Michigan Estate Planning Blog

When Your “Alter Ego” May Not Be Enough

LLCs or “Limited Liability Corporations” can be excellent vehicles to accomplish just what their names suggest - limiting liability. That said, I stumbled across a recent message of caution regarding some LLCs, and the court case of Martin v. Freeman, ___ P.3d ____, 2012 WL 311660, 2012 COA 21 (Colo.App., Feb. 2, 2012) to back it up, both of which are worth sharing. You might say that an LLC is one thing, but a SMLLC, or a “single member” LLC, is a different beast entirely, at least from an asset protection point of view. To wit, the above article points out that a single member LLC is “an alter ego case waiting to happen.” The case of Martin v. Freeman is, as you might have imagined, a “veil-piercing” case as Freeman was the sole owner of an LLC involved in some hefty litigation and sold the LLC’s property to, at least in part, help cover the legal fees of the litigation. Of course, that left the LLC with no assets to satisfy the judgment that came down against it and only one place to turn for that satisfaction: Freeman himself. After all, Freeman had just under-capitalized the LLC, and did so by distributing funds to himself only to turn around and help pay legal fees for the LLC. “Undercapitalization” is the great leveler of corporations when it comes to asset protection and with little difference on record between “Freeman the LLC owner” and “Freeman the individual,” the corporate veil fell apart. Freeman was held personally liable. This is one more lesson on a subject that always bears repeating. Single member LLCs aren’t exactly flawed by nature, but they are often the easiest to muck up. In the end, keeping things straight between yourself as the “business owner” and yourself as the “individual” requires some vigilance and diligence.

Reference: Forbes (February 5, 2012) “Martin: The Inherent Dangers Of The Single Member LLC And Alter Ego Veil Piercing”

When Bankruptcy Looks Like Peonage … Or Not

There are just some cases where you wish you could be there to see the look on the Judge’s face when they hear a defense, and one such recent case can be found in re Gordon, ___ F.Supp.2d ____, 2012 WL 255274 (N.D.Ga., Jan. 24, 2012). As reported here in Forbes, Mr. Derrick Dewayne Gordon has given voice to the many persons filing for bankruptcy by complaining it was like slavery or peonage… only that was his defense against actually filing for Chapter 11 bankruptcy. It’s especially hard to believe Mr. Gordon once you learn the circumstances. In brief, he was sued for running afoul of a non-compete clause and, having managed to have that reversed on appeal, went out to prevent having to pay for the $335,000 in legal fees that the court didn’t reverse. His strategy was to file for Chapter 7 bankruptcy, at which his former employer balked and wanted to either move him to Chapter 11 (which uses a payment plan over the full discharge of Chapter 7) or reject the bankruptcy out of hand. Indeed, Mr. Gordon was about to rack up a $250,000 annual salary, but that doesn’t change the principal, or so he would contend, that he is therefore put into a condition of servitude against many laws. The court didn’t bite, and even if you had figured that out already you can read all about it here. This case is something of an outlier, if an amusing one, but it also goes to show a few core realties to bankruptcy and asset protection. Firstly, that the purpose of bankruptcy is not to protect the bankrupt but to marshal their assets for their creditors, whichever chapter will get that accomplished most completely. Second, that the court isn’t one for tricks and last-minute strategies; asset protection is a real exercise in understanding your assets and keeping them out of harm’s way as much as possible.

Reference: Forbes (January 31, 2012) “Gordon: Debtor Asserts Concepts Of Slavery And Peonage To Try To Avoid Chapter 11 Bankruptcy”

Asset Protection Requires Proper Planning

It’s unclear how long this economic slump will last. One thing is certain, however, it’s not likely to change anytime soon. And, while the “times” have taken their toll on people, so have “creditors.” If you want to protect your assets from “future creditors,” then know that planning must take place well in advance. As a reminder of some of the basics of asset protection, I happened upon this article on the topic of “fraudulent conveyance.” Simply put, creditors and the laws that protect them have every reason to be wary of those last minute tricks some people try to pull to hide their assets (it would be pretty difficult to be a creditor if last minute tricks were allowed). As a result, laws are set up to void slick moves to defraud just creditors. In fact, they are aptly designated “fraudulent transfers.” Bottom line: If there’s already a creditor in the picture, and one that’s sniffing around no less, then it’s already too late. Of course, you have every reason to want to protect your assets. Who doesn’t? Accordingly, make sure you seek qualified legal counsel before making moves with your assets that will be ineffective… or get you in legal trouble.

