Husband Punished For Hiding Assets From Ex-Wife

Judge hitting gavel and businessman giving one hundred dollar biA man divorced his wife in California in 1999, and soon fell way behind in his alimony and child support payments. He moved to Pennsylvania and remarried in 2006.

Shortly before his remarriage, the man acquired some valuable real estate from his mother. A few days after the wedding, he conveyed the real estate – along with ownership shares in his corporation – into a “tenancy by the entireties” with his new wife. That meant that he no longer owned the property individually and a creditor couldn’t go after the property without his new wife’s permission.

Meanwhile, the man’s ex-wife filed a lawsuit to collect the overdue support. In 2008, a court awarded the ex-wife a judgment of $550,000.

The ex-wife wanted to collect the money from the husband’s real estate and corporate shares – but she couldn’t, because the new wife was a co-owner.

The case went to a federal appeals court. The result? The court said the husband had committed “fraud” by transferring the property into a tenancy by the entireties in order to avoid his debts to his ex-wife. It ordered the transfer to be undone and the assets returned to his sole ownership, so the wife could collect the judgment from them.

Then, in a unique twist, it ordered the man to pay an additional $550,000 to the ex-wife as punishment for his bad behavior. It said this was permitted by a Pennsylvania law on fraudulent transfers of property.

Not every state allows this type of additional punishment, but every state has laws that make certain transfers illegal if they’re designed to avoid lawful debts. We’d be happy to answer any questions you have about these types of situations.

DO NOT TRY TO ENGAGE IN ASSET PROTECTION TECHNIQUES IF YOU HAVE AN OUTSTANDING CREDITOR. IT CAN HAVE BOTH CIVIL AND CRIMINAL CONSEQUENCES. THIS IS ESPECIALLY TRUE IF THE CREDITOR IS AN EX SPOUSE OR IF YOU OWE CHILD SUPPORT.

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.

Now’s A Good Time To Review Your Beneficiary Designations

 

Did you know that your will does not determine who gets your IRA or your 40l(k) account when you die?
That’s right – these accounts are “non-probate” assets, which means they’re not covered by your will. Instead, they will generally go to whatever per­ son you named as the beneficiary when you set up the account.

Similarly, your will doesn’t determine who gets your life insurance – that will go to the named beneficiary on the policy. And your brokerage account might have a beneficiary as well.

So as part of your estate plan, is essential from time to time to review your beneficiary designations. For example:

  • You’ve remarried, but you want to leave your 401(k) to your children from your prior marriage. Under federal law, even if you name the children as beneficiaries, your account will go to your new spouse – and not your children – unless your new spouse signs a waiver.
  • Is one of your beneficiaries a trust? If so, it’s a good idea to have this reviewed. There have been a lot of developments in the law recently, and you might want to change the way the trust is set up in order to make sure you’re still getting all the possible tax advantages.
  • Is your estate listed as your IRA or 40l{k) beneficiary? This is generally a bad idea, because you can often save a lot of taxes by naming individual beneficiaries instead and stretching out payments over time.
  • Is one of your beneficiaries a minor? This could require going to court and setting up a guardian­ ship, which can be time-consuming and expensive. There are better alternatives.
  • Do you plan to leave money to charity? It might be wise to leave IRA or 40 l (k) assets to charity, rather than other assets. That’s because heirs who receive IRA distributions have to pay income tax on them, whereas they probably won’t have to pay tax on other assets.
  • Did you also know that a divorce may not automatically change your beneficiary designations?

Florida has a new statute, which became effective 07-01-12 that provides when an individual dies after a dissolution or annulment of his or her marriage, a beneficiary designation, which designates the former spouse as a beneficiary, becomes void upon the divorce and the former spouse is deemed to have predeceased the decedent. See Florida statute 732.703

There are exceptions to this statute. It is not automatic. It does not apply to the extent that controlling federal law provides otherwise (for example plans that are covered by the federal statute known as ERISA, such as 401ks) or if the governing instrument provides otherwise or if state law other than Florida governs the contract or agreement, to name just a few of the exceptions to the statute.

BE CAREFUL.

CONSULT WITH YOUR ATTORNEY IN THESE SITUATIONS, ESPECIALLY IF YOU HAVE BEEN DIVORCED.

