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Side Business? Silent Partner? What’s the Risk? Duties of non-manager members of LLCs

If you are interested in creating a managed multi-member LLC, one of the most popular questions for individuals in this position is whether non-manager members are held to the same standards (or have the same liability) with regards to fiduciary duties like care and loyalty. The answer is “it depends”.

Side Business Silent Partner Whats the Risk Duties of nonmanager members of LLCs
(Photo Credit: serpent.com)

In the non-manager members are involved in some significant aspect of the business, the operating agreement should generally include an expression of such duties for these individuals. Looking at the landscape of typical non-manager member involvement in the business of these LLCs, significant duties are typically rare with smaller businesses that are closely held.

There are some cases where the operating agreement might not address this question specifically. In this scenario, the LLC act governs and can provide some important insight. A lot of these acts, however, are quiet when it comes to this particular question. Some agreements, however, do have specific information about these duties included. An example is the Delaware Limited Liability Company Act, which actually negatives any duties for the non-manager members unless an express clause in the LLC agreement states anything to the contrary.

LLC formation and agreement construction can be aided significantly with the watchful eye of an attorney. Call us at 732-521-9455 or send us an email to info@lawesq.net to discuss your needs.

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Side Business? Silent Partner? What’s the Risk? Duties of non-manager members of LLCs

If you are interested in creating a managed multi-member LLC, one of the most popular questions for individuals in this position is whether non-manager members are held to the same standards with regards to fiduciary duties like care and loyalty. The answer is “it depends”, but with a few stipulations.

LLC practice - fiduciary duties of non-manager members of multi-member LLCs
(Photo Credit: serpent.com)

In the non-manager members are involved in some significant aspect of the business, the operating agreement should generally include an expression of such duties for these individuals. Looking at the landscape of typical non-manager member involvement in the business of these LLCs, significant duties are typically rare with smaller businesses that are closely held.

There are some cases where the operating agreement might not address this question specifically. In this scenario, the LLC act governs and can provide some important insight. A lot of these acts, however, are quiet when it comes to this particular question. Some agreements, however, do have specific information about these duties included. An example is the Delaware Limited Liability Company Act, which actually negatives any duties for the non-manager members unless an express clause in the LLC agreement states anything to the contrary.

LLC formation and agreement construction can be aided significantly with the watchful eye of an attorney. Call us at 732-521-9455 or send us an email to info@lawesq.net to discuss your needs.

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3 Estate Planning Mistakes From Which To Learn

If you haven’t already done your estate plan, perhaps hearing a few horror stories about people who made common mistakes will prompt you to do it — and do it right.

Last Will And Testament
Last Will And Testament (Photo credit: Ken_Mayer)

An article in the Green Bay Press Gazette, recounts a few cases that detail classic mistakes involving estate planning, or the lack of it.

  • A former Supreme Court justice wrote his own will, using just 176 words. It cost his family $450,000 in estate taxes and court fees because he didn’t take the time to do it right.

    • Lesson: Know what you know, know what you don’t know.

  • A young woman left her assets to her minor son. When she died, she had $1 million in her estate due to a wrongful death claim. Her son died soon afterwards and the money went to his only heir, his father, who was a drug addict.

    • Lesson: She could have put the assets into trust with a contingency plan were he to die, so the money could not go to the father.

  • A father had a stroke and had to go into a nursing home. His children closed his bank account but never went through his mail. After he died, they found a statement for a $1 million life insurance policy. But the premiums had not been paid since the bank account was closed. They didn’t get the money.

    • Lesson: Make sure somebody knows what assets you have, usually the person who has power of attorney, a trustee named in a trust you have set up or the personal representative named in your will.

These are common mistakes that can be avoided if you engage a qualified estate planning attorney to help you with your estate plan.

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Some Strategies To Shield Your Money

If you wish to protect your money or assets or are about to receive a sudden windfall such as an inheritance, you may want to consider a number of strategies to protect yourself from lawsuits. Simple reason: “The Deep Pockets Theory”; the people with the money are the people who are sued.

judge hand with gavel
(Photo credit: SalFalko)

Here are a few strategies, according to an article in the Chicago Tribune:

    1)  Increase your liability insurance. If you are about to inherit $3 million, call your broker and increase your liability policy to protect that additional $3 million. Do it before you get the money. Rates are inexpensive.

    2)  Consider separating assets. You may not want your spouse to have access to your new windfall. If you put the money in a joint account, that is what will happen.

