On the asset protection scale of what works, a proprietorship is a zero.

So why would someone want to be in a business as a proprietorship?  Well, it’s seductively easy, a real do-it-yourselfer. Pick a name for your business.  Print up some business cards and stationery showing the name.  Get a website. Voilà. You’re now a proprietorship.  But big deal.

Your assets are protected like Superman was protected from Kryptonite: not at all. And if you have business liability insurance, that’s certainly helpful. But did you ever hear of an insurance company denying a claim? Thought so.

Let’s consider a classic: “Buffalo Bill’s Wild West Show, William F. Cody, Proprietor.”

If Annie Oakley took someone’s eye out while she was performing in the Wild West Show, the injured spectator would have quite the lawsuit. Everyone else in the audience would be a witness.  If the injured person won the jury’s sympathies and got a verdict, the judgment would be against Buffalo Bill himself.

It would not be a verdict against Buffalo Bill’s corporation because there’s no corporation.  It wouldn’t be a judgment against “Wild West Show Limited Partnership” because there isn’t one.  Would it be against “Buffalo Bill’s Wild West Show Limited Liability Company? Wrong again.  Buffalo Bill didn’t put his business in an LLC.

So all of Buffalo Bill’s personal assets would be fair game to satisfy the judgment.  After insurance paid its part – if insurance paid its part – whatever else Buffalo Bill owned would not be protected one whit.  This would include his personal savings, stocks, real estate, even his ownership of his proprietorship.  Say “Adios, Wild West Show.”

What’s going on here?

A proprietorship is a nothing.  It’s a five-syllable word that indicates someone’s in business. And that’s it.

Adding the letters “d/b/a” -- the abbreviation for “doing business as” -- so you present yourself as “William Frederick Cody, d/b/a Buffalo Bill’s Wild West Show,” gives you zero protection.  Using the word “consultant” doesn’t add any protection, either.

So if you want to protect your personal assets from what your business does, start with three basic steps.

• First, your lawyer can show you how to do parts of the formation yourself online.  You'll then want your attorney to guide you through the paperwork to create the liability shield. (The “$49 specials” on the Internet do not begin to do the job, by the way.)
• Second, do what’s required by State and Federal law. Just because you don’t want to deal with little things like the Internal Revenue Code, Wage and Hour law, and Workers Comp, doesn’t make you exempt.
• Third, comply with the annual requirements.  Cinderella’s carriage was transformed into a pumpkin at midnight; something similar can happen to your business if you don’t pay the annual fee to the Secretary of State.  In Georgia, it’s $50.00.  And have an annual meeting, at the least.

So if you want the liability protection given by law for yourself, go get it.  Don’t assume it just happens.  It doesn’t.

Fox+Mattson, P.C. has again provided the Georgia model LLC documents for the 2011-2012 edition of the "Limited Liability Company Handbook" published by West Thomson Reuters as part of their Securities Law Handbook Series. The Handbook is edited by Mark A. Sargent, Dean of the Villanova University School of Law, and Walter D. Schwidetzky,  Professor at the University of Baltimore School of Law.   

Now you can catch a break.

On July 5^th, 2011, the United States Tax Court held that expenses you incur for providing unlicensed caregivers will be deductible on your income tax return.

(For years the IRS didn’t allow this deduction.  The Tax Court said they were wrong.   That happens more often than you think.)

Here’s the story. A woman was diagnosed with dementia in 2004, so her doctor prescribed appropriate medications and sent her home, where she lived by herself.  But the woman was hospitalized again, and the hospital noted that the woman had not been taking her medicines.  She was hospitalized once again, and the question came up: was it really safe for her to live alone?

By 1996, the question was resolved in writing.  Her physician wrote that the woman’s ability to communicate orally was impaired.  She was confused.  She needed assistance with normal activities.  She needed supervision because of her failed memory.  And she couldn’t be left alone for fear of her falling.

Thus, the doctor concluded she required homecare services; she required assistance and supervision all day every day for both medical reasons and to insure her personal safety.

The woman’s brother had her power of attorney, and so he took over her personal and financial affairs.  That included his hiring two 24-hours-a-day caregivers, who were not licensed healthcare providers.  But they did just fine, helping the woman with her bathing, dressing, trips to the doctor, taking her medications, and getting in and out of her wheelchair.

The woman eventually passed away, and her brother dealt with her final affairs, including her final income tax return.  And that’s when the problems started.

