Posts under: Asset Protection

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”.

Getting Married? You’ll Need a Caterer, a Photographer, a DJ … and a Lawyer!

September 12, 2017 Asset Protection, Law Comments Off on Getting Married? You’ll Need a Caterer, a Photographer, a DJ … and a Lawyer!

The process of getting married can be one of the most wonderful, exciting … and stressful periods in a person’s life.  There’s so much to plan for and do (and so many people to impress) that it can be hard to focus on what’s really important – the fact that you are making a commitment to love, honor and cherish the person who is (hopefully) the love of your life.

In the midst of deciding what flavor of cake to have and who will make the cut in terms of getting an invitation, please don’t overlook the fact that marriage is a change in legal status for both of you.  While certainly not the most romantic of wedding preparations, you may want to think about meeting with your attorney well in advance of the blessed day, to make sure your legal ducks are in a row before you say “I do.”  If you ask nicely, your lawyer might even agree to spread rose petals on the floor of his or her office to mark the occasion (for a small fee of course)!

Anyway, here are five legal questions you will want to consider before you take the plunge:

1) What are your assets? 

In most states, assets acquired prior to marriage are considered the separate property of the spouse who acquired them.  However, under certain circumstances, separate property can become marital or community property.  What are your shared (or unshared) expectations regarding such assets?  Do you have a plan for how assets acquired after the wedding will be handled?  Also, make sure you discuss your business as part of this conversation.  Even if the business doesn’t have many assets, the business itself is an asset that needs to be dealt with.

2) How are you going to handle finances?

Are your separate checking accounts going away and everything will be in one joint account?  Are you going to continue living separate financial lives?  Maybe you’ll play it down the middle and have “his, hers and ours” type accounts.  Regardless of what you decide, I suggest that you make a decision – any decision – before the wedding.  I render no advice about which approach is best, but I know plenty of marital spats could be avoided if folks would make these decisions before the wedding day (instead of trying to make them when one of the newlyweds wants to spend $1,000 to go diving in a shark cage on the honeymoon).

3) What are your debts and obligations? 

Now, I’m not suggesting that you run a credit report or have a minimum credit score requirement for your spouse.  However, I know someone who decided to get married primarily because she liked her new husband’s choice in shoes – so you could use worse criteria.  My bride-to-be and I had this very discussion, and I had to disclose that in addition to my student loans, I had racked up quite a bit of credit card debt during law school.  She still made the mistake of marrying me, but at least she couldn’t say I didn’t warn her about the credit card debt.  Also, like the joint vs. separate checking account conversation, I think it’s better to have this discussion before the wedding day.  You need to know going in how much of the family income will be going to cover debt payments, and whether your spouse will be a help or a hindrance when it comes time to apply for mortgages and other loans.

4) Are we going to bite the bullet and get a prenup? 

“Darling, I love you more than anything.  I can’t imagine my life without you … Whaddya say we each get our own an attorney and hash out how our assets will be divided if we ever get a divorce?!”  Yes, that is what you’re doing when you decide to get a pre-nuptial agreement.  I absolutely understand why people don’t want to do them.  They can be painful and a bit awkward (and, I mean, you probably won’t ever get a divorce).  I also understand why people don’t want to get the vaccination for diphtheria, tetanus and acellular pertussis (DTaP).  The DTaP vaccination can be painful and a bit awkward (and, I mean, you probably won’t ever get diphtheria).  However, in return for the small amount of pain and awkwardness caused by the DTaP vaccine, you get the peace of mind of knowing you have almost no chance of contracting diphtheria.  Similarly, in return for the small amount of pain and awkwardness caused by a prenup, you get the peace of mind of knowing how your assets are going to be divided if you ever get a divorce (and that you won’t have to pay a divorce attorney thousands to fight about it).  At the end of the day, I think both the DTaP vaccine and the prenup are almost certainly worth it.

5) What about our estate plan? 

If neither of you have a will, a trust, a medical or financial power of attorney or a living will, then your impending nuptials are a perfect time to get this work done.  Opt for the cash bar instead of the open bar at the reception, and use the savings to pay for a comprehensive estate plan (I promise your guests won’t mind).  If one or both of you do have these documents, then your marriage likely means they need to be amended.  You want to make sure you don’t unwittingly disinherit your spouse, or allow your mom (instead of your spouse) to have the authority to make decisions regarding your medical care if/when you become incapacitated.