Reference: NuWire Investor (January 17, 2012) “Asset Protection in Uncertain Times”

Discretionary Trusts Can Trump Bankruptcy Liquidation

Sometimes giving assets to a loved one in hopes of protecting those assets from future creditors may not be such a good idea. This is especially true when the loved one is a young one. No, if you want your asset protection planning to be successful, then that usually means a trust is necessary. Trusts are incredibly powerful tools for a number of reasons, foremost because they allow you to protect both the beneficiary and the assets. A powerful lesson on trusts recently came out and is featured in a recent Forbes article. It’s the case of re McCoy, 2011 WL 6748388 (Bkrtcy.W.D.Wis., Slip Copy, Dec. 21, 2011) and it’s worth a look. The case focuses on a trust containing a “spendthrift provision” against bankruptcy. A mother set up the trust for her daughter (and soon to be debtor) with her son as trustee. The trust has a spendthrift provision, meaning that the assets are controlled and kept from the beneficiary except in regular distributions. Further, the trust provided that the brother, as trustee, has discretionary control over the distributions, and can release them or hold them in the trust as deemed appropriate in his capacity as trustee. The daughter went bankrupt. Soon thereafter, her bankruptcy trustee soon turned a leering eye to those trust funds. You see, bankruptcy is about marshalling the available assets of a debtor to pay as many debts as possible. However, thanks to the spendthrift provision the trust funds are immediately disqualified from consideration. Why? Because the beneficiary doesn’t “own or exercise control” over them. Nevertheless, the bankruptcy trustee did try to grab an upcoming distribution, thinking it was leaving the trust and therefore fair game. This, too, was denied, because the trustee had discretionary control over its release and simply wouldn’t release it into the hungry jaws of creditors. If the trust had appointed the brother as trustee without granting discretionary powers and, instead, required mandatory distributions, then the distributions would have fallen into the hands of the creditors – but instead it was saved. In the end, there are a few good lessons for the wise in this case. Here are a succinct few advanced by the Forbes author: 1. A well-drafted Living Trust can provide, as here, very substantial asset protection for beneficiaries. Mark me as in the camp that says that children should never be given a significant gift outside of a trust, since children (particularly those with money, but without experience) are prone to develop creditors. 2. A well-drafted non-self-settled trust can provide, as here, very substantial asset protection for beneficiaries. Contrast this with self-settled spendthrift trusts (a/k/a “asset protection trusts” which despite their nickname provide at best highly dubious and almost entirely untested asset protection advantages). See Chart Regarding Effectiveness of Asset Protection Trusts 3. For asset protection purposes, trusts should be drafted as discretionary trusts. Remember: If a beneficiary has a right to the trust assets or payments, etc., so will creditors. To learn more and to successfully set up a trust for your loved ones, you will want competent counsel. This is not a Do-It-Yourself project.

Reference: Forbes (December 28, 2011) “The Real McCoy: Living Trust Provides Spendthrift Protection To Assets Of Beneficiary In Bankruptcy”

ESTATE PLANNING / ESTATE PLANNING FOR PHYSICIANS

I ran across an article last week written primarily for physicians (PhysiciansNews online), and while the advice was sound, the message really is appropriate for anyone who wants to preserve their hard-earned wealth and create a family legacy. Here are the high points: • It’s never too soon to start planning your estate. At a minimum, your estate plan should include a will, a power of attorney, a health-care proxy, and where appropriate, a trust. • Review and update in light of changing tax landscape. No one knows for sure what Congress will do about the currently-lapsed federal estate tax. But instead of keeping your hand in the sand, take time now to review and update your plan to take advantage of any (potentially expiring) opportunities to move your legacy forward. Physicians, professionals and business owners also should consider the issue of Asset Protection, which involves making prudent decisions today to protect yourself, your business, and your hard-earned assets from loss due to lawsuits, creditors or bankruptcies. This type of planning is especially prudent for professionals and business owners whose personal assets could be at risk due to the nature of their employment.

