Posts by: kevinkennedy

Simple is Sexy: Maximize Retirement Contributions for Tax, Asset Protection, and Estate Planning Benefits

September 25, 2017 Asset Protection, Retirement Planning, Tax Planning Comments Off on Simple is Sexy: Maximize Retirement Contributions for Tax, Asset Protection, and Estate Planning Benefits

Many clients appreciate our ability to see the big picture.  For example, when it comes to asset protection, estate planning, and tax planning, none of these practice areas happen in a vacuum, meaning the methods and tools used for asset protection will almost always affect and impact your estate plan and/or tax plan, for good and for bad, and vice versa.  These areas should be coordinated together.  While a lot of clients appreciate that, they often times overlook or fail to maximize the full benefits that come with funding and investing with a retirement account because it just doesn’t seem, well, sexy.  Keep reading.

  • Asset Protection. Effective asset protection rarely involves a transfer of all of your assets into some foreign off-shore jurisdiction.  For many people, there are much less expensive and effective ways to protect your assets and one of those ways is to put your money into retirement accounts.  So before you take other, more expensive, efforts to protect your assets, make sure you’re fully contributing to your retirement accounts because the funds inside your retirement accounts are generally protected from your creditors, though it varies from state to state in terms of the extent of the protection and the type of retirement account(s) e.g. ERISA v. Non-ERISA, etc..  Our office can help you determine the extent of the creditor protection based on your state and the type of retirement account but generally speaking all retirement accounts are protected from creditors at least up to $1M.
  • Estate Planning. One of the primary purposes of setting up an estate plan is the ability to transfer assets upon your death without having to go through the probate court.  One of the features of a retirement account is that upon your death it will directly transfer to whomever you listed on the account’s beneficiary designation form without having to go through the probate court!  So at a minimum, make sure to keep your retirement account beneficiary forms updated.  I am not suggesting you don’t need an estate plan at all, but if you fail to set one up, at least your retirement account would transfer upon your death without going through probate court.
  • Tax Planning. It typically makes sense to sell an asset or receive income when you’re in a lower income tax bracket.  There are all sorts of financial vehicles and instruments to accomplish these objectives, but once again, the “low hanging fruit” is to acquire assets and receive income into a retirement account.  Presumably during your peak income earning years i.e., 30’s, 40’s, and 50’s, rather than paying tax on your income and then contributing in a taxable account where the income is taxable, you defer the income tax liability until your later years once you’ve retired, under the presumption that when you’re retired, you are in a lower income tax bracket, AND the contributions you made into the retirement account are tax deductible!!  Plus, the money you would have paid in taxes stays in your account fully invested allowing the account to grow more quickly. Further, the REAL power of using a retirement account for tax planning is to utilize a Roth account because even though the contributions are not deductible, any qualified distributions are tax-free, even after your death!  In other words, when that Roth account is inherited, no tax is paid on distributions to heirs, unlike with a traditional retirement account where in the hands of the heirs, distributions are taxed.

Here’s a fictional story to illustrate my point.  Mart Kohlersen is 57 years old.  He’s worked for 35 years and done very well for himself.  He has an investment account portfolio worth $1.8M and owns a lot of toys (boat, ATV’s, RV’s, etc.).  He owns his home outright which is worth $950,000 and has $10,000 in a retirement account because he figures he’ll live off his investment account and downsize his house when he retires if needed so he never bothered to put much funding into his retirement account.  One day, while driving his ATV, he seriously injures somebody.  His insurance is insufficient and he loses in the lawsuit.  The plaintiff obtains a $1.5M judgment against Mart.  His accounts are garnished and assets are sold, leaving him with a much smaller investment account and a much smaller house.  And no more toys.  To make matters worse, Mart died later that year without an estate plan, and for the next five years, his siblings and kids fought in probate court significantly and further depleting what assets were left/available.  It’s a sad story, and he definitely would have benefited from some much better asset protection, tax planning, and estate planning, BUT, EVEN if he did nothing else different except fully contribute to his retirement accounts, here’s a much happier ending:  If he would have fully contributed to a retirement account throughout his lifetime, a large portion of his net worth would be inside  retirement accounts and thus protected from the aforementioned creditor, and thus remain intact to receive the tax benefits discussed above, AND said account(s) would have directly passed to whomever he named as the beneficiary(ies) without having to go through probate court!

In sum, I’m not suggesting that the ONLY investment vehicle should be your retirement account.  There are annual contribution limits which make it impossible to put all of your funds in a retirement account.  However, I am suggesting that if you will take advantage of fully contributing to your retirement account as much as possible, the RESULT is you will have a large account that has built-in, automatic features that provide creditor protection, estate planning, and tax planning.  Our office is available to discuss your situation and make sure your estate plan, asset protection plan, and tax plan is well coordinated and includes taking advantage of this “low hanging fruit”.

Essential Tax & Legal Tips for the NEW Business Owner

August 28, 2017 Business planning, Law, Tax Planning Comments Off on Essential Tax & Legal Tips for the NEW Business Owner

Starting a business is a process.  It is MUCH more than filing the one or two page articles/certificate of formation with the state.  At the same time, it doesn’t have to be so complicated and overwhelming that you never start.   Further, not only is starting a business a process, it’s a process that is unique to YOU.  It is not a cookie-cutter one size fits all proposition.  What your business and YOUR situation require may be completely different than anyone else you might know who is self-employed.  Having said that, here are 8 tips that apply to all businesses, but how to USE these tips will be different for each business owner:

