San Diego Business Lawyers and Contracts Attorneys providing a first class “one stop shop” for all your business, contract, wills, trusts, tax, estate planning, and intellectual property legal needs. Contact Kehr Law today: (619) 400-4942.

Contact Kehr Law today
Phone: (619)400-4942
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In this article, we will focus on an area that will likely apply to you or someone close to you: planning for a loved one with special needs. We will look at the increasing need for this planning; the decrease in government benefits; the concerns families have about providing for their loved ones; whether it is worth protecting government benefits; and planning tips to help you provide for and protect your loved one for as long as he or she lives.

Preserving Government Benefits/Special Needs Planning Today
Are government benefits for a special needs person worth preserving? For families of modest or limited means, the answer is almost always, “Yes.” However, for more affluent families, the answer may be, “Maybe not.”

In the past, many planners focused exclusively on preserving public benefits at all costs. Today, special needs planning is not necessarily “poverty planning.” The proper focus today is how to provide the best quality of life throughout the person’s lifetime. It may be better to privatize some special needs care instead of spending thousands to protect a benefit that has a low probability of being available in the future.

Careful planning is necessary to craft a plan that will supplement government benefits that are worth preserving, is flexible enough to adjust to changes in future benefits, will preserve and expand assets, will make sure this person receives proper care, and may even save taxes.

It Takes a Team
For a special needs trust, the proper funding, implementation and periodic review are especially critical because it may have to last a lifetime and often cannot be replaced. Once the plan is in place, it will be need to be managed. Who should do that? The ideal trustee would:

• use discretion, acting in the best interest of the disabled beneficiary;
• understand public benefits and keep up with changes in the law;
• wisely invest and conform to all statutory fiduciary requirements;
• understand taxes;
• keep perfect books;
• provide advocacy and prevent abuse; and
• be immortal.

Since no one person can meet all of these requirements, often the most effective solution is to divide the responsibilities into areas and have a team of professionals work together. For example:

• A Corporate Fiduciary Trustee (bank or trust company) keeps perfect books; carries insurance, is bondable or has deep pockets; is immortal.
• A Care Manager uses discretion and acts in the best interest of the beneficiary; understands public benefits; provides advocacy and prevents abuse.
• A Financial Advisor invests wisely; conforms to all statutory fiduciary requirements; understands taxes.
• A lawyer skilled in special needs matters keeps up with the ever-changing laws and regulations and provides wise counsel to the family and the other team members.

Often a professional trustee will manage the funds, make distributions, prepare tax returns and keep the records, but will be directed by a Trust Advisory Committee that makes distributions, can amend the trust or replace the trustee. A care manager can be on this committee or be appointed by the committee.

Another alternative is to have a trustee manage the funds but be directed by a care manager who interacts with the beneficiary. A trust protector or advisor would oversee the trustee and care manager from a distance and would be able to replace either for any reason.

Planning Tip: Many parents think a sibling would be the best trustee, but this is rarely a good idea. Most individuals are just not prepared to handle the responsibilities. A professional trustee likely will, in the long run, be less expensive than the mistakes that are often made by a well-meaning but inexperienced family member. Also, some siblings may be torn between using the trust assets to provide for the beneficiary and preserving the assets, especially if they will inherit the assets after the beneficiary dies. It is usually better to have a professional as trustee, and have the family member be on the Trust Advisory Committee or to be the trust protector.

Planning Tip: The role of the care manager is critical. In most families, one person has been a fierce advocate, actively seeking benefits and supervising the special needs person’s care and progress. The care manager will assume that role and will become the beneficiary’s advocate, seeking and evaluating benefits and programs, supervising the person’s care and preventing abuse. Selecting a care manager while the current advocate is living will give families peace of mind that their loved one will have the quality of life they so strongly desire.

Managing the Trust Assets
Careful investment of the trust assets is critical, since loss of these assets could be catastrophic for the beneficiary. The assets will need to earn or grow enough to provide for or supplement the beneficiary’s care. Trust income can be distributed in such a way that it is taxable to the beneficiary (because the beneficiary will typically be in a much lower tax bracket than the trust itself), but without unintentionally jeopardizing any public benefits the beneficiary may be receiving. This can often be accomplished by having the trustee make direct payments to the providers for care and/or supplemental benefits.

