Posts in: October

Series LLC’s (Somewhat) Demystified State-By-State

October 31, 2016 Asset Protection, Business planning, Real Estate Comments Off on Series LLC’s (Somewhat) Demystified State-By-State

Many of our clients, especially real estate investors, have heard of the Series LLC.  However, the Series LLC seems to have a bit of a mysterious aura that keeps it from being understood.  I think this comes from the fact that the Series LLC is relatively new (Delaware was the first state to adopt the Series LLC – in 1996, and many states have adopted it within the last 5-10 years), as well as the fact that only about 1/3 of the states have a Series LLC statutes and those statutes are not in any way uniform.  Additionally, Series LLC’s do not receive any sort of standard treatment when used in non-Series LLC states.

All of this sort of makes the Series LLC “a riddle wrapped in a mystery, inside an enigma” as someone famous once said.  So, let’s try to peel back the layers a bit

What the Heck Is a Series LLC?

The Series LLC is a species of LLC in which there is a “Parent” LLC that is formed and registered with the state.  The Parent LLC’s formation documents permit the LLC to create separate and distinguishable “Baby” LLC’s within its structure.

Ok. Why in the World Would I Want One?

Well, the nice thing about a Series LLC is that when correctly formed and operated, it provides limited liability protection not just between the owner and the Parent LLC, but between the Parent LLC and each of the Baby LLC’s, and between each of the individual Baby LLC’s themselves.

The most common use of a Series LLC is for a real estate investor who owns multiple rental properties in a given Series LLC state.  That real estate investor can establish a Series LLC with a separate Baby LLC for each rental property, deed each individual property into its separate Baby LLC, and establish a bank account for each Baby LLC and receive income and pay expenses for each separate property out of its own separate bank account.

At this point, if a slip and fall or some other liability occurs on one of the properties deeded into a Baby LLC, only that baby LLC’s assets (the property itself and the funds in that Baby LLC’s bank account) will be at stake in a lawsuit.  The assets belonging to the other Baby LLC’s, the Parent LLC, and the owner(s) personally, will not be available.

The difference between the Series LLC structure and just establishing a separate standard LLC for each property is that (in most cases) only the Parent LLC is filed and renewed at the state level.  This means that only the Parent LLC is paying filing and renewal fees.  The proof of the existence of the Baby LLC’s is in the Company’s Operating Agreement and other underlying documents.

Sweet! Where Is the Series LLC Available?

Sixteen jurisdictions with electoral votes (I’m taking Puerto Rico out of the mix) have LLC statutes that have provisions for Series LLC’s.  I have listed them below, with some information about naming and filing requirements for each.  Please note that for the sake of clarity, we typically advise clients to include the name of the Parent LLC when naming Baby LLC’s:

  • Alabama: The home of the defending National Champion Crimson Tide entered the Series LLC fray last year. Alabama does not require the Baby LLC’s to be registered at the state level, and has no specific naming rules.
  • California: Just kidding! The Golden State has a long and storied tradition of avoiding innovation in this area of the law! If you try to bring an outside series LLC to California, the Franchise Tax Board has warned that they’ll charge you $800 annually per series doing business in California. They’re not saying the series are valid in California, but if you try it is $800 annually for each.
  • Delaware: The First State was also the first to adopt the Series LLC, in 1996. In keeping with its business-friendly tradition, Delaware does not regulate Baby LLC names or require them to make any particular state filing.
  • District of Columbia: Our Nation’s Capital requires the name for any Baby LLC to include the name of the Parent LLC. In addition, the name of each Baby LLC must be filed with the District.
  • Illinois: The Land of Lincoln has the distinction of having the most stringent (and expensive) requirements for Series LLC’s. Every Baby LLC’s name must begin with the name of the Parent LLC, and a separate “Certificate of Designation” for each Baby LLC must be filed (and renewed each year).
  • Iowa: The Hawkeye State requires that the name of any Baby LLC include the name of the Parent LLC. However, it does not require any separate Baby LLC filing.
  • Kansas: Like Illinois, the Sunflower State requires a separate “Certificate of Designation” for each Baby LLC. It also requires that the name of each Baby LLC include the name of the Parent LLC.
  • Minnesota: The LLC statute for the Land of 10,000 Lakes makes mention of Series LLC’s, but doesn’t provide Baby LLC’s with any limited liability protection from each other of from the Parent LLC. Sort of defeats the purpose, right?!  So for all intents and purposes, Minnesota is not a Series LLC state.
  • Missouri: The Show Me State calls for all Baby LLC names to include the name of the Parent LLC, and requires a separate filing for each Baby LLC.
  • Montana: Big Sky Country has a, shall we say, quirky Series LLC statute. The law calls for Series LLC’s to have and file a separate Operating Agreement for each Baby LLC with the Articles of Organization.  As such, this is not a popular structure and is one I would avoid until the law is improved.
  • Nevada: The Silver State does not have name requirements for Baby LLC’s, and does not mandate any additional filings for Baby LLC’s.
  • North Dakota: See Minnesota, its neighbor to the east.
  • Oklahoma: There are no additional naming or filing requirements in the Sooner State.
  • Tennessee: The Volunteer State does not impose and additional filing requirements or name restrictions.
  • Texas: Everything’s … different in Texas. While the Lone Star State doesn’t have any naming restrictions or require a Certificate of Designation for Baby LLC’s (like Illinois and Kansas do), it does require the filing of a “Certificate of Assumed Name” – which is essentially a DBA – for each Baby LLC.
  • Utah: The Beehive State requires Baby LLC names to include the name of the Parent LLC. However, there are no Baby LLC filing requirements in the state.
  • Wisconsin: See Minnesota and North Dakota. Something’s in the water in the upper-Midwest.