  1. Operate out of and properly maintain the appropriate entity formation for YOUR situation. While it is true you can operate your business as a sole proprietorship, I think it’s generally better to operate your business out of an entity such as an LLC or corporation.  First, I think it has a positive impact on your mindset as a business owner in that it makes you feel more “legit”and others will see you the same. More importantly, it is always better to operate your business out of an entity such as an LLC or corporation as those companies prevent liability of the business from extending to the owners.  Lastly, operating out of an entity can in certain situations produce tax savings such as when operating out of an S-corporation to save self-employment taxes. This is generally recommended for operating businesses who have $30-$40k net annual income.
  2. Make sure you have a partnership/ownership agreement if there are other owners. If you have somebody that you trust to own and run your business WITH YOU, that’s a great thing, and hopefully you continue to have a great business relationship with that person(s).  But don’t let that be a reason to NOT get your relationship in writing through a written agreement that you both/all would sign to memorialize the rights and obligations of each other.  If the business fails or one of the owners wants out or isn’t “pulling their weight” and you didn’t address this in writing BEFORE the crisis/event has occurred, that friendly business partner could wind up AGAINST YOU.
  3. Embrace bookkeeping. Embrace the fact that bookkeeping is one of the keys to maximizing tax write-offs and commit to either obtain the right training to do it yourself OR see the value in outsourcing it to someone who knows what they’re doing.  Maybe your strength as an entrepreneur is the marketing/sales side of business, or you have the relationships to be successful, but when it comes to taxes, you must keep good records, and for all your strengths, if you’re not organized, you’re going to get killed in an IRS audit.  So either learn to be organized with your records in terms of tracking expenses and use a good bookkeeping software (Mark Kohler offers a great set of videos that train on how to use Quickbooks), or outsource it to someone else who is good at it so you can focus on what you do best. The clients who embrace bookkeeping usually have more write-offs and deductions come tax-time as they rarely miss an opportunity to expense something.
  4. Have periodic tax and legal consults with your attorney and CPA. Unfortunately, many small business owners don’t use a business attorney ever, and maybe only meet with their CPA once a year, assuming they even use a CPA.  I think the cost of meeting with a good business attorney and CPA at least twice a year is worth the cost.  Prevention is much less expensive than the cost of getting “sick”, whether “sick” is an unnecessary amount or risk exposure that leads to a lawsuit, or whether “sick” is failure to maximize tax write-offs and you’re paying more than necessary to Uncle Sam, OR, maybe without a good CPA you’re TOO aggressive on your taxes or even worse, you don’t file a return at all and the IRS comes knocking.  Not to mention meeting with your attorney and/or CPA is a tax write-off!  On the legal side, it is good to get periodic “checkups” on how your business is structured, what has changed, what’s coming up that is new in your business, etc., so that your business attorney can guide you on mitigating your risks and protecting against liabilities.  On the tax side, it’s good to also get periodic “checkups” to talk about tax strategies and which ones you aren’t maximizing or implementing, or which ones you’re doing wrong that is going to be a problem in an audit, i.e. health care, paying kids, auto, home office, dining, entertainment, travel, tax deductible contributions to retirement plans, owning real estate, etc.
  5. Be sure to have adequate insurance for your business. This legal tip is not new or cutting edge by any means, but the failure to follow it could be catastrophic to your business.  A good insurance broker can help a great deal to match up the appropriate amount of insurance (in terms of amount and policy types) for YOUR business.   You don’t want to spend TOO much of your business income on insurance premiums but if you don’t have any insurance, if/when a liability comes up in your business, and you don’t have an appropriate insurance policy to divert that financial responsibility for that claim/liability to an insurance company, it puts the full force of that claim or liability on potentially ALL of the assets and income of your business.
  6. Make sure to use contracts in your business and don’t rely on verbal conversations or handshake deals. You may have heard that under the law in most situations verbal contracts are enforceable.  That doesn’t mean you should RELY on them, especially with the core aspects of your business i.e. your clients, your vendors, your business partners, etc., you want to properly memorialize the agreement IN WRITING.  This will make it SO much easier to prove your case in court if the other party violates/breaches the written contract versus trying to prove they breached/violated a contract that is not in writing and signed by all parties.  You should have a good service contract or something applicable that is provided to your customers.  This not only helps with enforcing any liabilities or claims you have against them (non-payment for example), but it also is REALLY helpful to clarify the SCOPE of what your business WILL do for them and what your business will NOT do for them.  If you don’t clarify that in writing, you have no idea what your customer assumes or expects, so even it doesn’t result in a lawsuit, it can create a rift between your business and that client and result in bad press about your business on social media, etc.
  7. Make sure you are properly characterizing your workers (independent contractor v. employee). There is a temptation for the small business owner to view/consider ALL of their workers as independent contractors.  The small business owner loves to do that because there’s no payroll tax, no added costs for worker’s compensation, unemployment, employee benefits, etc.  Unfortunately, the federal and state taxing authorities do not take YOUR word alone that your workers are actually independent contractors.  IF you improperly classify workers as independent contractors and the government (state or federal) determines they are employees, you will have fines and penalties.  Don’t misunderstand, you can have workers that ARE independent contractors, so long as they are TREATED as independent contractors, and the key word there is “independent”.  If you’re going to micro-manage what they wear, when they work, how they work, where they work, etc., that doesn’t sound very “independent” and it sounds at lot like an employee, which it is sometimes necessary to have that much control of your workers, but you can’t have it both ways, if you treat them like employees, you have to accept that it comes with things like payroll taxes, unemployment, worker’s comp, etc.
  8. Have an exit strategy (including an estate plan). Understandably your primary concern is getting the business STARTED, so you might think it would be unproductive to think about an exit strategy so early in the “game”, but it is so important to have that in your mind.  Do you want to grow the business and sell it soon as possible or hold onto it and pass it loved ones, or maybe you want to buy out your partner’s ownership (or vice versa).  There are many unknowns that make it difficult to have any certainty about what WILL happen, but it’s very productive to consider the ways in which it COULD happen and form an opinion on what seems most appealing to you.  But REGARDLESS of what your exit strategy is, you should make sure your business ownership and estate plan is coordinated.  Even if you plan to sell the business as soon as possible, and you have no plans of owning the business for the long-term, the spontaneity of death requires that even in that situation, your business ownership be coordinated with your estate plan.  Don’t forget about incapacity either.  This could mean you have power of attorney documents in your estate plan that contemplates ownership/operation of your business if you become incapacitated.

In sum, your business needs you as the business owner to make sure your business is healthy from both a tax and legal perspective.  These tips are a great starting point to make sure that happens.  Our office is available to assist and would love to help you and your business with implementing these and other tips specifically to you and your business.

Estate Planning 101: 5 Tips to Avoid Mistakes

July 25, 2017 Estate Planning, Law, Litigation Comments Off on Estate Planning 101: 5 Tips to Avoid Mistakes

As I work with small business owners and investors throughout the year, I want them to see the big picture when it comes to Estate Planning. Many misunderstand what the Estate Plan is all about and think it’s simply an ‘asset protection’ strategy…that couldn’t be further from the truth.