Planning Tip: Insurance on the life of a parent or grandparent is often used to fund these trusts. Using a separate, stand alone trust (instead of a parent’s revocable living trust) will also allow other family members to make gifts to support the beneficiary.

Planning Tip: Tax planning combined with special needs planning can present some unique opportunities. For example, using qualified plans to fund these trusts can offer tax advantages. Charitable trusts can also be used to benefit both the beneficiary and an organization. Families are often grateful to organizations that have provided assistance and benefits to the family member and to them, and often want to help make sure these organizations can continue to provide services to not only their loved one but to other families in the future.

Planning Tip: Families with affluent means will be able to provide more opportunities for their special needs beneficiary. For example, purchasing a home in a residential community will guarantee your loved one will always have a familiar, safe home.
If you or someone close to you has a loved one with special needs, we can help with all phases of the planning and implementation. Contact our office for a consultation.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

See other Kehr Law practice areas including: Business Law, Estate Planning, Real Estate, Wills, Trusts, Corporations, Contracts, and Asset Protection.

This Article is used with permission and copyrighted  by WealthCounsel, LLC and written by WealthCounsel via EstatePlanning.com.

http://www.kehrlaw.com

At Kehr Law, Attorneys Dan W. Kehr and Matthew W. Deen can counsel you of the best ways to plan for the inevitable. As part of the planning process our attorneys review your needs, your wishes, your families needs, and your long-term goals. Wills and Trusts preparation may also include a look into business succession planning , asset protection, or even tax planning. Regardless of your age, if you are single, married, have a car, have a home, have a business, or hold treasured possessions, you need a trust. Our attorneys take the time to become familiar with your needs and customize an estate plan for every individual in need of a trust.

Contact our  experienced and professional San Diego attorneys to discuss wills, trusts, estate planning, business succession planning, and asset protection.

After your contact your office, read through a few of our latest articles to become familiar with the estate planning process. During your initial meeting with our attorneys you may highlight these points to determine if they apply to you.

1. How To Prevent Your Children from Fighting Over Your Estate After You Die

2.Can You Trust Your Trust?

3. How Should You Hold Title to your San Diego Real Estate

4. Wills, Trusts, and Estate Planning for Second Marriages

5. The Best Time to Plan for your Business and Life is Now

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

See other Kehr Law practice areas including: Business Law, Estate Planning, Real Estate, Wills, Trusts, Corporations, Contracts, and Asset Protection.

http://www.kehrlaw.com

San Diego Business Lawyers and Contracts Attorneys providing a first class “one stop shop” for all your business, contract, wills, trusts, tax, estate planning, and intellectual property legal needs. Contact Kehr Law today: (619) 400-4942.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

In first marriages, the couple generally has the same goals when it comes to their (wills, trusts) estate planning: take care of the surviving spouse for as long as he or she lives, then whatever is left will go to the children. They may own many of their assets jointly and, at the death of the first spouse, more than likely everything will go to the surviving spouse just as they had planned.

But second marriages (after divorce or death of the first spouse) are different. There may be his children, her children and sometimes our children. Each of you probably has assets that you brought into this marriage, and you want those to go to your own children after you die. At the same time, you probably want to make sure your surviving spouse will have enough to live on should you die first.

More than likely, the estate planning methods you relied upon in your first marriage will not work now. For example, let’s say you add your new wife’s name on the title of your home and you own it as joint tenants with right of survivorship. If you die first, your share immediately transfers to your wife, who now has complete ownership of your home. She can do whatever she wants with it now, regardless of what your will or trust says. She can leave it to her own children and completely disinherit yours.

There are similar problems with beneficiary designations. Many people name their spouse as beneficiary of their life insurance, IRAs and other tax-deferred plans to provide for their spouse should they die first. But this can be a problem with second marriages because your spouse-beneficiary can name anyone he/she wants as new beneficiaries to inherit the proceeds, bypassing your children. Promises may be made now to include them, but promises can be broken after you are gone.

