not Using QDRO

Dividing retirement assets without a proper QDRO can cause taxes, penalties, delays, or failure to receive the intended share.

Common Divorce Mistake: Emotional Decision-Making

Making decisions based on anger/fear instead of long-term financial impact.

Common Divorce Mistake: Not Updating Estate Plan

After divorce, wills, trusts, beneficiary designations, powers of attorney, and healthcare directives should be reviewed and updated.

Common Divorce Mistake: Forgetting Beneficiary Designations

Retirement accounts and life insurance pass by beneficiary form, so failing to update them can cause assets to go to the wrong person.

Common Divorce Mistake: Keeping the House Without Affordability Analysis

A spouse may keep the home but later struggle with mortgage, taxes, insurance, and maintenance.

Common Divorce Mistake: Comparing Assets by Face Value Only

Assets with the same dollar value may have different tax consequences, liquidity, risk, or future growth.