Posts in: May

What You Should Know about Administering a Family Member’s Estate

May 23, 2017 Estate Planning, Law, Retirement Planning Comments Off on What You Should Know about Administering a Family Member’s Estate

Most of us will, at some point in our lives, be called upon to administer the estate of a departed family member or loved one. While it may seem like an honor to have been entrusted with this responsibility, the reality is often it is a thankless, time consuming job, and even more so if there are disagreements and disputes among the heirs or beneficiaries of the deceased.

Being asked to shoulder the responsibility of administering a decedent’s affairs while still mourning their loss can be challenging. The precise rules and procedures that apply will depend on whether the decedent had a trust that was fully funded, whether probate will be necessary because the either decedent did not have a trust or did not fully transfer all relevant assets into the trust.

It will also depend on which state laws apply as well as the value of the estate. Keep in mind that it is impossible to provide an all-encompassing checklist that applies to each family situation and the procedures may vary greatly depending on if the decedent had a will or a trust. However, here are some general guidelines to keep in mind, some of which may or may not apply depending on the situation:

  1. Seek Professional Advice.   This is something you may only do once in your lifetime and Google is not going to give you all the answers you need.  Also, keep in mind you do not have to go at this alone. Depending on the value of the estate and its complexity, you may want to employ the services of professionals such as attorneys, CPAs, appraisers, etc. to assist in navigating your responsibilities. Typically this would entail an estate attorney, a CPA knowledgeable in estate and income taxes, and a financial advisor, although additional professionals may be needed depending on the situation. Usually, these fees would be paid from the decedent’s estate and so there should be no financial disincentive to seek help if needed. There may be certain actions, decisions, procedures or deadlines that need to be met in a timely manner, which could impact the ability of heirs or creditors to make claims or challenges to the estate. Most people are not aware of these rules and deadlines and so getting the right advice from the start may be good protection for both you and the estate.
  2. Inventory and Secure the Decedent’s Assets & Important Documents. A trustee or administrator of an estate is charged with the duty to assemble, inventory and safeguard the decedent’s assets and important documents. In the immediate aftermath of a death, it could be a chaotic situation with visitors and relatives coming and going and, as the representative of the estate or trust, it is incumbent on you to safeguard the important assets and documents. You will need to determine whether the decedent had a will or trust, and assemble all important documents, contracts, bank accounts, financial accounts, safe deposit boxes, investment accounts, unpaid wages or other income sources, mortgages, insurance policies, retirement accounts, social security or other government benefits, pensions, real estate, businesses, prior tax returns, digital assets (email, social media accounts), etc. of the decedent. It may take some investigation into the files of decedent or interviewing the family members to uncover all potential assets and liabilities, and don’t assume decedent told you everything there was to know. A separate bank account will likely need to be set up for the estate or trust, and never comingle your personal finances with the estate/trust finances. You will need to obtain several certified copies of the death certificate in order to establish control over certain accounts held by third party custodians/banks. Some assets such as real estate may need to be appraised to determine the fair market value for purposes of estate taxes, reporting, or for distribution.
  3. Gather and Assemble a List of Decedent’s Creditors. This does not necessarily mean that you will immediately pay every bill as soon as it arrives. Rather, there could be other expenses that take priority such as funeral expenses or federal and state taxes. As a trustee or administrator of the estate, you could get into trouble by paying expenses that then leaves the estate unable to meet its tax or other priority obligations.   It is important to try and get a broad picture of the Decedent’s overall financial situation, including factoring in potential tax liabilities, in order to establish a game plan for administering the estate or trust and paying creditors. Of course, some debts such as mortgages or car payments need to be timely made to prevent the account from going to default, but have a concerted strategy for handling Decedent’s creditors. If it appears that the estate may not have sufficient assets to cover all liabilities, then professional assistance or assistance from the courts may be needed to determine how to prioritize payments.
  4. Notify Decedent’s Heirs and Beneficiaries. Some states have time requirements on when heirs and beneficiaries should be notified and whether they are entitled to receive a copy of Decedent’s will or trust. Their ability to bring challenges to the trust or estate may depend on when they were first notified and so seek help to determine the requirements in your situation and document your communications with heirs and beneficiaries.
  5. Manage the Assets of the Estate Prudently and Obtain the Consent of Heirs or Beneficiaries for any Major Actions. As the trustee or administrator, you are a fiduciary and must act in the best interests of the beneficiaries or heirs. You generally have a duty to manage and invest the assets as a reasonably prudent investor would and can be held personally responsible for failing to do so. Therefore, seek the advice of legal and/or financial counsel regarding any issues with managing or investing the assets of the estate, and if a decision needs to be made regarding an important asset (such as selling the asset, making significant improvements to real estate, etc.), consider obtaining the written consent of all beneficiaries before authorizing such action.
  6. Distribute the Assets to the Heirs/Beneficiaries. Once all the creditors and taxes have been paid and the estate is in a position to be distributed to the beneficiaries, an accounting may need to be performed and approved by the heirs/beneficiaries, and then the assets of the estate/trust may be distributed and estate or trust closed.

Again, keep in mind these are only general guidelines for administering trusts and estates and there may be specific state or federal requirements and deadlines that will apply to your situation. If you have a particularly large estate that may implicate state or federal estate taxes, there are likely additional requirements and deadlines and so it is recommended that you check with appropriate professionals as soon as possible for large estates.