Other Considerations:

1. If each of you has considerable assets, you may want to keep your assets and your estate planning separate. If there will be a pre- or post-nuptial agreement, be sure to have it reviewed by your estate planning attorney (before signing).

2. If your spouse has considerably fewer assets than you do, you can provide for him/her until death or remarriage, then have the remaining assets distributed to your children. This is often accomplished through a life estate or what is referred to as a QTIP trust.

3. If your new spouse is much younger than you are, your children may be concerned that he/she is only after your money. These feelings may subside as the marriage lengthens. But if your spouse is closer in age to your children than to you, they may be wondering if they will ever receive their inheritance from you. Consider giving them some of their inheritance upon your death (e.g., though life insurance), then the rest at your spouse’s death or remarriage.

4. Naming a trust as beneficiary for your life insurance policies and tax-deferred plans is often a good choice for second marriages. This will allow you to keep control over how and to whom the proceeds are distributed. You can provide your spouse with lifetime income, yet keep control over the rest of the proceeds. Keeping the proceeds in a trust will also protect them from irresponsible spending, creditors, predators, divorce, remarriage and even estate taxes, if done properly.

5. Be sure to include planning for disability and long-term care. If one spouse becomes ill and Medicaid assistance is needed, the combined assets of the couple will be considered “available assets” to pay for the care of the ill spouse. Long-term care insurance may be needed to protect the assets of one or both spouses.

6.Discuss your individual estate planning goals together. If they are similar, then your task may be somewhat easy. But if they are considerably different, consider having separate attorneys.

You want to do the right thing for everyone involved: yourself, your spouse, your children, your spouse’s children. Take the time to consider this from everyone’s point of view. An experienced estate planning attorney will be able to advise you and work with both of you to create a plan that will do exactly what you want it to do.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

See other Kehr Law practice areas including: Business Law, Estate Planning, Real Estate, Wills, Trusts, Corporations, Contracts, and Asset Protection.

This Article is used with permission and copyrighted  by WealthCounsel, LLC and written by WealthCounsel via EstatePlanning.com.

http://www.kehrlaw.com

San Diego Business Lawyers and Contracts Attorneys providing a first class “one stop shop” for all your business, contract, will, tax, estate planning, and intellectual property legal needs. Contact Kehr Law today: (619) 400-4942.

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Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

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Find information about San Diego Lawyers Dan W. Kehr, Matthew W. Deen, Pearce B. Tucker, Jr. and staff members Lisa Ballard, Ruth Ryan-Cruz, and April Luttrell.

Kehr Law focuses on the formation and representation of businesses, corporations, limited liability companies, partnerships and joint business ventures; property and investment transactions; trademark and copyright law; business and individual tax planning; domestic and international contracts; corporate finance transactions and corporate mergers, acquisitions and reorganizations. We also provide real estate litigation legal services involving both residential, commercial and land disputes, broker liability, landlord-tenant matters, unlawful-detainers, premises liability, toxic tort defense and related insurance coverage analysis. Moreover, we provide probate and trust administration legal services. In addition to personal domestic and international asset protection, we also focus on estate and tax planning to provide our clients with a single, complete and comprehensive legal resource.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

See other Kehr Law practice areas including: Business Law, Estate Planning, Real Estate, Wills, Trusts, Corporations, Contracts, and Asset Protection.

http://www.kehrlaw.com

http://www.yoursandiegobusinessattorney.com

San Diego Business Lawyers and Contracts Attorneys providing a first class “one stop shop” for all your business, contract, will, tax, estate planning, and intellectual property legal needs. Contact Kehr Law today: (619) 400-4942.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

What is a non-traditional family?

For the purposes of planning, a non-traditional family is any family unit that has at its center a partnership other than a legally married, opposite-sex couple. While we can imagine a whole host of family arrangements that may also be considered non-traditional (such as a single parent with children, siblings living together, separated couples who choose not to divorce, etc.), the following non-traditional families face particular challenges due to inconsistent and lacking legal recognition of their family status:
• same-sex or non-traditional gender partners who are prohibited by law from marrying;
• same-sex or non-traditional gender partners who are legally married according to a state’s law;
• opposite-sex partners who choose not to marry for any number of reasons.

How are non-traditional families taxed differently?