Be aware that asking these questions before marriage may necessitate speaking with an attorney (either separately or jointly with your spouse-to-be).  The thought of visiting an attorney may be frightening to you.  However, just think, if you take that step and consult with an attorney prior to getting married, you may just conquer that fear of lawyers (and your fear of commitment) at the same time!

Til Death Do Us Part – Marriage and Asset Protection

August 15, 2017 Asset Protection Comments Off on Til Death Do Us Part – Marriage and Asset Protection

The question of whether a spouse can be held liable for the debts of the other spouse is often asked from married  (or to be married) couples, but the answer is not uniform and depends largely on  the laws of the state where you reside.

MOST STATES – COMMON LAW TREATMENT

The large majority of states that are NOT one of the nine “community property” states discussed below operate under the “common law” system, derived from Great Britain.  In these common law states, the liabilities of married couples are generally determined under the “title” theory, meaning whichever spouse is on title for the asset owns the asset, and whichever spouse was responsible for incurring the debt is solely responsible for that debt.  Spouses in common law states are generally not jointly liable for debts unless they both are involved in procuring the debt as a “joint debt.”  As a result, if a married individual in a common law state alone incurs a debt, the creditor would generally be limited to recovering from that individual’s assets only, and no recovery could be made from assets titled in the name of that individual’s spouse.   On the surface, this would encourage married couples to segregate their finances so that valuable assets are held in the name of the spouse with lessor risk, and corresponding debts in the name of the spouse with higher risk.  However, these rules are very state specific and, of course, moving your assets around when a creditor is already on the horizon raises fraudulent conveyance concerns, and so any asset protection planning should be done before the need arises.

Some common law states create an exception to the “title” rule for debts that are deemed for “necessities” or for “family expenses.”  In those states, spouses may be jointly liable for debts that are necessary for the family such as education, household, or medical debt even if the debt was obtained by one spouse only.   States also vary in how broadly they define debts deemed to be “necessities” or for “family expenses,”  and so it is important to understand how your state defines these terms to understand under what circumstances a creditor can attach the assets of a both spouses for the debts of only one.  Other states impose joint liability if the liability was created when a spouse was deemed to be acting as an agent of the other spouse, and so anyone concerned about spousal liability would need to familiarize themselves with the rules unique to their state.

TENANCY BY THE ENTIRETIES

In states that recognize “tenancy by the entireties,” assets owned jointly by the spouses as “tenants by the entireties” are deemed to be owned by the couple as a whole, and not owned by each spouse individually.   In these jurisdictions, a creditor of one spouse is generally unable to attach property owned “by the entireties” unless the other spouse also joined in the creation of the debt.   Therefore married couples in states that allow “tenancy by the entireties” often hold valuable real estate in this manner which can provide effective asset protection against creditors of just one of the spouses.   Again, these rules are not uniform as some states may find that a debt entered into by one spouse is nevertheless a joint debt if the non-debtor spouses knows, benefits, consents or ratifies the debt.

COMMUNITY PROPERTY

In the nine community property states (CA, AZ, TX, WA, ID, NV, NM, WI, and LA) which derives their marital property law from the Spanish system, each spouse in a marriage is deemed to own a ½ interest in assets that are deemed community property.  Since each spouse has a half-interest their individual debts could be attached and satisfied by a creditor against their 1/2 interest.  Therefore, by contrast to the common law system which relies heavily on “title,” the key component in community property states is not who owns the property, but how the property is characterized.   For these reasons, experts generally agree that community property states are more creditor friendly than their common law counterparts.  For example, assume a couple consisting of a primary wage earner and a homemaker.  The wage earner purchases a house during marriage using wages from employment, and takes title in the wage earner’s name only.  The homemaker then gets into a car accident which is not fully covered by insurance.  The resulting liabilities would obviously depend on the specific state but generally, in a common law state, the house could be protected from the homemaker’s liabilities because title is held in the wage earner’s name only, whereas in a community property state, ½ of the house could be exposed because the property would likely be deemed community property which the homemaker owns a ½ interest.   Therefore, marriage in a community property state could effectively expand the potential assets that creditors of either spouse can reach to the extent a married couple acquires assets characterized as community property.

