CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Limited Liability Companies. Limited liability companies (“LLCs”) provide virtually the same creditor protection as limited partnerships but with a number of advantages. Readers are encouraged to review previous issues of this newsletter addressing certain issues pertaining to asset protection and the use of entities, such as an LLC or a corporation. The principal distinction between an LLC and a limited partnership is that all members can actively participate in the management of an LLC and still receive the benefit of limited liability, while in the case of a limited partnership, limited partners are not active managers and the general partner faces liability for all partnership activities. A corporation also offers protection from liability for its shareholders, but there are certain tax disadvantages associated with a corporation, even if it elects “S” corporation status, as compared to an LLC which is treated as a partnership for tax purposes. An LLC is a more flexible entity for the ownership of assets and for the transfer of interests in the company as compared to transfers of partnership interests or capital stock in a corporation. It should be noted, however, that there is less certainty about the asset protection benefits of an LLC in the case of a single member LLC, particularly in the case of a bankruptcy proceeding filed by the single member owner of the LLC. In a non-bankruptcy setting, an LLC should operate as well as a single person corporation, although the LLC device is still relatively new and there are certain issues yet to be threshed out in the area of asset protection and limited liability on the part of the LLC member. Everyone should be aware, however, that the benefits of limited liability are overhyped in the case of all entities, including LLCs. Most liabilities result from financial liabilities due to mortgages and other indebtedness, and in the case of both an LLC and a corporation, virtually all active owners will be required to guarantee the entity liabilities. Most other liabilities can be adequately insured against. Also, many people do not operate their entity properly, since they do not comply with legal formalities, and do not hold meetings and prepare regular minutes or document management decisions and activities, thus allowing a court to “pierce the limited liability veil” that otherwise might be available had the entity complied with all legal prerequisites.
Drafting Beneficiary Designations. A very common planning error is the failure to execute a proper beneficiary designation form for life insurance policies, IRAs and other retirement benefits. Many people will name a primary beneficiary, but will fail to name a contingent beneficiary in anticipation of the possibility that the primary beneficiary may predecease the insured/plan participant. Often multiple beneficiaries will be named, either as primary beneficiaries or as contingent beneficiaries, and there will be no statement made regarding the contingency that one or more of the named beneficiaries may predecease the insured/plan participant. If a beneficiary designation names an adult beneficiary, with a per stirpital designation to the deceased beneficiary’s descendants, often that will not be stated properly, or if it is, there will be no statement concerning the possibility that one of the young beneficiaries may be under the age of 21 (even though the age majority is 18 in the State of Indiana, it is possible to designate a custodian under the Indiana Uniform Transfers to Minors Act to hold the benefits until the beneficiary attains the age of 21). Often the insured/plan participant will set up a trust, and then designate the trust as the beneficiary, which is frequently a major mistake in the case of IRAs and retirement benefits. People think that they will sign a new form if someone dies, but they frequently do not take the time or have the time, or they may no longer have the legal capacity, to sign a new beneficiary designation form. All beneficiary designations should be made after giving thought to a multiplicity of situations that can develop after the beneficiary designation form has been signed.
Fraudulent Transfers. Previous issues of this newsletter have included numerous commentaries pertaining to asset protection arrangements. The goal of asset protection may be to protect assets against the need to pay for long term care expenses (or limiting the exposure to long term care expenses), or the goal could be a broader one of protecting assets from claims of creditors. Underlying any asset protection strategy is the issue of fraudulent intent. Transfers can be set aside if deemed fraudulent, i.e., if undertaken for the specific purpose of avoiding existing creditors claims. This by definition requires a fraudulent intent. The motive to avoid possible future creditors is not an indication of fraudulent intent, and people are perfectly free to arrange their affairs in such a way as to minimize or avoid the exposure to creditors claims. The problem arises when there is an existing creditor and an arrangement is put in place in order to avoid the claim of that creditor. The goal of avoiding claims of potential creditors is frequently overstated. In 42 years of practice, I have never seen a client lose even a significant part of his or her net worth due to a tort creditor’s claim, i.e., due to an accident or injury. It does happen, but it is indeed rare, as most claims are settled well within the amounts of insurance. Most claims which arise from debts for loans and mortgages cannot be avoided, even through the use of an entity which provides limited liability (such as an LLC as addressed in the first article in this newsletter), since generally the owners of the entity will be required to guarantee the entity’s obligations. Consequently, if your goal is asset protection, it is first important to determine the types of claims you are most concerned about, and then arrange your affairs so as to limit that exposure. Adequate insurance is essential, and proper planning requires utilizing the arrangements, sometimes involving one or more entities, which are most appropriate to accomplish your specific goals.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.