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ASSET PROTECTION RESOURCES Articles and Resources

California Does Something Right (Temporarily) for Small Business

California’s minimum tax on business entities is $800.00 per year. The California Franchise Tax is the highest in the nation and also comes with corporate income tax and personal income tax. California traditionally is a tough state to own a small business due to all the taxation and ever-changing business regulations. Interestingly, corporations have been exempted from that high fee for their first year of business since 1998. However, only 75% of about 100,000 new corporations that are formed each year claim the exemption because of complicated tax filing requirements. And don’t forget, California demands you pay the business entity tax if you are “doing business” in California. Many people mistakenly believe that if they don’t specifically have a California LLC then this tax does not apply, but that is not the case. The definition of “doing business” in California is extremely broad. You are subject to this tax if you (among other things):
  • Engage in any transaction for the purpose of financial gain within California. (Even if you don’t live there.)
  • Are organized or commercially domiciled in California
  • Your California sales, property or payroll exceeds certain amounts.
With regard to exceeding certain sales amounts, it gets even muddier. There is a law that exempts certain companies outside of California from the tax even if they are making sales in California which is described by the Franchise Tax Board as follows:
Public Law 86-272 potentially applies to companies located outside of California whose only in-state activity is the solicitation of sale of tangible personal property to California customers. Businesses that qualify for the protections of Public Law 86-272 are exempt from state taxes that are based on your net income. These entities, however, still may be considered to be doing business in California and may be liable for filing and paying the applicable amounts.

Such broad explanations and definitions can make it extremely difficult for business owners to discern whether or not they must pay this tax. As well, there are ongoing battles in court in order to try to stifle the Franchise Tax Board’s broad interpretations. So even before the Coronavirus, these taxes have had the effect of discouraging business in the state.

But for now, everyone can go ahead and take a deep breath (albeit temporarily) when they form an LLC in California. California is changing its taxation policy to waive the $800.00 mandatory franchise tax for the first year on all new entities. LLCs, limited partnerships and limited liability partnerships that register in the years 2021, 2022 and 2023 will not have to pay the $800.00 in their first year of business. Through this change the state would be reducing the General Fund Revenue for California by about $50 Million dollars in 2020-21 and $100 Million dollars in 2021-22 and out years. The goal of the new legislation is “to help and reduce costs for first year California small business.” The legislation further notes that “…these taxes may stifle economic growth and job creation and may inhibit the formation of many small businesses.”  Which ironically, may have some new business owners holding off to open a new entity to avoid paying the 2020 franchise tax, thereby stalling the California economy even more until 2021 when the tax exemption will be placed. California traditionally has about 250,000 LLCs, partnerships and sole proprietorships formed each year. Now, to try and keep economic growth from stalling, the $800.00 fee is temporarily waived on the first year for these entities along with corporations. (Hopefully without the cumbersome tax filing requirements.) The cost of doing any sort of business in California is very high. Waiving the $800.00 fee for an LLC’s first year is a good start. But why not make the waiver permanent? Corporations are excluded from the fee for the first year, and have been for years. Allowing LLC’s and other entities a similar permanent first year exemption would be wise policy.

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The Crimes of a Nominee Officer

Matt wanted to open a confidential mail order business and he needed to operate with absolute privacy. No one could ever know that he ran a business that sold sensitive supplement products over the internet. Matt lived in Las Vegas and knew he needed a Nevada LLC for his new business. He had heard that the state of Nevada allowed both corporations and LLCs the use of nominee officers, whereby someone else’s name, a nominee, was used for all the state filings. In this way, privacy was achieved because Matt’s name would not be listed on the Nevada Secretary of State’s website as an LLC manager. No one could ever, he believed, find out about the new business. Matt’s friend told him there was a formation company in a nearby strip mall that set up LLCs for privacy. Matt made an appointment. The gregarious salesman explained to Matt how it worked. Their company provided an individual to serve as nominee manager. This person’s name was listed on the Annual List of Managers filed with the state. Once that was done the LLCs owner, Matt, then held a meeting and elected a new manager – Matt, to manage the business. Matt liked the privacy involved and paid a significant amount of money for the formation company to proceed. The nominee’s name was listed with the state and then Matt, signing the meeting minutes prepared by the formation company, named himself the real manager for the upcoming year. Matt got the business going. As the sole owner of the LLC he was a cosigner on the bank account. His in-house bookkeeper could sign checks up to $2,500. Anything above that amount required only Matt’s signature. In many cases where he didn’t want his name to appear, he paid the bills with cashier’s checks. The business grew. In the second year, when the Annual List to the state was due, the formation company prepared minutes that took Matt off as manager, put the nominee in as manager for the filing with the state and, once the filing was done, put Matt back in charge. Matt came to realize that he didn’t like the high fees the formation company charged for the nominee service. So before the third year’s filing was due he obtained a new registered agent. This essentially terminated his relationship with the formation company. Matt didn’t want to be bothered with all the minutes and managers being changed back and forth so he just left the nominee’s name on as manager and filed the Annual List with the state of Nevada. Matt assumed that the formation company would never know otherwise. It was just a name. Then disaster hit. Matt’s sensitive supplement products caused a number of heinous injuries to honest, doubt-free individuals. The online reviews indicated that many were in need of significant medical attention. Matt was confident he could beat this. He instructed his new registered agent company to dissolve the LLC. With the business shut down there would be nothing to go after, thought Matt. It would all blow over. But that is never the case when a large number of innocent people are injured. A government attorney was assigned the case. Using Nevada law, she went to the registered agent’s office and requested the names of the owners and managers. The registered agent was reluctant to turn it over until they learned that in a criminal case they were required to turn over such information. Learning of the investigation, Matt finally hired an attorney. Jerry set Matt straight on a number of legal issues. Selling untested compounds to the general public was one issue. But Matt’s misuse of the nominee service provided the government with an even easier case against him. Jerry clarified Nevada law with Matt. When the manager of an LLC (or the officer of a corporation) resigns, an amended list of managers should be filed with the state. Each time they annually switched managers around they ran afoul of Nevada law. Jerry told Matt that the formation company had provided him with inaccurate information. Matt was angry, which Jerry noted was a common experience when relying on non-lawyers to provide legal advice. Jerry said there was a wrinkle in all of this. If Matt had simply left the nominee on as manager for the whole year, with Matt serving as assistant manager and doing all the work, no filing problem would have occurred. It is perfectly acceptable to list someone as a nominee officer. It was the changing back and forth without notifying the state that caused the problems. Filing false reports with the state of Nevada can result in significant penalties. In this case the false filings were doubled. First, the Annual List was filed under a knowing falsehood. The nominee was listed as manager but would be replaced in days without proper notification. (Again, you are better off leaving the nominee as the manager.) Second, in later years, Matt listed the nominee as manager without paying the formation company for the nominee service. He used a name of a nominee who clearly was not acting as a nominee. Matt knowingly submitted a false report to the state.
Nevada corporate law (at NRS § 78.150(3)(a)(2)) and LLC law (at NRS § 86.263(3)(a)(2)) requires the lists to include a declaration under penalty of perjury that the corporation or LLC “acknowledges that pursuant to NRS 239.330, it is a category C felony to knowingly offer any false or forged instrument for filing with the Office of the Secretary of State.”
A category C felony requires a court to sentence a wrongdoer to state prison for not less than one year with a maximum term of five years. Monetary fines may also be imposed.
Nevada law further states in § 78.150 and § 86.263 that a person who files a list with the Secretary of State which identifies an officer, director, manager or managing member “with the fraudulent intent of concealing the identity of any person or persons exercising the power or authority…in furtherance of any unlawful conduct is subject to the penalty set forth in NRS 225.084.”
The penalty for filing a false statement of material fact includes actual damages (involving a minimum of $10,000 for each violation), costs of suit and attorney’s fees and punitive damages as the facts may warrant. Jerry represented Matt as the government investigated both the untested supplement issues and the LLC filing issues. In the end, the government didn’t want to deal with all the experts and time required to prove the supplement case. Matt had clearly done all the LLC filings with the intent of improperly concealing his identity. The government’s case was so easy. Jerry did his best, but as it turned out, Matt was sent to prison for five years and owed millions in actual and punitive damages.

Be very cautious when using a nominee service.