Since exposure of assets in community property states depends on characterization, there is an incentive for married residents in community property states to consider marital property agreements that alter the characterization of assets (i.e. pre-nuptial or post-nuptial agreements).   The procedural requirements to form an enforceable marital property agreement, and the extent to which such agreement will protect your assets will depend on the laws of the state.  Therefore, consulting with an expert who understands these nuances in the respective state is essential to ensure that any asset protection goals are maximized.

Any married individual concerned about asset protection would be well served to understand the specific rules in your state governing the exposure of your assets to creditors, what tools exist in your state to mitigate your exposure to spousal liability, and how to utilize these tools in a manner that maximizes your protection in the event of an unforeseen liability.   Most important is the need to engage in this planning before it is actually needed as any planning done when a creditor is already in the fray may be vulnerable to attack as a fraudulent conveyance.

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.

Eight Spring Cleaning Ideas for Your Business

March 14, 2017 Asset Protection, Business planning Comments Off on Eight Spring Cleaning Ideas for Your Business

Don’t ask me why, but my seven year-old daughter is obsessed with the cheesy early 1990’s goodness that is Full House.  Nick at Nite has scheduled a two-hour block of Danny Tanner, Uncle Jesse, Joey and the Tanner girls from 7-9 p.m. most weeknights, and my daughter begs to watch at least one episode every night before she goes to bed.

Because there are much worse things she could be asking to watch, we typically oblige.  As such, over the past year or two I’ve endured more than my fair share of Full House catchphrases (think: “Have mercy!” “How rude!” and “You got it dude!”).  Let’s just say that when Nick at Nite (or my daughter) moves on from Full House I won’t exactly be sad.  Anyway, in a recent episode that I’m sure probably originally aired in March 1990, the notoriously tidy and meticulously organized Danny Tanner exclaims: “I love this time of year!  First, spring cleaning – and now tax season!”

This got me thinking, while most of us do participate in spring cleaning for our homes, garages, and backyards, the concept of spring cleaning, with the feeling of renewal that it brings, is probably also a good idea in our businesses.  With that thought in mind, here are eight spring cleaning ideas to give your business a bit of a fresh start:

1)         Revisit your Business Plan.  If you’re like most small business owners, you’ve probably changed and adapted your business plan over the years to adjust to unexpected challenges and market changes – maybe to the point that you don’t feel like your original plan is even all that useful.  Instead of discarding it, you should think about taking some time to revisit it – maybe each spring – to update it based on what’s changed, and to evaluate if some changes may not have been necessary.  Going back to the basic foundation you built your business on will always be beneficial.

2)         Clean-Up Your Company Records and Documents.  Have you been maintaining your entities (LLCs, S-corps, IRA/LLCs) by completing minutes annually? Have you had any changes to the entities? Make sure your company documents are up to date. Also, what about the state? Are your state renewals up to date? If the legal foundation of the company is a mess it only gets more difficult to clean-up and address later.

3)         Think about your Long-Term Goals.  While you’re taking a look at your business plan, think about your long-term goals, both for the company and for your own professional life. You might find that what you really want is different than what it once was.  Maybe your concept of how your business should look five years down the road has completely changed.  It’s absolutely fine for your goals to change – but you have to be aware of what has changed and what you will have to do differently to get there.  If you determine that your aspirations are the same, then check in on your progress towards achieving them.  What could you be doing more or less of?  Are you gearing as many parts of your day – and your business practices – into moving in that direction, into attaining those goals?

4)         Take a Look at Staffing.  Spring is a great time to do employee evaluations and reward those who deserve it for their hard work – and trim what doesn’t seem to fit.  It’s most effective to sit down with your management team first and discuss your employees’ objectives, strengths and weaknesses.  Then, take the time with each individual employee to go over their measurable results.  Always remember to ask for employee feedback about your management style, as well as those of your managers.

