Practice Areas
Business Law
One of the first things a new business owner must decide is which type of legal entity to use for the business. There are generally five different forms of entities used by business owners: sole proprietorship, general partnership, limited partnership, corporation and limited liability company (other types also include limited liability partnership and limited liability limited partnership).
Sole Proprietorship. This is the simplest, least regulated and most common form of business organization. If you open shop and do nothing else regarding legally forming your business, this is the type of entity you have. You have total control of business operations and a complete share of the profits. The downside to this type of entity is that all of your personal and business assets are at risk for liability.
General Partnership. This legal form of business comes into existence if there are two or more people who carry on the business for profit as co-owners. Each partner has a right to participate in the partnership and share in the profits and be liable for the debts. It is a good idea to formally reduce the agreement to a written document. Generally, each partner has joint and unlimited personal liability for the obligations of the partnership.
Limited Partnership. A limited partnership has a general partner and limited partners. The general partner manages the partnership. The limited partners invest in the partnership and share in profits without personal liability for partnership debts. A limited partner in Georgia may also participate in control of the business. Limited partnerships are required to report the formation of the entity to the Secretary of State.
Corporation. A corporation is separate from its owners, who are shareholders. Control of the corporation is maintained by the shareholders, board of directors and officers, all of whom may be the same or different persons. Limited liability and tax benefits are the reasons many businesses choose to incorporate. To form a corporation, a name must be reserved and documents incorporating the corporation filed with the Secretary of State.
There are two types of corporations: A “C” corporation and an “S” corporation. These names are taken from the IRS Code. A C corporation is taxed at both the corporate level and the individual level when the corporate dividends are issued (think Home Depot or the Coca Cola Corporation). An S corporation is a small business corporation. This is the entity of choice for small businesses because no income tax on profits is due at the corporate level, but only when dividends are issued to the shareholders, essentially eliminating the double taxation that is required for a C corporation. There are additional requirements that must be met to qualify as an S corporation.
Limited Liability Company. A limited liability company (“LLC”) is a business entity organized under state law similar to a corporation and is essentially a cross between a partnership and a corporation. The following are additional characteristics of an LLC:
- Taxes can be structured like a partnership or a “C” corporation depending on choices made by the members and depending upon the election made at the time of filing the tax return (most entities use partnership taxation to avoid double taxation which is imposed on C corporations).
- The LLC is owned by one or more members and management rights can exist between all of the members or be limited to one or several managers with the members only exercising ownership (similar to the difference between shareholders and officers or directors of a corporation).
- Like a corporation, the LLC has perpetual existence (unlike a partnership). If a key member dies, the entity continues on.
- A member of the LLC can be another entity such as a corporation or another LLC.
- Limited liability is provided for the members who risk only the investment in the business. Other personal assets are not at risk unless a debt has been personally guaranteed. Georgia statute provides that even if the formalities relating to the exercise of power or management are not followed, the members will not be subject to liability. This is probably the best reason to use an LLC rather than a corporation to provide liability protection.
- Setting up an LLC is similar to a corporation in that Articles of Organization are filed with the Secretary of State.
- Unlike a corporation, annual meetings and minutes are not required.
- The operating agreement of an LLC is similar to the bylaws of a corporation. The operating agreement provides for the conduct of business of the company. Unlike a corporation, which requires a separate buy-sell or shareholders’ agreement, the operating agreement of an LLC can encompass many other requirements of the company including the buy-sell agreement. The operating agreement can simply be changed by Amendment signed by all of the members.
This is a short overview of the different forms of business entities and does not include any of the taxable consequences or advantages or disadvantages in forming these entities. Please contact my office for more information.
Estate Planning
Your Will and Other Related Documents
Whether it is a plan to do nothing and let the state decide how to distribute your assets or whether it is a set of finely drafted documents, everyone needs an estate plan. You will want to decide how and to whom your hard earned assets are distributed, not to mention, if you have young children, you will want to choose who is going to best take care of them if you are no longer around. The following documents are the foundation of a good basic estate plan: will, living will, power of attorney for health care and durable financial power of attorney. Chief among these items is the will.