Do not blindly accept the advice of those who don’t know the law. Leave your nominee on the annual list and work as an assistant manager or vice president. When the nominee is no longer used, file an amended list with the state. If you use the nominee’s name but you don’t pay for the service you can be charged with a felony and sent to prison. If you use a nominee to conceal your involvement in wrongful conduct the penalties are significant. It is easy to follow the law. It is also easy to avoid the advice of people who don’t know the law. Now that you know what not to do, here are some points to help you understand how and why you would use a Nominee Manager/Officer.
  • Nominee Manager / Officer can be used to provide privacy on state records. Each jurisdictions business statutes determine what information is made part of the public record, so this can vary depending on the state your entity is formed in.
  • Once a Nominee Manager/Officer is in place, the Member/Shareholder retains all operational authority, signature rights over any financial accounts, the right to enter any sort of financial or lease arrangement with any other entity, etc.
  • Agreement is signed between Member(s) and Nominee that outlines the parameters of the service.
  • Members/Shareholders retain the ability to vote the nominee officer out of the corporation if you so choose. Any state records that name the Manager, etc., must then be updated to show who is the current Manager/Officer/Director.

Can Emails Create a Binding Contract?

Joe exchanged emails with Mary. They were investigating whether Joe wanted a consignment of Mary’s embroidered toilet seat covers for Joe’s hardware store. The email conversation trailed off and Joe went on to other things.

Two days later, to Joe’s surprise, the toilet seat covers arrived.

Instead of emailing, Joe immediately called Mary.

“Why did you send these over?”

Because we have a contract” said Mary.

“No we don’t,” said Joe. “We only have a string of emails

“Which created a contract,” said Mary. “Aren’t you up on the new laws?”

Joe ended his conversation with Mary and called Hank, his attorney. After laying out the scenario, Hank told Joe what was happening in the world of emails.

“To create a contract,” said Hank, “you need to meet four elements. You must have offer, acceptance, mutual obligation or valuable consideration and capacity to contract. While I haven’t read the emails, courts are now saying that you can piece together the strings of an email conversation to find all of those elements.”

“But,” said Joe, “I didn’t sign a contract.”

“You don’t need ink anymore,” said Hank. “There’s a recent Texas case saying that the name or email address in the ‘from’ field satisfies federal law for a signature under the Uniform Electronic Transactions Act.”

Joe was exasperated. “That’s enough to create a contract?”

“In that case it was. Do you put your stylized signature at the end of your emails?”

“Yes. My web guy says it makes the emails look more personal.”

“And more binding. Some cases have looked to that as a binding signature, even for real estate contracts.”

“What do I do?”

Hank laughed. “I’m not going to charge you $5,000 to settle a $1,500 dispute. Just sell the merchandise and never do business with Mary again.”

“But for the future?” asked Joe.

“Today,” said Hank, “talk to your web guy. Tell them to change your name to block letters, so that it looks less similar to a real signature.”

“Anything else?”

“Yes,” said Hank. “Tell them to add this disclaimer to the language at the end of your emails:

The content of any and all communications from this email address shall not be interpreted as an enforceable offer or acceptance and shall not form the basis for a binding contract.

“Okay,” said Joe. “Thanks. Seems like this has become an issue.”

“Exactly,” said Hank. “Especially for my real estate clients. In real estate transactions the Statute of Frauds requires a signature for an enforceable contract. Some courts are holding that a purposely typed email signature now satisfies that requirement.”

“It’s a brave new world.”

Hank agreed. “Everyone needs to be careful.”

The Lesson: Beware of email conversations that create a contract and use disclaimer language to prevent contract formation. When negotiating terms via email, make it clear in the beginning that the email exchange is for discussion purposes only and that all communications are non-binding until the parties fully execute a formal contract.

Beyond including disclaimers, there are a few other things that you should keep in mind when communicating by email. Along with piecing together emails and ruling that emails can constitute a contract, some courts have also deemed certain emails as amendments or waivers to an existing contract. It should be expressly stated in your contracts that emails are not qualified to amend or waive any terms of the contract. Also, be sure to stay away from contractual language in your email conversations. Avoid using words like “agree,” “accept” and/or “offer”.

It may be helpful to remember that a signature is not needed to create a valid contract – there need only be offer, acceptance, consideration and capacity. Although a signature is the most common form of acceptance, that element can be proven in other ways. If all of the four elements can be proven, the lack of a signature alone may not be a sufficient argument of non-acceptance.

On the other hand, emails can be a quicker and more efficient way to create and/or amend contract terms. If you are comfortable doing business in that manner, it is acceptable to do so. The most important thing either way is that you know from the outset how you would like to conduct business and immediately make that clear to all parties involved.

Are Reverse Mortgages a Scam?

Scam-Proof Your Assets: Guarding Against Widespread Deception comes out in October. It is my newest Rich Dad Advisor book in several years. It covers the very important issue of cyber criminality now harming all of us. The monetary losses are staggering. The emotional damage is disturbing. Email, internet and telephone scams take our assets. You must be vigilant at all times.

Scam-Proof Your Assets also argues that the government must take greater action to end this crime wave. You can help. Buy the book from RDA-Press.com by clicking below.

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I’ve covered so many scams I couldn’t fit all of them into Scam-Proof Your Assets. So the following is an excerpt that didn’t make the book, but is important for you to know.

Home Equity Conversion Mortgage Scam

First, a home equity conversion mortgage is an actual, legitimate type of mortgage, one type of what’s known as a reverse mortgage, and some say they can be helpful for seniors. Whereas in a typical mortgage, you take out a bank loan and slowly make payments until you’ve paid it off, a reverse mortgage, like its name suggests, works in reverse: The bank pays you all the money for the house—in a lump sum, in monthly payments, or through a line of credit—so your debt grows rather than decreases. You can’t really pay the loan back until you sell the house, with anything that might be left over going to heirs. Reverse mortgages are often promoted to seniors as a way for them to afford life in their later years. Family members left behind can then sell the home once the elderly owner has passed away and pay off the debt.

According to HUD, HECMs are the most common type of reverse mortgage, and it’s the only type that’s insured by the Federal Housing Administration. In this scenario, the homeowner is able to take advantage of equity earned in a home. The maximum loan amount of about $680,000 is available to a homeowner aged 62 or older who lives in it as the primary residence. The homeowner must have paid off the home or at least paid a significant portion of it. Terms are available at fixed or adjustable rates for a period of time that may be selected by the homeowner. The reason it’s endorsed by the government is that the homeowner doesn’t have to start paying on the loan until he or she is no longer living in it as a primary residence. Also, the loan involves FHA mortgage insurance that guarantees the owner or the heirs won’t have to pay more than the value of the home, even if that amount is lower than the loan amount.

But it’s definitely not a low-risk mortgage, which is why anyone considering a reverse mortgage of any sort has to go through mortgage counseling. It’s not a decision to make on the spur of the moment during a time of financial hardship. But scam artists and unscrupulous mortgage and financial insiders know that HECM’s are legitimized by the U.S. government, and they take advantage of this fact to con seniors who are concerned about making ends meet without a salary. This is a particularly easy sell because the terms of reverse mortgages are hazy at best to most people, so it’s easy for con artists to gloss over the important details.

Even though they may not blatantly be attempting to steal money, business people hungry to sell reverse mortgage products may use high-pressure sales tactics to sell the product to homeowners who aren’t a good fit for it. The Wall Street Journal actually says that the majority of these scams are perpetrated by people the victims know, such as financial advisors.

Reverse mortgage scams include the following:

  • The fraudster may take out an HECM without the homeowner’s knowledge in order to obtain the loan for the value of a home that the homeowner is now responsible for paying. Often this is done by relatives of seniors who are preying on their neediness and abusing their personal connections. They may take the monthly payments and keep some or all of it themselves rather than give it to the homeowner.
  • Obviously, those taking out lump-sum loans are at greater risk of scams. Some scammers find out who is opting for a cash-out reverse mortgage, in which the total value of the loan is taken as a lump sum, then fraudulently take the money or transfer it to a personal account. This can be done by an insider—for instance, a mortgage broker or relative, who endorses the check and puts it in his or her own account. Then the person may explain that the borrower has to go through this person to receive the money. The scammer only distributes a portion of the full amount and keeps the rest for him or herself. In one Michigan case detailed in a report by the Consumer Financial Protection Bureau, a loan officer directed the closing agent to write two checks: One to himself for over $42,000, and one to the actual borrower, for just over $61,000. In the end, the borrower was left with a balance of more than $131,000—nowhere near the amount received.
  • Some scammers convince reverse mortgage recipients to invest those loan dollars into shady schemes, promising they’ll double their money and preying on their desire for financial security or wish to leave money to their heirs.
  • Some crooked loan salesmen may offer reverse mortgages as “free income,” when in fact a mortgage isn’t income, it’s a loan payment, which is why it’s not taxed. This type of pitch cleverly hides the associated fees as well as many of the terms of the loan, such as the fact that the homeowner still must keep up the property and pay the property taxes each year. Other tactics suggest taking reverse mortgages as a way to delay Social Security benefits until 70, despite the fact that the CFPB found that the costs of doing so always exceed the cumulative savings created by delaying retirement benefits. Or they may create straw buyers in order to purchase distressed properties, convincing unwitting seniors to “purchase” the low-cost properties by taking over the deed without exchanging any money. Then, in this too-good-to-be-true scenario, the homeowner is convinced to take a cash-out reverse mortgage based on inflated appraisals, and the scammer makes off with the loan amount.

