Asset Protection and Business Planning (3)

Will putting my business or other assets into a limited liability company (LLC) give me the same protection from personal liability as a corporation?

Generally speaking, yes.  One of the essential differences in making a choice to set your business up as an LLC instead of a corporation is that under some circumstances, you may have better asset protection opportunities with a limited liability company.

Can I better protect against creditors by having my assets in a limited liability company instead of a corporate entity?

In some instances, yes.  If your debt is unrelated to your assets (e.g., auto accident liability or malpractice liability) and if your assets are in a corporation, creditors can enforce a court judgment by taking away your stock in the corporation.  With an LLC, however, your creditors may only be able to obtain what is known as a “charging order.”  A charging order will not allow your creditor to take your limited liability company interest away from you like taking stock in a corporation.  Instead, it merely gives the creditor the right to be paid any distributions that would otherwise be made to you from the LLC.  If no distributions are made, the creditor gets nothing.  As a result, with an LLC, your creditors are more likely to consider settling their claims on terms more favorable to you.

Are there advantages to setting up asset protection entities in other states, and can I use my New York lawyers to accomplish that?

Yes.  Different states have different LLC statutes and therefore have different levels of protection.  Among the “good” states for asset protection are Alaska, Delaware and Nevada, for example.  Your New York lawyer can assist you in creating LLC’s in those and other states.

Estate Planning and Elder Law (15)

What are advanced written directives (AWD) and what are they used for?

There are two types of AWD that clients are recommended to consider, namely, medical and financial directives.

First, the medical directives typically include a health care proxy and a living will. A health care proxy permits you to appoint someone you trust to make health care decisions for you if you are unable to make those decisions for yourself.

A living will is a separate document containing your specific instructions concerning medical treatment to be administered (or withheld) should you ever become incapable of making treatment decisions in the future.

The second type of AWD, the financial document, is a statutory durable power of attorney. This is a written document by which you select and appoint a trusted person (your agent) to manage your property and/or financial affairs in the event of your incapacity. A power of attorney can also be used, with the your authorization, to assist you at a time when you have capacity but could use help with your financials affairs.  Should you become unable to handle your own affairs and you have not appointed an agent, a court may appoint a guardian to make decisions about your property and you may have no control over the selection of that guardian.  A guardianship proceeding can result in substantial courts costs and legal fees and often produces family disharmony, particularly over the question of who will serve as your guardian.

Why do I need a will at all? Who will get my property if I do not have a will?

Under state laws of descent and distribution of intestate estates (i.e., estates of decedents without wills), your property will pass to a specified list of relatives. These may not be your first choices to whom you want your estate to pass. For example, if you die without a will in New York State and you are married with children, your spouse will receive the first $50,000 of your estate and one-half of the balance of your estate. Your children would receive the remaining half of the balance of your estate. If those who become entitled to share in your intestate estate are minors, they could be faced with the requirement of going to court each time there is a need for money. There may also be other legal requirements, such as a surety bond, that could make the whole process expensive and time-consuming. The failure to have a will can also result in a lost opportunity to protect heirs from divorce, taxes, loss of government benefits, lawsuits, creditor claims and other potential demands or obligations that may erode their inheritance.

Do I need a will if my spouse and I own all our property in joint names?

Generally, yes.  Like most questions about the law, the answer is, it depends. Depending on the character and size of your estate, holding property in joint names—while it may avoid the probate of a will—could result in unnecessary estate taxation.

Between spouses, there should be no federal or state estate taxes imposed on property passing from one to the other who survives. However, if the surviving spouse dies with the entire estate in his/her name, estate taxes which could have been avoided with proper planning, may become due.  Joint ownership alone with a right of survivorship might turn out to have unintended and unfavorable consequences in the absence of a good estate plan.  In addition, if spouses die within a short time of each other’s passing, the second to die may be without a will, in which event, all of the property would pass by intestacy (see “Why do I need a will at all?”) with possible unintended consequences and expense.

I purchased a substantial amount of life insurance and named my spouse as the beneficiary. Why should we need wills if the insurance proceeds will be paid directly to my spouse?