Small Business Owners – Watch Your Capitalization!

The corporate veil is not an unlimited defense… as yet another owner of a sole shareholder corporation has discovered in a recent case, Bogosian v. All American Concessions, 2011 WL 4460362 (E.D.N.Y., Slip Copy, Sept. 26, 2011). So, what did him in? As Forbes reports it was undercapitalization, among other missteps, making the case one of several recent ones in a rash of such cases. It was the U.S. Open in 2005 and The United States Tennis Association contracted with Restaurant Associates to provide catering services. Restaurant Associates, in turn, subcontracted beverages out to All American Concessions. The sole shareholder of All American Concessions was one Marty Rosen. As a condition of the subcontract with Restaurant Associates, All American Concessions was required to obtain proper insurance. A class action suit was later filed against all three – the USTA, Restaurant Associates, and All American – leaving Restaurant Associates out $92,000, but with All American declining to participate. Naturally, Restaurant Associates sued All American for indemnification and even sought to “pierce the corporate veil” all the way to Marty Rosen. The veil was pierced and Rosen was on the hook for the $92,000. There were a couple of problems, and it should be noted that sole shareholder corporations oftentimes invite some of these problems unintentionally. Nevertheless, such invitations tend to leave them with greater exposure to veil-piercing claims. At the outset, it certainly didn’t help that Rosen failed to maintain all of the standard “corporate formalities” and, therefore, had little documentation to produce during discovery. But the far bigger issue is that All American was undercapitalized. That means it did not have the necessary capital to pay its liabilities. In the end, all would have been fine if Rosen had only purchased the insurance he was required. But, he did not. As a result, that put All American in a tight spot, as well as Rosen himself, once the corporate veil was pierced. While this case is instructive on many levels, it is a good lesson in the powers of a corporation. True, a corporation protects against “unlimited liability,” but it still requires liability for the appropriate capital for a particular transaction undertaken. Yes, it’s easy to move capital around, but the rule of thumb is to have sufficient capital to cover O&O, operations and obligations. The corporation can be a powerful vehicle, but only with the proper care. Indeed, for greater protection, other measures also may be needed.

Reference: Forbes (September 30, 2011) “Undercapitalization Again: Owner of Sole Shareholder Corporation Gets Aced On Veil Piercing Claim At The U.S. Open”

Medicare Advantage Maze

Did you know Medicare’s annual election period is just around the corner, October 15 through December 7, to be precise? Now is the time to evaluate your options. Should you stick with your current plan, or is it time to make a change? Would you be better off using Medicare classic or is a Medicare Advantage Plan the e-ticket? This is not planning that you should take lightly, especially when it comes to Medicare Advantage plans. According to a recent article on MarketWatch many seniors simply end up paying too much. Why? Because they either didn’t take the time to evaluate their options, or they didn’t understand the consequences of their decision. About 1 in 4 of all Medicare recipients is signed up through a Medicare Advantage plan – about 11.7 million Americans – and for good reason. Under the right circumstances a Medicare Advantage plan can be much cheaper than pairing Medicare classic with Medigap and prescription drug plans. You just have to choose wisely. Plans vary in many ways, some great and some small, and, without realizing it, you could choose a plan that makes your prescriptions cost several times what another plan would offer. The MarketWatch article’s most telling example is that “people in one Georgia zip code who take 70 mg tablets of osteoporosis drug Fosamax once daily may have annual expenses ranging from $2,661 to $9,032 — depending on which Medicare Advantage plan they pick.” I can understand and appreciate that it’s easy to get confused. You can easily suffer option overload, especially for the 25% of the nation that has 30 or more plan options. To narrow things down, keep a few things in mind. First, how important is your doctor to you? Advantage plans don’t let you choose your doctor. Why? They work as managed-care policies, either health maintenance organizations (HMOs) or preferred provider organizations (PPOs), and specify the networks. So, if you like your own doctor, then you might consider only those plans where your doctor is within the plan network. Realize, however, that keeping your own doctor may come at a price. When it comes to cost, the second and most important detail after choice of doctor, you want to keep updated and run the numbers every year. Plans can change every year by tweaking co-payments here or altering premiums there, not to mention the fact that you might find yourself taking new prescriptions year to year. You need to examine all the changes and actual prices for your prescriptions to get a true picture of your true costs. By the way, when comparing costs, the Medicare website can be helpful with its plan finder tool. Atlernatively, you also can consult experts like those at the Medicare Rights Center or a local organization.

