Business Owners: Be Careful Making Loans To A Company

Man putting money in suit jacket pocket concept for corruption,If you own a business and you plan to loan money to the company, be sure to consult an attorney about the paperwork. Otherwise, the IRS could claim the money wasn’t a loan after all, and come after you for additional taxes.

Fred Blodgett found this out the hard way. Blodgett owned a small company (an S corporation) that sold architectural glass blocks. When the real estate downturn hit, he supported the company by transferring money to it from a family trust. He called this a loan. In subsequent years, the company paid him about $60,000, which he called a loan repayment.

Not so fast, the IRS said. According to the IRS, the “loan” wasn’t a loan at all, but a simple contribution of capital. And the “repayment” was actually just ordinary wages for the manager of the business. Therefore, the IRS claimed, the company owed more than $13,000 in employment taxes and penalties.

The U.S. Tax Court sided with the IRS. Although the money that Blodgett transferred to the business could have been a loan, the court said, Blodgett blew it because he didn’t create a paper trail showing that a bona fide loan was being made. There was no written loan agreement, no interest, no repayment schedule, and no collateral.

Although this case involved an S corporation and employment taxes, the IRS can also reclassify a “loan” in other ways, such as taxable compensation or taxable dividends.

If you’re thinking of making a loan to a business, be sure to treat it as a loan. Ideally, a written loan document should specify the repayment terms and schedule, interest, security, and subordination rights. Also, the loan shouldn’t be so large in relation to the company’s other operating capital that the IRS can argue that it’s commercially unreasonable.

Don’t Get Burnt By Boilerplate Contracts

man wearing a suit sitting in a table showing a contract and wheWe have all been there before—ready to sign the lease on a new apartment, and then the leasing manager passes over a contract with a bunch of blanks to fill out and even more fine print. These form contracts are often referred to as “boilerplate” contracts. Although they usually look standard and straightforward, it is important to read all form contracts before you sign them. When you are asked to sign a form contract, keep the three “Rs” in mind: Read, (be) Realistic, and Respond.

Read— The most important thing to do before signing any contract is to read the entire document. In most states, courts have held that people are bound by all the terms of a contract, even if they didn’t read the contract before signing it (unless the other party engaged in fraud or unconscionable conduct). Don’t trust the other party to tell you what a contract term means; even with good intentions, that party could be mistaken. When a substantial amount of money is at stake, take the time to sit down with the form and underline any parts you don’t understand. Then find out what they mean horn someone you trust, such as your attorney. Also, be suspicious if the other party to the contract urges you to disregard certain terms as unimportant. If the other party continues to push a clause as unimportant, ask if it is okay to cross it out; an individual who refuses to cross out a clause after asserting it is unimportant, is probably not one with whom you want to do business.

Realistic— Even though you must take time to read and understand all the contract terms, you must still be realistic about exercising your right to read a form contract. At the airport car rental counter, you probably don’t have the time to read the contract and get an explanation of each confusing term. And even if you did take the time, with whom would you negotiate? The sales clerk almost certainly doesn’t have the authority to change the contract. Similarly, when agreeing to the license term of a commercially sold software program, no negotiation is possible. If you want the program, you have to agree. However, contract forms and terms are usually available to examine while you are considering a transaction and before you actually enter into the deal.

Moreover, if you are worried about a good deal disappearing while you take the time to read the fine print, you shouldn’t. Rarely will a truly great bargain not be there tomorrow. For all the great deals that work out fine, the one you will remember is the one that went sour—where the seller socked you with the fine print you didn’t bother to read.

Respond— Think of the standard contract you are presented with as a first offer— if you don’t like a term in it, respond with your own offer. You never have to accept a contract. Every part of a contract is open to negotiation, at least in theory. You can cross out parts you don’t like. You can also add terms that the contract doesn’t include, such as oral promises made by a salesperson. (However, make sure that any changes appear on all copies that will bear your signature; initial any pages that are altered but unsigned, and have the other party do the same.)

This doesn’t mean the other side must agree to your changes. But if you encounter a lot of resistance over what seem to be reasonable issues, take a hard look at the person with whom you are dealing—especially if they resist your request to put oral promises in writing.