Often, younger married couples who are just beginning to build estates choose to buy large amounts of life insurance to cover the possibility of an unexpected early death. At younger ages, life insurance coverage should be relatively inexpensive. It makes good sense to buy it when there are minor children to be considered. However, it is a mistake to count on life insurance alone. If both parties die at the same time without wills, their minor child(ren) stand(s) to inherit substantial life insurance proceeds without a guardian or trustee to manage them. The child(ren) could wind up with a court-appointed guardian who the parents may not have chosen. A properly drafted will can eliminate these risks.

Are life insurance proceeds tax free?

Generally, the receipt of life insurance proceeds are income tax free but not estate tax free. Proper planning can be undertaken, however, so that life insurance proceeds can also be estate tax free. For example, an Irrevocable Insurance Trust can be created which will avoid federal estate taxes.

To qualify for Medicaid coverage, what is the “lookback period”?

Medicaid “looks back” for a period of 60 months from the date of a Medicaid nursing home application to determine whether you have made any gifts which may be subject to a penalty. The lookback period is only an audit period during which time Medicaid has the right to review all of the financial records of a Medicaid applicant (and, where applicable, the spouse of the applicant).

Will I be ineligible for Medicaid If I transferred my assets during the lookback period?

It depends.  Whether ineligibility for benefits applies depends on the amount and date of any gift you’ve made, the identity of the recipient, and the type of Medicaid benefit you’re seeking. Transfers to spouses and disabled children are not subject to a penalty, and additional exceptions may apply if the applicant transferred his or her personal residence. The transfer penalty only relates to nursing home care. The penalty may be shorter than 60 months. There is no transfer penalty for Medicaid home care benefits.

Are gifts under $14,000 generally excluded from the Medicaid transfer penalty?

No.  A gift under $14,000 is generally subject to the Medicaid transfer penalty rules for nursing home care and the Long Term Home Health Care program even though the gift is excluded from taxation for federal gift tax purposes.

Do gifts in excess of $14,000 require a gift tax payment?

It depends.  Gifts in excess of $14,000 are subject to federal gift tax, but the amount of the gift will be offset by the current $5,340,000 federal gift tax exclusion. Therefore, no gift tax will  actually be due unless your total lifetime gifts exceed the federal exclusion for gifts and estates permitted at the time. New York State no longer has a gift tax.

Should I use a revocable trust as part of my estate plan?

Perhaps.  Because this is a multi-dimensional question, your lawyer needs to have certain basic information before recommending the use of a revocable trust.  A revocable trust can be used to manage assets during your lifetime and to pass those assets on to your beneficiaries at your death.  One substantial benefit of using this kind of a trust is that you will be able to avoid the need for probating a will.  Whenever a will is probated, your next of kin must be notified and asked to consent to the probate (acceptance by the court) of your will.  However, if you choose to pass your assets through a trust to individuals who are not your next of kin, there will be no such notice/consent requirements which means that you can leave your assets on a confidential basis to non-relatives without having to explain your reasons to relatives.  In addition, in many, if not most, cases, administration of your estate will be considerably less expensive through the use of a trust instead of a will.

Do revocable trusts avoid estate taxes?

No. A revocable trust does not avoid estate taxes although it may avoid the expense of going through the probate process if your assets pass under a will instead of a trust. The trust’s assets will still be part of a decedent’s estate for estate tax purposes. Married couples can defer the payment of estate taxes by using revocable trusts which contain what is known as  a “credit shelter trust” (also known as a by-pass trust.)

Can revocable trusts protect assets from Medicaid claims?

No.  A revocable trust will not protect assets from Medicaid and nursing home claims. The trust assets are considered “available” for purposes of determining Medicaid eligibility. Creditors, such as a nursing home, can also make a claim against the Trust assets. Only a properly drafted “irrevocable trust” may protect the assets from Medicaid and nursing home claims.

Is estate planning necessary for people with less than $1,000,000 in assets?

Yes.  Everyone should consider estate and long-term care planning to protect their assets and preserve their dignity. A durable power of attorney, health care proxy and a living will can ensure ongoing decision making in the event of a disability. Wills and trusts can ensure a proper disposition of your assets at the time of your death. Long term care planning can protect your assets from Medicaid and nursing home claims. There are also federal and state income tax issues which may affect people with under $1,000,000 that should be addressed (e.g., IRA distributions, basis rules, and capital gains on the sale of a residence).