Reference: MarketWatch (September 2, 2011) “Got Medicare? You May Be Paying Too Much”

ELDER LAW

Choosing the right nursing home for a loved one is no easy choice. There are simply so many factors involved, not least of which is cost, and there is always the ultimate concern that your loved one receive the proper care. Still, there are ways of determining the good from the bad. Reuters collected advice from several experts in a recent article and specifically pointed out the controversy surrounding the difference between for-profit and non-profit facilities. The article dwells on the legal battles of a former Florida state-appointed consumer advocate, Brian Lee, and the controversy there, but the central kernel is a suspicion of for-profit nursing homes. Last month the U.S. Government Accountability Office published a study indicating that for-profits had more frequent and serious deficiencies than non-profits. Indeed, it is not the first such study to come to that conclusion (see here and here, amongst many others.). Unfortunately, these decisions are seldom simple. For-profit nursing homes make up more than two-thirds of all nursing homes. So, most of us will probably be using a for-profit facility – but forewarned is fore-armed, so be sure to do your research. Experts indicate that a good starting point is the Medicare website and the ratings there, but you will also want to visit the facility to do your own fact-finding. Indeed, many say that you should visit at various times, the evening especially, and to do so unannounced to see what things are really like. Cleanliness, accessibility, and a pleasant environment are all important, but what is more important is to be sure that the residents themselves are happy and aware. It’s often not enough to simply trust a hospital discharge practitioner since they might not know best. Patience and persistence are key.

Reference: Reuters (August 23, 2011) “For-profit or not: what to consider when choosing a nursing home”

ESTATE PLANNING

Watching the market nowadays is hardly a soothing pastime. It seems that once again we’re watching our futures in ticking numbers and advancing line graphs. There is, at least, some solace to be found in volatile markets for the careful estate planner, however. Indeed, there are a number of ways that the present woes of the marketplace can create a useful estate planning environment, and a few of them can be found in this recent article from the Wall Street Journal. In large part the advice divides between whether you have holdings in private or public stock, but there are three ideas. If you have holdings in private stock, then volatility raises the possibility of greater discounts when gifting. In general, private stock can have discounts up to 30% or 35% applied when they are gifted simply because, without public trade, it would have been harder to find a buyer and the IRS takes note of that fact. The IRS, thankfully, can also be persuaded to take note of market volatility and its affect on the sale of private stock. With volatility too high (hovering around 40 by the Chicago Board Options Exchange Volatility Index) discounts might range as high as 40% to 50%. If you have public stock, then consider a Grantor Retained Annuity Trust (GRAT). As many readers will know, a GRAT works like a trust turned annuity, since you put assets in a trust and thereafter receive payments for a set period. The principle benefit is the ability to give away assets without paying tax on the appreciation. With markets as they are, and with interest rates at such lows, timing could be perfect to form a GRAT around depressed assets and lock out the tax-man when those assets bounce back. (The GRAT just has to rise above the IRS’s “hurdle rate” presently 2.2% a year.) Finally, even simple options can work wonders: with low interest and low stock prices, it may also be the time to make an interfamily loan to fund an investment. Using the loan to purchase depressed stock (or depressed real estate if you have faith in that market) can secure that appreciation for your family member. These are a few of the WSJ’s ideas to get started. You’ll find some more out there (like Deborah Jacobs’s recent advice on gifting), but in general it’s a good time to look over your assets and your plans with your counsel. You need to weather the present storm, yes, but there’s more work to be done too.