5)         Spruce up your Web Presence.  In most lines of business, an up-to-date and useful website is necessary for attracting and retaining customers.  Potential customers and clients expect a smooth user experience that incorporates the latest Internet trends and styles.  If your website looks like something cobbled together in the era when we were all waiting for the dial up to connect so the AOL voice could tell us “You’ve got mail!” then customers probably won’t stick around long enough to find out how great you are.  Consider including marketing content on your website such as blog articles, white papers and videos.  In addition, everyday it becomes more important for your business to be active and engaged on social media.  Your website should include links to your social media channels, and those channels should be updated frequently with useful and (if at all possible) entertaining information.  In many cases, your online presence is the only tool new customers and clients will use learn about you, and it’s important that you make a good first impression.

6)         Lock Down your Intellectual Property.  Has your business progressed to the point where the name of your business or of a particular product or service has enough value that you want to make sure no one else can use it?  If so, you should think seriously about filing for a registered trademark.  Similarly, if you want to keep copycats from stealing online, recorded or printed content, filing for registered copyright protection may also make sense.  Finally, you should examine your policies and procedures to make sure trade secrets (like customer lists, manuals, databases, etc.) remain, you know, secret.

7)         Actually Deep Clean the Office.  Seriously, when is the last time anyone vacuumed behind that filing cabinet?!

8)         Dissolve and Shut-Down Entities You No Longer Use.  Do you have entities that no longer have business activity or assets in them? Are you paying fees to keep them open? Consider shutting them down if you have no future plans for their use. Keep in mind, that the liability protection of an entity still protects you for acts that occurred when the entity was in existence and in good standing.

Hopefully, these ideas can serve as a jumping off point for how to renew and refresh your business and take it to the next level!

Alternatives for Securing Your Loans or Investments

March 7, 2017 Asset Protection, Business planning, Law Comments Off on Alternatives for Securing Your Loans or Investments

We often advise clients who want to loan money or participate in an investment to “get adequate security” for their investment. The purpose of getting additional security for your loan is so that you have something else that you can go after if the loan goes south.

Ordinarily, if your loan is “unsecured,” it generally means that if the investment tanks, then your only remedy would be to sue the debtor and go through the potentially expensive process of litigation in hopes that you can get a judgment against the debtor, and perhaps most importantly, that the debtor will then have assets from which you can collect.

In our experience, if a debtor has defaulted on your investment, they are likely experiencing financial issues as a whole, and will unlikely have assets for you to recover from even if you prevail in your lawsuit. Moreover, a debtor having financial issues and/or without assets is a likely candidate for bankruptcy, and for those reasons, investors who are reduced to having to resort to the court system to remedy a failed investment are often just throwing good money after bad.

In general, real estate with sufficient equity to secure the investment is the best form of security for the primary reasons that real estate is immovable, and there is a well established public record for recording and determining rights and priorities to real estate.

However, if securing your investment with real estate is not an option, that does not mean your investment must be unsecured. In fact, virtually any type of property or asset can serve as collateral for an investment. Unlike real estate, the process and laws for securing your investment using “personal property” as collateral will depend on the type of property as well as the applicable state, local, and sometimes federal law that apply.   Examples of personal property that can serve as collateral for your loan include the following:

  1. Interests in Inventory, Equipment, or Fixtures – If you are lending to a business and that business has assets, those assets could likely serve as security for your loan. In general, this would require an additional “security” agreement which specifically identifies the assets that are being offered as security for the loan, which then must be “perfected” usually by filing a UCC-1 Financing Statement with the Secretary of State for the state where the business is located. This procedure is most often used by banks and other financing companies for business loans that are not secured by real estate. The benefit is, like real estate, the office of the Secretary of State serves as a central resource where anyone can access to determine the existence of liens against the assets of a business and the priority of those liens.
  1. Interests in Stock or interests in LLCs – If the debtor owns interests in his/her own corporation or LLC, the interest in the corporation or LLC could serve as security for a loan. This is most often accomplished by a “pledge” agreement whereby the debtor offers his/her interests in the corporation or LLC as collateral for the loan. One drawback for stock or LLC interests is, unlike real estate or other asset classes, there is no central resource like a recorders’ office or secretary of state for determining if there are competing or priority claims against privately held interests in businesses.   In addition, a pledge agreement doesn’t mean much if the entity itself has no assets and so adequate due diligence on the entity that is being pledged is essential.
  1. Interests in publicly traded securities and securities accounts – Interests in stocks or other securities held by a brokerage can also serve as collateral for a loan. Usually, this is achieved by having the parties to the loan enter into an agreement with a third party custodian that holds the account (sometimes called a securities intermediary) which provides that upon a default on the loan, the third party custodian will deliver the asset to the creditor without further consent by the debtor.
  1. Interests in Intellectual Property – Interests in Trademarks, Patents, Copyrights, and even Trade Secrets can serve a security for a loan, although the procedures for perfecting these interests in intellectual property will differ and it is often difficult to place a value on intellectual property for purposes of determining whether the value is adequate for the loan.
  1. Interests in Tangible Personal Property – Virtually any item of personal property of value (such as jewelry, equipment, vehicles, etc.) can serve as security for a loan. Usually this would entail delivering the property to a third party who holds the asset similar to an escrow or consignment subject to performance of the terms of the loan. For assets which ownership is evidenced by some certificate of title, there may be a department or organization which provides for registering your lien (e.g. the Department of Motor Vehicles).