Lastly, take some solace in knowing that there are laws that offer you some protection in these situations. Many states now require that some or most consumer contracts use plain English, and that potentially confusing sections or clauses be written in precise, standard terms that nearly anyone can understand. Federal and state truth-in-lending laws require providers of credit to furnish specific information about credit contracts in clearly understandable forms.

If you are worried about your rights and responsibilities under a contract, or that the terms to a contract you are a party to have been violated by the other party, your lawyer will be able to help you wade through the “legalese” and determine if you have any legal recourse.

Crossing the Line -There’s Nothing Neighborly About Boundary Disputes

boundrylinessmallWhat your neighbors do can easily impact your quality of life; good neighbors invite you to barbecues, provide an extra set of hands to help when repairs are needed, and let you enjoy your own home in peace and quiet. However, living next to problematic neighbors can make your life complicated and stressful. From dogs barking, to late-night parties, to overgrown bushes, neighborhood problems will quickly convert you to a believer in the old aphorism, “Good fences make good neighbors.” In fact, of all the disputes between neighbors, disagreements over boundary lines may be the most complicated and require the most legal work to solve.

Boundary-line disputes are less common than other neighbor-related problems, in part because of modern surveying techniques. Boundary lines may be set forth in the property description in your deed. However, if the property description was created decades or even centuries ago, the description in the deed may be a bit difficult to trace on the ground.

So what should you do if you think your neighbor’s new fence crosses onto your property? As soon as construction starts on land you believe is yours, notify your neighbor immediately. If you wait to complain and allow the construction to continue, you could be giving up your right to that land. After years of uncontested use, courts sometimes grant the party that has used the land the right to continue using the land.

If the structure has already been completed, mere are a number of steps you can take to confirm boundary lines and determine if they are being followed. First, you can spend a couple hundred dollars and hire a professional surveyor to confirm your suspicions. Your lawyer or real estate agent should be able to help you find a reputable surveying service in your community. You may also talk to your lawyer about filing a quiet title lawsuit; such a court action asks a judge to determine the location of a boundary line. This can be more expensive than simply hiring a surveyor, but it will give you legal peace of mind.

Of course, you could always try to work out an agreement with your neighbor informally. Consider talking to your neighbor to see if you can agree that a certain imaginary line or physical object, such as a fence or tree, will serve as the boundary between your properties. Then, have your lawyer draw up quitclaim deeds for both you and your neighbor to sign, each of you granting ownership to the other of any land on the other’s side of the line. Be sure to record the deed by filing it in the county records office. Be aware that your mortgage holder may need to approve a quitclaim deed before you can sign it; talk to your lawyer to determine how to go about getting the proper approval if necessary.

What if you are the one planning on building? Before you erect a fence or other structure on your land, make sure that the land is indeed yours. If you innocently, but mistakenly, erect a fence on your neighbor’s property, you may be liable for trespassing. Your neighbor could ask a court for an injunction to make you tear down the fence and could seek to recover for any damage you may have caused to his or her property.

Some Seniors Losing Their Homes Due To Unpaid Property Taxes

Woman With Shocked Surprised ExpressionAn 81-year-old woman in Rhode Island was evicted shortly before Christmas from the home she had lived in for more than 40 years – because she failed to pay a $474 sewer bill. A corporation then bought her house at a tax sale for $836… and later resold it for $85,000.

While this is an extreme case, it’s a symptom of a growing trend. More and more seniors around the country are being forced to pay large, unnecessary fees – or even losing their homes – as a result of unpaid property tax bills.

Because property taxes aren’t regular monthly expenses like utility or cable bills, they’re often among the first things that seniors overlook if they begin to have some difficulty managing their own affairs. And they’re frequently missed by children and caretakers as well.

Many older people who have recently finished paying off a mortgage aren’t used to paying their property tax bills, because for decades they were paid directly by the lender. Surprisingly, every year about $7 billion to $10 billion in local property taxes aren’t paid on time.