Reference:  The Wall Street Journal (August 20, 2011) “How Volatility Eases Estate Planning”

Asset Protection Pointer: Start Yesterday

We tend to think of the law as a rigid structure, unless of course it’s bending to help us. On the other hand, the law also might bend against us… and that can be rather unsettling, especially when you are a debtor attempting to protect your assets. Unfortunately, it seems creditors win most of the asset protection cases brought to court. In fact, a review of such cases suggests that courts have a bias in favor of creditors over debtors. Jay Atkinson at Forbes recently weighed in on why that is so and offers a glimpse into the politics and psychology of the court. I thought you might find it instructive. Truth be told, assessing the value of asset protection is not something that can be done by merely scanning a record of court wins and losses for debtors and creditors. Why? Consider this: Creditors, by nature, tend to be the litigants who are after something. That means they can call it quits if they feel their legal position is not particularly strong. As a result, they are more likely to pursue an out of court settlement. Debtors, however, have to stay on the defensive no matter how much ground they’re forced to surrender. Unfortunately, too, this means that most of the court precedents and legal interpretations are going to be pro-creditor, because the only way the court can affect change is by coming to a decision. If the decisions are always victories for creditors, then it follows that the precedents will also be pro-creditor. As Atkinson concludes: “The cases that are ‘good’ for debtors usually settle; the cases that are ‘good’ for creditors will probably go to a decision and thus ‘make law.’” That is about as well-summarized as I have seen it. Atkinson has some more to say, particularly on the topic of judicial psychology, but the main lesson here: Court is not a “friendly” place for debtors. Indeed, as Atkinson points out, proper asset protection is really all about avoiding court or the need for a court decision. Simply put, proper asset protection is about proper planning and having it completed far ahead of time.

Reference: Forbes (August 25, 2011) “Why Do Creditors Win In Most of the Reported Asset Protection Cases?”

Income Protection Insurance For Self-Employeds?

If you’re self-employed, then likely you know just how much the flu or even a short-term injury can set you back. If you are out of the “game” for even a short period of time, then there is a direct impact on your bottom line. There is no sick leave to fall back on, is there? What if an illness or injury were to take you out of the game for an extended period of time? You might just lose your business and, with it, your home and the rest of your assets. That is not a pretty picture, is it? Maybe it would be worth taking a look into the possibility of long-term disability insurance, but according to a recent Reuters article, long-term disability insurance is far more difficult to underwrite for the self-employed. The purpose of long-term disability insurance is to replace income that might be lost if you are incapacitated for a long period of time, or for some, at least until age 65 (when social security kicks in instead). However, the self-employed have the problem of either “being” their business, or being unable to prove the full extent of their business. If you own an actual business, rather than operate as a freelancer or individual agent, then the first case is your problem. The insurance will pay out in accordance with what it thinks you actually live on, your gross minus your business expenses (roughly what you pay income taxes on), but that just might mean cutting out necessary business costs (like licenses). While extra protection can be purchased, there is the extra expense to consider. If you are a freelancer or just work on a case to case basis, then you’ll also have to work to prove your income to the insurance underwriter. If they have trouble pinning down your actual income, then it makes it difficult for them to properly assess how much your policy would cost and how much it might offer in protection. In the end, the insurance company simply may elect not to offer coverage. At any rate, the original article is worth a look. It is, after all, an important issue to bear in mind. If you are your own boss, then plan accordingly.

Reference: Reuters (August 16, 2011) “Self-employed? How to find disability insurance”

ASSET PROTECTION

When it comes to protecting your assets, the best advice is to plan ahead. Waiting for a crisis means you’ll have many fewer options available to protect yourself. If you have valuable assets or your business or profession makes you particularly susceptible to lawsuits, then now is the time to plan your asset protection strategy – before you face a financial or legal crisis. The caveat to asset protection planning is that you have to do it right. You’re trying to keep those most precious things safe but attempting to do so through illegal and disingenuous means can only come up to bite you in the end, and could land you in jail. How do you do it right? Qualified legal counsel is your best resource, but there are some good general maxims to keep in mind. Jay Adkisson of Forbes recently offered his 10 rules for asset protection planning. It’s worth a look at the entire list, but here are a few choice ideas to keep in mind: Plan ahead of time, that is, before a claim arises. Planning before a claim allows you to escape from accusations of fraudulent transfer. Knowingly making a fraudulent transfer is especially dangerous since the judge doesn’t simply undo the transfer, there is likely to be a punishment involved as well. An asset protection plan is not insurance and does not afford the same protection. An asset protection plan may keep your assets safe in the event of a claim, but it won’t protect you from legal fees. An insurance plan can shield you from paying those legal fees and therefore can offer a vital supplement to the plan itself. You can learn more about how to legally protect your assets in the Asset Protection Practice Center on our website.