Reverse mortgages are a calculated risk that should involve insights from numerous professionals. Be sure, before considering any such option, that you speak with a certified HUD housing counselor and consult Better Business Bureau reports regarding any mortgage broker or lender. Of course, don’t believe anyone who claims to be able to offer you a home—or money for your home—with no strings attached. There are always strings, and they may be really pricey ones.

Scam-Proof You Assets: Guarding Against Widespread Deception covers the threats we all face from cyber criminals. It can be found on Amazon.

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Black Swan Events and Force Majeure Clauses

Force Majeure is a French term meaning superior force. It is also a contract clause that relieves parties from performance when an extraordinary event occurs. Such challenges, known as ‘black swan’ events or generically ‘Acts of God’, may be mitigated by a force majeure clause acknowledging that contracts can’t be fulfilled when issues are outside of everyone’s control.

Did the Coronavirus arise from bat soup in a filthy, fetid wild animal market? Or was it accidentally leaked from China’s national biology lab in Wuhan? It doesn’t really matter. It is a superior force that was not foreseeable. (Although some would argue that with so many novel infectious diseases arising over the last 20 years, epidemics should now be expected).

With that last thought in mind, going forward, you should work with your attorney to include specific force majeure provisions in your contracts. A well drafted clause may excuse performance during events that are beyond the reasonable control of the parties. These can include acts of terrorism, labor shortages and strikes, new government regulations, fire and floods. Events such as epidemics, pandemics, biological outbreaks and wide spread illness should now also be incorporated into force majeure clauses.

What if your current contract does not include such language or the event doesn’t trigger a force majeure clause? Your fall back position is the doctrine of “frustration of purpose.” This doctrine can excuse contractual performance if events have now made it impossible to perform, or the central purpose of the contract has been frustrated due to unforeseeable events. However, Courts do not favor upending contracts under this doctrine. You are better off relying on a well drafted force majeure clause.

It is interesting to note that a Chinese agency is issuing force majeure certificates to local companies unable to perform on their contracts due to the Coronavirus challenge. It would be nice to just wave a certificate and make all the issues go away. But in the United States and other common law countries, force majeure is a question of fact for the Court. Was the event reasonably foreseeable? Were any notice provisions complied with? Does prior case law shed any light on the current situation? These are all facts to be considered. A government certificate won’t work here.

Still, your Chinese counterpart is probably struggling even more than you are. Is litigation even advisable? And if so, could you even collect?

The bigger issue for everyone is to understand the nature and need for force majeure clauses in your contracts. Well, that and the need for alternate sources of supply outside of China.

10 Rules for Asset Protection Planning

Asset protection planning defends your assets from future creditors, divorce, lawsuits or judgments. How can you best plan to protect your personal and business assets? Here are some guidelines to implement strong asset protection.

  1. Plan Your Asset Protection Strategy BEFORE You’re Sued
    Once a lawsuit has arrived, it’s too late to put protections in place and there is little you can do. Take action before a claim or liability arises. In fact, a strong asset protection structure can discourage lawsuits because the better protected your assets are, the stronger a deterrent it is.
  2. Keep Your Personal and Business Assets Separate
    If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.
  3. It’s Risky to Be A Sole Proprietor
    As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.
  4. A Two-Man Partnership is Double the Risk
    Maybe you have thought about forming two-man partnership with your friend. This may perhaps be an even worse idea than operating as a sole proprietorship. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.
  5. Use a Registered Corporate Entity for Asset Protection
    To protect yourself, use a registered corporate entity. Most people don’t realize there’s a risk in keeping assets and property in your name, which also means keeping the liability and the risk. To succeed in business, to protect your assets and to limit your liability, you want to select from one of the good entities / structures that are truly separate legal beings. They are:
    • C Corporations
    • S Corporations
    • Limited Liability Companies (LLCs)
    • Limited Partnerships (LPs)

    Each one has it’s own advantages and specific uses. Each one is utilized by the rich and knowledgeable in their business and personal financial affairs. And, depending on your state’s fees, each one can be formed for $800 or less so that you can achieve the same benefits and protections that sophisticated business people have enjoyed for centuries.

  6. Meet Annual Requirements so That Legal Protection Remains Intact
    You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business funds separate from your own, and avoid signing any business-related documentation in your name. This is known as maintaining the corporate veil and we provide this service to many of our clients. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.
  7. Protect Your Business Assets in a Business Entity
    You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. (Learn how to become incorporated now.) For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.
  8. Ensure You Have a Comprehensive Commercial Insurance Policy
    A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for?
    • The liability insurance should cover injuries to third parties on your property.
    • It should cover trespassing, especially if you have undeveloped or vacant land.
    • If you have people working on your property as your employees, you should also have Worker’s Compensation insurance.
    • The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years.
    • If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses.
    • A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.
  9. Use Entities as a Second Line of Defense
    It is extremely important to carry adequate and proper insurance coverage, but as we know, insurance companies have an economic incentive to avoid covering all claims. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.
  10. Avoid Incorporation Scams
    You need to know that there are a number of other corporate information scams in the marketplace. A popular one is the $99 incorporation. For just $99, they claim you will be bulletproofed and asset-protected. “C’mon down. We’ll set you right up”, they say.

    We have tested such services to see how they could possibly do all the work necessary to completely and properly form and document a corporation or LLC for just $99. These providers fall into two camps.

    1. The first camp does the minimal work needed to form an entity. They file the articles. That’s it. Once you pay the $99 they will no longer take your phone calls or questions. Eventually you will be sent a document with a state seal on it indicating that you are incorporated. But you will not be sent the minutes, the bylaws, or any issued stock – all of the other components necessary to be a complete corporation. Of course, if you hadn’t read this article, you would probably think in your blissful ignorance that for just $99 you were protected. You are not.
    2. The second camp uses the $99 as a come-on. They offer an a la carte menu in which the $99 is just for the filing of the articles. The bylaws are another $350. The meeting minutes are $250, and so on. By the time you are done they have gained your confidence and that $99 has ballooned up to $2,000 to $3,000 for just one entity.

U.S. Supreme Court Unanimously Rules: States Can’t Tax Out-of-State Trusts

Do you live in a high-tax state? Would you be better off having assets in a trust in a state with no taxes? The U.S. Supreme Court just answered the second question with a resounding “Yes” in the Kaestner case. States cannot tax out-of-state trusts. A case summary of this important decision follows:

ISSUE

Can a State lawfully tax the income of a trust merely because a beneficiary of the trust lives in the State?

APPLICABLE LAW

In North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, 588 U. S. _ (2019) WL 2552488 (decided June 21, 2019), the United States Supreme Court unanimously conclude that the North Carolina state residence of a trust beneficiary did not supply the minimum connection with North Carolina to support the State’s imposition of tax on trust income, and thus the State’s tax as applied to the trust violated the Due Process Clause of the United States Constitution.

The Decision in Kaestner

Justice Sotomayor delivered the opinion for a unanimous Court, and Justice Alito filed a concurring opinion, in which Justices Roberts and Gorsuch joined.

The court stated that this case was about the limits of a State’s power to tax a trust, and observed that North Carolina imposes a tax on any trust income that “is for the benefit of” a North Carolina resident. The court noted that the North Carolina courts interpret this law to mean that a trust owes income tax to North Carolina whenever the trust’s beneficiaries live in the State, even if—as was the case here—those beneficiaries received no income from the trust in the relevant tax year, had no right to demand income from the trust that year, and could not count on ever receiving income from the trust.

However, the Court pointed out that, even the North Carolina courts held the tax to be unconstitutional when assessed in such a case, because the State lacked the minimum connection with the object of its tax that the Constitution requires. The Court agreed, and affirmed the decision of the North Carolina courts, because, as applied in these circumstances, the Court concluded that the State’s tax violated the Due Process Clause of the Fourteenth Amendment.

The Facts in Kaestner

Originally, the precursor of the trust in question was formed nearly 30 years ago when New Yorker Joseph Lee Rice III formed a trust for the benefit of his children. Rice decided that the trust would be governed by the law of his home State, New York, and he appointed a fellow New York resident as the trustee, who was later succeeded by a Connecticut resident as trustee.