An Estate Plan is about passing on your hard earned wealth to your loved ones, or a project/institution you love.  What a tragedy for a small business owner or investor to spend decades toiling to build wealth, only to have it crumble at the very end of their life because they don’t have an estate plan. YOUR wealth should go to what or who you love, NOT lawyers or to ungrateful and litigious family members fighting over who gets what.

Having said that, estate planning is not just for entrepreneurs or investors – anyone who has assets and/or a family should have an estate plan.  So here are 5 tips for avoiding mistakes when setting up an estate plan:

1. Putting It Off / Procrastination. Nobody likes thinking about dying.  But here’s a motivating factor to not put off your estate plan.  Imagine how you would feel if upon your death your assets went to your worst enemy (or at least someone you don’t like).  Although that’s an extreme thought, the reality is that if you don’t have an estate plan, you lose that control, that ability to decide who gets your assets upon your death.  So before you put off doing an estate plan, imagine your ex-spouse getting everything you own, and hopefully that is all the motivation you need to get your estate plan done.  The first step is to fill out an estate planning questionnaire.  Our questionnaire has all the basic questions you should be asking yourself when setting up an estate plan.  Then I would review those answers and we would schedule a consult to make sure everything is in order.

2. Making Sure the Estate Plan Fits You / Your Situation. It doesn’t make sense to have an elaborate expensive estate plan if that’s not necessary.  It also doesn’t make for a successful business owner or investor to pay $99 for a boilerplate estate plan off the internet.  The key is making sure your estate plan is a good fit for your  You don’t want it bigger and more expensive than it needs to be, but you also want to make sure it is comprehensive and custom-fitting to your circumstances.  Our office can assist with making sure it’s a good fit for your situation.

3. Not Knowing the Difference Between Creating a Trust and Funding a Trust. One of the biggest tragedies is when someone finally gets an estate plan with a revocable living trust but they fail to FUND the trust i.e. put assets into the trust.  Certainly the trust can’t own assets until it is created, but simply creating the trust without funding it is insufficient.  Creating your revocable living trust is a matter of getting the documents drafted and properly executed/signed.  Funding your trust is a matter of actually putting your assets into the trust.  The manner in which this is accomplished depends on the asset.  Some assets require having ownership re-titled into the name of the trust.  Other assets simply require having the trust listed as the beneficiary.  But if you create the trust but don’t fund it, you’re missing arguably the most important step in the process of estate planning.  If you created a trust but are unsure if it’s been funded appropriately, our office can assist with this.

Here is a video by our senior partner here at KKOS lawyers, Mark J Kohler, explaining 4 reasons why you might need a trust. Understanding the role and purpose of a trust can help you fund it and maintain it properly.

 

4. Understanding that Estate Planning is Not Just About Death. If death isn’t reason enough to have an estate plan, what about incapacity?  Imagine the impact on your business and your life if you lost your mental capacity either because of a coma or something less dramatic.  You would no longer be able to make important decisions about your business and your life.  A good estate plan will include documents that address this.  So make sure your estate plan has the appropriate documents for death AND disability/incapacity.

5. Knowing When to Make Changes / Take Ownership of Your Estate Plan. Your estate plan is meant to be a living, breathing thing that should probably be changed as your life circumstances change.  If you plan to setup an estate plan and hope to leave it alone until you die, there’s a good chance either the applicable law will have drastically changed or your intent will be completely different than it was when you first set it up.  So if you put your best friend as a beneficiary of your trust and then you guys become worst enemies, it’s a good idea to update to your trust.  If your trust was written when your kids were little and they’re now adults, it’s probably a good idea to update your trust.  If you put your brother as the successor trustee of your trust with no backup and he died 5 years ago, you need to update your trust.  Basically, if the nature of your relationship with anyone you’ve listed in your estate plan has materially changed, it’s time to update your trust.  Now if someone’s address changes or something minor, you don’t necessarily need an overhaul of your estate plan.  The other part of this tip is making sure you take ownership of your estate plan.  Hopefully you get an attorney to draft it but even so, you should know the basics of your estate plan such as who the trustee(s) is/are and who are the beneficiaries, so that as your life changes and your relationship with these people change, you know if a change needs to be made to your estate plan.  For example, I have talked to many people who obtained an estate plan previously and they don’t know who the beneficiaries are or who the trustee(s) is/are or what the trust owns.  While you don’t need to know the legal jargon you should know these basics about your estate plan.

Hopefully these tips will get you thinking about setting up your estate plan or updating it if you already have one and your situation has changed from when you set it up originally.  Our estate plans come include a one hour consultation so you’re getting sound legal advice tailored to your situation, and not just boilerplate paperwork. Please contact our office at 888-801-0010 to book a consultation with an attorney to start the process. Any retainer will be applied to the cost of setting up the entire estate plan.

Bitcoin Basics: What is Cryptocurrency?

July 3, 2017 Business planning, Law, Tax Planning Comments Off on Bitcoin Basics: What is Cryptocurrency?


Questions about Bitcoin have increased dramatically as investors have seen the price of Bitcoin rise from 30 cents per Bitcoin in 2011 to $2,550 per Bitcoin in July 2017. This article answers basic questions about Bitcoin and we’ll have two follow-up articles addressing IRA ownership of Bitcoin and about accepting Bitcoin in your business. Needless to say, there’s a “bit” of uncertainty when it comes to whether or not one should invest in Bitcoin (sorry –bad pun) but here’s a breakdown of the basics.

What Is Bitcoin And How Does it Work?

Bitcoin is one type of digital currency also known as crypto currency. Users of Bitcoin pay each other directly without traditional intermediaries such as banks or even governments using what is known as blockchain technology to effectuate transactions. First, you would install a Bitcoin wallet on your device and it will generate a Bitcoin address. When you provide your Bitcoin address, the person paying you can transfer funds to your address and into your Bitcoin wallet. This transaction and all transactions on the Bitcoin network are done using this blockchain technology, which is a ledger that tracks balances. Cryptography i.e. mathematical proofs that provide high levels of security are used to strengthen the security of the Bitcoin network. By the way, cryptography is not some untested technology – it is through cryptography that online banking is currently done. As a Bitcoin user, you would authorize a transaction using a secret piece of data called a private key. A transaction isn’t finalized until it has been mined, which is a confirmation process to ensure the integrity of the transaction. You can learn more at www.bitcoin.org. I will write another article regarding whether a small business owner should consider accepting Bitcoin as a form of payment.