Can’t I Just Set Up a Series LLC in One of These States and Use It to Own Property Elsewhere?

Because the Series LLC is so new (in legal terms), there is very little developed case law about how the structure will be treated in states without a Series LLC structure.  Because of this uncertainty, we do not recommend clients use a Baby LLC to own property in a non-Series LLC state.

What’s the Bottom Line?

The Series LLC can be a great option in order to get the limited liability protection of multiple LLC’s without the need to file and renew multiple full-blown LLC’s with the state.  However, the Series LLC is a complex beast and we suggest consulting with a knowledgeable attorney before taking the plunge.

What are My Options if I Disagree with the IRS?

October 25, 2016 Business planning, Law, Small Business, Tax Planning Comments Off on What are My Options if I Disagree with the IRS?

Many view the IRS as an agency shrouded in mystery and the IRS is generally perceived as the omnipotent “big brother” that we should all fear. It is true that the IRS does have the ability to unilaterally garnish wages or levy on assets, whereas almost every other creditor would only have these rights only after filing a lawsuit and successfully getting a judgment from the courts.

However, that does not mean you do not have rights if you disagree with the IRS, and the IRS does have administrative procedures available when a taxpayer disagrees with an IRS determination.

In general, disputes with the IRS from individual taxpayers will usually fall into several categories which include:

  1. Deficiency determinations: Taxpayer disagrees with a determination of income or certain other taxes or penalties assessed by the IRS after an examination (audit). Typically, when the IRS assesses additional taxes after an examination, they will send a letter stating what changes were made which could be on a Letter 915 or “30 day letter.” If there was no examination but the IRS believes additional taxes are due, they may send a “balance due” notice instead. Typically, if you disagree with the determination by the IRS, you should file a “Protest” with the office issuing the letter within thirty (30) days. The notice you receive from the IRS usually includes a summary explanation of your rights or options if you disagree, and so read those notices carefully, and especially any time limitations stated in the letter.   For additional information on preparing Protests, see IRS Publication 5.
  2. Collection Actions: Taxpayer disagrees with actions the IRS intends to take to collect on taxes owed, or is planning to deny or revoke a proposal for tax resolution such as an installment agreement or offer in compromise. The issue in these types of cases is not whether the tax liability is valid or not, but whether the proposed collection action by the IRS is reasonable and/or whether the IRS followed the required procedures. For example, the IRS filed a federal tax lien, or purports to seize assets from the Taxpayer without complying with the notice requirements in 26 U.S.C. §6331(d). In these circumstances, you may have the right to a Collection Due Process Hearing (CDP) with the Office of Appeals or an appeal under the Collection Appeals Program (CAP).   There are differences in which types of actions can be appealed as a CDP or as a CAP, and there is no right to judicial review of CAP decisions, and so you must familiarize yourself with the rules for these procedures which you can find under IRS Publication 1660 and in the Internal Revenue Manual Section 5.1.9. This should also be done within 30 days of the date of the notice or according to the date stated in the notice.
  3. Disallowing Refund Claims: The IRS disallows all or part of a refund claim filed by the taxpayer. The deadlines for filing Refund Claims is generally 3 years from the return due date or 2 years from the date the tax was paid.   IRS Form 843 is generally used for this purpose.   If you disagree with the determination of the IRS with respect to a refund claim, the procedures for disputing the IRS determination and requesting an Appeals conference can be similar to deficiency procedures and more information can be found in IRS Publication 556.
  4. Penalty Abatement: If you disagree with a penalty proposed by the IRS, it is important that you respond timely to the deadline stated in your notice and usually to the office that proposed the penalty. You may be able to obtain relief under the provisions for “First Time Penalty Abatement, ”the “Reasonable Cause Exception,” or other basis for relief.  Details on the factors for meeting these exceptions can be found in the Internal Revenue Manual from the IRS.

