Dedon on Estate Planning

Asset Protection For Business Owners

2009-12-02T09:40:34-08:00

See the attached article below published on December 2, 2009 in Virginia Business Magazine on asset protection for business owners.

Wednesday, December 2, 2009

Virginia Business

Asset protection for business owners in uncertain times

December 02, 2009 11:30 AM
John Dedon

Many business owners face a number of issues unrelated to revenue and expenses. One pressing concern is the threat to the business from liability claims. If you are selling a product or providing a service, the danger that you may be the target of a products liability or negligence claim is a reality of doing business. The business could be selling automobiles, landscaping, real estate development or property management, customers in a store. It does not matter because the concern is the same: if I am sued am I personally at risk, and is my business at risk?

Checklist of protection steps

Here is a checklist of basic safeguards all business owners should have in mind:

1. Do you have sufficient liability insurance in amount and in scope of coverage?

2. Are you aware of the various statutes of limitations that may protect you from various claims?

3. Do you operate as a corporation or LLC so that you are protected personally? Thus, liability would be limited to the entity, not its shareholders, officers or directors. This assumes you observe the corporate formalities so that a plaintiff could not “pierce the corporate veil.“

4. If the corporate veil was pierced, perhaps the stock is owned in a Trust or separate entity so that you are not personally liable as the shareholder.

5. If you operate as an S corporation or an LLC, do you pay out most or all of the earnings to the owners so that, if liability is limited to the entity, there are not significant assets at risk?

6. If there are various business activities (e.g., real estate holdings, real estate management, and real estate sales) do you maintain LLC’s or Corporation’s for each business to segregate liability?

7. If somehow personal liability attaches to the owners, officers, or directors, have you titled and positioned your personal assets so that the personal assets are protected? These personal steps could include tenants by the entirety, trusts, or entities that receive the protection of charging orders. For more information on these personal steps, see below.

Personal liability protection

If you are a professional you may be subject to personal liability for negligence claims regardless of the entity you create. Alternatively, any business owner who fails to take the necessary steps to ensure the corporation or LLC entity is respected can be liable if the plaintiff or creditor “pierces the corporate veil.” In either of these events, you may be personally liable. In the case of personal liability, what steps can you take to protect yourself short of a bankruptcy filing?

Here are some fundamental planning considerations:

1) Assuming you are married, are your assets titled “tenants by the entirety” with your spouse? Many states, such as Virginia, protect assets from claims against only one spouse if the assets are jointly titled with the spouse. One negative of titling assets “tenants by the entirety” is that it may not be desirable for estate planning purposes.

2) Have you irrevocably transferred assets to trusts with an independent trustee for beneficiaries, such as your children? In this event, if a claim later arose after the transfer the assets in trust would be protected. Some states, such as Delaware, offer additional asset protection if a Delaware irrevocable trust is created and managed by a Delaware Trustee.

3) Are you using LLCs or family limited partnerships with several members or partners so that, if you are sued, the remedy is a “charging order. “ A charging order precludes the creditor from attaching the assets or your ownership interest.

Of course, if you transfer assets after a claim or judgment arises, none of these transfers would be protected if the plaintiff can prove a “fraudulent conveyance.” A fraudulent conveyance refers to a transfer that renders you insolvent or that is done with the intent to delay, defraud or hinder creditors. Therefore, the protective planning described above is best accomplished and mostly likely to succeed if done before any known or potential claims exist. If the planning is part of a comprehensive estate plan it further enhances the likelihood of success.

John P. Dedon is a principal in the firm with the Trust, Estate & Tax Planning practice group of Odin, Feldman & Pittleman. Dedon blogs about estate planning issues for Virginians and U.S. citizens at dedonestateplanning.typepad.com

Protecting Business Owners From Creditors

2009-11-23T13:15:10-08:00

Many business owners face a number of issues unrelated to revenue and expenses. One pressing concern for many business owners is the threat to the business from liability claims. If you are selling a product or providing a service, the danger that you may be the target of a products liability or negligence claim is a reality of doing business. The business could be selling automobiles, landscaping, real estate development or property management, customers in a store - it does not matter because the concern is the same: if I am sued am I personally at risk, and is my business at risk?

Here is a checklist of basic safeguards all business owners should have in mind:

Do you have sufficient liability insurance in amount and in scope of coverage?

Are you aware of the various statute of limitations that may protect you from various claims?

Do you operate as a corporation or LLC so that you are protected personally? Thus, liability would be limited to the entity, not its shareholders, officers or directors. This assumes you observe the corporate formalities so that a plaintiff could not "pierce the corporate veil."

If the corporate veil was pierced, perhaps the stock is owned in a Trust or separate entity so that you are not personally liable as the shareholder.

If you operate as an S corporation or an LLC, do you pay out most or all of the earnings to the owners so that, if liability is limited to the entity, there are not significant assets at risk?