Where Did It Come From And Is It Risky?

Bitcoin was created in 2008 by an anonymous creator. Many executives in the financial sector are cautious or even skeptical, but others are optimistic and confident that it is not going anywhere. Fidelity CEO Abigail Johnson believes in the future of digital currency and has been a proponent of Bitcoin.. One of the biggest complaints against digital currency is the lack of security/protection from hackers. JP Morgan Chase CEO Jamie Dimon has been a notable critic citing its use by criminals looking to transact outside of the traditional financial system. In 2015, a notorious online drug sales scheme was orchestrated using Bitcoin. There was an incident in Japan in 2013 in which digital hackers stole about $450M worth of Bitcoin. A similar incident happened in Slovenia in 2013. Other controversies surrounding Bitcoin include the disappearance of notable Bitcoin start-up companies Neo and Bee in 2014. In 2015 there were arrests when it was learned that Bitcoin company MyCoin was running a Ponzi scheme in Hong Kong. There have been quite a few money laundering cases here in the U.S. involving Bitcoin.

Should I Invest In It And How Do I Invest In It?

Most people investing in Bitcoin are using a relatively small portion of their investment portfolio i.e. I don’t know anyone who is investing most or all their “eggs” in the digital currency. A lot of people are excited about it, but like any investment, if you don’t time it right and/or you don’t know what you’re doing you can and probably will lose money. The concept, however, in simplistic terms is that you buy the digital currency at a certain price and sell it for more than you paid for it. There is the famous story of Kristoffer Koch who paid $27 in 2009 for 5,000 Bitcoins which has now been valued at almost $1M. Currently, 1 Bitcoin equals approx. $2,550 U.S. Dollars, so it would cost you over $10,000 to buy 4 Bitcoins right now. Over the last three or four years, the value of Bitcoin has continued to increase and it is the dramatic increase in value that has caused the recent stir and attention around digital currency investing. Others are attracted to Bitcoin as a protection against government currency. These investors fear a failure in the financial markets, which will dilute and may cause value declines in the dollar or other government currencies. These investors prefer to hold their Bitcoin directly, rather than through a fund.

Assuming you’ve done your research and are comfortable with the process, in terms of actually investing, one option is to invest in the Bitcoin Investment Trust (GBTC). GBTC is a publicly traded security that solely invests in Bitcoin. This allows an investor to use a traditional investment vehicle to realize gains (or losses) as the price of Bitcoin fluctuates without actually possessing and storing bitcoins. However, investing in bitcoin through the GBTC provides only a fractional value of the actual price of bitcoin and so in terms of ease and convenience, the GBTC is a good option, but at least for now, it’s not the best option to capitalize on the full value of Bitcoin. Coinbase, Inc. is another option – it is essentially a digital exchange where you can invest in Bitcoin as well as other cryptocurrencies (see below). Another option is to invest in actual Bitcoin through a self-directed IRA, which I will write about in another article.

What Are Other Types of CryptoCurrency?

Bitcoin is not the only form of digital currency – others include Litecoin, Peercoin, Primecoin, Namecoin, Ripple, Quark, Mastercoin, and Ether(Ethereum).

In sum, like any investment, it requires due diligence and a correct timing of the market(s). As you can tell, there have been some crazy tales of Ponzi schemes and fraud but also stories of incredible returns. In any case, I don’t think digital currency is going away anytime soon – I guess you could say that the stories in this article have been “tales from the crypt”-o currency (it was a stretch but I decided to go for it).

6 Tax and Legal Tips When Investing in Real Estate

June 6, 2017 Real Estate Comments Off on 6 Tax and Legal Tips When Investing in Real Estate


Sir Francis Bacon put it best when he said, “knowledge is power”.  Not only does he have a great last name but he gives good advice that applies to all facets of life including investing in real estate.  Whether you are new to real estate investing, or a seasoned investor, before you rush off to make your first/next real estate investment, consider the following tips all of which are to help you be strategic about investing in real estate the right way for your situation, i.e. knowledge is power.  With that in mind, here are six tax and legal tips / questions to ask yourself when investing in real estate:

  1. Will you invest directly in real estate by yourself / with a small number of business partners OR invest indirectly alongside many other investors in a company that invests in real estate? For example, let’s say you invest $200,000 for 5% ownership of a company that will take your funds and, along with the funds of other investors, probably in the millions of dollars, invest in real estate. In this situation, you typically have very little control or decision-making authority, such that you are basically “parking” your money and somebody else will make decisions regarding the real estate investment such as what to acquire, how to manage it, when to sell, etc.    There is nothing wrong with this type of investment, you may actually desire that, but you want to understand this going into the investment and not have false expectations. You should consult with an attorney before signing documents to invest in real estate through a company, particularly one in which you are a minority owner.  Contrast that with a situation in which you invest $200,000 along with a friend or business partner to buy an investment property.  In this situation, you have a lot more control over the real estate investment, but that comes with more responsibility and potentially more liability.  Again, you should consult with an attorney to make sure you are setup properly from a tax and liability perspective and also to make certain you have the appropriate documentation between any business partners you may have in addition to the proper documentation to make your real estate investment.  Neither option is better than the other one – they are just different so before making your investment, you should consider which scenario makes more sense for you / which situation you are dealing with.
  1. Does your real estate investment require financing? There are many benefits that come with investing in real estate with financing/loans, such as minimizing the amount of out-of-pocket cash you have to provide.  However, anytime you have a loan, that means you have a lender, and if you have a lender, that means you have to play by their rules.  Sometimes having a lender is like dealing with a big gorilla on your back.  They have a legitimate interest in the property and want to make sure their interests are properly protected.  So by financing a property, you tend to lose a bit of control.  You should have an attorney review any loan documents so you understand the rules of the game with that particular lender as it will affect your deal.   Without involving a lender in your deal, you get a bit more flexibility and control of the deal but of course this assumes you have all of the cash necessary to complete the investment.  Further, if you own properties outright i.e. no financing, that typically means there is a sizeable amount of equity which may require some additional consideration and structuring in terms of asset protection.  Again, neither option is better than the other one – they are just different which is why before making your investment, you should consider which scenario makes more sense for you.
  1. Are you going to invest in real estate inside your retirement account OR outside your retirement account? For the average person, they probably have no idea they have the option to invest in real estate inside their retirement account. But for most of our clients, it is a large part of how they invest in real estate.  In fact, many of them invest in real estate inside AND outside their retirement account.  Knowing the difference between the two and the impact it has is crucial.  If you invest in real estate inside your retirement account, the income is typically either tax-deferred or tax-free.  This is probably the biggest benefit to investing in real estate inside your retirement account.  However, there are a few more restrictions when investing in real estate INSIDE your retirement account versus outside your retirement account.  For example, inside your retirement account, you need to be aware of matters such as “disqualified persons”, “prohibited transactions”, “unrelated business income tax”, and “unrelated debt financed income tax”.  Such matters don’t exist when you invest in real estate OUTSIDE your retirement account.  Long story short, there is a ton of upside to investing in real estate inside your retirement account, but you should counsel with an attorney before doing so.  Yet again, neither option is better than the other one – they are just different so before making your investment, you should consider which scenario makes more sense for you.
  1. Is your real estate investment a long-term deal OR a short-term deal? This is especially important if you are simply one investor in a company that invests in real estate alongside a number of other investors because if the investment is long-term real estate, such as owning a commercial property, an apartment building, or even a single-family residence, your capital is typically “locked up” for a longer period of time as opposed to a short-term real estate deal such as a 12 month development project for immediate re-sell. Either way, you may be taxed on the income differently with a short-term deal than with a long-term deal, which is why it is important to understand before making your investment how you will be taxed on your income from your real estate investment.  Again, neither option is better than the other one but you should consider which scenario makes more sense for you.
  1. Understand the different ways to acquire investment properties. Besides cash deals and traditional financing deals, there are other ways to acquire investment real estate, such as seller financing, or “subject to” deals.  There are pros and cons to some of these less conventional forms of acquiring real estate.  One of the biggest benefits is, like traditional financing, it requires relatively little out of pocket cash.  However, when acquiring a property via seller financing or subject to existing financing, you should consult with an attorney to make certain the purchase contract properly reflects this type of financing.
  1. Understand the various ways to sell your real estate investment (Exit Strategy). The more you consider your exit strategy before making your investment, the better situation you will be in.  This is similar to #5 above, you might decide to sell via seller financing, or an installment sale, or a 1031 exchange.  These are some of the strategies you might consider to defer the capital gain income tax that would otherwise be due when you sell your real estate investment.

In sum, just because you have a friend or a relative who invested in real estate a certain way does not mean you should invest in the same manner.  For example, there is a big difference between someone who invests outside their retirement account as an investor in a company alongside a number of other investors in a short-term real estate deal versus someone who is invests inside their retirement account in a two-man partnership on a long-term real estate deal that is financed/has a loan.  These are two situations that will have different outcomes from a decision-making perspective during the life of the investment, the liability exposure, and the tax consequences.  So before you rush off to invest in real estate, please contact our office.  We can properly advise you and also make certain you have the right paperwork, contracts, entities, etc., for your particular real estate investment(s).

Owner’s Liability After Your LLC is Closed or Dissolved?

April 25, 2017 Asset Protection, Business planning Comments Off on Owner’s Liability After Your LLC is Closed or Dissolved?

Many business owners wonder whether their LLC will protect them from claims and liabilities after their LLC is closed. Does the limited liability protection of the LLC still apply? Does it only apply for claims when the LLC was active? What about after the LLC is closed or dissolved? What if the claim is about something that arose when the LLC was in good standing but was something you never knew and filed after the LLC is dissolved?

Here are a five tips that answer these questions and that will help you decide when to dissolve your LLC.

First, when you close an LLC, a process known as dissolution, you must pay known/present LLC creditors before distributing assets and profits to the owners of the LLC.  If you fail to pay known creditors of the LLC and if you instead distribute assets of the LLC to the owners, then the owners can be sued by those creditors to collect on the assets distributed from the company.  Part of the process of properly dissolving an entity includes sending notice to known creditors.  In other words, if the LLC has current debts/liabilities and/or known creditors, you can’t simply “shut down the doors”, take all of the assets personally, and refuse to pay the creditors.   If the LLC is insolvent (i.e. the debts exceed the assets) and if there are no assets distributed to the LLC owners, then their is no personal assets which a creditor can pursue against the LLC owners.

Second, dissolve the LLC once business operations have ceased and once known creditors have been paid or otherwise resolved. If you have known creditors in your business, you cannot close down an LLC for the sole purpose of evading those creditors and then re-open your business with another LLC if it’s essentially the same business. As a precautionary measure, if you are aware of a liability issue but you are unsure whether it is a legitimate claim, you should wait until the statute of limitations for that potential claim has passed until you dissolve the LLC.

Third, follow the LLC operating agreement and/or state statutes regarding the voting rights required for dissolution and for the order of events to dissolve an LLC. A common order of events is as follows; pay-off all known creditors, return contributed capital to the members, distribute profits/assets to the members.  Many states have a notice requirement to creditors of the LLC which can actually be helpful in some cases to shorten the time limit they may have to file a claim. If you have known creditors you will want to send them notice of the dissolution to shorten the period upon which they have to file a claim for the assets of the LLC.

Fourth, if you dissolve the LLC when no known/present LLC creditors exist, the owners of the LLC are still afforded the protection from creditors for any claims that arose when the LLC was in good standing.  For example, if you dissolved your company in 2015 and were later sued in 2017 for an act that occurred in 2014, then so long as the company was unaware of the incident giving rise to the claim then the members of the LLC would be personally protected from the liabilities of the business.

Fifth, if you are aware of a potential liability (no judgement or lawsuit exists) and dissolve the LLC, the members may be personally liable up to the amount distributed from the LLC upon dissolution. This situation was the 2014 case of CB Richard Ellis v. Terra NostraIn this case, an LLC failed to pay a commission to their broker pursuant to a listing agreement and then dissolved their LLC. The real estate broker eventually obtained a judgement against the dissolved LLC and was able to pursue the members of the LLC for the liability of the LLC up to the amounts distributed to the LLC owners.