    3)  Protect yourself from renters. If you have rental property or are going to get rental  property, put the property into a business entity such as an LLC to shield your assets from a disgruntled tenant. That way, they can sue the entity for what it has, but cannot go after you and what you have.

    4)  Create a trust and/or business entity to shield your assets. If you do part-time work you probably are operating as a sole proprietorship. But all of your assets are at risk if you are sued.

    5)  Be careful with partnerships. If you have an informal partnership, you are responsible for the actions of your partner. Form an LLC or other entity to provide legal protection.

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Are You a Sitting Duck? Four Asset Protection Strategies to Consider

Many investors are so focused on their return on investment that they fail to consider or implement asset protection strategies. As a recent article explains, an investor who has not protected his investments is a mere sitting duck. If you haven’t considered asset protection for your investments, below are four strategies you should consider:

Duck
(Photo credit: Wikipedia)

    1. Insurance: This is an important part of any asset protection plan because it shifts the risk of loss to somebody else. Insurance can be purchased for almost any asset or activity.

    2. Wait for Social Security: Social security is an important safety net for an individual or couple as they age. By waiting as long as possible before withdrawing benefits, an individual or couple can increase their ultimate return.

    3. Execute and Update an Estate Plan: An estate plan accomplishes many tasks. Not only does it provide for your loved ones after your death, but it can also utilize various tools to reduce the tax liability on your estate and your heirs.

    4. Consider Business Ownership for a Favorable Tax Rate: Ownership of assets by a business entity rather than an individual often means a lower tax liability on the assets. If you have a home business or simply a large amount of assets, consider forming a corporate entity to lower your tax liability.

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Three Important Rules of Asset Protection

Asset protection planning is an important part of any estate plan. Incorporating asset protection strategies into an individual’s estate plan is the best way to ensure that he or she is able to leave the bulk of his or her assets to his or her heirs, rather than his or her creditors. A recent article discusses several rules of asset protection.

First, realize that everything sees the light of day. An individual should craft his asset protection plan with the knowledge that his or her creditors will eventually become aware of the plan and purpose. Typically, the use of secrecy in asset protection planning can only lead to trouble.

Second, it is important to begin such planning before claims arise. An asset protection strategy will work best if it is implemented early and reviewed often. Typically, after a claim arises, it will be too late to take any asset protection measures, as they may be considered fraudulent transfers.

Finally, realize that asset protection planning cannot substitute for purchasing insurance. Having an asset protection plan in place should not deter a person from purchasing liability and professional insurance. Instead, planning should be seen as a supplement to that insurance.

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Cat & Mouse: Probate Avoidance as Asset Protection

Probate is a court-supervised process through which the provisions of a person’s will are carried out. Many people choose to avoid probate by employing various estate planning tools that transfer their assets outside of their will. As a recent article explains, an additional benefit of creating non-probate transfers is that they provide a level of asset protection.

Cat & Mouse
(Photo credit: Mark Sardella)

If a person’s estate goes through probate, his or her executor will begin the process by collecting the decedent’s assets and giving notice of the death to any potential creditors. After this notice is given, the decedent’s creditors will have a specified amount of time to make any claims against the estate. The executor will have to pay these claims through the estate before distribution to the heirs.

Alternatively, certain non-probate assets such as life insurance policies, beneficiary accounts, and items held in joint tenancy pass immediately to the beneficiary or joint tenant upon the decedent’s death. Therefore, creditors are often unable to reach these assets.

Although non-probate transfers are a great way to incorporate asset protection planning into your estate plan, it is important not to use non-probate transfers specifically to avoid a particular creditor. These transfers can be undone if a court finds that the transfer was made for the sole purpose of avoiding an existing obligation to a creditor.

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Separate Accounts From Your Spouse? Avoid This Asset Protection Pitfall!

It is becoming more commonplace for spouses and cohabitating unmarried couples to keep their financial accounts separate. While this strategy has many advantages, it comes with at least one (avoidable) asset protection pitfall. A recent article discusses what this pitfall is, and how you can avoid it.

As the article explains, tangible property that is jointly held between two spouses has an automatic layer of protection against plaintiffs and bankruptcy creditors in most states. This protection comes from the fact that plaintiffs and creditors often will not pursue tangible assets that they can only gain a half interest in. Most often, tangible assets must be liquidated in order to be of any benefit to a creditor or plaintiff. However, this would be impossible if, for example, a creditor and your spouse are half owners of your home.