The brother had paid the caregivers just short of $50,000 for their services.  He treated that amount as an itemized deduction on his sister’s tax return.

The IRS took the position that he couldn’t do so.  Part of the Internal Revenue Code says “long term care services” are “services [are] required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.”

The brother read the whole definition carefully.  He decided that the Service’s denial of the deduction for his sister’s care was flat-out wrong because:

●      His sister was chronically ill,

●      the doctor was a licensed healthcare practitioner, and

●      the doctor had laid out a plan.

The evidence: the doctor, the licensed health care practitioner treating the woman, determined that she was chronically ill.  The doctor also had determined that 24-hour-a-day supervision for the woman’s health and safety was necessary to protect her from the consequences of her dementia – a plan.

(By the way, you don’t need to be a doctor to be a “licensed health care practitioner.”  Registered professional nurses, licensed social workers and others are covered by the definition.)

But didn’t the 24-hour-a-day caregivers have to meet this “licensed practitioner” definition?  Nope. They just had to be operating under the plan which the doctor devised.

The bottom line: the Tax Court held that the woman’s final tax return was entitled to deduct that $49,580 paid to her ‘round-the-clock caregivers. 

There are two morals of this true case.

First, whoever’s paying the non-licensed caregivers may be entitled to deduct 100% of what they paid. 

Second, assume nothing and don’t believe a non-expert’s opinion. It’s worth checking out the law, regulations and cases; you never know what’s in place – here, as recently as July 5^th, 2011.

The nephew put the cat to sleep.  He then demanded the five grand from his aunt’s estate. His reason: "I took care of the cat.” 

They ended up in court.  And the judge wisely decided that what the aunt had meant by taking care of the cat was markedly different from what the nephew claimed she meant. 

Now before you groan, it would only be fair to tell you the other side of the case. A witness testified how much the aunt had loved her cat.

But there was also evidence that the aunt knew that her nephew didn’t like her cat at all. So the aunt was picking a fight by putting this provision in her will.

We all can wince at incidents like these. They can be avoided:  Rule #1: Don’t entrust your pet’s care to someone who hates your pet.  Rule #2: Don’t leave your pet to someone who’s allergic to your pet. You get the idea. 

A much better route: create a Pet Trust.  A new statute now allows for them.  And a court can be used to oversee what you provide in the Trust.

Here’s the big picture:

You can choose the right person to receive a bequest to provide for your animal if you are dead or disabled. You can even provide for a succession of persons.

Or you can provide for one person to provide a home and care for your animal, using funds which you’ve entrusted to another person to hold, invest, etc. (“My pet is to live with X, and my trustee shall give X the  funds to pay for all the expenses of caring for my pet.”)

And yes, the Georgia Code allows for a trust to provide for the care of more than one animal. 

Now in “human” trusts, the beneficiary can go to court if the trustee is not abiding by the trust’s terms.  Or the trustee can seek a judge’s help if the beneficiary is missing,  or the trustee is concerned about distributions to a beneficiary being squandered on drugs. 

And if alive, a trust’s creator (i.e., the “grantor” or “trustor”) can ask for a court’s help if this person thinks that the trust isn’t being administered according to his or her wishes.

It’s not this easy in a Pet Trust.   Your pet is never, ever going to file a suit for a protective order, or to ask for a change in guardian. This isn’t some courtroom scene out of a cartoon, the Honorable Scooby-Doo presiding.

But Georgia law does provide that any person who’s interested in an animal’s welfare can go into court on the animal’s behalf.

This caring soul could ask the court to change the trustee because the trustee isn’t doing what the trust specifies.  Or if someone named in the Pet Trust needs to be replaced for any other good reason.

Here’s one big caution, though. The Pet Trust terms need to be done correctly and will need to be integrated with your other legal documents.  This doesn’t happen in a fill-in-the-blank form

And no form language covers the situation if your pet is a horse, coatimundi, or spider.

Bottom line: if you want the law to help protect your pet if you’re gone, or if you’re totally disabled and not able to care for your pet, now you have a way.

The financial planner thought he knew everything.  And with that confidence, he downloaded a form will. It wasn’t a bad will, actually. But he made one enormous mistake: he didn’t sign it right.

So when he died, his wife went to an attorney to find out how she would collect everything. She got a shock: she wasn’t going to. The will was useless. Void. Non-existent. Consequently, the law says that she and the child had to split the assets. The scorecard: Child: 50%. Mother 50%. Game, set, match.

