So You Think You Want to Retire – Now What?Are you getting to the point in your life where you are thinking about retiring (or is the next generation dropping not-so-subtle hints)? If so, I have a recommendation. Last year my friend and colleague Rob Couch published So You Think You Want to Retire – Now What? I recommend it to you. Rob has a wonderful sense of humor that shines throughout the book. His subject matter is serious but his delivery is anything but.

I believe Rob’s book should be read by all high-achieving, hard-working business builders who are moving into the “next phase of life.” That is the phase where you reap the fruits of your labor or, according to some of my friends, it is the pasture into which you are put by your children. In any event, most founders and business leaders do not intend to leave this life while sitting at their desk. So, the question is: Are you prepared for your next phase? In my experience an honest affirmative answer is rare.

In the online article “The big thing everyone should think about before retiring – but almost no one does,” reporter Catey Hill observes that we plan for building wealth to retire and do our best to maintain our physical health so we can enjoy retirement but we rarely consider the psychological impact of leaving our life’s work. Consider the emphasis placed on “work identity” and how we are defined (in our own minds, at least) by the business we have built or the work we do. Think about the impact that losing that “work identity” is likely to have on your mental health.

My friend Gary, who has blown past “retirement age” and now spends most of his weekdays counseling younger CEOs, reports on his peers who have retired and are struggling. They have lost their sense of purpose and identity. Golf every day has gotten old, and they are watching too much cable news. They are at risk of rapidly becoming “angry old men.”

The good news is that there is an answer to Rob’s question, “Now what?” The answer begins with vision and planning. Successful business leaders know how to envision the future and develop a strategic plan.  Why not be as intentional in your planning for the next phase as you have been in building a successful business? Rob is an excellent guide through that thought process. If that isn’t enough to pique your interest, Rob includes a joke at the end of each chapter that is worth the read in its own right.

My next post will be an interview with Rob that touches on a few of the lessons from So You Think You Want to Retire – Now What? Stay tuned.

Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 4As noted in Part 1 of this series, owners of private aircraft will often want to share ownership and/or use of their aircraft with others. In most cases the motivation for sharing ownership and/or use of an aircraft is to defray the significant costs and expenses associated with the purchase and maintenance of the aircraft, purchasing or leasing a hanger for storage of the aircraft, employing a pilot or pilots and other crew to operate the aircraft, insuring the aircraft, and other similar costs and expenses. For these and other reasons, it is common for owners of private aircraft to enter in various types of arrangements to share ownership and/or use of their aircraft with others. However, any such arrangements must comply with the Federal Aviation Administration rules for the operation of private aircraft, namely, Part 91 of the Federal Aviation Regulations (FARs), which were discussed in greater detail in Part 3 of this series. The following are the more typical arrangements for sharing ownership and/or use of a private aircraft permitted under the FARs:

Aircraft Dry Lease Agreement

It is common for a small business or individual owner of a private aircraft to make the aircraft available for use by others at times when the owner is not using the aircraft. This is often accomplished by what is referred to as an “aircraft dry lease.” An aircraft dry lease is an arrangement whereby the owner leases the aircraft to another party (lessee) and the lessee is required to provide its own pilot or pilots and pay the costs of fuel and other expenses incidental to the lessee’s operation of the aircraft. The FARs require that the owner and the lessee enter into an aircraft dry lease agreement, which provides, among other things, that the lessee is to have “operational control” of the aircraft at all times that it is operated by the lessee. This means that the lessee, rather than the owner of the aircraft, is deemed to be responsible for the operation and control of the aircraft while it is being used by the lessee, thereby placing primary liability upon the lessee for any accidents or incidents that occur during the lessee’s use of the aircraft. The financial arrangements under an aircraft dry lease vary from one lease to another but generally include an hourly charge for the operation of the aircraft, a flat fee (daily, weekly or monthly) for the lessee’s possession of the aircraft during the lease term, and reimbursement or sharing of certain costs related to maintenance, repairs and/or insurance.

Time Sharing Agreement

In situations where the owner of a private aircraft would like to make the aircraft available for use by others under a lease arrangement, but the owner prefers that the owner’s pilot(s) operate and control the aircraft while it is being used by the lessee, the owner and lessee may enter into a time sharing agreement. A time sharing arrangement differs from an aircraft dry lease arrangement in that the owner is deemed to retain “operational control” of the aircraft even though it is being leased to and used by the lessee. The two arrangements also differ on account of strict limitations imposed by the FARs on the amount that the owner of the aircraft may charge the lessee for its use of the aircraft. The lease charges under a time sharing arrangement are limited to twice the cost of fuel used in the operation of the aircraft plus the following incidental expenses associated with the operation of the aircraft: (i) travel expenses of the crew, including food, lodging and ground transportation; (ii) hangar tie-downs costs; (iii) insurance obtained for the specific flight(s); (iv) landing fees, airport taxes and similar charges; (v) flight food and beverages; and (vi) other limited incidental costs associated with the flight(s). In contrast, there are no limitations on the amount of rental fees and other charges that an owner may charge a lessee under an aircraft dry lease arrangement. Payments by a lessee to an owner under a time sharing agreement are generally subject to a 7.5 percent federal excise tax.