Alternatively, tangible assets that are owned separately are considered fair game because the creditor or plaintiff can pursue the entire interest. However, this problem can be easily solved through the use of trust accounts. If spouses would like to keep their assets separate, they can each create a trust account to hold the assets. This will not only protect the assets from creditors and plaintiffs, but it can also facilitate the transfer of the assets upon either spouse’s death.

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What Goes in the Bucket? (i.e. What Can I Use to Fund My Trust?)

Aside from an individual’s Last Will and Testament, a trust is probably the most popular estate planning tool. Trusts, which come in various forms, are often used as a vehicle for tax avoidance. Assets in certain Irrevocable Trusts often avoid taxation because, by putting them in such a trust, the owner relinquishes ownership of the assets to a trustee.

When considering whether an estate plan should incorporate a trust, it is important to consider what type of assets within the estate may be transferred to the trust. A recent article discusses certain types of trusts, and the assets that they hold. This is NOT an exhaustive list, but rather a ‘sampler’ of sorts.

  1. Property and Land Trusts: These trusts can hold any sort of property or real estate, such as your residential home or an investment property.
  2. Financial Asset Trust: This type of trust can hold a multitude of financial assets, such as stocks, bonds, and shares.
  3. Life Insurance Trust: This type of trust holds a life insurance policy that is ‘written into trust.’ A life insurance policy that is ‘written into trust’ will be paid out to the trust, rather than an individual.

Many other assets, such as Business Interests (even S Corporations), Hotel Investments and Personal Property, can be written into appropriate trusts as well.

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Safeguard Your Wealth for Retirement

It is never too early to start planning for a long and comfortable retirement. A major part of retirement planning is safeguarding assets from the uncertainty that life often brings. A recent article shares some tips for protecting retirement savings from potential liabilities such as lawsuits, while also ensuring that there is money available to you when you need it.  Here are some important takeaways:

retirement
retirement (Photo credit: 401(K) 2013)

Schedule Your Assets Based on Your Financial Timeline
People often protect their wealth by putting it in investments or policies that they will not be able to access for a number of years. While this is typically a great way to keep assets from creditors, it may become problematic if a person needs access to the money. Therefore, it is wise to schedule your investments and policies so that they become due at various, critical times in your life, such as when your children go to college or when you plan to retire.

Be Risky, Within Reason
Risky maneuvers, such as putting money into the stock market, can often pay off where financial planning is concerned. However, too much risk can lead to disaster as well. In order to safeguard the bulk of your retirement savings, you may consider secured-return investments such as a fixed indexed annuity. Place a much smaller portion into vulnerable investments and securities.

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Pass on the Bypass? Is a Bypass Trust Necessary?

Many people wonder whether bypass trusts are still necessary for asset protection. Even after the 2013 unified credit changes have been implemented for estate planning, making the transfer of assets between spouses easier, a recent article explains why bypass trusts may still be a good idea for certain estate plans.

One benefit of a bypass trust is that it protects assets from creditors and lawsuits. The provisions of a bypass trust that offer this protection depend on the state that the trust was created in and the state that the surviving spouse currently resides in.

Bypass trusts are also a good tool because they can transfer assets to more than one generation. A bypass trust can be set up to benefit the surviving spouse for the remainder of his or her life, then provide assets for his or her children and grandchildren. Bypass trusts can be written to include various other special benefits. These benefits can include professional management, provisions to limit spending, and provisions to avoid probate.

Finally, bypass trusts are helpful in avoiding estate taxes on appreciating assets. For example, imagine that a person put $5.25 million worth of assets in a bypass trust. Further, imagine that the $5.25 million grows to a value of over $10 million while in the trust. In this scenario, the entire $10 million will avoid estate taxes. As a result, bypass trusts may still be essential for particular estate plans.

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Protecting the Nest Egg: Asset Protection for Retirement

By the time a person retires, he or she should have created an asset base that is sufficient to allow him or her to retire without dramatically reducing his or her standard of living. Moreover, most individuals would also like to pass down assets to the next generation. As a recent article explains, those who succeed in creating a sufficient asset base for retirement need to be careful to protect it from any liability that may arise down the road.

Asset protection strategies cannot fully protect all assets from all claims. However, a good asset protection strategy can effectively reduce threats to many assets, such as real property, investments, businesses, and various other assets.

