CA Estate Planning

Bankrupt's Misconduct Strips Exempted Assets of Protection

If property is exempt from creditors in bankruptcy, there is no way that creditors can get at that property, right?

Wrong. 

In re Wilson illustrates how the misconduct of a debtor can allow a creditor to get at exempt assets.

The law between creditors and debtors is not always kind when you are the debtor, especially when the debtor does not have “clean hands.”

Generally, the law tries to protect a debtor from utter destruction by providing certain amounts of exempt property. Still, a particularly difficult debtor isn’t going to maintain such good graces from the court system if he or she fails to understand their role and do as told. Consider the case of In re Wilson, 2012 WL 1856587 (Bkrtcy.D.Dist.Col., Unpublished, May 21, 2012).

The case is discussed in a recent Forbes article titled “Wilson: Surcharge Of Debtor's Exempt Property Based On Debtor's Contempt In Refusing To Assist Trustee In Sale Of Property.” It is a classic example of what happens when “exempt” property isn’t actually exempt if you don’t follow the rules.

Essentially, Wilson co-owned property with another as joint tenants, but neither one of the owners listened to the court. Wilson failed to show up for an examination and, when the court tried to work around him by trying to discuss the necessary sale of the co-owned property with the other owner, the co-owner also ignored them. To make matters worse, both co-owners then ignored an order to compel coordination.

Note: Civil disobedience is not a successful strategy with a bankruptcy court. While Wilson and the co-owner’s disobedience initially saved the property from sale, it didn’t stop the U.S. Marshall from seizing the property and changing the locks.

Thereafter, the realtor sold the property and the trustee moved for sanctions against both Wilson and the co-owner, assessing the debt against their otherwise exempt property (and the co-owner against the sale of the shared property).

Teaching point: the purpose of “exempt property” is to keep it from the grips of creditors. Sanctions are particularly potent, so don’t antagonize the court.

It is important to understand and appreciate your role and rights as a debtor, as well as the various powers of the court over you.

Reference: Forbes (May 26, 2012) “Wilson: Surcharge Of Debtor's Exempt Property Based On Debtor's Contempt In Refusing To Assist Trustee In Sale Of Property”

 

 

 

MISTAKE THAT CAN KILL YOUR FAMILY BUSINESS

Running a family business is the most natural thing in the world--and the most unnatural. Handle it well, and it can make you rich, capitalize on bonds no ordinary colleagues could share, and keep your family employed for generations. Handle it badly, and it can instead keep lawyers employed for generations.

If you have a family business, then a recent article in Inc. magazine is a must read to avoid unaffordable mistakes. In short, these mistakes can kill your family business.

The Inc. article is titled the “4 Worst Legal Mistakes a Family Business Can Make.” While I commend the entire article to your reading, here is some of the wisdom offered by the author:

1. Do not mix your family finances with those of the business.
2. Do not muddle along without employment agreements.
3. Do not forget to get (and remain) street legal with appropriate licenses and filings.
4. Do not fail to have a succession plan.

Remember, large or small, your business is just that – a “business.”

If you treat the company accounts like your personal checkbook, hire and fire employees on a handshake (if that), ignore “legal formalities” attending the creation and operation of the business and take the “get-around-to-it” approach to the succession of the business, then do not be surprised when the business crashes and burns.

Teaching point: Take time right now to engage competent legal, accounting and financial counsel to help you stay out of trouble … before it is too late.

Reference: Inc. (April 9, 2012) “4 Worst Legal Mistakes a Family Business Can Make”

 

Qualifying a "sick spouse" for Medicaid when there's a "well spouse"

There’s another layer of rules for families in which the person hoping to get government help paying for long-term care has a spouse who is still living independently. States are treating such “well” spouses in dramatically different ways.

Marriage is a unique economic and legal institution. Indeed, when it works out, marriage also means a happy lifetime of living with another. Of course, because life lasts longer and health wanes differently between persons, those unique economic and legal parts to marriage can translate into difficult times later in life.

Against the backdrop of the in sickness portion of the vows, one difficulty that arises was addressed recently in a Wall Street Journal article titled Long-Term Care and Couples: Who Pays?. That difficulty is the phenomenon of the “well spouse,” the “ill spouse,” and Medicaid.  Practically speaking, if one spouse becomes chronically sick and needs long-term care, will the other spouse be driven into poverty?

Marital assets, whether owned by the husband or the wife, are part of the equation when it comes to determining Medicaid eligibility, especially in California being a community-property state.. Medicaid is the joint federal/state government program to provide means-tested health care assistance to those who qualify.

With both federal and state coffers bleeding red ink (with a few state exceptions), Medicaid money is tight, especially in terms of long-term care coverage -- whether married or single. As the Wall Street Journal article notes, however, some states are treating the “well spouses” more generously than others regarding how much wealth they may retain while the “sick spouses” are receiving taxpayer support through Medicaid.