Aircraft Charter Agreement

Another opportunity for the owner of a private aircraft to generate revenue to defray the expenses associated with ownership and maintenance of an aircraft is to make the aircraft available for charter by others. Because most owners of private aircraft are not authorized to provide charter flights under Part 135 of the FARS (see Part 3 of this series for a discussion of Part 135), an owner will typically contract with an aircraft charter services company (charter operator) to place the aircraft on the charter operator’s Part 135 certificate. This makes it possible for the charter operator to provide charter flights using the owner’s aircraft when the owner is not using the aircraft. The charter operator will typically retain between 15 and 20 percent of the net charter flight revenues and remit the balance to the owner. The charter operator is responsible for all aspects of the operation of the aircraft during any charter flights, including providing the pilot(s) and other crew for the flights.

Joint Ownership Agreement

A joint ownership agreement provides for the ownership of a private aircraft by multiple individuals and/or companies who enter into an agreement regarding their respective ownership of the aircraft, the rights of each owner to use the aircraft, and the manner in which the owners will share the costs and expenses of owning, maintaining, insuring and operating the aircraft. In a joint ownership arrangement, a single owner assumes responsibility for employing and providing the pilot(s) and other flight crew to operate the aircraft for the benefit of all of the owners. The salary, benefits and other costs and expenses incurred by the owner employing the pilot(s) and other flight crew are shared among the owners in the manner provided in the joint ownership agreement.

The forgoing is a general overview of the more common arrangements for the owner of a private aircraft to “share” the aircraft with others and receive compensation for doing so. There are a variety of other arrangements for sharing ownership and/or use of aircraft, including co-ownership, fractional ownership, and interchange arrangements. All such arrangements are governed by and must be conducted in strict accordance with the FARs. The owner of a private aircraft should consult with experienced aviation counsel before entering into any arrangement whereby the owner makes the aircraft available for use by others in exchange for any compensation, reimbursement or other remuneration.

The New Tax Act – A Year LaterOn December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “2017 Act”) which, among other items, made several changes to the federal wealth transfer tax system with respect to transfers occurring during calendar years 2018 through 2025.

Here we are, another year older, another year wiser, and with a full year of living under the 2017 Act under our belts. So, what have we learned?

By way of quick reminder, under the 2017 Act, the basic exemption amount was doubled from $5 million to $10 million, which, after being indexed for inflation, is now $11,400,000 for 2019 (or $22,800,000 per married couple). However, the increased exemption amounts are still scheduled to “sunset” or revert on January 1, 2026, to the 2017 levels, as adjusted for inflation.

Review Your Documents.

Based on the number of clients we have seen (and not yet seen) in our practice over the last year, many of you may not have had the time to reach out to your estate planning and tax advisors to review your current wills and estate plan. If you have reviewed your plan, we trust you have satisfied yourself that your current will, perhaps with some tweaks here and there upon the advice of your lawyer, still causes your wealth to be distributed in accordance with your goals and objectives. If this year has gotten away from you before you could review your documents, here is a brief summary of the types of changes that may be made.

  1. Many carefully drafted wills and other estate planning documents are designed to minimize estate taxes through the use of formula provisions that are dependent on the estate tax exemption amount, the GST tax exemption amount, or both. Because of the historically high exemption amounts introduced under the 2017 Act, these formula provisions may produce serious unintended consequences for a person dying between 2018 and 2025, including the possibility of materially altering the intended beneficiaries receiving property under a person’s will.

    For example, assume that a person’s will makes a gift equal to “the largest amount that can pass free of federal estate tax” to his or her children, with the remainder of property given to such person’s spouse, and that person has less than $11,400,000 million of assets passing through his or her will. If this person dies while the 2017 Act is in effect, the children may receive 100% of this person’s property and the surviving spouse may receive no property. Other examples would include wills that have similar formula provisions to make charitable gifts or generation-skipping gifts for grandchildren, before providing for a spouse or children. As much as we advisors work to build flexibility into your estate planning documents, even the best laid plans must be reviewed every five years and certainly after a significant change in the tax law like that made by the 2017 Act.

    We think it is very important that you consider these recent changes in the tax law in connection with your current estate plan and encourage you to review these matters as one of your 2019 New Year’s resolutions. At a minimum, you should be aware of the possible impact of the 2017 Act on your estate plan and should consider what changes, if any, should be made to your will and other estate planning documents.

  1. In addition, the substantially increased estate tax exemption amount may permit the wills of married couples to be simplified. For the past 30+ years, the wills of many clients have included tax-planning provisions creating a so-called “bypass trust” or “family trust” to protect the estate tax exemption of the first spouse to die of a married couple. While there are many non-tax reasons to continue to use such a trust, the increased $11,400,000 estate exemption may enable some married couples to eliminate such a trust and allow assets to be given outright to the surviving spouse.

Time to Make Gifts?

There is also an opportunity to take advantage of these historically high exemption amounts to make lifetime gifts. For individuals who want to make gifts to family members, gifts may be made during 2019 that utilize an individual’s unused $11,400,000 gift tax exemption amount, or $22,800,000 gift tax exemption amount per married couple (taking into account prior gifts). Such a gift may be made outright or in trust, and unused GST exemption may be allocated to a gift into a long-term trust to protect it from future estate and GST taxes. You may also want to leverage these gifts using your gift and GST tax exemption amounts through other estate planning strategies, such as sales of assets to grantor trusts, intra-family loans, grantor retained annuity trusts (GRATs), and split-interest charitable trusts.