Nest egg
Nest egg (Photo credit: Gemma Garner)

One common asset protection strategy is holding property under Tenancy by the Entirety. This is a type of co-ownership that is available exclusively to married couples. Couples who own asset(s) through Tenancy by the Entirety each have a right of survivorship, meaning that the surviving spouse automatically takes the deceased spouse’s share. In certain states, assets held in this form are protected from lawsuits that fail to name both spouses as defendants.

Another common asset protection strategy is transferring the ownership of assets to a limited partnership. Limited partnerships are popular for holding investments and liquid assets. In order to form a limited partnership, you need one or more general partners, and one or more limited partners. These particular strategies will allow for the effective protection of assets for retirement. 

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Make Sure Your “S” Is Covered: Estate Planning Considerations for S Corporations

It is important for those who hold shares in an S Corporation to carefully plan for the distribution of those shares. The stakes for these transfers are high, as a faulty transfer may result in the inadvertent termination of the corporation’s S status. A recent article discusses several considerations to make when planning for the transfer of S Corporation shares.

Individuals or entities such as estates or certain types of trusts may hold shares in an S Corporation. The types of trusts that are qualified to hold S Corporation shares include grantor trusts, qualified Subchapter S trusts, electing small business trusts, testamentary trusts, and voting trusts. All other trusts are considered to be non-qualifying shareholders.

If a shareholder’s estate plan inadvertently transfers his or her S Corporation shares to a non-qualifying shareholder, not only will the S Corporation be inadvertently terminated, but corporate level taxes may be triggered on the other shareholders. To avoid this fate, it is important to review your estate plan to ensure that your plan does not transfer S Corporation shares to a non-qualifying trust. On the other hand, the right kind of trust can be a powerful tool to achieving Estate Planning, Asset Protection & Business Succession Planning goals.

S Corporations can also work to avoid costly missteps by employing shareholder agreements, which provide that the shares may only be transferred to qualified shareholders. Additionally, S Corporation shareholders should carefully monitor shareholder trusts to ensure that the trusts remain eligible to hold S Corporation shares.

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“It’s For Your Own Good! – Protecting Your IRA For & From Your Children”

One important asset that many people pass on to their beneficiaries is their Individual Retirement Account (“IRA”). For many people, it is important to protect their beneficiaries from immediately draining the IRA. A recent article discusses the new option of a Trusteed IRA, which helps to prevent this outcome.

A relatively new financial product, the Trusteed IRA is offered by several financial firms. Trusteed IRAs are marketed towards affluent investors who might otherwise put their IRA in a trust. Through a Trusteed IRA, the bank becomes trustee over the IRA assets. The bank then works with the beneficiary’s financial advisor in order to manage and distribute the assets.

If you are interested in a Trusteed IRA, be sure to discuss it with your CPA, financial advisor, and estate planning attorney. These members of your professional team should review the plan thoroughly and be comfortable with how the Trusteed IRA will be managed. A carelessly set up Trusteed IRA may impact an individual’s ability to utilize his or her estate tax marital deduction. The marital deduction, which is vital to many high net worth married couples, allows the estate of a deceased spouse to pass, tax free, to the surviving spouse.

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Two Strategies for Medicaid Planning

Many individuals who require a nursing home stay at the end of their life deplete their assets in order to pay for the care. As a recent article explains, when people fail to protect their assets, it is because they failed to plan properly. The article urges readers to take steps towards Medicaid planning while they are still young and healthy.

One way to protect your assets is to exchange non-exempt assets for exempt ones. When determining whether you are eligible for Medicaid benefits, Medicaid representatives include all of your countable assets, those not exempted by State law, or that are otherwise inaccessible to Medicaid. Exempt assets vary from state to state, but typically include the family home, burial plots, one automobile, and term life insurance. Check with your state for an exact list of exempt assets.

Many people do not realize that Medicaid will count one’s spouse’s assets as well when determining Medicaid eligibility. If your spouse is still healthy, consider purchasing an appropriate single premium annuity benefit for them. This will provide your spouse with an additional income stream, while keeping the cost out of the countable assets for you, as well as your spouse.

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Can’t Touch This: Asset Protection is Important for Everyone

Asset protection strategies are vital in protecting a person’s ability to retire comfortably. Without these strategies, a person’s assets could easily be put at risk based on unexpected personal liability. As a recent article explains, when implementing asset protection strategies, it is best to err on the side of caution.