The single biggest difference in planning for non-traditional families is the unavailability of the marital deduction as a safety net. Married couples can give money to each other, combine their income and assets, name each other as life insurance and retirement plan beneficiaries, and hold property and bank accounts jointly with rights of survivorship, largely without consequence or concern. Unmarried partners are not allowed this benefit. This means that if one partner contributes more to the household than the other, and an effective plan is not in place, the IRS could look upon the one partner’s greater contribution as a gift to the other, possibly triggering a surprise gift tax bill. Another tax trap that awaits non-traditional families is the generation skipping transfer tax. Unmarried partners who are not close in age are more vulnerable to the GSTT. While married couples are considered to be in the same generation regardless of age, unmarried partners whose ages are more than 12.5 years apart are considered to be one generation removed from each other. If this non-traditional family also includes the younger partner’s children, any gift from the older partner to the child is treated as if it had skipped a generation and is subject to the GSTT. If the partners are more than 37.5 years apart, any gift from either partner to the other is subject to the GSTT, just as if the younger partner were the older partner’s grandchild.

How should non-traditional partners hold property?

Most non-traditional partners come to the table with the assumption

that joint tenancy with right of survivorship is the obvious and best way for them to hold title to their property to ensure efficient transfer of their jointly held property outside of probate. This is not always the best choice. For married couples who hold property as joint tenants with rights of survivorship, one half of the value of the property is included in the estate of the first partner to die.In contrast, for unmarried partners who hold property as Joint Tenants with Rights of Survivorship, the entire value of the property is included in the estate of the first partner to die, unless the surviving partner can prove his or her contribution in acquiring the property (consideration) or that the property was a gift to both partners equally. The burden of proving the origin of the funds that went into the down payment, mortgage payments, and improvements to the house is on the surviving partner and can be very difficult
to establish.
While this difference may sound like a disadvantage, there is an advantage that can sometimes outweigh the cost if the property is highly appreciated and the deceased partner supplied most or all of the consideration. This is because the surviving partner will receive a full step up in basis, resulting in 100% of the appreciation of the property between the time it was acquired until the deceased partner’s death not being subject to capital gains tax. However, the down side is that the surviving partner’s interest in the property is potentially exposed to estate tax twice: once due to inclusion in the deceased partner’s estate, and again when the surviving partner dies. How property is titled can also affect property taxes. For example, in Florida, the transfer of property between married
partners does not trigger reassessment for property tax purposes. However, the transfer of property between unmarried partners can trigger reassessment for property tax purposes. There is an exception if the property is held in joint tenancy and an original owner remains on the title. However, if one partner owns property and adds the other partner to the title, and the original owner dies first, the property will be subject to reassessment for property tax purposes even though the property was held in joint tenancy. There may also be homestead issues to consider in your particular state.
Determining the best way for unmarried partners to hold property depends on current federal and state laws, market conditions, and the partners’ individual circumstances, and is not the simple answer your clients probably assume it is. The special importance of living wills, health care directives and powers of attorney. If two people are not legally married, not related by blood, In contrast, for unmarried partners who hold property as Joint Tenants with Rights of Survivorship, the entire value of the property is included in the estate of the first partner to die, unless the surviving partner can prove his or her contribution in acquiring the property (consideration) or that the property was a gift to both partners equally. The burden of proving the origin of the funds that went into the down payment, mortgage payments, and improvements to the house is on the surviving partner and can be very difficult to establish.
While this difference may sound like a disadvantage, there is an advantage that can sometimes outweigh the cost if the property is highly appreciated and the deceased partner supplied most or all of the consideration. This is because the surviving partner will receive a full step up in basis, resulting in 100% of the appreciation of the property between the time it was acquired until the deceased partner’s death not being subject to capital gains tax. However, the down side is that the surviving partner’s interest in the property is potentially exposed to estate tax twice: once due to inclusion in the deceased partner’s estate, and again when the surviving partner dies.

How property is titled can also affect property taxes.