Will. A Will is used to set out the terms of how your assets are distributed upon your death. Generally, couples leave all of their assets to the surviving spouse and then to their children. In Georgia, if you die without a Will, state law designates that your spouse will receive a one-third share if you have at least two children, with the two children receiving one-third each. Of course, anything jointly held or which has a beneficiary designated, such as a home, if titled correctly, will go to the other joint owner. Also, assets with a beneficiary designation, like life insurance or retirement benefits, are distributed outside of probate and directly to the designated beneficiary. Additionally, if you have minor children, your Will is the only place you can designate a guardian if both parents die. If you are married and own property in excess of $2,000,000 (including the face value of any life insurance), you need a Will with tax planning to ensure that the IRS does not take more than its fair share.
Durable Financial Power of Attorney. Powers of Attorney go by many different names in the estate planning context. A durable financial power of attorney is used to designate someone to act on your behalf regarding your financial affairs in the event of your incapacity. Ensuring that financial power of attorney is included in your estate plan could eliminate the need to request that the Probate Court in your county appoint a Conservator of your property if you are incapacitated. Conservatorships should generally be avoided due to the expense and burden of having the Probate Court monitor the activities of the Conservator.
Georgia Advance Directive for Health Care. There are many different forms of Health Care Directives or Living Wills. The Georgia Advance Directive for Health Care (“DHC”) is a document which allows you to appoint someone to make health care decisions for you when you are unable to verbalize your wishes. It is a detailed document which enables you to make choices regarding specific types of health care you are willing to be subjected to including blood transfusions and amputation and to state your treatment preferences if you have a terminal condition or if you are in a state of permanent unconsciousness. It is used to allow your appointed agent access to your health care information when they otherwise would not be allowed that information pursuant to the privacy protections required by the Health Insurance Portability and Accountability Act (HIPPA). You may also have your health care agent make decisions for you after your death with respect to autopsy, organ donation, body donation and final disposition of your body. With this document, you can also appoint a Guardian in the event of permanent physical and mental incapacity.
Advance health care directives are used only after the initial emergency has passed and the outlook for recovery has been established. This document is separate from a Do Not Resuscitate (DNR) Order. A DNR is issued by a physician after conferring with the patient (or family or health care agent) and is generally used when CPR would be medically futile or only temporarily successful.
All of these documents must be formalized in the appropriate manner which requires two witnesses and a notary public. The witnesses cannot be related to you nor can they be a beneficiary under the Will.
Fiduciaries
When discussing wills and trusts, my clients want to know the responsibilities of the people they are appointing to serve in fiduciary duties. These are the following offices that must be filled:
Executor. The Executor files the original will for probate in the county of residence of the deceased. The Executor is sworn by the Probate Judge to follow the fiduciary duties required of an executor; specifically to follow the terms of the will. An Executor usually serves for a finite period of time until all of the property of the estate has been transferred to the beneficiaries and the estate is closed.
Trustee. If a trust is created either in your will or outside of your will, a Trustee must be appointed. This person has a fiduciary duty to follow the terms of the trust as specified in the will or trust document. The Trustee is responsible for investing assets and paying income and principal either to or for the beneficiary’s benefit including health, education, support and various other expenses. Service required of a Trustee varies depending on the trust. The term can be the entire life of the Trustee or more usually, until your children have attained an age at which the trust requires final distribution of all of the trust assets.
The Executor and Trustee are sometimes called Personal Representative.
Guardian. This is the person you appoint to care or see to the care of your minor children until they have reached 18 years of age.
The same person or several different people can fill the above offices. You may also designate more than one person. If you do not want an individual to serve in the Executor or Trustee capacity, many banks have trust departments that fill these responsibilities or there are private fiduciaries available.
Trusts That Can Save Estate Taxes
Many people do not consider themselves wealthy; however the federal government has different ideas when it comes to your estate. While the laws on estate taxes are in a state of flux, current law provides that in 2011, ifyou have in excess of $1 million in assets when you die, your estate will be subject to estate taxes…UNLESS you take some steps to alleviate the problem.