The trust agreement provided that the trustee would have “absolute discretion” to distribute the trust’s assets to the beneficiaries in such amounts and proportions as the trustee might from time to time decide. When Rice created the trust, no trust beneficiary lived in North Carolina. That changed in 1997, when Rice’s daughter, Kimberley Rice Kaestner, moved to the State. She and her minor children were residents of North Carolina from 2005 through 2008, the time period relevant for this case.

A few years after Kaestner moved to North Carolina, the trustee divided Rice’s initial trust into three subtrusts. One of these subtrusts—the Kimberley Rice Kaestner 1992 Family Trust (the “Kaestner Trust”)—was formed for the benefit of Kaestner and her three children. The same agreement that controlled the original trust also governed the Kaestner Trust. Critically, this meant that the trustee had exclusive control over the allocation and timing of trust distributions.

North Carolina admitted in the state-court proceedings that the State’s only connection to the Trust in the relevant tax years was the in-state residence of the Trust’s beneficiaries. From 2005 through 2008, the trustee chose not to distribute any of the income that the Trust accumulated to Kaestner or her children, and the trustee’s contacts with Kaestner were “infrequent”; there were only two meetings between Kaestner and the trustee I those years, both of which took place in New York.

The trustee also gave Kaestner accounts of trust assests and legal advice concerning the Trust. The Trust was subject to New York law; the grantor was a New York resident; and no trustee lived in North Carolina. The trustee kept the Trust documents and records in New York, and the Trust asset custodians were located in Massachusetts.

The Trust also maintained no physical presence in North Carolina, made no direct investments in the State, and held no real property there. The Trust agreement provided that the Kaestner Trust would terminate when Kaestner turned 40, after the time period relevant here. After consulting with Kaestner and in accordance with her wishes, however, the trustee rolled over the assets into a new trust instead of distributing them to her. This transfer tool place after the relevant tax years.

Between 2005 and 2008, North Carolina required the Connecticut trustee to pay more than $1.3 million in taxes on income earned by the assets in the Kaestner Trust. North Carolina levied this tax solely because of Kaestner’s residence within the State.

Course of Proceedings in Kaestner

The Court noted that North Carolina taxes any trust income that “is for the benefit of” a North Carolina resident, and that the North Carolina Supreme Court interprets the statute to authorize North Carolina to tax a trust on the sole basis that the trust beneficiaries reside in the State. Applying this statute, the North Carolina Department of Revenue assessed a tax on the full proceeds that the Kaestner Trust accumulated for tax years 2005 through 2008 and required the trustee to pay it. The resulting tax bill amounted to more than $1.3 million.

The trustee paid the tax under protest and then sued in state court, arguing that the tax as applied to the Kaestner Trust violated the Due Process Clause of the Fourteenth Amendment. The trial court decided that the Kaestner’s residence in North Carolina was too tenuous a link between the State and the Trust to support the tax and held that the State’s taxation of the Trust violated the Due Process Clause.

The North Carolina Court of Appeals affirmed, as did the North Carolina Supreme Court. A majority of the State Supreme Court reasoned that the Kaestner Trust and its beneficiaries “have legally separate, taxable existences” and thus that the contacts between the Kaestner family and their home State cannot establish a connection between the Trust “itself” and the State. The Court granted certiorari to decide whether the Due Process Clause prohibits States from taxing trusts based only on the in-state residency of trust beneficiaries. 

The Rationale in Kaestner

Initially, the Court noted that, in its simplest form, a trust is created when one person (a “settlor” or “grantor”) transfers property to a third party (a “trustee”) to administer for the benefit of another (a “beneficiary”). As traditionally understood, the arrangement that results is not a distinct legal entity, but a fiduciary relationship between multiple people.

The trust comprises the separate interests of the beneficiary, who has an equitable interest in the trust property, and the trustee, who had a legal interest in that property. In some contexts, however, trusts can be treated as if the trust itself has a separate existence from its constituent parts, and that trusts are treated as distinct entities for federal taxation purposes. 

The court noted that the Due Process Clause provides that “[n]o State shall…deprive any person of life, liberty, or property, without due process of law.” The Court pointed out that the Clause centrally concerns the fundamental fairness of governmental activity; and that in the context of state taxation, the Due Process Clause limits States to imposing only taxes that bear fiscal relation to protection, opportunities, and benefits given by the state. The Court observed that the power to tax is essential to the very existence of government, but cautioned that the legitimacy of that power requires drawing a line between taxation and mere unjustified confiscation. 

The Court concluded that the boundary turns on the simple but controlling question whether the state has given anything for which it can ask return. In this regard, the Court applied a two-step analysis to decide if a state tax abides by the Due Process Clause. First, there must be some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax. Second, the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State. 

To determine whether a State has the requisite “minimum connection” with the object of its tax, the Court borrowed from the familiar test of International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.ED. 95 (1945). Thus, a State has the power to impose a tax only when the taxed entity has certain “minimum contacts” with the State such that the tax does not offend “traditional notions of fair play and substantial justice.” The Court stated that the “minimum contacts” inquiry is flexible and focuses upon the reasonableness of the government’s action. Ultimately, only those who derive benefits and protection from associating with a State should have obligations to the State in question.

The Court noted it had already held that a tax on trust income distributed to an in-state resident passes muster under the Due Process Clause, as does a tax based on a trustee’s in-state residence (this is a planning opportunity for creating Nevada based trusts, where there are no state taxes). The Court also suggested that a tax based on the site of trust administration was constitutional. However, the Court carefully distinguished the Kaestner Trust upon the following grounds: (1) the Kaestner Trust made no distributions to any North Carolina resident in the years in question; (2) the trustee resided out of State; (3) the Trust administration was spilt between New York (where the Trust’s records were kept) and Massachusetts (where the custodians of its assets were located); (4) the trustee made no direct investments in North Carolina in the relevant tax years; and (5) the settlor did not reside in North Carolina. The Court emphasized that of all the potential kinds of connections between a trust and a State, North Carolina sought to rest its tax on just one—the in-state residence of the beneficiaries.

For these reasons, the Court held that the presence of in-state beneficiaries alone did not empower a State to tax trust income that had not been distributed to the beneficiaries where the beneficiaries had no right to demand that income and were uncertain ever to receive it. In limiting its holding to the specific facts presented, the Court did not imply approval or disapproval of trust taxes that were premised on the residence of beneficiaries whose relationship to trust assets differed from that of the beneficiaries here.

In discussing its holding, the Court noted that, in the past, it had analyzed state trust taxes for consistency with the Due Process Clause by looking to the relationship between the relevant trust constituent (settlor, trustee, or beneficiary) and the trust assets that the State sough to tax. In the context of beneficiary contacts specifically, the Court noted that it had focused upon the extent of the in-state beneficiary’s right to control, possess, enjoy or receive trust assets. The Count pointed out that its emphasis on these factors emerged in the following two early cases: (1) Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83, 50, S.Ct. 59, 74 L.Ed. 180 (1929) (rejecting Virginia’s attempt to tax a trustee on the whole corpus of the trust estate, and explaining that nobody within Virginia had the present right to the trust property’s control or possession, or to receive income therefrom); and (2) Brooke v. Norfolk, 277 U.S. 27, 48 S.Ct. 422, 72 L.Ed. 767 (1928) (rejecting a tax on the entirety of a trust fund assessed against a resident beneficiary because the trust property was no within the State, did not belong to the beneficiary, and was not within her possession or control).

Both of these cases invalidated state taxes premised on the in-state residency of beneficiaries, and in each of these cases, the challenged tax fell on the entirety of a trust’s property, rather than on only the share of trust assets to which the beneficiaries were entitled. On the other hand, the Court noted that the same elements of possession, control, and enjoyment of trust property had let it to uphold state taxes based upon the in-state residency of beneficiaries who did have close ties to the taxed trust assets, and where the trust income actually was distributed to an in-state beneficiary. The Court states that, in those circumstances, the beneficiary owned and enjoyed an interest in the trust property, and the State could exact a tax in exchange for offering the beneficiary protection. 

The Court observed that its past cases reflected a common governing principle, i.e., when a State seeks to base its tax on the in-state residence of a trust beneficiary, the Due Process Clause demands a pragmatic inquiry into what exactly the beneficiary controls or possesses and how that interest relates to the object of the State’s tax. Although the Court stated that its resident-beneficiary cases were most relevant here, similar analysis also appeared in the context of taxed premised on the in-state residency of settlors and trustees; and that a focus on ownership and rights to trust assets also featured in the Courts; ruing that a trustee’s in-state residency can provide the basis for a state to tax trust assets.