Securing your loan or investment with personal property is just one part of the due diligence that you should be performing when considering any particular investment. As this article demonstrates, the documents and procedures necessary to document, establish and perfect these secured transactions may vary widely and so you want to make sure that you follow the correct legal procedures and that your security documents are properly drafted so ensure that your loan or investment is, indeed, secure.

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.

Which State’s Law Applies in a Lawsuit?

February 14, 2017 Asset Protection, Business planning, Corporations, Law, Litigation, Real Estate, Small Business Comments Off on Which State’s Law Applies in a Lawsuit?

We frequently hear from clients who have been told by others that they should incorporate in Nevada (or other states outside of their home state) in order to take advantage of their favorable laws.   We have seen many individuals persuaded into incorporating in a state outside of their home, only to complain about the cost and complexity of the structure which ultimately had to be unwound.

This is not to say that incorporating an entity in Nevada or Wyoming should never be considered as part of an asset protection strategy. One primary reason for incorporating a Nevada or Wyoming entity is arguably due to their strong “charging order” protection.   The charging order is a concept protecting an LLC owner who is sued and held liable for something unrelated to and “outside” from the LLC from then being able go and take that LLC interest or the asset held by the LLC.   For example, if you’re cruising on the highway over the weekend and get into a major accident causing serious injuries, the charging order could prevent or hinder the injured plaintiff from seizing your assets held in your LLC.

However, the myth that we often hear from clients is that because states like Wyoming or Nevada have strong asset protection laws, they should take advantage by incorporating these entities into their structure even if they don’t own assets or do business there. What is often omitted from the conversation is whether Nevada or Wyoming law will actually be applied if there is no connection between the lawsuit and Nevada or Wyoming.

Since we are a union comprised of fifty states with different laws, there is an incentive to try and take advantage of states that have more favorable laws. Courts generally discourage this type of “forum shopping” where people try to use the favorable laws of one state even if they have no actual connection with that state.

One of the ways courts deal with these types of cases is by applying a set of rules called Conflicts of Laws. It is an area of the law that allows a state to determine which laws will apply to a case when the laws of multiple states could potentially apply.

For example, lets say a California resident is driving in Nevada on his way to Vegas and collides with a Colorado resident causing catastrophic injuries. Where should this type of lawsuit be filed and which of these three state’s laws should we apply? Because these types of circumstances can be so varied depending on the residency of the parties and the location where the events resulting in a lawsuit occur, it is sometimes difficult to predict where a lawsuit should be and what state’s laws should apply. This is further complicated by the fact that states have different Conflicts of Law rules.