Dying In a Digital World

Each year, more and more of our lives move online. From photos posted on a 
social-networking site to bank statements stored in your email, many of our assets that used to be detailed by a paper trail are now completely digitized.

If something happens to you, your loved ones or the executor of your estate may have no simple way to locate your pictures, or figure out where you bank, without 
access to your online accounts. However, many online service providers will not
release your password to anyone but you, even if you are no longer living or are 
incapacitated.

Unless you have shared your email accounts and passwords with your executor or family, your social networking profiles, blogs, and other digital media may be lost forever upon your death or disability. For some people, this may be exactly what they want. However, if you spend a significant amount of time online, your online accounts may contain material that 
has financial or sentimental value to your loved 
ones. If this holds true for you, consider creating a set of instructions on how you would like your online life handled. Consider listing: all of your computer, tablet, and smartphone devices and 
their connected service providers; all e-mail addresses, including how the address is used (e.g., for personal or professional use, or to receive spam and other unwanted messages) and the 
password; and the usernames and passwords to each of your social networking profiles and instructions as to what should happen to the 
profile upon your death (e.g., Should it be deleted? 
If not, who should be responsible for continuing 
the profile?). You should also list all of your blogs, domain names, and webpages and the host for 
each; each bank and brokerage account for which 
you have online access along with the username 
and password for each account; where you store 
digital photos; and, finally, if there is any sensitive 
information in these online accounts that should be 
kept secret from certain family or friends.

A few words of caution, before you create a 
list of all your online accounts and passwords–check the privacy policies, terms, and conditions of each of your online service providers. Some web sites prohibit anyone but you from using 
your account; your executor or agent should be mindful not to violate these policies. You’ll also want to take great care to keep this list in a safe place; if the list falls into the wrong hands, your bank accounts could be wiped out and your online identity could be tarnished, or worse.

If a simple paper list isn’t really your way of doing things, a software or web-based password 
storage mechanism such as Legacy Locker or KeePass may be a better alternative.

Since so much of our lives these days exist in a digital environment, it is more important than ever to make sure you include this part of your life in your discussions with your attorney when developing your estate plan. Your attorney can help to make sure that your executor has the necessary authority to access your various financial accounts 
and pass along the information you wanted your 
executor to have upon your death.

May 2014 Be Careful Using IRA Funds for ‘Alternative’ Investments

nesteggIRAs can be an important part of estate planning, especially for savvy investors and business owners. But be careful – mixing your IRA and your business interests too closely can cause big tax problems.

The IRS can “revoke” an IRA, and deny you all its tax benefits, if you use the funds for certain improper purposes. This rule applies not only to you, but also to actions by your family members and any business or trust that is controlled by you or your family.

What can’t you do? You can’t buy, sell, or lease property to or from an IRA; you can’t borrow money from an IRA or lend money to it; and you can’t make personal use of IRA property.

So, for instance, you can’t invest IRA funds in a business you own, you can’t lend money from an IRA to a relative to start a business, and you can’t use real estate owned by an IRA (such as rental property) for personal purposes (such as a vacation).

In fact, if your IRA owns rental property, you should avoid making any repairs or improvements yourself, because the value of your labor might be considered an improper contribution.

Two Colorado business partners found this out the hard way recently.
The two each used about $300,000 in their IRAs to buy 50% shares in a new corporation. The corporation then used the funds, plus a bank loan and a promissory note personally guaranteed by the partners, to buy a fire-safety company.

Oops! The personal guarantees meant that the partners were indirectly lending money to the IRA. As a result, the IRS revoked the IRA, and it charged the partners more than $500,000 in taxes and penalties.

If you’re considering putting IRA funds into “alternative” investments such as real estate, art, or shares in a private business, be careful and consult an expert first.

Consult a tax professional before attempting this.

 

How To Transfer A Family Business To The Next Generation

transfer-family-businessMany people who seek estate-planning advice are owners of family businesses, and one of their chief concerns is how to pass on the business to the next generation. The fact is, there are almost as many ways to transfer a family business, as there are family businesses. There’s no way to know what’s best for you without a thorough discussion of your goals, your family, and your complete financial picture. However, there’s no question that dealing with a family business is an essential aspect of planning your estate.