When a homeowner fails to pay a property tax bill, what happens next varies from state to state. However, typically the taxing authority will obtain a “lien” against the property, meaning that, in certain circumstances, it can foreclose on the property and sell it to pay the tax debt.

Of course, cities and towns usually don’t want to go to the trouble and expense of foreclosing on people – they just want to get their taxes paid. In most states, a city or town can solve this problem by selling its tax liens to someone else, at an auction.

Who would buy a tax lien? Sometimes big financial companies buy them, and sometimes it’s individual investors who are looking to make money from someone else’s misfortune. Some states require local authorities to wait for a year or two before selling a tax lien, but some allow them to sell a lien after just a few months – which means that an elderly person who misses a payment could have a problem escalate quickly.

Once a tax lien is sold, there’s usually another period that the buyer has to wait before it can foreclose and sell the owners property. This is called a “redemption” period, because during this time the homeowner can redeem the property by paying off the debt. The problem is that at this point, the property owner doesn’t just have to pay off the debt; he or she might also have to pay interest on the debt, plus interest to the investor who bought the lien, plus various fees and penalties.

These can add up quickly, in part because the rate of interest is usually determined by state law, and most of these laws were passed many years ago when interest rates were much higher. A rate of 10 to 12 percent is common, and in some places rates can be 18 percent or even much more.

In one recent case, a homeowner in Baltimore didn’t pay a $362 water bill. By the time she sought to redeem her property, the amount she had to pay had increased to about $3,600, due to interest, fees and penalties. Sadly, she wasn’t able to come up with the $3,600 in time, and was evicted from her home.

We’d be happy to help if this is an issue for someone you know. It’s much better to act quickly, because the problem only gets worse the longer a homeowner delays.

Divorced Couples Need To Update Beneficiary Designations

last will and testament.
last will and testament.

One of the most important things people can do after a divorce is to update their beneficiary designations, and indicate who should get the assets in various accounts if they should unexpectedly pass away.

Most married people name their spouse as the beneficiary of their accounts, but in the stress following a divorce, they often forget to update these designations.

And even when people make an effort, they might not remember every account. Pensions, 40l(k) plans, life insurance policies, brokerage accounts, bank accounts, and more may all have listed beneficiaries. Remember that if you die, who gets the money in these accounts usually depends on who is the listed beneficiary – not who is named in your will. Even if your will says that “everything” will go to a new spouse or a child or other relative, the will doesn’t govern a separate account such as a 401(k) or an insurance policy. Some states have tried to help divorced people by passing laws that say that a divorce automatically revokes these types of beneficiary designations. But even where that’s true, you need to name a new beneficiary, or the money might still go to someone who is not your choice.

Also, these laws don’t always work. For instance, Warren Hillman was a federal employee in Virginia who had low-cost group life insurance through a special program for federal workers. Warren married Judy in 1996 and named her as his life insurance beneficiary, but he divorced her two years later. In 2002, he married Jacqueline, but for whatever reason he never changed the beneficiary on his life insurance.

In 2008, Warren died. Both his wives claimed his $125,000 life insurance proceeds.

The case went all the way to the U.S. Supreme Court. The court said that, under Virginia law, a divorce revokes beneficiary designations such as on a life insurance policy. However, because the life insurance in this case was arranged under a federal program, and federal law trumps state law, the Virginia law didn’t apply – and therefore first-wife Judy, not second-wife Jacqueline, got the funds.

Of course, even people who haven’t been through a divorce should periodically review their beneficiary designations to make sure they’re all current, because these designations are an important part of a well-constructed estate plan.

Divorcing couples need to update beneficiary designations:

“Florida Statute 732.703 generally provides that beneficiary designations upon death may be voided upon divorce, dissolution or annulment of a marriage. BUT THIS IS NOT AUTOMATIC. THERE ARE EXCEPTIONS, PARTICULARLY FOR ASSETS GOVERNED BY CERTAIN FEDERAL STATUTES SUCH AS RETIREMENT PLANS OR IRAs OR EMPLOYEE BENEFIT PLANS. BE CAREFUL. CONSULT AN ATTORNEY.