Would it matter if it was his child, and not their child? Not a whit. Could they fudge the distribution? Nope.

What if parent and child didn’t get along? Doesn’t matter. They were chained legally to 50% each. They may not have spoken in years . . . but now they sure were going to.

The key: if the once-good will is not good now, or if there’s no will, then the spouse and the children divide the estate assets equally. Example: Remarried mother has two children from her first marriage. She dies with a faux will. We have three people, right? Two kids plus spouse. Since the will is garbage, each child inherits one-third of the dead mother’s assets. The surviving husband gets the final one-third.

There’s a small legal protection for the surviving spouse: he or she can’t get less than one-third.

What this means: imagine that Snow White married the prince, they adopted the seven dwarfs, and then he died sans will. Snow White gets one-third of the prince’s assets, and the seven dwarfs split the other two-thirds.Not too bad, right? Well, it is pretty bad: Doc-through-Dopey together get twice as much as Snow White. She certainly won’t live happily ever after.

The situation gets more complicated if a minor child is getting a piece. The surviving parent may not be appointed the legal guardian for the receiving child; being mother or father isn’t decisive. Periodic inventories can be required. And the child gets his or her share as a much-too-young age.

So do you really want to share ownership of your house equally with two teenage kids? It can (and would) happen.

What else can trigger this besides the financial planner’s defective signing? If particular events happen with a lawyer-drawn will. And of course, if there’s no will.

Consider the parent who recently remarried, who didn't do a new will in the midst of planning the wedding and honeymoon.

How about the parents who did the right documents for their children, but later decided to have or adopt one more . . . and the old will didn’t contemplate more kids.

Or the person who typed up an old will, or copied a neighbor’s will. The document may have had the title "Will" at the top, but it wasn’t any good.

In each of these examples, the surviving spouse took it in the ear: take a half, take a third. Do not take all, do not pass "Go," do not collect even an extra $200.

The bottom line: having a document-gone-bad, or no document, can mean you'll be looking to your kids (or your dead spouse’s kids) for spending money, instead of the other way around.

This is the basement, dingy and dark
In the house that Jack left.

This is the chest, so rarely opened,
Covered by carpets and dust and webs
In that basement, dingy and dark
In the house that Jack left.

Read the complete poem here

Get assets to loved ones, or move them from loved ones?  Forget “$13,000 per year” gift limits. A strategy lets you discount the asset value and then move them by sale. And I.R.S. says that if your sale is during August, your interest rate can be as low as 0.53%. That’s Zero-point-Five-Three-percent.

Think this doesn’t apply to you? If Congress doesn’t act, the estate tax comes back on 1/1/11.  So anything a dead person owns over $1 million will be taxed at 55%. 

Want more information? Call fast; no telling what the 0.53% will become in September. 

Our article on how assets get discounted with IRS approval:  http://tinyurl.com/3xajfhz.

This is not exactly a case of undue influence. Nobody has you in a chokehold, nobody is threatening to lop off your fingers one at a time, saying “Sign this or else!”  That’s what undue influence is usually about.  

Aging adults, however, sometimes face the pressures of a different undue influence: being manipulated when they have diminished mental capacity. Who’s doing it? People – often relatives -- who seek influence and financial control over the aged adult as well as financial benefit for themselves.

The typical strategy plays on the fear of isolation, the aura that others cannot be trusted, and the threat that “If I don’t act to protect you, you’ll be penniless, uncared for, and out in the cold.”  

 Because of the pressure, the aging adult signs documents at the behest of the person being put in charge – documents which never should have been signed in the first place, and which need to be undone.

Consider this recent case about Mrs. Fox (no relation), a widow.  She had six children, five sons and a daughter.

One of the sons, William, had developmental disability issues, and always lived with his parents in their house. Mrs. Fox repeatedly said that when she died, she wanted William to continue to live in the house for as long as he lived.  She also wanted all her other assets to go into a trust for William.  

But Mrs. Fox’s daughter Elaine, and Elaine’s son Harry, had other ideas.

As Mrs. Fox’s health declined, Elaine gave her mother a very hard time. According to the Court of Appeals, Elaine dominated and belittled her mother. Elaine told her mother that she was the only child who could be trusted to take care of William after Mrs. Fox died.