In any written dispute to the IRS, you should always include copies of all documents and any legal authorities supporting your dispute. This may include documents previously sent or received from the IRS including, the legal notice you received, IRS tax transcripts, receipts, affidavits or sworn statements from third parties in support of your dispute, and send your dispute certified mail with return receipt.

This is where an attorney who is experienced in such tax issues who can research your specific issue and present your legal arguments in an organized and logical manner setting forth the facts, the law, and legal analysis applying the facts to the law can be helpful. Above all, always make sure the IRS has a current address for you and do not ignore IRS Notices as failure to take advantage of these dispute procedures will effectively waive your rights.

If you are not satisfied with the administrative remedies with the IRS, you may have an option to litigate the matter in tax court. The procedures and rules are similar to litigation in court. For more information on your rights and options with the IRS, refer to the Taxpayer’s Bill of Rights.

Starting Your Solo 401k By Year-End

October 17, 2016 Business planning, Retirement Planning, Tax Planning Comments Off on Starting Your Solo 401k By Year-End

The end of the year is approaching fast and many small business owners and real estate investors are looking for end of year tax savings!  One of the typical year-end tax strategies is to make a tax deductible retirement account contribution. If you’re self-employed with no other full-time employees, you have some choices, but typically a SEP IRA or a solo 401k are the most popular options.  With that said, the 401k strategy is by far the best in the long-run.

A SEP IRA is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRA’s. However, a solo 401k can have both a traditional and a Roth account but your business cannot have full-time employees other than you and certain family members.

Both SEP IRA’s and 401k’s can be good for the small business owner, but it depends on your situation.  Both are easy to setup and operate with low administrative costs.  However, in terms of the amount of business income that is required to max out an annual contribution, a solo 401k typically provides much greater tax efficiency with contribution amounts than the SEP IRA.  Also, options such as Roth and the 401k loan are available with a Solo 401k, but not a SEP IRA.

To help our clients make this move to the 401k, every year in the month of November we provide a consultation with a lawyer and complete set-up of a 401k (that YOU can self-direct) and do it all at a significant discount.

     Check out a video and more information about our 2016 Special HERE.

Here are five of the most common reasons to setup a solo 401k:

  1. You need to make a year-end tax deductible contribution. If you need a tax deduction for the current tax year then you need to setup your solo 401k before the end of the year.  Don’t wait until the last month of the year to set it up.  Get it set up now so you’re not stressing during the final month to set it up.  Also, make the contribution as soon as possible.  Talk to your accountant because by November you and your accountant should have a pretty good idea where you’re at in terms of annual business income.  If you need to wait until after the New Year to actually make the contribution that is allowed because you may need to see how your other deductions are affecting your taxable income before you can determine the appropriate contribution amount.  However, keep in mind that if your business is an s-corp and you get a W2, you’ll need to know your contribution amount by the end of January which is when W2’s are required to be filed.  Also, if you miss the December 31 deadline to setup a solo 401k, you can setup a SEP IRA up until the date of your business tax return deadline, including extensions and still make a contribution for 2016.   Follow this link for more information on account setup and contribution deadlines.
  1. You want to rollover existing retirement funds and make self-directed investments into real estate, etc. This reason doesn’t involve making a tax deductible contribution for tax year 2016 and so there isn’t as much pressure to get the 401k setup before the end of the year but you may still want to set it up before the end of year deadline so you have the option to make a tax deductible contribution for 2016.
  1. You want to rollover existing retirement funds and take out a 401k loan. We can help you be strategic with the 401k loan and make sure you stay compliant with the IRS to pay it back in accordance with their requirements.  This reason doesn’t involve making a tax deductible contribution for tax year 2016 and so there isn’t as much pressure to get the 401k setup before the end of the year but you may still want to set it up before the end of year deadline so you have the option to make a tax deductible contribution for 2016.
  1. You want to grow your retirement through generous contribution limits. The solo 401k (and all 401k’s) offers some of the most generous contribution limits of any retirement account.  The amount of your business income will be the true contribution limit but the solo 401k allows contribution limits of up to $53,000 for 2016 ($59,000 if you’re age 50+) whereas the IRA allows contribution limits of up to $5,500 for 2016 ($6,500 if you’re age 50+).  The SEP IRA is capped at $53,000 (no catch up contributions and no employee contributions are allowed).    Follow this link for more information on contribution limits.

  1. You want to make Roth contributions. If you’re a married couple filing jointly and your modified adjusted gross income is greater than $194,000, you cannot contribute to a Roth IRA.  A Roth 401k has no such income limitations.  A Roth 401k is a great way to grow a Roth account through contributions but remember Roth contributions are not tax deductible.

The end of the year will be here soon, so don’t delay!  I invite you to contact our office to discuss the timing of what type of account to setup, when to set it up, and how and when to make your contributions.