In summary, the Court concluded that, when assessing a state tax premised on the in-state residency of a constituent of a trust—whether beneficiary, settlor, or trustee—the Due Process Clause demands attention to the particular relationship between the resident and the trust assets that the State seeks to tax. Because each individual fulfills different functions in the creation and continuation of the trust, the specific features of that relationship sufficient to sustain a tax may vary depending on whether the resident is a settlor, beneficiary, or trustee. However, when a tax is premised on the in-state residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property, or a right to receive that property, before the State can tax the asset; otherwise, the State’s relationship to the object of its tax is too attenuated to create the “minimum connection” that the constitution requires.

Applying these principles to the Kaestner Trust, the Court concluded: (1) the residence of the Kaestner Trust beneficiaries in North Carolina alone did not supply the minimum connection necessary to sustain the State’s tax; (2) the beneficiaries did not receive any income from the trust during the years in question (if they had, such income would have been taxable); (3) the beneficiaries had no right to demand trust income or otherwise control, possess, or enjoy the trust assets in the tax years at issue; (4) the decision of when, whether, and to whom the trustee would distribute the trust’s assets was left to the trustee’s “absolute discretion”; (5) the Trust agreement explicitly authorized the trustee to distribute funds to one beneficiary to the exclusion of others, with the effect of cutting one or more beneficiaries out of the Trust; (6) the Trust Agreement authorized the trustee, not the beneficiaries, to make investment decisions regarding Trust property, thus making the beneficiaries’ interest less like a potential source of wealth that was property in their hands; (7) not only were Kaestner and her children unable to demand distributions in the tax years at issue, but they also could not count on necessarily receiving any specific amount of income from the Trust in the future; (8) Kaestner and her children had no right to control or possess the trust assets or to receive income therefrom; and (9) Kaestner and her children received no income from the Trust, had no right to demand income from the Trust, and had no assurance that they would eventually receive a specific share of Trust income.  The Court concluded that, given these features of the Kaestner Trust, the beneficiaries’ residence could not, consistent with due process, serve as the sole basis for North Carolina’s tax on trust income.  For these reasons, the Court affirmed the judgment of the Supreme Court of North Carolina.

Justice Alito’s Concurring Opinion

Justice Alito noted that he joined the opinion of the Court because he believed that it properly concluded that North Carolina’s tenuous connection to the income earned by the trust was insufficient to permit the State to tax the trust’s income.  However, he cautioned that, because this connection was unusually tenuous, the opinion of the Court was circumscribed. He stated that he wrote separately to make clear that the opinion of the Court merely applies its existing precedent and that its decision not to answer questions not presented by the facts of this case did not open for reconsideration any points resolved by its prior decisions.

Justice Alito observed that, although states have broad discretion to structure their tax systems, in a few narrow areas the Federal Constitution imposes limits on that power.  The Due Process Clause creates one such limit. It imposes restrictions on the persons and property that a State can subject to its taxation authority. The Due Process Clause requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.  North Carolina assesses this tax against the trustee and calculates the tax based on the income earned by the trust. Therefore, it is necessary to look at the connections between the assets held in trust and the State.

Justice Alito pointed out that it is easy to identify a State’s connection with tangible assets.  A tangible asset has a connection with the State in which it is located, and generally speaking, only that State has power to tax the asset.  However, intangible assets–stocks, bonds, or other securities–present a more difficult question.  In the case of intangible assets held in trust, Justice Alito noted that the Court previously had focused upon whether a resident of the State imposing the tax has control, possession, or the enjoyment of the asset.  Because a trustee is the legal owner of the trust assets and possesses the powers that accompany that status–power to manage the investments, to make and enforce contracts respecting the assets, and to litigate on behalf of the trust–the trustee’s State of residence can tax the trust’s intangible assets.  On the other hand, the Court now was being asked whether the connection between a beneficiary and a trust is sufficient to allow the beneficiary’s State of residence to tax the trust assets and the income they earn while the assets and income remain in the trust in another State.

Justice Alito stated that the following two cases provide a clear answer: (1) Brooke, supra; and (2) Safe Deposit, supra.

In Brooke, supra, Virginia assessed a tax on the assets of a trust whose beneficiary was a resident of Virginia. The trustee was not a resident of Virginia and administered the trust outside the Commonwealth. Under the terms of the trust, the beneficiary was entitled to all the income of the trust and had paid income taxes for the money that had been transferred to her. But the Court held that, despite the beneficiary’s present and ongoing right to receive income from the trust, Virginia could not impose taxes on the undistributed assets that remained within the trust because the property was not within the State, did not belong to the petitioner, and was not within her possession or control.  Even though the beneficiary was entitled to and received income from the trust, the Court observed that she was a stranger to the assets within the trust because she lacked control, possession, or enjoyment of them.
In Safe Deposit, supra, Virginia again attempted to assess taxes on the intangible 

assets held in a  trust whose trustee resided in Maryland.  The beneficiaries were children who lived in Virginia.  Under the terms of the trust, each child was entitled to one half of the trust’s assets (both the original principal and the income earned over time) when the child reached the age of 25.  Despite their entitlement to the entire corpus of the trust, the Court held that the beneficiaries’ residence did not allow Virginia to tax the assets while they remained in trust, and noted that nobody within Virginia had the present right to the assets’ control or possession, or to receive income therefrom, or to cause them to be brought physically within her borders. The Court concluded that the beneficiaries’ equitable ownership of the trust did not sufficiently connect the undistributed assets to Virginia as to allow taxation of the trust, and that the beneficiaries’ equitable ownership yielded to the established fact of legal ownership, actual presence, and control elsewhere.

Justice Alito pointed out that in Kaestner, as in Brooke and Safe Deposit, the resident beneficiary had neither control nor possession of the intangible assets in the trust.  She did not enjoy the use of the trust assets. The trustee administered the trust and held the trust assets outside the State of North Carolina.  Justice Alito stressed that, under Safe Deposit and Brooke, that was sufficient to establish that North Carolina could not tax the trust or the trustee on the intangible assets held by the Kaestner Trust.

In summary, Justice Alito concluded that the Due Process Clause requires a sufficient connection between an asset and a State before the State can tax the asset.  For intangible assets held in trust, the Court’s precedents dictate that a resident beneficiary’s control, possession, and ability to use or enjoy the asset are the core of the inquiry.  Justice Alito stated that the opinion of the Court rightly concluded that the assets in the Kaestner Trust and the Trust’s undistributed income could not be taxed by North Carolina because the resident beneficiary lacked control, possession, or enjoyment of the Trust assets.  Justice Alito emphasized that the Court’s discussion of the peculiarities of the Kaestner trust did not change the governing standard, nor did it alter the reasoning applied in the Court’s earlier cases.  On that basis, he concur with the Court’s opinion. 

BRIEF DISCUSSION

The gist of Kaestner was that a State cannot tax trust income merely because a beneficiary of the trust lives in that State; however, the discussion in Kaestner also provides some indication as to when it may be permissible for a state to tax the income of a trust.  The following is a list of some of the factors to be considered:

  1. Income Distributed to an In-State Resident. The Court noted that the in-state beneficiaries in Kaestner did not receive any income from the trust during the years in question; and that, if they had, then such income would have been taxable.  The Court further noted that it had already held that a tax on trust income distributed to an in-state resident passes muster under the Due Process Clause.  The court emphasized that, not only were Kaestner and her children unable to demand distributions in the tax years at issue, but they also could not count on necessarily receiving any specific amount of income from the Trust in the future; they had no right to control or possess the trust assets or to receive income therefrom; they received no income from the Trust; they had no right to demand income from the Trust; and they had no assurance that they would eventually receive a specific share of the Trust income.  
  2. Residence of Trustee. The Court noted that a tax based on a trustee’s in-state Residence also passes muster under the Due Process Clause.
  3. Site of Trust Administration. The Court suggested that a tax based on the site of trust administration was constitutional.
  4. Residence of Grantor/Settlor. The Court concluded that, although the residence of the grantor/settlor of a trust is an important factor to be considered, the mere fact that the grantor/settlor of a trust lives in the taxing state may not, in and of itself, be sufficient to support taxation of the trust. 
  5. Control, Possession, and Ability to Use or Enjoy Intangible Asset. The Court noted that the beneficiaries had no right to demand trust income or otherwise control, possess, or enjoy the trust assets in the tax years at issue.  Justice Alito’s concurring opinion also emphasized that, for intangible assets held in trust, the Court’s precedents dictate that a resident beneficiary’s control, possession, and ability to use or enjoy the asset are the core of the inquiry.  
  6. Trustee’s Exclusive Control. The Court noted that the Trust agreement provided that the Trustee would have “absolute discretion” to distribute the trust’s assets to the beneficiaries in such amounts and proportions as the trustee might from time to time decide; that the Trustee’s exclusive control over the allocation and timing of trust distributions was “critical”; that the Trust agreement explicitly authorized the trustee to distribute funds to one beneficiary to the exclusion of others, with the effect of cutting one or more beneficiaries out of the Trust; and that the decision of when, whether, and to whom the Trustee would distribute the Trust’s assets was left to the Trustee’s “absolute discretion.”  The Court stressed that the Trust Agreement authorized the Trustee, not the beneficiaries, to make investment decisions regarding Trust property, which made the beneficiaries’ interest less like a potential source of wealth that was property in their hands.
  7. Trust Not Subject to Governing Law. The Court noted that the Trust was formed under New York law, and not under North Carolina law, and that the Trust was subject to New York law. 
  8. Physical Location of Trust Records. The Court indicated that the Trustee kept the Trust documents and records in New York, and not in North Carolina.
  9. Physical Location of Asset Custodians. The Court indicated that the Trust asset custodians were located in Massachusetts, and not in North Carolina. 
  10. No Direct Investments in Taxing State. The Court noted that the Trust maintained no physical presence in North Carolina, made no direct investments in the State, and held no real property there.  
  11. Number of Meetings Between Trustee and Beneficiary. The Court noted that the Trustee’s contacts with Kaestner were “infrequent”; therefore, the number of meetings between the trustee and the beneficiary may be relevant. 
  12. Geographic Location of Meetings Between Trustee and Beneficiary. The Court noted that there were only two meetings between Kaestner and the Trustee, both of which took place in New York; therefore, the geographic location of trustee/beneficiary meetings may be important.
  13. Termination of Trust at Specified Age. The Court noted that the Trust agreement provided that the Kaestner Trust would terminate when Kaestner turned 40; but that, after consulting with Kaestner, and in accordance with her wishes, and after the relevant tax years, the Trustee rolled over the assets into a new trust instead of distributing them to her.  Thus, it would seem that drafting a trust as long-term trust, or even as perpetual trust, would be a safer option.  

CONCLUSION

Although the decision in Kaestner generally was a favorable decision for taxpayers, it was, by its terms, a very narrow holding.  The Court concluded that the residence of the Trust beneficiaries in North Carolina alone did not supply the minimum connection necessary to sustain the State’s tax; and could not, consistent with due process, serve as the sole basis for North Carolina’s tax on trust income.  For these reasons, the Court affirmed the judgment of the Supreme Court of North Carolina. As noted by the concurring opinion of Justice Alito, for intangible assets held in trust, the Court’s precedents dictate that a resident beneficiary’s control, possession, and ability to use or enjoy the asset are the core of the inquiry.

Guardianship Abuse: Are Your Parents Protected From a State Sanctioned Nightmare?

By Ted Sutton

Imagine your elderly parents living a peaceful and happy life after having retired from the workforce. Both of them are staying active whether that includes traveling to new places or taking part in community activities with others their age. They may need some assistance from you or a paid nurse, but they live a happy life free of any health issues that require serious attention.

Then all of a sudden, somebody comes to your parents’ door with a court order mandating that they be moved into an assisted nursing care facility. They are told to drop everything, pack their belongings, and are then forced to leave their house without notice or any counsel from family members or anyone else. Their lives would change immediately, and ultimately for the worse. After being removed from the life that they knew and loved, your parents would have no control over any of the decisions affecting their lives. It would take a serious emotional toll on not only them, but everyone else in the family as well. This horror story of elder abuse sounds like hyperbolic fiction, but the sad reality is that stories like these happen frequently right here in the United States.

In October of 2017, The New Yorker published a shocking article that detailed a case of elder abuse involving Rudy and Rennie North, a couple who lived in a retirement community in Las Vegas. The Norths were a couple in their sixties and had a nurse that visited five times a week. One day in 2013, a woman named April Parks came to their house with a court order that forced the Norths into an assisted living facility without any prior notice.

After they were moved into the facility, the Norths would watch their human rights get stripped away from them. Parks, who was now their guardian, would make their decisions for them. Parks would then go on to overcharge the Norths’ estate for guardian fees, give them new doctors that prescribed stronger, mind-numbing medications, withhold medical information from their family members, and sell their belongings from their old house, which monies were used to pay Parks for her “services”. The worst part of all is that Parks had the right to do all of these things under the then current laws of the state of Nevada.

The New Yorker exposition details how easy it was for doctors to deem seniors medically unfit, judges to order senior citizens into nursing care facilities, and the authorities to ultimately take control of seniors’ lives. While this article brought to light a situation that has seldom been reported, there are many other cases of this abuse of power that happen in other parts of the country.

I had the opportunity to speak with a family from Massachusetts who had a similar encounter with that state involving their elderly parents. Understandably, they requested that their identities not be revealed.

One evening while returning from dinner, the mother, who is an octogenarian, was driving on the wrong side of the road and had to be corrected by the father. Her daughter, who is very involved with her parents, and the father, both made the decision that she should stop driving. This is where most stories would end, but this is only just the beginning.

The mother and father had home health aides who were there seven days a week. When the father had told the aide about his wife’s incident, it was then reported to a nurse, who reported it to others. A slew of events followed shortly thereafter. Once Adult Protective Services (APS) caught word of the incident, they decided to contact the local police, the rescue squad, the family doctor, and an attempt was made to move the elderly parents out of their home by launching an investigation into the retired couple.

The local police then sent an officer to the parents’ home the next day requesting that the mother revoke her driver’s license. The father and daughter both reassured the officer that she would not drive again. However, the police decided to take it one step further by suggesting that the parents’ vehicles be disposed of. The rescue squad showed up on the same day as the police and found no issues with the mother when they checked her out. When the family doctor was notified, the APS suggested that the mother undergo a psychiatric evaluation. All of this left the daughter with her hands full when she was coming to visit a few days later. Instead of spending quality time with her family, she would be making every effort to fight for her parents against the state, fronting for guardians who benefit greatly from senior incarcerations and asset sales.

The first thing she did was take her mother to a local neurologist for a psychiatric evaluation. Although she passed with flying colors, APS still came to their house later in the day. They did not feel that it was safe for her to live in her own home, contrary to what the doctor and the family believed. This undesirable encounter prompted the daughter to make a visit to the law library, where she was advised to buy a no trespassing sign and inform the local police of the posting. After she bought the sign and went to the police station, she discovered something even more appalling.

A police officer at the station called APS to inquire about her parent’s history. Instead of the one aforementioned report, the daughter found out that APS had filed five reports on her parents. A missed dose of medication and forgetting to use the shower were reported as horrific lapses. Worse yet, one of the reports filed mentioned a fire taking place at her parents’ house. The actual event was a cooking incident where food stuck to the bottom of a cooking pan and turned black. Nevertheless, the parents’ aides still reported it to APS, which lead to another false report. In truth, the fire department had never been called.

After all of this came to light, the daughter decided to take action. She called the Massachusetts Department of Aging to file a complaint, and she was given a contact at APS. The daughter asked her brother to get involved, and he decided to write a letter to APS threatening legal action against the agency if they continued to harass the family. Three days later, APS contacted the family stating that their case was closed. Not every family is so lucky.

In the face of negative publicity, some state governments have taken steps to deter guardianship abuse. Nevada, where the North family’s case took place, has become more aware of problems and has acted quickly, even before The New Yorker article appeared. In 2017, the Nevada Supreme Court created a Permanent Guardianship Commission that includes a Guardianship Compliance Office and has drafted the Protected Person’s Bill of Rights. The Nevada Attorney General’s office launched a task force between his office and local agencies to investigate and prosecute any cases that involve the abuse and exploitation of senior citizens.

James Hardesty, a Justice on the Nevada Supreme Court and chair of the Nevada Supreme Court Permanent Guardianship Commission, is pleased with the results of the reforms. “Over the past year”, said Justice Hardesty, “we have seen dramatic improvements with how guardianship abuse cases are handled,” giving potential wards the right to an attorney, creating a new set of more productive statutes for both child and adult guardianships, and staffing the Guardianship Compliance Office with an accountant to review each estate. The amendments proposed by Justice Hardesty and the Commission were passed unanimously in Nevada’s 2017 legislative session.

Nevada’s measures are being considered in other states. But, as in Massachusetts, the issue continues to be unreported in many jurisdictions. While listening to the Massachusetts family’s story, it became clear that they were not the only ones who was dealing with this issue. The doctor who gave the mother her psychiatric evaluation had seen hundreds of cases like hers and was completely beside himself when he had yet another government sanctioned evaluation to complete. The family, now attuned to the problem, discussed similar cases that her friends were dealing with in other states.