For example, in Florida, the transfer of property between married partners does not trigger reassessment for property tax purposes. However, the transfer of property between unmarried partners can trigger  eassessment for property tax purposes. There is an exception if the property is held in joint tenancy and an original owner remains on the title. However, if one partner owns property and adds the other partner to the title, and the original owner dies first, the property will be subject to reassessment for property tax purposes even though the property was held in joint tenancy. There may also be homestead issues to consider in your particular state. Determining the best way for unmarried partners to hold property depends on current federal and state laws, market conditions, and the partners’ individual circumstances, and is not the simple answer your clients probably assume it is.

The special importance of living wills, health care directives and powers of attorney. If two people are not legally married, not related by blood, and not in a partnership that is legally recognized by the state where they live, or often in the state where they are travelling, then the partners are legal strangers in that state. The ongoing Florida case of Langbehn v. Jackson Memorial Hospital arose when a non-traditional family from Washington state suffered the tragic illness and death of one of the partners while vacationing in Florida, and the even greater tragedy of the Florida hospital not allowing the family to visit the dying partner and parent or even receive medical updates until a blood relative arrived. Traditionally, if a spouse dies or becomes mentally or physically incapacitated, state statutes allow the other spouse to make health care decisions and carry on the affairs of the family unit with minimal to no state intervention. In contrast, if an unmarried partner dies or becomes incapacitated, many states will look to the partner’s other relatives as the only legal family. This can have devastating consequences for the partners and any minor children. Estranged relatives may suddenly have complete control not only of health care decisions, but also of the children, the family home, the family property, and even the family pets. The partner will have little to no legal recourse to keep the family together. In many states, the partner doesn’t even have the right to temporarily possess the family home while things get sorted out.
Because of the legal uncertainty from state to state, it is essential that non-traditional families execute living wills, health care proxies, HIPAA authorizations, and durable financial powers of attorney, even if you practice in a state where non-traditional families are recognized. It is a very good idea for them to register their health care directives with Legal Directives, DocuBank, or a similar organization and carry their cards with them at all times, particularly if traveling out of state. Consent forms to authorize medical
care for children, to pick children up from school, etc., should also be on file with children’s schools. Domestic Partnership Agreements aren’t just for family law attorneys.
A Domestic Partnership or Life Partnership agreement can be very helpful in establishing the parameters of the partners’
non-traditional arrangement. This holds true whether they are a same-sex or opposite-sex couple, or even if two people are comingling their affairs in a non-romantic relationship If the partners are living together, own property or substantial assets together, or are comingling their finances, a Life Partnership Agreement will allow them to contractually establish
• how real property is owned and titled, who owns what percent of the property, and how additional contributions
or payment of expenses affect the balance of ownership;
• whether income, gifts or inheritance of one partner during
the partnership belong to that partner individually or to the partners together;
• how household expenses and duties will be handled;
• how financial support and division of property will be determined in the event the relationship ends;
• whether and how mediation can be used to settle disputes.
While no one wants to think about a relationship ending, a Life Partnership Agreement can be considered an “insurance
policy” – you hope they’ll never need it, but having such an agreement allows the partners to go about their lives with peace of mind that they have a plan in place.
Additionally, a Life Partnership Agreement is not just about planning for separation. A Life Partnership Agreement can serve as valuable evidence in court of the committed relationship in the event that it is ever questioned. It can document the partners’ intentions regarding property and income that may have important tax consequences. A Life Partnership Agreement can also be a valuable planning tool for the partners to think through the responsibilities of day-to-day living to avoid misunderstandings down the road.

Valuable planning tools for children in non-traditional families.

Just as a Life Partnership Agreement can document the partners’ relationship, a Parenting Agreement can serve as important evidence in court of how the partners and any biological parents have agreed to share the care and financial responsibilities of any children. It is important to counsel clients that in most states, courts are not bound by Parenting Agreements; they are bound by law to protect the If the partners are living together, own property or substantial assets together, or are comingling their finances, a Life Partnership Agreement will allow them to contractually establish
• how real property is owned and titled, who owns what percent of the property, and how additional contributions
or payment of expenses affect the balance of ownership;
• whether income, gifts or inheritance of one partner during
the partnership belong to that partner individually or to the partners together;
• how household expenses and duties will be handled;
• how financial support and division of property will be determined in the event the relationship ends;
• whether and how mediation can be used to settle disputes.