Many of my clients who do not think that they have close to $1 million in assets are surprised to find that once we total up the equity in the home, the face amount of life insurance policies and the value of retirement plans, their estates usually exceed that amount. The following are some basic ways to lower or eliminate the estate tax entirely:
Bypass Trusts (also known as Credit Shelter Trusts). A bypass trust is used by married couples to take advantage of the $1 million estate tax exclusion amount (current law provides for no estate taxes in 2010 and a $1 million exclusion in 2011). A married couple may be able to give away $2 million estate-tax-free if they have a bypass trust arrangement.
Most couples leave everything to the surviving spouse. Because the IRS allows you to give everything to your spouse estate-tax-free, it seems to be the easiest solution; however, this unlimited marital deduction just postpones the estate tax date of payment. When the second spouse dies, his or her estate will include assets of both spouses, but there will be only a single $1 million exemption. This can potentially result in federal estate taxes that could have been easily avoided with a bypass trust.
The advantage of the bypass trust is that although the money you leave behind is ultimately earmarked for your children, your spouse can collect the income from the trust and in some cases also tap into the principal. But since the money technically "bypasses" both of your estates, it never gets subjected to federal estate taxes. Generally, you want an amount equal to the estate tax exemption to be distributed to the bypass trust when the first spouse dies. Because you do not know exactly when that will be, each spouse's Will should include language implementing the bypass trust if he or she is the first to die. The trust won't actually come into legal existence until the first spouse passes away.
Disclaimer Trust. A disclaimer trust is used by couples with assets that are close to the border of being taxed, between $1 and $2 million. The Will is set up to distribute everything outright to the surviving spouse, who can then choose to disclaim an amount equal to the exemption amount available at the time of death of the first spouse. This is similar to creating a credit shelter trust but the decision to disclaim does not have to be made until nine months after the date of death of the first spouse. There are specific rules that must be followed for this to be effective, such as it must be in writing.
QTIP Trusts. A QTIP (Qualified Terminable Interest Property) is often teamed with a bypass trust. For the purpose of taxes, the QTIP trust's assets are distributed to your spouse’s estate, not yours, even though you designate who ultimately receives the trust's assets. That's an important distinction, because generally, when you name the ultimate beneficiaries of a trust, the money must be included in your taxable estate. A QTIP trust is the exception. The benefit is that you can bequeath more than $2 million to your children, but they will not be required to pay taxes on it until your spouse dies. There is one potential cost to this benefit (depending on your situation): Your spouse must get the income generated by the trust as long as he or she is living. This setup can be really helpful if this is your second marriage and your spouse is worth either far less or far more than you are.
A QTIP trust works as follows: If your assets total $1.5 million and your spouse’s assets total $500,000, then the first step is to set up a bypass trust for $1 million, with your children as the ultimate beneficiaries. This step is estate-tax-free, because it's sheltered by your $1 million exemption. That leaves $500,000 remaining in your estate. You could, of course, leave it to your spouse with no tax penalty (because of the unlimited marital deduction), but that means that your spouse is allowed to determine the money's ultimate fate. You could leave the money directly to your children, but then they would have an immediate estate tax requirement.
The best choice is to set up a QTIP trust, naming your children as the
final beneficiaries of the $500,000. In this case, the trust's
assets are counted as part of your spouse’s estate for tax purposes,
but when your spouse dies, the money is actually distributed as you provide
in your Will. Since your spouse’s assets are still below
the $1 million estate tax exemption, there are no estate taxes due.
Requirements
for Trusts. For these trusts to work, each spouse
must own assets in their individual name. This might require changing
ownership on certain assets, such as your residence or investment accounts.
Irrevocable Life Insurance Trusts
Many clients are surprised to learn that life insurance is included in their taxable estate. Most of my clients have their spouse named as beneficiary and their children named as contingent beneficiaries. This means that the face value of the policy is included in their estate for estate tax purposes, not the cash value as believed by some of my clients. As a result, the more life insurance that is owned, the greater the taxable estate and the greater the estate taxes owed.