It is clear that more judicial and legislative changes are needed. In some cases, basic estate planning whereby a living trust appoints a guardian when needed can be used to limit state intrusions.  Absent such foresight, given the actions already taken and the actions yet to come, there is hope that Americans can come together and make changes in order to protect our elder family members and friends from these types of guardianship abuses.

LLC Strategy Tip for Protecting Against Guardianship Abuse

Consider holding your parents’ assets (brokerage accounts, real estate and/or personal residence) in one or more LLC’s. Your parents will serve as managers of these LLC’s. However, if a guardianship is later imposed, a specially drafted Operating Agreement can provide that the children or a trusted advisor (and not the state or any of their appointees) become the managers.  From this position your successor manager will be better able to fight the guardian’s attempts to improperly sell assets. You may contact Corporate Direct at 800.600.1760 or at corporatedirect.com for more on this strategy.

Guardianship Abuse: Are Your Parents Protected from a State Sanctioned Nightmare?

Imagine your elderly parents living a peaceful and happy life after having retired from the workforce. Both of them are staying active whether that includes traveling to new places or taking part in community activities with others their age. They may need some assistance from you or a paid nurse, but they live a happy life free of any health issues that require serious attention.

Then all of a sudden, somebody comes to your parents’ door with a court order mandating that they be moved into an assisted nursing care facility. They are told to drop everything, pack their belongings, and are then forced to leave their house without notice or any counsel from family members or anyone else. Their lives would change immediately, and ultimately for the worse. After being removed from the life that they knew and loved, your parents would have no control over any of the decisions affecting their lives. It would take a serious emotional toll on not only them, but everyone else in the family as well. This horror story of elder abuse sounds like hyperbolic fiction, but the sad reality is that stories like these happen frequently right here in the United States.

In October of 2017, The New Yorker published a shocking article that detailed a case of elder abuse involving Rudy and Rennie North, a couple who lived in a retirement community in Las Vegas. The Norths were a couple in their sixties and had a nurse that visited five times a week. One day in 2013, a woman named April Parks came to their house with a court order that forced the Norths into an assisted living facility without any prior notice.

After they were moved into the facility, the Norths would watch their human rights get stripped away from them. Parks, who was now their guardian, would make their decisions for them. Parks would then go on to overcharge the Norths’ estate for guardian fees, give them new doctors that prescribed stronger, mind-numbing medications, withhold medical information from their family members, and sell their belongings from their old house, which monies were used to pay Parks for her “services”. The worst part of all is that Parks had the right to do all of these things under the then current laws of the state of Nevada.

The New Yorker exposition details how easy it was for doctors to deem seniors medically unfit, judges to order senior citizens into nursing care facilities, and the authorities to ultimately take control of seniors’ lives. While this article brought to light a situation that has seldom been reported, there are many other cases of this abuse of power that happen in other parts of the country.

I had the opportunity to speak with a family from Massachusetts who had a similar encounter with that state involving their elderly parents. Understandably, they requested that their identities not be revealed.

One evening while returning from dinner, the mother, who is an octogenarian, was driving on the wrong side of the road and had to be corrected by the father. Her daughter, who is very involved with her parents, and the father, both made the decision that she should stop driving. This is where most stories would end, but this is only just the beginning.

The mother and father had home health aides who were there seven days a week. When the father had told the aide about his wife’s incident, it was then reported to a nurse, who reported it to others. A slew of events followed shortly thereafter. Once Adult Protective Services (APS) caught word of the incident, they decided to contact the local police, the rescue squad, the family doctor, and an attempt was made to move the elderly parents out of their home by launching an investigation into the retired couple.

The local police then sent an officer to the parents’ home the next day requesting that the mother revoke her driver’s license. The father and daughter both reassured the officer that she would not drive again. However, the police decided to take it one step further by suggesting that the parents’ vehicles be disposed of. The rescue squad showed up on the same day as the police and found no issues with the mother when they checked her out. When the family doctor was notified, the APS suggested that the mother undergo a psychiatric evaluation. All of this left the daughter with her hands full when she was coming to visit a few days later. Instead of spending quality time with her family, she would be making every effort to fight for her parents against the state, fronting for guardians who benefit greatly from senior incarcerations and asset sales.  

The first thing she did was take her mother to a local neurologist for a psychiatric evaluation. Although she passed with flying colors, APS still came to their house later in the day. They did not feel that it was safe for her to live in her own home, contrary to what the doctor and the family believed. This undesirable encounter prompted the daughter to make a visit to the law library, where she was advised to buy a no trespassing sign and inform the local police of the posting. After she bought the sign and went to the police station, she discovered something even more appalling.

A police officer at the station called APS to inquire about her parent’s history. Instead of the one aforementioned report, the daughter found out that APS had filed five reports on her parents. A missed dose of medication and forgetting to use the shower were reported as horrific lapses. Worse yet, one of the reports filed mentioned a fire taking place at her parents’ house. The actual event was a cooking incident where food stuck to the bottom of a cooking pan and turned black. Nevertheless, the parents’ aides still reported it to APS, which lead to another false report. In truth, the fire department had never been called.

After all of this came to light, the daughter decided to take action. She called the Massachusetts Department of Aging to file a complaint, and she was given a contact at APS. The daughter asked her brother to get involved, and he decided to write a letter to APS threatening legal action against the agency if they continued to harass the family. Three days later, APS contacted the family stating that their case was closed. Not every family is so lucky.

In the face of negative publicity, some state governments have taken steps to deter guardianship abuse. Nevada, where the North family’s case took place, has become more aware of problems and has acted quickly, even before The New Yorker article appeared. In 2017, the Nevada Supreme Court created a Permanent Guardianship Commission that includes a Guardianship Compliance Office and has drafted the Protected Person’s Bill of Rights. The Nevada Attorney General’s office launched a task force between his office and local agencies to investigate and prosecute any cases that involve the abuse and exploitation of senior citizens.

James Hardesty, a Justice on the Nevada Supreme Court and chair of the Nevada Supreme Court Permanent Guardianship Commission, is pleased with the results of the reforms. “Over the past year”, said Justice Hardesty, “we have seen dramatic improvements with how guardianship abuse cases are handled,” giving potential wards the right to an attorney, creating a new set of more productive statutes for both child and adult guardianships, and staffing the Guardianship Compliance Office with an accountant to review each estate. The amendments proposed by Justice Hardesty and the Commission were passed unanimously in Nevada’s 2017 legislative session.

Nevada’s measures are being considered in other states. But, as in Massachusetts, the issue continues to be unreported in many jurisdictions. While listening to the Massachusetts family’s story, it became clear that they were not the only ones who was dealing with this issue. The doctor who gave the mother her psychiatric evaluation had seen hundreds of cases like hers and was completely beside himself when he had yet another government sanctioned evaluation to complete. The family, now attuned to the problem, discussed similar cases that her friends were dealing with in other states.

It is clear that more judicial and legislative changes are needed. In some cases, basic estate planning whereby a living trust appoints a guardian when needed can be used to limit state intrusions.  Absent such foresight, given the actions already taken and the actions yet to come, there is hope that Americans can come together and make changes in order to protect our elder family members and friends from these types of guardianship abuses.

LLC Strategy Tip for Protecting Against Guardianship Abuse

Consider holding your parents’ assets (brokerage accounts, real estate and/or personal residence) in one or more LLC’s. Your parents will serve as managers of these LLC’s. However, if a guardianship is later imposed, a specially drafted Operating Agreement can provide that the children or a trusted advisor (and not the state or any of their appointees) become the managers.  From this position your successor manager will be better able to fight the guardian’s attempts to improperly sell assets. You may contact Corporate Direct at 800.600.1760 or at corporatedirect.com for more on this strategy.  

Theodore Z. Sutton is a recent graduate of the University of Utah and will be attending the University of Wyoming Law School in the Fall of 2019. He is currently involved with legal research in Reno, Nevada.

Protect What’s Yours: The Top 10 Benefits of Incorporating Your Business

Starting your business from scratch is a big deal. There are a million details to take care of, and the list of demands can seem endless. Small business owners have to hire employees, worry about taxes, and find ways to maximize profits while keeping costs as low as possible.

Every smart business owner should consider the benefits of incorporating. This is an important decision that has a significant financial impact.

Let’s take a look at the reasons why this is a smart move by helping you understand a few of the benefits.

Protect What’s Yours: The Top 10 Benefits of Incorporating Your Business

Have you heard about business incorporation but aren’t sure why it’s worthwhile? Read on to learn the top 10 benefits of incorporating your business.

1. It Protects Your Personal Assets from Lawsuits

Incorporating creates a safety barrier between you and your business. This is important because believe it or not, if you don’t incorporate your business, you run the risk of losing your personal assets when sued. Incorporating protects your personal assets if a lawsuit is filed against you.