In Sum, if the purpose of the LLC has legitimately come to an end, and there aren’t any known/present creditors, then depending on the laws in your state and your situation, you may decide either to (a) keep the LLC open until, for example, the statute of limitations runs out, or (b) shut down the LLC so long as it was in existence and in good standing during the time in which the business had operations. If you dissolve the LLC when there are known/present creditors, the members of the LLC will generally be liable for amounts distributed from the LLC to the owners.

Note:  This article, like all of our articles, is to provide some general guidelines – always get specific advice for your situation.

Business Succession: When Corporate Governance and Estate Planning Converge: Are You Setup Properly?

March 28, 2017 Business planning, Corporations, Estate Planning Comments Off on Business Succession: When Corporate Governance and Estate Planning Converge: Are You Setup Properly?

You may have heard in the news recently that there’s been some fighting among the ownership team of the Los Angeles Lakers. When Dr. Jerry Buss, the majority owner, died in 2012, his ownership passed to his six children via a trust, with each child receiving an equal vote/share.

His succession plan had his daughter Jeanie take over his position as the Lakers’ governor as well as its team representative at NBA Board of Governors meetings. This last month, there’s been a fight between her and certain of her brothers that has become a power struggle filled with plenty of contention and legal fees. They appear to have settled this particular dispute but there were a lot of moving parts to their particular situation especially because of NBA rules, etc., so in that sense, what happened with the Buss family is unique.

However, what is not unique is that every business owner faces the same dilemma that Dr. Buss faced before he died – how to pass their business to their loved ones properly and effectively through corporate documents and estate planning. We have many clients who are confronted with this. With that in mind, here are a few tips and items to consider:

  1. Make Sure You Have the Right Entity and the Right Trust. There are a number of different entity structures you might have for your business and there are just as many, if not more, different type of trusts. If you aren’t properly setup, it’s going to make your business succession plan very difficult. In the case of Dr. Buss, at least he had a trust, and what turned out to be a month long dispute might very well have turned into a much longer dispute but for the trust. However, just having a trust is not the end-all be-all, rather, you need to make sure it’s the right type of trust and also that it contains the appropriate provisions for your circumstances.
  1. Have Your Corporate Documents Reviewed and Amended if Necessary. This is critical especially when you have business partners. Hopefully you have something in place currently in terms of corporate governance documents, whether it’s an operating agreement, partnership agreement, bylaws, and/or a shareholder agreement. If so, don’t assume it covers this issue and/or that is covers this issue in the best way for you based on your circumstances. The provisions you’ll want reviewed include but are not limited decision-making, ownership rights, transfer of ownership, etc.
  1. Consider A Plan To Transfer Some or All of Your Business Ownership To Your Loved Ones During Your Lifetime. You can wait until you die to have your business ownership transfer to your loved ones, or during your lifetime, you can strategically phase the transfer of ownership in your business to your loved ones over time. There are pros and cons to both approaches. With the former approach, it could increase the likelihood of estate tax liability. With the latter approach, you can be directly involved in the transfer of ownership and if handled carefully, it can decrease the likelihood of estate tax liability. This is where meeting with a professional can help you make a good decision here.
  1. Don’t forget to plan for incapacity. If your estate plan and business documents properly transfer your ownership to your loved ones, then you’re ahead of the game, but that is only half the battle. You also need to plan for incapacity. Such an event, if not properly planned for, can have a devastating effect on your business. You may recall back in 2014 another NBA owner, Donald Sterling, of the Los Angeles Clippers was ruled mentally incompetent and it affected his rights as owner of that team.

In summary, don’t own an NBA team from Los Angeles, but if you do, or if you own any other business, make sure you have a coordinated set of documents in terms of the corporate documents that govern your business and your estate plan documents, and that you’ve addressed not only death in said documents, but disability as well.

You’ve worked hard to build your business and when your intent was for the business to provide peace and stability for your family, the last thing you want is fighting and instability. If you are a business owner, please call our office so we can assist with this critical topic.

Real Estate Investor Escapes Criminal Charges: Legal Factors When Raising Money from Others with Promissory Notes

February 28, 2017 Business planning, Real Estate Comments Off on Real Estate Investor Escapes Criminal Charges: Legal Factors When Raising Money from Others with Promissory Notes

Thousands of real estate deals/projects involve the use of promissory notes as a way to raise money to fund the project.  If you are raising capital for a real estate project using promissory notes and you assume incorrectly that securities laws do not apply to your deal/project, you could be fined or possibly end up in an orange jump-suit.

In a recent California case called People v. Black, the California Court of Appeals was asked to whether a promissory note in the real estate deal (an investment in land in Idaho) was a security.  Needless to say the project/deal did not go as planned.  Once the lender felt that he was getting the “run-around” from the borrower, he hired a private investigator which eventually led to a criminal investigation of the borrower.  Please note that this was a criminal case, which is important to mention because it highlights the fact that certain actions when raising capital can result in criminal charges, i.e., fraud, etc.  Also, although this case is from California, it is instructive for many real estate venturers and investors even outside of California because the court used many securities law cases from the United States Supreme Court to reach its conclusion.

The court in Black concluded that the promissory note at issue was not a security.  It used the “Howey Test”, to reach its conclusion, which derived from the famous securities case, SEC v. Howey Co., 328 U.S. 293 (1948).  The Howey Test is this:  If the funds were invested with the promoter/manager with the expectation of receiving a profit from a business enterprise, which profit wholly depends on the managerial efforts of the promoter/manager, then the promoter/manager has issued a security.   The analysis of WHY the court reached this conclusion with respect to promissory notes and securities law is very instructive.  Here are the “take-aways” from the case:

  1. Avoid Profits Sharing in Notes, Split of Profits v. Straight Interest / Promise to Pay. The promissory note in the Black case stated that the amount of interest paid to the lender would be either a percentage of profits from the sale of the underlying real estate, or two lots from the property if it is held for development.  There was also a provision that whether the property is sold or developed, the principal amount plus 10% interest would be due one year from the date of the note.  This last provision was a very important fact that the court seemed to place a lot of emphasis.  However, it also conceded that “the promise of a fixed return does not in itself remove the transaction from securities laws” because as the United States Supreme Court stated in a case called Edwards, (SEC v. Edwards, 540 U.S. 389 (2004)), “unscrupulous marketers of investments could evade securities laws by picking a rate of return to promise.” In other words, the court in Black was careful to not “hang its hat” on just this one factor.
  1. Give Investor Control or Protections, Control of the Investment / Split of Profits. If the note is a profit-sharing note where the borrower has total control of the investment and there are not protections to the lender, the investment will look more like a security.  The court relied on a United States Supreme Court case called Marine Bank, involving a profit-sharing arrangement involving loans between the parties.  The U.S. Supreme Court held that the loan in that case was not a security because the lender in that case has a measure of control over borrower regarding the investment/project despite the fact that the borrower’s obligation to repay was based in part on the success of the venture/project.
  1. Avoid Bringing in Multiple Parties Without Proper Legal Documents, Negotiated One-on-one v. Offered as a Uniform Instrument to the Masses. The lender and borrower in this case knew each other for six years.  They had appeared to individually negotiate this promissory note with each other as opposed to the lender simply taking the same promissory note and offering it to multiple investors especially in a public manner through public advertising.  The court also used the Marine Bank case mentioned above in this context.  As opposed to many deals/projects that involve promissory notes that are issued to many investors, another reason the U.S. Supreme Court held in the Marine Bank  case that the profit-sharing loan arrangement was not a security was because of the one-on-one nature of the investment.  The court in Black was careful to state that this is not the only factor but is simply one of a number of factors.
  1. Give Security for the Loan, Is the Promissory Note Adequately Secured. The lender in this case had secured the promissory note with his separate / personal property.  This was a factor in the court’s conclusion but it is important to note that the security must be adequate.  The court was careful to make this point and it did so by mentioning a case called Shock, (People v. Schock, 152 Cal.App.3d. 379 (1984)), in which the California court of appeals found that the public sale of fractional interests in secured promissory notes were securities, in part, because of the inadequacy of the collateral together with the investors’ dependency on the promoter’s success for a return on the investment subjected the superficial loan transaction to security regulation.   Similarly, In a California case called Miller, (People v. Miller, 192 Cal.App.3d. 1505 (1987)), the promoter issued notes to multiple investors in connection with a luxury home purchase “scheme”.  The court determined the notes and trust deeds were securities because the loans, i.e., the funds obtained by Miller were so far in excess of the value of the secured interest that no resale or foreclosure could recoup more than a few cents on the dollar to the individual lenders.  Also, it should be noted that investors were solicited from the general public and had no control over the success of the venture.  Likewise, in a 9th Circuit case called Wallenbrock, (SEC v. Wallenbrock, 313 F.3d 532, 9th 2002), the court found that promissory notes sold to the public which were secured by the accounts receivable of Malaysian latex glove manufacturers were securities.  The court determined that if the receivables existed at all, the investors had no way of reaching the assets. If you are planning to invest and your investment is secured by the receivables of Malaysian latex glove manufacturers, it’s probably not a good investment.  Nothing against the Malaysian latex glove industry, I’m just saying.

In summary, some promissory notes are securities and some are not.  Each deal/project must be analyzed by looking at the substance rather than just its form. The details matter as does careful legal planning. In this case, the promissory note (a) was an actual promise to repay regardless of the success of the underlying venture/project, (b) was adequately secured, and (c) was negotiated one-on-one i.e., individualized versus a uniform document to be used by the mass investors.  These facts were persuasive enough for the court to conclude the promissory note in this case was not a security.  If you’re using promissory notes to raise money in real estate deals, please carefully consider the points in this article and call our office to discuss your situation.

Who’s Liable- The Landlord or the Tenant?

February 14, 2017 Asset Protection, Business planning, Litigation, Real Estate, Small Business Comments Off on Who’s Liable- The Landlord or the Tenant?

We have many clients that own residential rental and commercial properties and lawsuits involving landlords continue to happen throughout the country, and will continue so long as someone is willing to ‘rent a room’ and someone is likely not to pay or damage something.

However, the question then becomes…who’s liable when something goes wrong.  As you can imagine a lot of finger pointing takes place and it can oftentimes be difficult to see who is in the right.

Thus, history has taught one of the most important lessons of all- “learn from the past”.  As such, I have compiled a brief snapshot of a few recent court cases throughout the country that have dealt with landlord liability.  Hopefully learning from one of these difficult situations will help you avoid the some of the same mistakes.

In a case called Lipp v. Ginger C., LLC (W.D. Mo., 2016), the tenant threw a party. Surprise…Surprise!!! And as you would expect, one of the guests, who had been drinking at the party, went onto a second floor deck to urinate. While on the deck, the wooden balcony broke, causing the guest to fall 18 feet onto the driveway. He then died a few days later. The landlord knew that the balcony had been temporarily repaired by a prior owner, but the landlord had not permanently repaired the balcony as of the date of the party. The family of the deceased guest sued the landlord.

In a case called Ortega v. Murrah (Tex. App., 2016), the tenant broke her leg after slipping on water that had leaked from a broken pipe under the rental property’s kitchen sink. The tenant sued the landlord for personal injuries.

In a case called Moore v. Parham (Ariz. App. 2016), the landlord owned a residential property in Lake Havasu that he leased to a tenant. A satellite dish installer came to the property to install a satellite dish for the tenant. The installer was injured when he attempted to access the roof by climbing on a shade structure attached to the house. The installer sued the landlord for personal injuries.

Lastly, in a case out of California last year called Ramos v. Breeze, 2016, the tenant tripped and fell in the parking lot of the apartment complex in which she was living.   The tenant sued the landlord for personal injuries.  The landlord was held substantially liable for the injuries.