If someone dies in 2011 and their estate is valued at more than $1 million, estate taxes must be paid. This is an expensive tax, approximately 50%. Without proper planning, the largest beneficiary of your estate could become the IRS. In addition, family members would be required to pay the federal estate tax within nine months after death - in cash.
One way to delay the tax is to name the surviving spouse as beneficiary of the entire estate. He or she will receive it federal estate-tax free because of the unlimited marital deduction. However, if your spouse dies before you do, your insurance will be distributed to your children and your estate could face a significant federal estate tax liability. Transferring the estate to the spouse usually just delays the federal estate tax burdens that will be faced by your children or other beneficiaries at the death of the second spouse. A good solution to the federal estate tax problem involving life insurance is an irrevocable life insurance trust. With a properly drawn irrevocable life insurance trust, the trust owns the policy on your life, thus removing the insurance from your taxable estate. The proceeds of the policy are paid to the trust at death. The trust agreement controls the distribution, timing and management of the trust assets following death. As with traditional life insurance, no income tax is owed by the trust or its beneficiaries upon death.
There are some very specific steps that have to be followed to make the trust work properly:
- Have the trust drafted by an attorney. These trusts are complicated and will likely be in effect for many years.
- Fund the trust. Make a gift to the trust of the first year’s premium so the trustee can purchase the policy. An existing life insurance policy can be transferred to the trust, but the disadvantage of transferring an existing policy is that if the grantor dies within three years of the date of any transfer made to the trust, the IRS will disqualify the transfer and the transfer will be included in the taxable estate. Also, the transfer of an existing policy to an irrevocable life insurance trust is considered a taxable gift if there is cash value in the policy. The better approach is to create the trust and allow it to purchase the policy.
- Make annual gifts. Each year, make a gift to the trust at least 30 days before the premiums are due. This will make the gifts "present interest gifts," so that you can use up your annual exclusion. These are typically tax-free gifts made to the trust each year of up to $13,000 per beneficiary (annual gifts made in excess of $13,000 are permitted but gift taxes may apply). These gifts are then used to pay the premiums on the policy.
- Give notice. The trustee must notify each beneficiary of the gift made to the trust by you and give the beneficiary a reasonable opportunity to withdraw his or her portion of the gift (this is called a Crummey notice based on a federal case). Crummey notice must be given each time a gift is given to the trust.
In addition to minimizing federal estate tax liability, a life insurance
trust can meet other financial and estate planning needs. These
include providing financial support for a surviving spouse, minor children
or legally incompetent family members and creating future financial security. Some
of my clients wish to create a “dynasty” with the trust
whereby their children and grandchildren will be well taken care of for
their entire lives. A common use of the life insurance trust is
to provide liquidity in an estate. An illiquid estate that consists
generally of real estate, collectibles, a business or other property,
may be difficult to sell quickly. Proceeds from a life insurance
trust can be used to pay estate taxes or other settlement costs which
will help the beneficiaries avoid the forced sale of assets for such
taxes. Other advantages include avoidance of probate and being
very difficult for disgruntled beneficiaries to challenge.
The disadvantage
of creating an irrevocable life insurance trust is just that, it is irrevocable. This
means that once the trust terms are determined, they can’t be changed. If
one child is not living up to expectations, and they are to be written out
of the will, they can still benefit from the proceeds of the irrevocable trust.
Living Trusts (also known as a Revocable Trust)
A living trust or revocalbe trust is sometimes called a will substitute. This is a document drafted and funded during your lifetime and which stays in effect even after your death. Typically you name yourself as the trustee of your own trust and someone else (spouse, relative, friend, bank) as the successor trustee.
Reasons to use a living trust:
- Your assets are transferred to your beneficiaries without having to go through probate (the process by which the Probate Court declares your Will valid and gives your Executor authority to transfer your assets). This is a big advantage in states like California and Florida where probate can be time consuming and the expense can be very high due to court costs and attorney fees.