I recommend reading the original article. Also, consider purchasing long-term care insurance so Medicaid does not become part of your future. In any event, a consultation with a qualified Elder Law Attorney would be prudent to evaluate your options.

Reference: The Wall Street Journal (April 2, 2012) “Long-Term Care and Couples: Who Pays?” 

 

Small-business owners beware: Roth IRAs and S Corps Do Not Mix!

It may be obvious but the powers of an S Corp cannot be combined with the powers of a Roth IRA. 

As many small business owners already know, S Corporations can be supremely advantageous, if you’re in the position to use one, because they can avoid corporate income tax.

The Roth IRA meanwhile avoids tax on future earnings by paying taxes on contributions upfront, rather than upon eventual distributions. Together that would have made for some serious savings for small business owners who also are thinking ahead and planning for their eventual estate transfers.

But you cannot have your cake and eat it too.  An S Corp election is only valid if all shareholders of the S Corp are valid, and a Roth IRA is apparently not a valid one. This became clear in the recent case of  Taproot Administrative Services, Inc., Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee.

Peter Reilly of Forbes recently highlighted the case in an article titled Hog Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock. I recommend reading the full article, as there are more moving parts and other alternatives to consider.  Too few small business owners consult their estate planner and financial consultant about the eventual transfer of their businesses as part of their overall estate planning. 

Reference: Forbes (March  28, 2012) “Hog Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock”

 

GET YOUR HEALTH CARE DOCUMENTS PREPARED BEFORE APRIL 16th!

National Health Care Decisions Day is set for this coming Saturday, April 16. Preparing your Health Care Documents is one of the most important decisions you need to make, whatever your age. If you were unable to make health care decisions for yourself, who would make them for you?  How would they know what decisions you want them to make for them?

 Get a Health Care Documents, and appoint the people you want to make such important decisions for you!  Let them know what decisions you would make if you were able to yourself!

You can learn more about Health Care Documents –known in California as advance directives --– on our website.

According to their website, this initiative is a collaborative effort of national, state and community organizations committed to ensuring that all adults with decision-making capacity in the United States to document their healthcare decisions.

You also can learn more on their Facebook Page.

ESTATE PLANNING: WHY YOU SHOUDN’T AVOID IT

It certainly is understandable that no one enjoys a conversation about death – especially their own! And, with the estate tax exemption now set at $5 million for an individual and $10 million for a couple, many people may believe they have no reason to consult an attorney about their estate planning. But avoiding the topic of estate planning can mean unnecessary expense, confusion and conflict.

SmartBusiness last week highlighted the fundamentals of a “well-thought-out estate plan,” with topics that everyone should consider – whether prince or pauper.

• Why do you need an estate plan? A comprehensive estate plan ensures that when you die your estate is distributed according to your wishes, it protects you in the event of your own disability, and allows you to plan for minor children, pets, and charitable causes.
• What are the basics everyone should have? SmartBusiness (should be hyperlink as above) recommends at a minimum a power of attorney for healthcare and a living will.  In California where I practice law these documents are combined in an Advance Health Care Directive. This Directive is critical should you become ill and unable to make your health care wishes known.   Your appointed health care agent can make sure your wishes are followed.  Also strongly recommended is a Power of Attorney for Finances and Personal Affairs.  This allows whoever you appoint to pay the mortgage, utilities and take care of your cat if you are unable to do so for yourself.  In my experience, people in hospital without such a Power, are often more worried about such matters than their illness! 
• What about a will? Absolutely, you should have one, otherwise the State where you live will distribute your estate according to its probate rules, which may not reflect your wishes.  You certainly can write your own will and there are many online sites to help you do so! However, as in most things of life, you do get what you pay for. Improperly drafted or last-minute, hand-written wills are frequently contested and invalidated in court. If you don’t know what you’re doing, the outcome could be much different than you expect.
• What about trusts? Many people choose to create trusts to help their heirs avoid the time, expense and lack of privacy in probate proceedings.  A trust can help reduce estate taxes if applicable to you,  Trusts also can help shield assets from spendthrift children, divorce, children of a second spouses, and other unforeseen circumstances, such as lawsuits against your heirs.
• What mistakes to people tend to make in estate planning? The writer points out two common mistakes: failure to plan for their personal effects which can lead to more family disputes than the distribution of money, and failure to review and update estate plans over time.

You can learn more about comprehensive estate planning in the Grain Law FAQ's section of our site.

 

PROTECT YOUR CHILDREN FROM SQUANDERING THEIR INHERITANCE. INCLUDE A CHILD’S TRUST IN YOUR ESTATE PLAN.

Many parents are concerned that their children or grandchildren might squander their inheritance if they receive it when they are too young to appreciate its value.  It is therefore not uncommon to put such inheritances into children’s trusts to limit the age at which the child receives the capital outright, and sometimes even limits the income paid to them.