These are just a few of many recent cases involving landlord liability and a landlord being sued. Most of the cases above are still working themselves through the court system in terms of being resolved on the merits, but the point is that if you’re a landlord, you need to consider your exposure to liability and consider what steps you can take as a preventative measure, including the following:

  1. Have your landlord-tenant agreement reviewed. Whether you’re a landlord of commercial real estate, or investment residential real estate, you need to make sure you have a strong “landlord-friendly” agreement. Have you had it prepared or at least reviewed by an attorney?
  1. Review your rental property insurance policies and applicable limits. If a landlord is subject to a legitimate claim, hopefully it never ripens into a lawsuit because the claim is a covered event under the appropriate insurance policy. But make sure you know exactly what claims are covered and what claims are not covered under your insurance policy(ies) so that you know what is and what is not covered under the policy(ies). Do you know what policies you have and what events are covered and what events are not covered?
  1. Consider how you’re managing your rental(s). You want to make sure you utilize best practices and procedures for managing your rental(s), whether you can and are managing them yourself or you have someone else manage them for you.
  1. Consider how you’re vetting your tenant(s). Are you being careful to properly vet/screen your tenants? A little extra time on the front-end to make sure the tenant is properly qualified will save you a lot of time later on.
  1. Consider an entity(ies) for your rental(s). Certainly having an LLC own your rentals is not the end-all, be-all, and it won’t in of itself prevent a lawsuit. However, it can, unless abused, prevent you from personally being named in the lawsuit, and thus exposing your personal assets in the event the plaintiff obtains the judgment against you.

Even in cases in which the landlord “wins”, the time spent and the costs involved to defend the lawsuit can be enormous. An ounce of prevention is worth a pound of medicine, particularly when it comes to landlord liability. This type of liability can arise in a number of ways, including failure to comply with statutory requirements, a breach of contract, premises liability, or negligence.

Each one of these liabilities requires a state-specific analysis based on statutes and cases in the particular state in which the property is located. Please contact our office at 888-801-0010 if you would like to schedule a consult regarding these matters.

“Piercing the Veil” – Are you Appropriately Maintaining your LLC or Corporation?

January 17, 2017 Asset Protection, Business planning Comments Off on “Piercing the Veil” – Are you Appropriately Maintaining your LLC or Corporation?

Our law firm takes the position that an entity (such as an LLC or corporation, etc.), if properly maintained and used, can serve an important function in terms of liability protection, in addition to other forms of risk management such as insurance. This may be a business owner looking to put some distance between him and his business operations, or it may be an entity which forms subsidiaries or has sister companies setup for legitimate operational reasons.

However, there are limits to how much liability protection an entity can serve to provide. Even though the presumption is that a legal entity such as an LLC or corporation is separate from the owners and management, i.e., “veil piercing” is rare, don’t shoot yourself in the foot by doing things, such as commingling business and personal funds, or failing to do things such as entity maintenance or appropriately title assets that would rebut this presumption.

With that in mind, here is a brief snapshot of a few recent court cases throughout the country that have discussed “piercing the veil” and some of the factors that were considered:

In a case called Knopf v. Phillips (S.D.N.Y., 2016), which was decided last month (December 2016), the number one factor as to whether or not the “veil” of corporate/entity protection should be “pierced” was the disregard of corporate formalities. The court ruled that the plaintiff’s adequately pleaded a claim for veil piercing/alter ego because the defendant had “abused the corporate form” to defraud the plaintiffs. Another factor which is often analyzed in these cases, including this one, is the fact that the defendant has “undercapitalized” his business as evidenced by the inability to pay debts, in conjunction with the fact that the defendant had diverted thousands of dollars from one entity to another entity despite the inability to pay its debts. The takeaway from this case is that if you’re going to setup an entity, take the time to treat it as a separate entity and be sure you have enough funds inside the business to service debts of the business.

A few months earlier (October 2016), 5th Circuit Federal Court of Appeals, a case called Janvey applied some of the same analysis as in Knopf yet because of the facts, reached a different conclusion. In Janvey, it involved a parent company and a subsidiary and whether the parent company should be liable for the actions of the subsidiary. Here, the outcome was in favor of the parent company that the “veil” should not be pierced between the subsidiary and the parent company, and one of the factors the court looked at was how assets of the subsidiary were titled and how the subsidiary was operated. Had there been a disregard and failure to appropriately hold title of the subsidiaries assets in the name of the subsidiary rather than the parent company, or had the overall operations of the subsidiary collapsed into the parent company where it would have been indistinguishable to differentiate between the subsidiary’s business operations and the parent company’s operations, the court might have more seriously considered allowing the veil to be pierced. This is one reason why in the real estate context it is important to ensure that if a parent company with subsidiary’s is going to be utilized, that assets are appropriately held and maintained by the subsidiaries rather than everything in the name of the parent company.

A case in Ohio in November 2016 called Premier Therapy v. Childs, provides further instruction. Some of the factors the court looked at were “lack of corporate records” and “disregard of corporate roles”, as well as the entity’s inability to pay its debts to due siphoning of funds for personal use. In this case, the business had been unable to pay its debts and was essentially insolvent at the time the plaintiff was injured by the acts of the business, so the court (appellate court) decided there was more than enough facts to allow a jury trial to make a determination whether to pierce the LLC/corporate veil. This case highlights the importance to keep corporate records such as annual minutes.

Lastly, a case out of California last year (2016) called Boeing v. Energia highlights the importance of properly maintaining entities with the state, holding annual meetings, and keeping corporate records. The defendant was a parent company which had setup multiple subsidiaries to hold various assets such as licenses, etc., and some of the main reasons the court disregarded the corporate veil was because the subsidiaries were not properly maintained (Delaware) in terms of annual filings and payment of franchise taxes, and also because there was a dearth of corporate meetings and records held and maintained by the subsidiary. In applying Delaware law, despite a court’s reluctance to pierce the veil, it may do so when a “parent and subsidiary operate as a single economic entity” and there is an “overall element of injustice or unfairness that is present”.

Although a typical requirement for the veil of your entity to be pierced by a plaintiff or injured party is that the entity was used to perpetuate fraud, illegal acts, or unlawful behavior, and certainly we hope you aren’t committing such acts, you nevertheless don’t want to open up yourself to a “pierce the veil” claim for failure to appropriately maintain your entity.

For more on this general issue in the LLC context, which would receive the about the same analysis for “veil piercing” as a corporation, please read http://kkoslawyers.com/llcs-and-limited-liability-protection-a-primer-for-the-small-business-owner/ . For a brief list of our suggestions for best practices in operating your entity, please read http://markjkohler.com/piercing-the-corporate-veil-what-you-need-to-know-that-t/ . Our office not only sets up entities for clients, but just as important, we offer services such as our company maintenance program, “corporate cleanup”, registered agent services, and mail forwarding services, all of which can to varying degrees provide support to a small business owner in terms of entity maintenance.  In fact, the New Year is a good time to consider setting up annual company maintenance with our office through our discounted rates that are being offered right now.