Reference: Forbes (July 13, 2011) “Ten Rules For Asset Protection Planning

ESTATE PLANNING / ASSET PROTECTION

Sometimes when people get into financial trouble, they look for an easy way out. Whether out of sheer desperation or an attempt at trickery, some resort to making what the law considers a fraudulent transfer. Fraudulent transfers have a tendency of coming back to bite you and several recent cases serve to demonstrate that fact, as in one of Lewis Saret’s recent posts on Forbes (and the much longer list in the Wealth Strategies Journal.)

One case is that of re Quaid, (2011 WL 285645, Bkrtcy.M.D.Fla., Jan. 26, 2011,) where a Florida man sought to use a self-settled trust to shield his assets from his creditors. According to his account, even though the trust was self-settled (he, the beneficiary of the trust, set it up) the assets were still exempt because of a spendthrift provision. Unfortunately the Orlando Division of the US Bankruptcy court ruled that a spendthrift provision does not apply to a self-settled trust when the beneficiary contributed assets, and that wrecked the plan. The assets amounted to $400,000 and were added to his estate, well within reach of his creditors.

Also consider the case of Struyk v. Meltzer (2011 WL 1019916, Cal.App. 4 Dist, Unpublished, Mar. 23, 2011), and the far more common case of inter-spousal transfers deemed to be fraudulent. A California man, with $500,000 debt, tried to shield assets by transferring them to his spouse, who was debt-free. He tried to quit-claim his interest in their residence and allow her to claim it as sole property, effectively transferring the asset. Instead of shielding the residence, the jury found that the husband intentionally transferred the property to the wife in order to defraud his creditor, which ultimately led to a jury verdict well in excess of the value of the assets transferred.

The bottom-line is that fraudulent transfers can prove counter-productive at best, and disastrous at worst. These cases remind us of the importance of using knowledgeable professionals in the estate planning and bankruptcy process to avoid the disastrous results that potentially accompany fraudulent transfers.

You can learn more about how to legally protect your assets in the Asset Protection Practice Center on our website. While you’re there, be sure to sign up for our free monthly estate planning e-newsletter as well.

Reference: Forbes - Lewis Saret. (June 7, 2011) “Fraudulent Transfers and Estate Planning: Recent Cases, Important Caveats”

ASSET PROTECTION / IRS AUDITS

If you’re a high-earning taxpayer, with an adjusted gross income of more than $500,000 – well, first, congratulations! and second – beware. It appears that the IRS may be gunning for you. As the Wall Street Journal recently reported in their MarketWatch section, the IRS is stepping up audits of wealthier taxpayers as part of their offensive to crack down on tax avoidance. According to the IRS’s most recent statistical report, audits are increasing on most high income groups and increase as the tax brackets get greater. The percentage of taxpayers who were audited increased in every category of adjusted gross income above $500,000, compared with a year earlier. The biggest jumps came at the top of the income ladder. About 18% of Americans earning at least $10 million were audited in fiscal 2010, up from 11% in fiscal 2009, according to the IRS. For those earning $500,000 to $1 million, the audit rate rose to 3.4% from 2.8%. The audits are often “correspondence” exams in which a series of letters is exchanged. Such exams account for more than 70 percent of IRS audits of individuals. The lesson here is “documentation.” Be sure you and your tax advisor(s) retain records and can document every item on your tax return.

Link: http://www.marketwatch.com/story/rich-get-targeted-in-irs-audit-offensive-2011-04-04

From MarketWatch (April 4, 2011) “Rich are Targeted In IRS Audit Offensive”
Link: http://www.marketwatch.com/story/rich-get-targeted-in-irs-audit-offensive-2011-04-04

From MarketWatch (April 4, 2011) “Rich are Targeted In IRS Audit Offensive”

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