And Elaine’s coup de gras: she told her mother that if she put all her assets in Elaine’s name, then Elaine could prevent her brothers from putting Mrs. Fox in a nursing home, selling everything, and putting William out on the street.

So Mrs. Fox signed a Will prepared by grandson (and Elaine’s son) Harry. On the surface, it did provide for a trust for William.   

But then Elaine and Harry gutted it.

How? Nine days later, Harry showed up with a Quitclaim Deed, which he had his grandmother sign. It conveyed her rental house to – guess who? – Elaine and Harry. As a result, the rental house wasn’t going to pass under Mrs. Fox’s Will. It was gone from her assets and would never, ever be in her estate.

Then Mrs. Fox had surgery. She had terminal lung cancer. She went on strong pain medicine.  She wasn’t in good physical or mental shape.

But two days before she was to start chemotherapy, Harry showed up with another deed for his grandmother to sign.

This deed moved the house where she and her late husband and son William had always lived, plus the surrounding 14 acres, to -- surprise! -- Elaine and Harry.

Then to get the rest, Elaine thoughtfully changed her mother’s savings accounts to joint name. So when Mrs. Fox died, her daughter got all of them.

Even after her mother’s death, Elaine couldn’t leave well enough alone. She found a $27,000 money market account in the name of Mrs. Fox, son William, and Elaine.   Elaine changed the name on the account to just herself and her son Harry.

Nice, huh?

The five Fox brothers filed suit. They wanted to set aside the two deeds, claiming that Elaine and her son had used undue influence to have Mrs. Fox sign them. It was a nasty interfamily fight.

A jury decided that the brothers were right: Elaine and Harry had used undue influence over Mrs. Fox. So the deeds were put aside. And the Court of Appeals affirmed the jury’s decision.

I wish I could tell you this is an isolated incident. It’s not. It happens all the time in families.

So how do you prevent it?

If you have aging parents: meet with them and all the sibs and step-sibs. If somebody balks, let everyone else meet to find out your parents’ wishes. Everyone hearing the same thing, everyone hearing the answers to questions, works wonders.

If you are an aging parent (aren’t we all?), take your children through your documents. This way, there will be no surprises afterward. It’s why we encourage our clients, after their documents are signed, to bring in all their children for a free meeting to do this.

You knew that already, right? It’s time to act on it.

Certain superstitions are silly: "Handling a toad gives you warts." "Step on a crack, break your mother’s back." "It’s good luck to find a horseshoe." (Unless, of course, it’s still attached to the horse).

Other superstitions have intellectual issues: When Punxsutawney Pete looks for his shadow on Groundhog Day, how does he know what he's looking for? Or do the shadow know?

Other superstitions come with directions: "Pull off the petals of a daisy one by one, naming a boy (or a girl as the case may be) at each one, thus: Jenny, Fanny, Jenny, Fanny, etc. The one named with the last petal is your sweetheart."

Life and death have their superstitions. If you’re having thirteen for dinner in Brookline, MA, "the last one who sits down will not die." In nearby Somerville, "the one who rises first from a table of thirteen will not live through the year." So if you’re invited to dinner in New England, take your time showing up and chew your food really, really well.

Here’s a superstition which is both worthless and dangerous: "If you discuss your Will with your children, you die really soon."

Now of course, you can avoid making your parents uncomfortable. But you’ll pay for it in other ways.

The problem: where is the Will hidden? Or even, was a Will ever signed?

Consider the first couple I ever did Wills for. Really nice people. They moved out-of-state with the admonition to get their documents checked in their new state. "Instead," said the wife, "Whenever we talked about it, we decided we liked what you did and never did get it checked."

How do I know? She called us 25 years later, after her husband died while jogging. She didn’t know where he had stored the original Will. She never did find it.

Or how about the daughter who had no idea where her mother stored her Will and refused to discuss it. After she died, her daughter couldn’t find the document.

As a result, daughter had to start an "Administration" in Probate Court. That costs an unnecessary bundle, takes too much time, and requires filing inventories with the court. And more.

Then it got worse. While cleaning out the attic of her parents’ house, she found her mother’s Will.

So she had to go back to court, stop the Administration, and then start Probate proceedings.

All because the mother refused to give any information about her Will.

The problem with all this: what you don’t know will hurt you. What you can’t find will hurt you. And in turn, will cost you.

Isn't a safe deposit box the answer? Well, it could be. But at which branch? Who’s on the signature card? And where’s the key?