- If you own property in several states, multiple probate proceedings may be required to settle your estate in the absence of a living trust.
- A living trust is private, while probate is a public process. This is a plus if you do not want people to know who received your assets.
- If you think someone is likely to be unhappy with your carefully crafted estate plan, a living trust is less likely to be contested than a Will.
- A living trust can provide better management of your property in the event that you become incapacitated.
- A living trust can function as a coordinator of all probate and non-probate assets (such as qualified retirement benefits).
Reasons not to use a living trust:
- A living trust is generally more expensive to create than a Will.
- In Georgia, a Will is generally used because probate is simple and inexpensive.
- There is no tax avoidance. If your estate is taxable, a Will can accomplish exactly the same tax savings as a trust at a much cheaper cost.
- Even if you have a living trust, you will still need a Will to ensure that anything that was inadvertently omitted from the living trust will be transferred to the trust upon your death.
- You cannot appoint a guardian for minor children in your living trust, it must be done in your Will.
- To make the living trust effective, all your assets, your house, your brokerage accounts, life insurance, essentially everything you own, must be transferred into the trust. In my opinion, this is the biggest problem with living trusts, if you do not transfer all of your assets to your living trust, probate will still be required.
Nonprofits
Creating a Tax-Exempt Organization
An organization can be not-for-profit, yet still be subject to federal income taxes. Section 501(c)(3) of the Internal Revenue Code specifies which organizations qualify for tax-exempt status. The following types of organizations are those that qualify: Religious, charitable, testing for public safety, organizations that foster amateur sports competition, scientific, literary, educational, or aid in the prevention of cruelty to children or animals. To qualify, these organizations must not be organized for a profitable and must have an exempt purpose.
Section 501(c)(3) has many advantages for a nonprofit organization. In addition to obtaining exemption from federal income tax, the other advantages are:
- Assurance to donors of deductibility of contributions
- Exemption from certain state taxes
- Exemption from certain Federal excise taxes
- Exemption from taxation on purchases of goods
- Nonprofit mailing privileges
There are also some disadvantages:
- Continuous planning to maintain the status of tax-exemption
- Records of meetings are open to the public, not just the membership
While it is most certainly advantageous for all nonprofit organizations to request tax-exempt status, those organizations that have gross receipts each year in excess of $5,000 are required to apply for tax-exempt status.
The IRS form used to apply for tax-exempt status is Form 1023. Prior to filing, an organization must have some form of business entity, most commonly, a corporation. This requires registration with the Secretary of State, approving bylaws and obtaining a federal identification number.
Probate
To assist you in making a decision on whether to use a Will or a living trust for your estate plan, the issue of probate must be addressed. The following are typical questions asked by my clients:
What is probate? Probate is the process by which property is transferred after the death of the owner. If there is a Will, then the Executor files a petition along with the original Will in the Probate Court in the county where the decedent lived. The Executor is sworn to follow the fiduciary duties required of an Executor and begins the process of paying bills and transferring property to the beneficiaries of the Will. If there is no Will, an Administrator is sworn in and must follow the laws of the state of Georgia when distributing the property.
Should I avoid probate? You might have already taken steps to avoid the probate process and not even know it. If you hold property, such as your home, as joint tenants with right of survivorship, then the property will be distributed to the co-owner and will not pass through probate. All of your life insurance and retirement plans have a beneficiary designated and do not pass through probate. If you have not designated your estate as the beneficiary of your life insurance and retirement assets (which is not always advisable), then the benefits will be distributed to the designated beneficiary and not pursuant to your will, thus passing outside of probate.
Is probate time consuming? With a simple will that has followed all of the required procedures and formalities, some estates can be closed in as little as six months after opening. The time an estate is open depends upon certain factors including whether the estate is subject to estate tax, the type of property owned and the beneficiaries designated.
Is probate expensive? In Georgia, filing fees for probate are approximately $200. Most attorneys and CPA’s charge their normal hourly rate to assist in the probate process, unlike other states where a normal fee is based on a percentage of the probate estate.