Here’s a broad, general look at some of the ways in which a business can be transferred to your children:

• Put it in your will. You can give your interest in the business to your children in your will. This is simple, and it allows you to keep complete control of the business for as long as you live.

There are some downsides to this method, however. Some busi­ness owners think that their children will benefit from having an ownership stake in the business while they learn to manage it. Some owners worry that as they get older, they might no longer be competent to fully run the company’s affairs. In addition, there may be very significant tax advantages to transferring all or part of the business while you’re still alive.

• Give it away now. You could make a gift to your children of all or part of the business. This might result in your having to pay a gift tax, but at least through the end of 2012, the lifetime gift exclusion is very large, so there might be little or no current gift tax to pay.

A big advantage to giving away your interest now is that any future appreciation in the value of the business will be excluded from your estate, so it won’t be subject to estate tax when you die.

One disadvantage is that, generally, your children’s tax basis in the business will be the same as yours (whereas if they inherited their ownership interest through your will, they would get a “stepped-up” basis equal to the value as of the date of death). But there are ways to mitigate this problem.

• Sell to your children. Some people want to transfer the ownership of a business while they’re still alive, but they also want to continue receiving income from the business. The answer is usually to sell the business to the children. Of course, the children might not have enough assets of their own to buy the business for its fair market value. But that’s okay; there are many alternatives.

For instance, you could sell an interest in the business in return for a promissory note. The children would pay off the interest and principal over time using income from the business, and you would have a great deal of flexibility to structure the note in a way that meets your needs.

A variation on the promissory note is a “self-cancelling installment note,” which is a type of promissory note that says that if you pass away before the note is paid off in full, any further obligations to you or to your estate are cancelled. This has different tax consequences from a standard promissory note, and it might be worth considering.

Self-cancelling notes generally must have an interest rate premium in order to avoid gift tax issues, but with interest rates so low today, this might not be a problem.

Other variations include a sale of the business in return for a private annuity, which is like a self-cancelling note but with different annual payments. Also, you can give the business to your children via a “grantor retained annuity trust,” in which the trustee makes annuity payments to you for a term of years out of the profits of the business, after which the trust ends and the children become the new owners.

• Transfer the business to a trust. You can also sell or give an interest in the business to a trust for your children’s benefit. A big advantage of a trust is that it protects the children’s interest from creditors and ex-spouses – so the business will be less at risk if the child gets sued or goes through a messy divorce.

It’s usually possible to set things up so that the child is a co-trustee who can make business decisions regarding the company, but a second trustee will control distributions of income to the child (to protect against claims from creditors).

Many business owners give or sell business interests to a “grantor trust,” in which the owner continues to pay the income tax on the trust assets. Among the advantages of such a trust are that it can avoid capital gains tax on the sale of the trust assets, and it can avoid income tax on interest payments from the trust to the owner. This can be a very powerful method of transferring wealth.

All of the above ideas can be combined in various ways. For instance, you could arrange a transfer of a business interest that is partly a gift and partly a sale.

And if you’re not comfortable giving up control, it’s usually possible to split the ownership of the business into voting and non-voting interests, and for now you could transfer only non-voting interests.

Considerations For The Children

Often a business owner will have several children, and not all of them will be equally interested in the business. For instance, suppose an owner has three children – Peter, Paul, and Mary – and while Peter and Mary are enthusiastic about the business, Paul has chosen a very different career path.

One option is to give or sell the business to Peter and Mary, but provide for Paul in some other way. For instance, you could leave other assets to Paul in your will, or purchase a life insurance policy that names Paul as the beneficiary.

Once Peter and Mary become part owners of the company, some thought should be given to what would happen if one of them died or became incapacitated. If Mary dies, and her heirs inherit her share of the business, will that be the best thing for the company? Maybe not. Her heirs might want to sell their share, or might have to do so to pay estate taxes.

A good option is for Mary and Peter to enter into a buy-sell agreement, which says that if one of them dies, the other one (or the business itself) will have the option to buy out that person’s interest at some fair price. Having life insurance policies on Peter and Mary’s lives, with either the other sibling or the business itself as the beneficiary, can fund this purchase.