For smaller estates or assets with lower value that are not held in trust, there may be other options for distributing those assets without the need for probate.   The rules and procedures can be rather complex depending on the state and the situation and so make sure you consult with appropriate professionals to ensure you are complying with your responsibilities as a fiduciary for the estate/trust.

Feds Make Change to Help Entrepreneurs Raise More Money

May 9, 2017 Business planning, Real Estate, Small Business Comments Off on Feds Make Change to Help Entrepreneurs Raise More Money

Your federal government has modified rules making it easier to raise more money from so-called “unaccredited investors”. Under the updated rule, known as Rule 504, you can raise up to $5 million from unaccredited investors in a 12-month period. Prior to the 2017 update, you could only raise $1 million from unaccredited investors. The updated $5 million cap is available under Rule 504 offerings and should only be used when the offering is a private placement memorandum offering (“PPM”), where you aren’t marketing the offering to the general public but privately to know persons and contacts. The new $5 million cap will make it easier to raise larger amounts of money from unaccredited persons and we expect to see an increase in persons using Rule 504 to raise money for operating businesses and real estate investments.

Background to Securities Offering Exemptions

At some point in its lifespan, just about every business needs an infusion of capital, whether to buy equipment or inventory, hire more employees, make additional investments or something else.  Obtaining that capital can be accomplished in several ways – maxing out credit cards, getting a business line of credit, tracking down private money loans, bringing on partners who invest money but also participate in the decision-making process of the business, or maybe even having a bake sale!

However, sometimes it makes sense to raise cash by bringing on investors – silent partners who have funds to contribute, but who would rather not (and maybe who you would rather not) participate in the business.  These are the type of folks who want to invest their money, step away, and then have you make the hard decisions and put in the blood, sweat and tears to produce a return on their investment.  When you bring on an investor of this type, whether you know it or not, you have sold that investor a “security” and you are now under the purview of the Securities and Exchange Commission (the “SEC”) – perhaps the only federal agency with a less developed sense of humor than the IRS.

Created by FDR and Congress while the country was in the throes of the Great Depression in 1934, the SEC exists to make sure the excesses and outright frauds that created the 1929 Stock Market Crash do not repeat themselves.  The intervening decades have seen the number and complexity of SEC regulations wax and wane, but in 2017 we are left with a multi-layered, multi-faceted system that those seeking to raise capital should not attempt to navigate without expert guidance.

Regulation D and the 2017 Federal Securities Exemption Options

One of the most popular tools for small businesses looking to raise money is something called “Regulation D.”  In a nutshell, under Regulation D, the SEC allows businesses to raise capital through the sale of securities without requiring those businesses to register said securities with the Commission (an extremely expensive and time-consuming process).  For the past 35 years or so, there have been three separate and distinct sets of hoops to jump through to comply with Regulation D, called Rule 504, Rule 505 and Rule 506.

Rule 506 has been the most popular of the three.  For all intents and purposes, Rule 506 only allows businesses to offer and sell securities to “Accredited Investors” – people with a net worth over $1 million, or whose annual income exceeds $200,000 (individually) or $300,000 (jointly with a spouse).  In exchange for only dealing with Accredited Investors, issuers of Rule 506 offerings get to raise an unlimited amount of money from an unlimited amount of investors over an unlimited amount of time.  In some situations, they may also be eligible to solicit their offerings to the general public (think email blasts and radio and TV ads).  Rule 506 offerings are also simple at the state level – where only the same short document filed with the SEC (the “Form D”) has to be filed (and a fee paid) in each state where Rule 506 securities are sold.

2017 Update

The recent SEC change that will help entrepreneurs raise money comes in Rule 504 of Regulation D.  The nice part about Rule 504 has always been that it allows the company raising the funds to accept money from both accredited and non-accredited investors – a huge advantage if you don’t have contact info for a bunch of super-rich folks in your phone.

The main problem with Rule 504 has always been that you can’t raise more than $1 million in any 12-month period, and $1 million doesn’t go quite as far today as it did in 1988 (which is when the $1 million cap was instituted).  Well, apparently late last year the powers that be at the SEC woke up one morning and realized that 1988 was almost 30 years ago, so they decided to increase the cap from $1 million to $5 million in any 12 month period.  This increase became effective January 20, 2017.  The increase is a potentially significant change, so let’s recap the parameters of the new Rule 504 Offering:

1)   You may offer up to $5 million in securities in any 12 month period.

2)   You may offer securities to an unlimited number of both accredited and non-accredited investors.

3)   Unless you jump through some pretty onerous hoops, you may not “generally solicit” your offering.  You will still need to rely on “word of mouth” marketing.

4)   You can’t play in the Rule 504 sandbox if you have run afoul of the SEC previously and have been branded a “Bad Actor” under their rules.

5)   You still have to comply with state-by-state “Blue Sky” laws.  This can be tricky.  Unlike with a Rule 506 offering, state law compliance is not always as simple as filing the SEC Form D and paying a fee.  In some blessed states (let’s give a shout out to Colorado and South Dakota) the process is exactly the same as a Rule 506 offering.  In others (I’m looking at you California and Texas) the rules are restrictive and complex, and you will be very limited on the number of folks you can accept money from (or even solicit) without “qualifying” the offering in that state.

The bottom line is that if you want to bring on investors and raise up to $5 million in capital, but you are worried about only being able to take money from “accredited investors” then the Rule 504 Offering absolutely needs to be on your radar.  It’s going to take a bit of heavy lifting on the state compliance side of the coin, but depending on the states involved, it could be a very attractive option.  Please speak with an experienced securities attorney to see if a Rule 504 Offering could make sense in your specific situation.