Estate Planning: Recent Questions from our Clients

October 1, 2016 Estate Planning, Real Estate, Retirement Planning Comments Off on Estate Planning: Recent Questions from our Clients

In my experience, estate planning is one of the most important, and simultaneously least understood, areas of the law. Perhaps this is because none of us ever see how our own estate plan (or lack thereof) plays out after we are gone. Maybe it’s because there’s just a certain amount of mystery associated with death. Or it might be because people just don’t want to deal with death or the consequences thereof. Whatever it is, there just seem to be a lot of myths and half-truths circulating around this area of the law, and when clients actually get started with their estate plans, they tend to have a lot of questions.

At KKOS, the first line of defense on many of those questions is our fantastic estate planning paralegal, Julie Deck. Julie and I came up with a list of some of the most frequently asked estate planning questions, and I will answer them below:

Do I need a will if I have a trust?

The answer to this is a pretty emphatic YES! In a comprehensive estate plan, the trust is definitely going to be the star player. The trust is where you name beneficiaries as divide up assets owned by the trust. If you have done your estate plan correctly, you have “funded” the trust with the vast majority of your assets – things like real estate, interests in LLC’s and corporations, bank and brokerage accounts, and beneficiary designations for retirement accounts and life insurance policies.

However, the trust only deals with assets it owns. If for some reason you fail to “fund” the trust with the correct assets, then your will kicks in to deal with these assets. When you have a trust, your will will essentially say “distribute my assets as my trust directs,” but having the will in place is crucial to make sure the decisions you make in your trust are honored. If you have a trust, but no will, and you die with assets titled in your own name, then those assets may end up being distributed according to your state’s intestacy laws – instead of how your trust directs.

The will is also where you designate a guardian for your minor children and/or adult children with special needs. This makes sense because the trust only deals with assets it owns – and it doesn’t own your kids! Making this guardian designation is an absolutely crucial step for parents. Without a will, the question of who will be your children’s guardian is left to the courts, and I have personally seen the bitterness that can ensue when in-laws fight over who is supposed to watch after the children left behind when parents die.

Can a beneficiary of my trust also be my Successor Trustee when I die?

Absolutely, although it certainly isn’t required. This is actually usually what people choose to do. They typically name all their children as equal trust beneficiaries, and then designate one or more of those children as the Successor Trustee(s). However, this can open up the Successor Trustee to claims of bias or conflict of interest – especially in highly emotional situations or situations where the beneficiaries don’t necessarily get along. To avoid claims of bias, someone who is both a beneficiary and a trustee may want to take measures to safeguard his position. Such steps include: choosing an estate planning attorney to mediate or oversee the process, using fair methods for dividing unassigned personal property with emotional value, and involving an impartial appraiser if real property is involved. If an individual feels he cannot impartially act in both positions, an independent third-party can always be appointed to serve as trustee.

How do my assets actually get into my trust?

This is a very important question, because as I mentioned above, your trust only deals with assets it owns. If the trust doesn’t own any assets, then it’s really nothing more than a very expensive paperweight. Some people seem to think that assets magically get poured into the trust upon execution. Obviously, that isn’t the case. Different assets are transferred into a trust in different ways. Here is how the most common trust assets make their way into a trust:

  • Real Estate – must be deeded into the name of the trust by executing and recording a deed.
  • Corporation, LLC, and Partnership Interests – a formal stock, membership interest, or partnership interest agreement is executed and kept in the corporate book of the company involved.
  • Bank and Brokerage Accounts – you can speak with the financial institution(s) where you hold your accounts and they will help you execute documents to change ownership of those accounts into the name of the trust.
  • Retirement Accounts – the trust doesn’t actually become the owner of any retirement account during your lifetime. However, it can be named as a death beneficiary of any such accounts. You can make the necessary changes by requesting a beneficiary designation form from your account administrator.
  • Life Insurance Policies – you can name the trust as a beneficiary on life insurance policies as well.

How do I know the trustee I select isn’t just going to do whatever they want with my assets after I die?

You don’t know for sure! This is why it is very important to select responsible and trustworthy people to serve as trustees. It can also be a reason to select co-trustees who are required to act together. This ensures there are always two sets of eyes on every transaction. Another option is to name a third-party trust company, attorney, or accountant to serve as trustee (of course, these people will also charge for their time in acting as a trustee). Additionally, trustees are bound by a fiduciary duty to execute the trust as you direct. If they fail to do so, they can be sued by the beneficiaries, and the penalties can be steep.

In summary, these are just a few of the most common questions we get when helping clients with their estate plans. There are many others, and you may have specific questions that may not pertain to anyone else’s situation. That is why it is so important to get a knowledgeable estate planning attorney involved when you are making these important decisions.