While no one wants to think about a relationship ending, a Life Partnership Agreement can be considered an “insurance
policy” – you hope they’ll never need it, but having such an agreement allows the partners to go about their lives with peace of mind that they have a plan in place. Additionally, a Life Partnership Agreement is not just about planning for separation. A Life Partnership Agreement can serve as valuable evidence in court of the committed relationship in the event that it is ever questioned. It can document the partners’ intentions regarding property and income that may have important tax consequences. A Life Partnership
Agreement can also be a valuable planning tool for the partners to think through the responsibilities of day-to-day living to avoid misunderstandings down the road.

Valuable planning tools for children in non-traditional families.

Just as a Life Partnership Agreement can document the partners’ relationship, a Parenting Agreement can serve as important evidence in court of how the partners and any biological parents have agreed to share the care and financial responsibilities of any children. It is important to counsel clients that in most states, courts are not bound by Parenting Agreements; they are bound by law to protect the best interest of the child. However, if a surviving partner can present the court with a parenting agreement that shows that two or more interested parents have considered the best interest of the child and have a plan in place, the court will likely be more inclined to consider the partners’ wishes. Also, like a Life Partnership Agreement, a Parenting Agreement can be a valuable tool to help the partners to think through the multitude of day-to-day issues that surround the care and responsibilities of raising children.

This Article used with permission and copyrighted by WealthCounsel, LLC and written by WealthCounsel Members Tanya Simpson.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

See other Kehr Law practice areas including: Business Law, Estate Planning, Real Estate, Wills, Trusts, Corporations, Contracts, and Asset Protection.

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San Diego Business Lawyers and Contracts Attorneys providing a first class “one stop shop” for all your business, contract, will, tax, estate planning, and intellectual property legal needs. Contact Kehr Law today: (619) 400-4942.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

San Diego Attorney’s Participation

Managing Attorney Dan W. Kehr, a San Diego business lawyer, and his staff and family members participated in the third annual San Diego Miracle Babies Walk this past Sunday, November 13, 2011.

“MiracleBabies is a charitable, nationwide organization made up of volunteers to provide education, support and financial assistance to families with newborns in the NICU. Parents submit an application provided to them by their social worker and assistance is provided to qualified families. Amount of assistance provided is based on the families income, debt and length of stay in the NICU. Majority of our donations are from individuals. We hold three main fundraising events: Casino Night, Golf tournament and a 5K walk/Run. Cities currently involved in fundraising are San Diego and Atlanta.”

Visit the San Diego page for additional information about this event.

To view additional information about San Diego business lawyer, Dan W. Kehr, visit his page at KehrLaw.com

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

See other Kehr Law practice areas including: Business Law, Estate Planning, Real Estate, Wills, Trusts, Corporations, Contracts, and Asset Protection.

http://www.kehrlaw.com

http://www.yoursandiegobusinessattorney.com

http://www.yoursandiegobusinessattorneys.com

http://www.yoursandiegobusinesslawyer.com

http://www.yoursandiegobusinesslawyers.com

San Diego Business Lawyers and Contracts Attorneys providing a first class “one stop shop” for all your business, contract, will, tax, estate planning, and intellectual property legal needs. Contact Kehr Law today: (619) 400-4942.

Contact Kehr Law today
Phone: (619)400-4942
Text Message: (619)823-8230
Email: dan@kehrlaw.com

Protection Considerations for Business Owners | Kehr Law

Many business owners devote much time and energy “working in” their business to improve business operations and profitability; however, they often neglect to “work on” their business by not addressing certain asset protection issues. Business owners, particularly those owning their business in corporate form, should consider the following:
1) how to own C corporation or S corporation stock to minimize exposure to creditors, an “outside” asset protection issue; and,
2) whether to implement several basic business agreements designed to protect and even enhance business  alue from the “inside” of the corporation.

Stock Ownership

Generally, a creditor of a corporate shareholder may seize the shareholder’s stock and thus have the same management and liquidation rights as the debtor shareholder. Charging order protection (described below), normally applicable to limited liability entities, does not apply to S corporations or C corporations. S corporation owners may have additional concerns if a creditor is an ineligible S corporation shareholder thereby causing the corporation to lose its S election. As a result the corporation will be treated as a C corporation and exposed to double taxation.