It is quite common now for a child to receive an inheritance in three stages: at age 25, 30 and 35.  A trustee appointed for the purpose, usually has a wide discretion whether to make advance payments out of the trust’s capital where circumstances suggest it is right to do so.  For example, if a child is married and wants to buy a house before the trust is due to make a payment of capital outright, the trustee can decide to distribute the down-payment on the house.

Often, the trustee has the discretion to distribute all the funds outright if he or she considers the child is mature enough to manage a large sum of money.  Other times, a child might be appointed co-trustee of his or her trust, or even replace the original trustee at a certain age.  There are often advantages in leaving a child’s inheritance in trust for life.  This can provide many protections, for example if the child divorces, the ex-spouse cannot access the trust fund in a divorce settlement.

There are other strategies to consider if the estate is over the estate tax exclusion (currently $5 million, and $10 million for a married couple). The greatest inheritance protection is achieved when the estate plan creates a Long-Term Discretionary Trust to administer the inheritance for the children. Such an arrangement can make both income and principal available to the children for their health, education, maintenance and support, as well as for any purpose deemed appropriate in the discretion of your appointed inheritance managers. This can have favorable estate tax consequences.

You can learn more about Long-Term Discretionary Trusts and other estate planning strategies in the July issue of our estate planning newsletter, Majoring in Minor Children (this link is to Kyle’s website.  We should have the same newsletter on our site). Be sure to sign up to subscribe to our free monthly e-newsletter, which is full of estate planning tips for you and your family (ditto).

Call (877)-858-4724 or Email richard@grainlaw.com to schedule your free consultation today.

 

ARE YOU, YOUR FRIENDS OR CLIENTS IN A CALIFORNIA REGISTERED DOMESTIC PARTNERSHIP? THEN READ ON.

If you are in a California registered domestic partnership (RDP) you should know about a little-publicized IRS announcement last year. Starting with 2010 Tax Returns, the IRS will treat 2010 income earned by both partners in an RDP* as community property, thus applying the “income-splitting” rules until now only applicable to the community property of different sex couples. 

Mandatory for 2010, the IRS requires that all income earned by both RDP partners treated in California as community property must now be added together and allocated equally to each partner’s federal tax return.  Unlike different-sex couples, RDPs must continue to file separate federal tax returns.

This could have a major impact on the amount of income tax owed by the individual partners.  It makes the preparation of 2010 federal tax returns for RDPs even more complex than before requiring a tax professional with experience in preparing LGBT tax returns to determine how the new IRS position will affect them. For CPAs in Los Angeles known to have experience in preparing LGBT returns, visit the following websites (David Paddock’s and William Hurtt’s websites)

It should be noted that the change in treatment only applies to community property and not the separate property of each party.  Determining what is separate property is not always an easy task, and an attorney or tax professional should be consulted where classification is difficult. 

As a consequence of the new IRS treatments, LGBT couples contemplating registering as domestic partners may want to consider beforehand whether they should enter into a pre-partnership agreement to have their incomes treated as separate income if registration would have a negative impact on their tax positions.  For those RDPs who are greatly affected by the new IRS rules may want to consider a post-partnership agreement, although they raise several critical issues. 

For more information on such agreements, contact Richard Grain, an attorney focusing on the LGBT community, at richard@grainlaw.com.

* NOTE: the new IRS position although it does not mention them will probably apply to California same-sex married couples as well.

 

IF YOUR CHILDREN WON’T LISTEN TO YOU PERHAPS THEY’LL LISTEN TO AMERICAN EXPRESS!

There is an old saying that can be painfully true, “You are only as happy as your unhappiest child.” One of the most common laments I hear from parents of adult children is that, for whatever reasons, their offspring seem to (repeatedly) need financial assistance … not because of illness of hardship, but simply through poor decision-making.

It’s hard to talk-turkey with your adult children, and they seldom listen anyway. But, maybe they will listen to advice from a third-party, especially if that advice is delivered in a manner with which they are most comfortable – fresh, fun and online.

American Express has launched Currency (www.getcurrency.com) to provide just that type of advice.  They offer online “courses,” and even a new iPhone app, Social Currency for social networking. A recent hot topic: Currency 101: What is “Spending”?

Some of other course topics include Buying Your First Home, Get a Handle on Your Taxes, and Managing Student Loans.

But if your adult children still keep on coming to you for “loans” there are two estate planning steps you can take that might discourage them for “freeloading” of you:

(a)  Make provision in your trust that any loans will be deducted from their share of your estate on your deaths

(b)  Set up a spendthrift trust which can limit their access to their share of your estate by providing for payout to be at the discretion of a third-party trustee.

And if neither of those deterrents are effective, well stop giving them loans or make them sign promissory notes for the loans.  It’s called “tough love”!

 

For more information regarding spending advice and planning that can ensure your family is taken care of, while still responsible with their money, visit us here to set up a FREE consultation.