As the number of lawsuits filed in the United States continues to grow, so does the potential liability of every American citizen. No line of work or business is unexposed. Unfortunately, most people do not realize that they are exposed to liability. Moreover, even if a person understands that he or she is exposed to significant liability, it is next to impossible to estimate the value of damages that may be awarded against them in a lawsuit. For example, a person awarded one dollar in actual damages may be awarded millions of dollars in punitive damages.

Asset protection allows a person to protect his or her home, business, and various other assets from unexpected claims or lawsuits. Although a person can never fully protect his or her assets, they can take steps to minimize potential lawsuits, their financial impact, as well as possibly negotiate a better settlement.

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The Difference Between an LLP and LLC

In order to transfer assets to the next generation, some people may choose to use an LLP or LLC. Both of these are legal business arrangements that can be implemented into any estate plan.  A recent article discussed the differences between the two.

An LLP, or limited liability partnership, is a general partnership. In this type of partnership, ownership of the business is split between the partners. Profits from the business are distributed based upon the percentage ownership of each owner. An LLC, or limited liability company, is a partnership wherein owners are issued shares of stock. Profits from the business are split between the owners based on their share of the stock.

The use of an LLC or LLP may be beneficial for those Americans who have estates valued above the federal estate tax exemption, are seeking asset protection, or both. This is because these devices lower the value of the entire estate by dividing ownership of the business between yourself and your children. Moreover, if you gift a portion of your LLC or LLP to a child, that gift can be discounted by 20 percent or more for purposes of the federal gift tax exemption. By giving such gifts, you increase the value of your allowed $14,000 gift by 20 percent.

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How To Save Your Heirs From Your Debt

We will die, our debts will not. Many people falsely believe that any debts they have incurred will dissolve when they die. Unfortunately, this is not the case. A new article discusses steps you can take to ensure that your debts do not eat away at the assets you had intended would go to your heirs.

Wipe our Debt (Photo credit: Images_of_Money)

One important move you can take now to protect your heirs later is to do what you can to pay down your debt. Speak with a financial advisor about how much debt you have, and how you can responsibly continue to pay it down while you are still alive. If you have a large amount of debt, consider cutting your spending now so you have more money to put towards your debts.

You may also want to consider loan protection insurance. This type of insurance is offered in a declining-term policy that will pay off specific loans if you die or become otherwise unable to pay through disability. Whether you need insurance for your home loan, credit card balances, or car loan, loan protection insurance may be a good option for you. These types of loans are often offered from lenders who provide mortgages, and may be a sensible solution for some individuals and couples.

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Insurance Considerations When Transferring An Asset To A Trust or LLC

Two popular and time-tested methods of wealth transfer are the trust account and limited liability company. While both of these options can provide an excellent vehicle for the transfer of assets, it is important that the creator consider all the related details. One such detail that must be addressed is insurance.

Without addressing insurance considerations while forming a trust or limited liability company, a person may face an unexpected and catastrophic loss of insurance coverage. All insurance policies, no matter what type, are written to provide the owner or titleholder of an asset with coverage. Problems may occur, therefore, when assets are transferred to a trust or LLC.

For example, a person may transfer ownership in their home to a trust fund, LLC for various reasons including estate planning, tax considerations, or protection from creditors. Upon making such a transfer, the homeowner must be sure to change the homeowner’s insurance policy to reflect the fact that the home is now owned by the trust or LLC. Should the previous homeowner fail to make this change and the home is damaged, the insurance company may question the ownership change. Without making the appropriate changes, therefore, a homeowner could become potentially liable to pay any arising damages out-of-pocket.

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Pointers for Asset Protection Planning

An article in Forbes likens asset planning to “taking chips off the table in good times, so that you can still walk away from the table a winner.” With that idea in mind, the article offers several tips for protecting your assets from creditors.

One of the first things you can do to protect your assets is to have a plan for asset protection before a claim even arises. This is important because creditors can potentially undo many asset transfers undertaken after a claim arises under various “fraudulent transfer” laws. Moreover, if a creditor is successful in undoing a fraudulent transfer, he may also be able to hold the debtor, as well as anyone who assisted in executing the transfer, liable for attorney fees.

Clients must also realize that asset protection is not a substitute for having a proper insurance policy. Asset protection, rather, should be seen as a supplement to one’s liability and professional insurance plans. Moreover, in the event of a lawsuit, proper liability and professional insurance will pay to defend and settle the lawsuit. An asset protection plan will not.

A final note offered by the article is that asset planning should be based on the underlying assumption that creditors will be aware of and understand the purpose and extent of your asset protection plans.