So you still need to know. You still need to ask. And you need to get answers.

What if your parents still won’t tell you? Well, leave ‘em a copy of this article. Or bring them a horseshoe and a daisy, which you can explain as a prelude to the "Let’s not talk about it" superstition.

And if they’re still not convinced? Find that toad. So if this superstition works and they get warts, they’ll definitely need to tell you where their healthcare documents are. Hopefully the Wills will be nearby.

So if you inherit from someone who dies in 2010, you will face a death-related tax. It just won’t be called the Federal Estate Tax.  It’s a capital gains tax.

Here’s the story, in three short variations.

First variation. Years ago, your widowed uncle, Scrooge McDuck, bought an investment for $50,000. (It could have been Home Depot or UPS stock, or acreage along GA Highway 372.) When Uncle Scrooge died in 2009, the investment was worth $3 million more. Was the $3,050,000 total subject to Estate Tax? No, because it was below the $3.5 million Estate Tax Credit you got in 2009. So no Estate Tax would have been due. You wouldn’t even file an Estate Tax Return. And when you sold the property for that $3,050,000, you wouldn’t pay any capital gain, either. You had inherited an asset worth $3,050,000, according to IRS. In tax parlance: that asset had a “stepped up” basis; what the investment cost your Uncle just didn’t matter.

Second variation: Uncle Scrooge dies in 2010. There would be no Estate Tax, obviously.
But -- big “but” –when you sell that property you inherited from Uncle Scrooge for that  $3,050,000, you’ll have a big capital gain to report on your Income Tax Return.  No kidding. Compare: In 2009: estate tax minus a credit, but no capital gain. In 2010:  no estate tax but capital gain. Why? Because the 2001 Congress wrote “When the estate tax goes, ‘stepped up’ basis goes, too.” So in 2010, the asset you inherit is worth taxwise what the dead person paid for it. That’s the asset’s original cost, or “basis.”  That basis doesn’t change (or “step up”) when McDuck dies, like it did in 2009 and before.

Here’s the consequence: when you sell that asset, you have to figure out the dollar difference between that old basis and today’s sale price. The difference is taxable capital gain. Your uncle may be a dead McDuck; but taxwise, you’re a dead duck, too. And good luck finding the papers showing what your Uncle paid for the investment. (Yes, you’ll have to.)

That ’s not all. In 2011, the third variation cranks up: the Estate Tax roars back into effect. It has a bigger bite now, because you’ll have a much lower Estate Tax Credit to subtract out: a $1 million credit, not the $3.5 million credit of 2009.  This means your check for the Estate Tax you’ll face on X assets in 2011 will be greater than the check you’d have written in 2009.  

What’s going on here? In 2001, Congress voted to make two things disappear: the Estate Tax and stepped-up basis. They also voted to have the Estate Tax return in 2011, but at 2001 levels.  This created the variations above.

Fast forward: with everything else on its plate, the 2009 Congress was headed towards freezing the estate tax and basis rules at the 2009 level. The Estate Tax would have stayed in place with the $3.5 million Credit.

The stepped-up basis would have continued. But the move stalled just before Christmas.

Now Congress still might vote to do so. Or they might not. They may in January. They may in September. Or maybe they won’t at all. Nobody knows. But until something happens, we’re stuck with the situation described in the variations above.

Why is this happening? Here’s a theory. If a Congressman votes to extend that $3.5 million Estate Tax Credit and let stepped-up basis continue, that would continue to give couples a credit of $7 million. That eliminates most people’s estate tax liability and leaves them with stepped-up basis.

So why wouldn’t a Congressman vote for that? Well, in next year’s re-election campaign, he or she would inevitably be accused of voting “for” the Estate Tax. So it wouldn’t be politically savvy to vote for the extension of that tax, even if it was for the right, temporary reasons.

We’re confident this is more than you ever wanted to know. We’re confident you didn’t even want to know this much on the subject. But there are two reasons for telling you all this.

First, when someone dies and has left you an inheritance, don’t let anyone throw out all those financial records in the attic. Among the old suitcases and the loose insulation are the papers to prove the deceased person’s basis in the asset left you. You’ll need it for your tax return.

Second, if you have assets, your documents need updating. There’s no unlimited marital deduction any longer, no need for bypass trusts. Why be stuck under a trustee?

But that’s for another day. Class dismissed.