Once my estate plan is in place, am I done?

Not necessarily.  An individual’s estate planning needs can change due to life circumstances as well as changes in the law. It is important to review your estate plan on a regular basis, particularly upon the occurrence of an event such as the birth of a child or grandchild, a divorce, a medical emergency, incapacity, receipt of an inheritance, the passing of a loved one, or in contemplation of a new marriage, among other things.

Can a will be challenged if I think it was improperly made?

It depends.  Whether you can challenge a person’s last will and testament generally depends on whether you are what is known as an “interested party.” An interested party is a person who is what the law calls a “distributee” (i.e., the closest relative who would be entitled to a decedent’s assets if a will had not been executed) or a person who can demonstrate they had a greater interest under the decedent’s prior Will (e.g., an individual named as a beneficiary in the prior will). Additionally, a person challenging a will must generally prove either that (a) the decedent did not have legal capacity to make a valid will at the time the will was signed, (b) that the will was not properly executed, (c) that the decedent was unduly influenced to make the will, or (d) that the will was the result of fraud.  As a general rule, a will signed under the supervision of a New York attorney will be presumed to have been properly executed.

Taxation Information (4)

Does attorney experience really make a difference in the outcomes of tax controversies?

In most cases, yes.  According to Tax Professors Leandra Lederman and Stephen W. Mazza, in their treatise Tax Controversies: Practice and Procedure (3rd Ed.):

“One study of a sample of tax court cases found that the presence of an attorney for the taxpayer decreased the government’s recovery rate by 17.9 percentage points on average. . . Moreover, the taxpayer’s results improved with the years of experience of the attorney. . . [E]ach additional year of attorney experience decreases the IRS’s recovery ratio by approximately 9/10 of a percentage point, and this is statistically significant [citing Leandra Lederman & Warren B. Hrung, Do Attorneys Do Their Clients Justice? An Empirical Study of Lawyers’ Effects on Tax Court Litigation Outcomes, 41 Wake Forest L. Rev. 1235, 1255 (2006)].”

Am I personally liable for the tax liabilities of my corporation?

Generally no as to corporate income taxes, with the exception of S corporations.  But as to payroll taxes, maybe.  The Internal Revenue Code requires employers to withhold from employees’ wages both federal income tax and the employees’ share of FICA (Social Security) contributions.  The employer is required to hold these funds withheld from its employees in a “special fund in trust” for the government until such time as the employer actually pays them over to the government.  The failure of the employer to pay such “trust fund taxes” over to the government can subject a responsible person of the employer to personal liability for a civil “trust fund recovery penalty” equal to 100% of the tax not accounted for and paid over (colloquially known as the “100-percent penalty”).

Who is a “responsible person?”

A responsible person is any person who is required on behalf of an employer to collect, account for and pay over the “trust fund taxes” to the government who willfully fails to do so.  Responsible persons are jointly and severally liable for the 100-percent penalty although the government as a matter of public policy does not collect more than 100-percent of the unpaid trust fund taxes.  Officers, directors or partners as well as certain types of employees can be personally liable as responsible persons.

What kinds of tax disputes can a person have with the IRS?

Tax disputes with the IRS most commonly arise in two settings.  The first is when the IRS determines that a person owes more tax than he or she reported on his or her tax return.  This additional amount of tax is called a deficiency.  The IRS provides individuals with several different levels of administrative review to challenge its deficiency determinations.  If the dispute involving the IRS determination of a deficiency cannot be resolved administratively, individuals can challenge the determination in the United States Tax Court, the Federal District Court, or the United States Court of Federal Claims.

The second setting is where there is no dispute about the amount of tax a person owes, but the IRS is seeking to collect the tax owed by seizing assets or foreclosing liens it has filed against specific property belonging to that person.  The IRS tries to resolve collection disputes administratively to avoid having to pursue involuntary collection action against a person’s assets, especially if the activities of an ongoing business may be placed in jeopardy.  The administrative resolution of collection disputes is generally at the discretion of the IRS, making it essential to have the guidance of a person with expertise in this area.