A business owner who owns S corporation or C corporation stock should consider the asset protection benefits of converting or merging the corporation to a new Limited Liability Company (“LLC”). There are several limited liability organizations that can protect business assets from the personal liabilities of the owner. However, entities such as limited partnerships, or limited liability limited partnerships,
are treated as partnerships for federal tax purposes and therefore cannot own S corporation stock; whereas, an LLC electing to be taxed as a corporation may. Generally, the asset protection benefit of an LLC is a judicial remedy as known as a “charging order” which protects the owner’s interest in the LLC from his or her personalliabilities. If a creditor obtains a charging order, the creditor is limited to the rights of an assignee of a membership interest in the LLC. If a distribution is made from the LLC, the creditor is entitled to receive a proportionate distribution. However, the creditor has no voting rights and thus, cannot force a distribution, liquidate the LLC, or otherwise manage the business.
With proper planning, both C corporation and S corporation owners may be able to avail themselves of the LLC asset protection benefi ts by converting the corporation to an LLC taxed as a corporation. Generally, such conversions are treated as nontaxable “F”  organizations under IRC Section 368(a)(1)(F). However, potential income tax consequences and individual state law considerations should be carefully evaluated. For instance, C corporations considering conversion should analyze potential exposure to the “built-in-gains tax” under IRC Section 1374. Also, the strength of the charging order protection provided by an LLC varies depending upon state law.

Business Agreements to Protect Value “Inside” the Business

Among the basic business agreements or legal documents that should be considered by business owners to protect business value include a Non-Compete and Confidentiality Agreement, Buy-Sell Agreement, and perhaps even a Deferred Compensation or Bonus Plan for key employees. Few events can sap the value of a small business like a key employee or associate leaving the business and starting a similar enterprise, especially if such an employee departs with trade secrets, confi dential information or even customer lists. Business owners should require their employees to sign Non-Compete and Confidentiality Agreements to prevent this from occurring. If the terms of such an agreement are considered reasonable under state law, the agreement should be enforceable.

Buy-Sell Agreements

A Buy-Sell Agreement is another key document that if properly structured, funded, and updated will protect the value of both the exiting and remaining business owner’s interest in the business. The Buy-Sell Agreement accompanied by proper planning should provide the exiting owner a fair value for his or her ownership interest and provide the remaining owner a means to purchase the exiting owner’s interest without depleting the business of cash flow and its value. A Buy-Sell Agreement is designed to establish a
predetermined and agreed-upon business value (or method of arriving at the value) at the occurrence of certain trigger events such as the death, disability, voluntary or involuntary termination, or retirement of a shareholder or partner.
It is crucial that planning be done to ensure there are sufficient funds available to implement the buy-sell provisions when triggered. Funding at an owner’s death with life insurance may be the easy part. More problematic may be how to buy-out a departing owner’s interest in the event of disability, retirement or voluntary termination, especially if a portion of the business’ cash fl ow must be devoted to that purpose. Further, once in place a Buy-Sell Agreement should periodically be updated to refl ect changes in the business value and the owners’ objectives. Finally, business owners should consider putting into place a deferred compensation or bonus plan designed to reward key employees who meet certain performance targets. A properly planned deferred compensation or bonus arrangement can serve two purposes which will work toward protecting the value of the business. First, the plan should be designed so that employees are rewarded for achieving benchmarks that not only protect but increase the business value. Second, such agreements, for example through gradual vesting schedules, should place “golden handcuffs” on valuable employees by making it diffi cult for a key employee to leave the business and forfeit certain benefi ts. A detailed discussion of the aforesaid legal documents is beyond the scope of this article. The point here is that when considering asset protection strategies for business owners, protecting the internal value of the business through a few important but often overlooked documents can be just as important as the legal wrapper placed on the ownership of the business. It should also be noted that implementing such agreements not only protects the value of the business but also enhances its value and makes the business a more attractive target to a potential buyer when the owner eventually exits.

This Article used with permission and copyrighted by WealthCounsel, LLC and written by WealthCounsel Members Ryland F. Mahathey and Brad Milhauser.

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