If there are various business activities (e.g., real estate holdings, real estate management, real estate sales) do you maintain LLC's or Corporation's for each business to segregate liability?

If somehow personal liability attaches to the owners, officers or directors, have you titled and positioned your personal assets so that the personal assets are protected? These personal steps could include tenants by the entirety, trusts, or entities that receive the protection of charging orders.

Each topic in this list could lead to a discussion in and of itself, but this is a good starting point.

Life Insurance

2009-11-09T15:27:08-08:00

Many clients rely on life insurance as part of their estate plan. Indeed, for clients with taxable estates, it is difficult to plan without using life insurance to pay estate taxes. Life insurance is particularly important if the assets are illiquid, such as real estate or a closely held business, and the estate tax needs to be paid within nine months of death.

Life insurance can be purchased so that the entire amount of the death benefit is received by the beneficiaries estate tax free. For example, under current law, if a husband and wife have assets worth $7 million exclusive of life insurance, and they have a $3 million life insurance policy in an irrevocable trust, the children receive $10 million estate tax free. This assumes the assets are positioned properly to take advantage of each spouse's $3.5 million exemption and the irrevocable trust is the original owner of the policy.

When creating an irrevocable trust, several complicated issues arise that are the Trustee's responsibility. If the Trustee is a family member unfamiliar with the legalities of irrevocable trusts, professional guidance is necessary. Issues relevant to the Trustee include (1) is a Trust account opened by the Trustee to receive premium payments; (2) assuming the grantor pays the premium, is the payment protected by the annual exclusion; (3) the answer to (2) above often depends on whether "Crummey letters" have been prepared, qualifying the premium payment for the annual exclusion.

The Trustee also is responsible for making sure the policy is performing properly, e.g., are the policy assumptions pertaining to interest and mortality rates appropriate? Also, the Trustee must determine if the insurance carrier is still a strong company.

Using an Irrevocable Trust to own life insurance provides significant advantages. However, the advantages come with some complication; namely, choosing the right Trustee. If the Trustee is not an institution or professional, the Trustee must know where to turn for help in dealing with a myriad of issues.

Estate Tax Legislation

2009-10-26T13:39:46-07:00

Inquiring minds want to know: what is the latest in Congress on estate tax? All tax legislation must come from the House Ways and Means Committee, and two news items came out of Ways and Means last week.

First, Chairman Charles Rangel, despite his own problems and contrary to earlier statements, said he is drafting a bill to make the $3.5 million exemption permanent. In the past, Rangel said he favored extending the $3.5 exemption amount one year and addressing it again in 2010.

Second, two other Ways and Means Committee members introduced legislation to increase the exemption to $5 million over the next 10 years, plus index the amount for inflation. This bill would also lower the estate tax rate from 45% to 35%.

As you know from reading this Blog and other publications, if the estate tax law is not addressed the exemption amount will fall to $1 million with a maximum 55% tax rate in 2011. The estate tax would disappear entirely for one year, 2010. Hence, the estate tax system is a Congressional priority, notwithstanding all the other issues Congress is now facing.

Besides dealing with the exemption amount and the tax rate, there are other important estate issues before Congress. For example:

the issue of "portability," i.e., the ability of a married couple to protect $7 million without having to carefully arrange asset titling and beneficiary designations prior to their deaths.
whether Congress should curtail certain advanced estate planning tools, such as being able to discount for tax purposes the value of intra-family gifts and the use of 2-year GRATS.

(I have written in prior posts on portability, discounting and GRATS.) As of now, it is anticipated that none of these subjects will be addressed this year.

Settling Tax Issues with the IRS

2009-10-19T12:53:14-07:00

The IRS is gearing up its tax compliance efforts after a few years of reduced activity. One indication of these increased efforts is the recent hiring of 400 new IRS Appeals Division employees. The IRS now has roughly the same number of Appeals Officers that existed a decade ago. As professionals who deal with the IRS know, the Appeals Division is the second layer of IRS review for taxpayers whose estate and income tax returns are audited.

The first level is the audit level, where the agent is likely to view issues from the IRS perspective. If matters cannot be settled at the audit level, the next step is typically the Appeals Division. The Appeals Officer is supposed to consider the "hazards of litigation," meaning rather than take a biased IRS view, the Appeals Officer should consider the legal issues supporting each side and strive to reach a reasonable settlement. As Kurt Meier, deputy chief of the Internal Revenue Service's Appeals division recently said at an American Bar Association luncheon, Appeals must provide an "impartial, fresh look." It has been my experience that most Appeals Officers subscribe to this view.

Therefore, often taxpayers who settle their tax problems with the IRS will do so at the Appeal level, not at the audit level with an agent. Settling at the Appeals level avoids the added cost and time involved in Tax Court litigation. For this reason, having adequate Appeals Officers on board is not bad news.