As you can see, transferring a family business has many complexities. But the good news is that there are many, many options – and with careful planning, you can choose the ones that make the most sense for your business, your family, and your long-term goals.

 

‘Do-It-Yourself’ Divorce Can Be a Costly Error

divorceRecently, a number of companies have been trying to persuade people that they can save money by handling­ their divorce on their own. These companies sell packets of generic forms in books or on the Internet, claiming that they were developed by “expert “attorneys and that they’re all you need.

Buyer beware!

These forms might be accepted by a divorce court, but they’re not tailored to your specific situation and the companies do not provide legal advice to protect you. Countless people who have used these forms have made mistakes that have cost them far more than they would ever have spent on a lawyer.

The sad irony is that the people who use these forms tend to be couples who are splitting up on reasonably good terms. They think they’re saving money -but the truth is that these types of uncontested divorces are the ones where attorney fees are low and where an attorney can provide the greatest “bang for the buck:’ because all of the attorney’s time is spent protecting you rather than fighting with the other side.

If you know someone who’s thinking of a “do-it­ yourself’ divorce, ask them these questions:

Do you know if you’re entitled to a share of your spouse’s pension, IRA or 40l {k) plan? If so, do you understand the highly technical require­ments you must comply with as to your spouse’s employer or plan custodian? A “divorce kit” generally won’t help you with this.

If you’re splitting up property, are you aware of all the tax consequences? Many people have done it the wrong way, and been surprised later with a large and unnecessary capital gains or other tax bill (A divorce kit won’t give you tax advice, either.)

  1. How can you be sure that your spouse doesn’t have assets that he or she isn’t telling you about?
  2. If your spouse promises to pay you money, and doesn’t follow through, how will you be protected? Or if your spouse promises to pay you money and later files for bankruptcy, how will you be protected?
  3. Do you know how to re-title property in separate names in a way that provides legal safeguards?
  4. Do you know every type of beneficiary designation that needs to be changed?
  5. Are you entitled to a share of your spouse’s stock options? Do you know how to divide them in a way that’s legally effective?
  6. Do you know what changes need to be made to your estate plan–after the divorce?
  7. Do you fully understand the effect of the divorce on Social Security, Medicare, Medicaid, health insurance, and other benefits?
  8. If you have children, have you taken care of them in terms of visitation and support? Will they be fully protected if your circumstances change in the future, or if your spouse’s circumstances change?
  9. What if your children incur large expenses in the future, such as for medical problems or college tuition? Does your divorce agreement deal with this in detail?
  10. What if your spouse agrees to pay child sup­ port, but dies unexpectedly? Have you provided for this, such as through a legally mandated life insurance policy?

If your head is spinning, it should be. Because the legal and financial implications of even the most simple, uncontested divorce can be profound.

You get what you pay for, and the legal conse­quences of doing a divorce on the cheap with an online kit can be very costly indeed.

Father’s Gift to “Y’all” Could Be Divided At Divorce

Fight For MoneyA father in Virginia gave his married daughter a check for $15,000, and told her it was a gift for “y’all.” The daughter and her husband used the money to fix up their home, which they jointly owned.

Later, the couple divorced.

The husband argued that the money was a joint gift, and thus he was entitled to a share of it in the divorce. The wife argued that it was a gift to her and that she didn’t have share it.

So the case turned on the legal definition of “y’all.” Did that refer to just the daughter, or the couple?

Be careful with family gifts if the recipient is contemplating a split.

A judge ruled that the gift was for the couple, and thus it could be split at divorce. This was partly because the father said he intended it for “y’all”: but also because the money was used to improve joint property – so regardless of how the gift was intended, it was converted into a joint asset.

The idea of a judge analyzing the legal significance of “y’all” might be amusing, but the larger point is very serious: If a person is contemplating divorce and also might be receiving a gift or an inheritance, it’s very important to speak with a family law attorney about how to make sure the assets remain separate.

There might not be a foolproof way to keep a gift or inheritance from becoming divisible at divorce, but you can improve your odds dramatically if you’re careful about how the gift is transferred, and if you make sure the assets aren’t put into a joint account or used for a joint purchase.