2. It Protects Personal Assets From Creditors

Incorporating also protects your personal assets from creditors wanting to collect on business debts. This is accomplished by forming an LLC, or a C or S Corporation that protects your personal property in the event that your business falls on hard times.

When not incorporated, your personal property will be automatically linked to your business, including your home, investment accounts, cars, as well as future assets.

3. It Makes It Easier to Transfer the Business

Someday you may wish to sell your business or pass it on to a member of your family. Or perhaps you will get sick and no longer have the energy to continue running things. This is something many people don’t think about until they are near retirement.

When you are running a sole proprietorship, all of your personal property is linked to your business, making it very difficult to value the business or transfer it to someone else. Incorporating makes this process much easier.

4. It Allows Your Business to Grow Long After You’re Gone

The reality is that you won’t be around forever. Despite this, you will likely wish for your business to flourish long after you’ve passed away. When you are incorporated, probate won’t touch the business directly. The business will simply go directly to the new owner assuming you have the proper documentation in place.

5. It Has Huge Tax Benefits

Incorporating also offers massive tax benefits, such as the ability to deduct travel expenses and Social Security taxes that you’re paying into the system, deduct business losses, and claim some daily expenses required to operate the business.

Keep in mind that when you make the transition from being a partnership or a sole proprietor to an LLC or similar business structure, there are a multitude of deductions available to you that weren’t at your disposal as an individual.

6. It Makes It Easier to Raise Investment Capital

Another significant advantage of incorporating your business is the access it gives you to raising vital capital. The ability to borrow money is very important to any business, and being incorporated adds a legitimacy that helps when applying for loans.

It also allows you to open bank accounts and establish lines of credit that will make it easier and more efficient to operate your business.

7. It Makes it Easier to Sell Your Business

Incorporating also adds legitimacy to your business in other ways. Sole proprietors simply aren’t as attractive to potential buyers.

This is due to the fact that corporations are easier to track and manage, and they tend to be more stable. These are things that are of the utmost importance from an investor’s perspective.

Being incorporated also gives you a leg up when there are competing businesses that a buyer might be interested in.

8. It Helps Protect Your Brand

When it comes to owning a business, branding is everything. Keep in mind that if you don’t take the necessary steps to protect your brand, it’s possible for someone to swoop in and steal it.

That’s why incorporating is also important for protecting your brand. This includes everything from your business name, slogans, logos, and colors that represent your brand, to trademarks and any designs that distinguish your business from everyone else. Not sure if you’ve got a brand worth protecting? There are some tweaks you can do immediately to improve your brand.

9. It Makes Establishing Retirement Accounts Easier

When you own a business, you want to make sure that you and your employees are taken care of beyond a basic paycheck. Many companies provide health savings accounts and retirement accounts to help employees plan for the future.

Incorporating makes this process less expensive due to tax-advantages, and there is far less red tape involved in setting these types of accounts as a corporation compared to a sole proprietorship.

And even if you don’t have employees, there are still plenty of advantages to setting up accounts for yourself by incorporating your business.

10. It Helps Protect Your Privacy

One of the biggest benefits of incorporating your small business is something you might not have considered.

When your business is incorporated, you’re better able to keep your personal information hidden. This is especially vital for companies who need to closely protect trade secrets. For many companies, this level of privacy is what helps them maintain an edge on the competition.

Incorporating allows you to keep all of your business affairs private, and they will be kept completely confidential unless you make the decision to disclose them.

Taking Your Business to the Next Level

When you take the time to consider the benefits of incorporating, it really doesn’t make sense not to. After all, the advantages of incorporation not only include ways to save money, they also provide brand protection and allow you to more effectively manage the long-term needs of your employees.

As you can see, there are plenty of good reasons to incorporate, and far fewer reasons not to. So take your business to the next level by incorporating!

Do Land Trusts Provide Asset Protection?

Have you heard that land trusts provide asset protection? Do you believe it?

Applicable Law

Two cases from Illinois concluded that, in a land trust, although the legal and equitable title lies with the trustee, most of the usual attributes of real property ownership are retained by the beneficiary under the trust agreement: (1) Just Pants v. Bank of Ravenswood, 136 Ill.App.3d 543, 483 N.E.2d 331, 335-36 (Ill.App. 1985); and (2) People v. Chicago Title and Trust Co., 75 Ill. 479, 389 N.E.2d 540 (Ill. 1979).

Just Pants v. Bank of Ravenswood

In Just Pants v. Bank of Ravenswood, 136 Ill.App.3d 543, 483 N.E.2d 331, 335-36 (Ill.App 1985), the lessee of property which was subsequently sold under a land trust sued the trustee of the land trust for conversion and breach of contract. Following judgment in favor of the trust, the trial court granted the lessee’s motion to amend the complaint and judgment to include the beneficiaries, and entered judgment against only the beneficiaries. The beneficiaries appealed, and the Illinois Court of Appeals held that reversal was required where the reviewing court had no way of knowing the respective responsibilities of the trustee and the beneficiaries. 483 N.E.2d at 333-34. The Court noted that, in an action involving a land trust, the question of whether the beneficiary or the trustee is the proper party depended upon the nature of the action in light of the rights and duties established by the trust agreement. The Court pointed out that the beneficiary in a land trust is the proper party to litigation involving his rights and liabilities of management, control, use and possession of the property; and, moreover, that beneficiaries in land trusts oftentimes retain managerial rights in the property, and in exercising these rights, enter into a variety of contractual arrangements resulting in the accrual of causes of action against then that do not involve the trustee. The Court observed that actions sounding in tort involving land trust property usually arise from the operation and maintenance of the property; that such causes are based on negligence, and accrue against only the beneficiary, and not the trustee; and that the trustee is insulated from these responsibilities if he has no rights of possession, operation, control, or maintenance. Thus, the Court concluded that trustees who hold legal title to realty through a trust agreement are not liable for damages resulting from defects in the trust premises when the agreement gives the beneficiaries, and not the trustees, the power to make the needed repairs; and furthermore, that beneficiaries can also be held responsible for the torts or frauds of the trustee where they participate in or authorize the commission of the wrongs. 483 N.E.2d at 335. The Court remanded the case to the trial court to determine the respective responsibilities of the trustee and the beneficiary under the trust agreement. 483 N.E.2d at 336.

People v. Chicago Title and Trust Co.

In People v. Chicago Title and Trust Co., 75 Ill. 479, 389 N.E.2d 540, 542-43, 546 (Ill. 1979), a consolidation of six separate actions brought in the name of the People of the State of Illinois to recover unpaid real estate taxes on land held in land trusts, the State sought to impose personal liability for the real estate taxes on the following three entities: (1) the banks or trust companies in their individual corporate capacities; (2) the banks or trust companies in their capacities as land trustees of land trust property; and (3) the beneficiaries of the land trust, all as “owners” of the tracts of land trust property. The trial court found the trustees in their individual corporate capacities liable, and dismissed the cases as to the banks and trust companies as trustees, and as to the beneficiaries. 389 N.E.2d at 542. The Illinois Supreme Court granted motions for direct appeal, and held that, since the beneficiaries of a land trust controlled the purchase, sale, rental, management, and all other aspects of land ownership and title; and since the trustees could act only upon the beneficiaries’ written direction, the beneficiaries were “owners,” within the meaning and intendment of the statute providing that “owners” of realty shall be liable for taxes. As such, the beneficiaries were personally liable for the unpaid real estate taxes. The Court stated that the realities of land ownership clearly indicated that land trust beneficiaries were “owners”; and that, as “owners,” they were personally liable for the unpaid real estate taxes. 389 N.E.2d at 546.

In so concluding, the Court reviewed the history of the Illinois land trust. The Court noted that the Illinois land trust was a unique creation of the Illinois bar, although its acceptance elsewhere had received a great deal of attention. The Court pointed out that its origin was rooted in case law rather than in statute; and that, over the years, the land trust had served as a useful vehicle in real estate transactions for maintaining the secrecy of ownership and allowing for the ease of transfer. The Court noted that, despite recent disclosure statutes, the Illinois land trust remained a widely utilized and useful device. 389 N.E.2d at 543. The Court emphasized that, in land trusts, the legal and equitable title lies with the trustee, and the beneficiary retains what is referred to as a personal property interest; however, most of the usual attributes of real property ownership are retained by the beneficiary under the trust agreement. In fact, the Court observed that the only attribute of ownership ascribed to the trustee is that relating to title, upon which third parties may rely in in transactions where title to the real estate is of primary importance. 389 N.E.2d at 543.

Conclusion

The prevailing belief, that land trusts protect property owners from all liability, is not even true in Illinois, which originated land trusts.