Here are some general rules that courts will usually apply depending on the type of case. Examples include the following:

  1. Personal Injury or Fraud: Generally the law of the state where the wrongful act causing the injury or fraud occurred will be the law that should be applied. For example, if the accident or fraudulent conduct occurred in Nevada, that is an indicator that Nevada law should be applied;
  2. Personal Property (damage or theft): Where the personal property was located when the act causing the theft or damage occurred may determine which state’s laws should apply;
  3. Real estate: The state where the real estate is located will often determine which state’s laws will apply in a dispute relating to real estate;
  4. Contracts: Where the contract was entered or where the principal events necessary to form the contract occurs. Keep in mind that many contracts have provisions governing which state’s laws or courts will be used in the event of a dispute. These types of “forum selection” or “choice of law” clauses are often enforced by courts, unless there is no substantial or reasonable relationship with the chosen state. For example, if you are in California and you enter into a contract with someone else in California and all the activities relating to the contract occur in California, it is unlikely that a California court would enforce a provision that says Delaware law should apply even if you included such a provision in your contract.

These are just some very general guidelines as courts may consider additional factors in any given case. Hence, the outcome in any particular case is often difficult to predict with any consistency.

Therefore, before you decide to set up a structure that includes incorporating in a state which you have little or no connection with, make sure you understand not only the purposes for choosing that particular state, but perhaps even more importantly, its limitations.     Don’t assume that if you incorporate your entity in Nevada, that you will necessarily get the benefit of Nevada’s laws, especially if you do not live in Nevada.

What Is a “Holding Company” and When Could It Make Sense to Have One?

February 7, 2017 Asset Protection, Business planning, Real Estate, Small Business Comments Off on What Is a “Holding Company” and When Could It Make Sense to Have One?

We have lots of clients who come to us after dealing with promoters and would-be practitioners who have recommended elaborate (and usually expensive) entity structures for their businesses. This “up-sell” approach tends to happen whether the business sells cheeseburgers or invests in buy-and-hold rental properties.

One of the structures that is almost always included in these intricate structures (especially when real estate is involved) is something called a “holding company.” Simply put, a holding company is a business entity that exists solely to own other business entities. In our practice, we see this most often in the form of a holding company LLC, which owns one or more additional LLC’s, each of which, in turn, owns a single rental property.

At first glance, this structure may seem like overkill, and in many situations it is. Owning a rental property in the name of a single properly established, maintained, and operated LLC will provide the LLC owner with limited liability for the potential debts and obligations associated with that property.

In several states (but certainly still less than half), this simple structure also does a great deal to protect the rental property from the debts and obligations of the LLC owner. In these states, if an LLC owner has some sort of judgment against him or her, the sole remedy available that judgment creditor has to get at the LLC owner’s interest in the LLC that owns the rental (and the rental itself) is something called a “Charging Order.” Let’s call these states “Charging Order States.”

The Charging Order lets the judgment creditor step into the LLC owner’s shoes if and when the LLC makes a distribution of profit – but it doesn’t let that judgment creditor do much else. For that, and several other reasons, the Charging Order is a particularly weak remedy that many judgment creditors will simply decide not to pursue (or that they may be willing to walk away from for pennies on the dollar).

So, given the protections offered by a single LLC, when can a holding company, set up in a Charging Order State, actually make sense in the context of rental real estate? Here are a few:

1)         You work in a profession that tends to get sued a lot (think doctors and engineers), and your rentals (and their associated LLC(s)) are located in a non-Charging Order State. In this situation, the holding company can be an effective barrier between the people who might sue you for malpractice and your rental property assets.

2)         Even though you don’t work in a “high risk” profession, you are a bit of an asset protection junkie, so for you, because your rentals (and their associated LLC(s)) are located in a non-Charging Order State, the additional cost and paperwork of having another entity is worth the additional protection from personal creditors. Here, the holding company may have less practical effect than in number one above, but it will serve as that same barrier if you get tied up in a lawsuit you end up losing.

3)         You are a bit of an asset protection junkie, and you like the idea having two layers of limited liability protection between the liabilities associated with your rental property and your personal assets. In this situation, if a plaintiff in a lawsuit is for some reason able to pierce the corporate veil of the entity that owns the rental and get at the owner, they will find yet another corporate entity whose veil will also have to be pierced before they can access your personal assets to satisfy a judgment.

You’ve worked hard to accumulate the assets you have, and it makes sense to take steps to protect them. Don’t be fooled by those who say “you have to” do X, Y or Z. There is no one-size-fits-all-approach. The art and science of asset protection involves one cost/benefit analysis after another. Make sure you are seeking and following the advice of a knowledgeable professional who has your best interests at heart.

“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.