Estate Planning for Athletes Part 2: Notable Real-Life Examples


Proper estate planning does much more than address what happens to your assets and property at death. It starts with taking control over your assets and well-being.  Your estate plan must consider all aspects of your life and protect your assets and property so that you receive the maximum use and enjoyment during your life and preserve whatever you choose to leave to your loved ones upon your death.

For many people, a trust is the correct estate planning strategy to provide this protection – especially athletes and others with high-risk occupations. In its basic form, a trust is a formal relationship in which someone (the Grantor) appoints someone else (the Trustee) to hold title to and manage the trust accounts and property for the benefit of one or more people (the Beneficiaries). Often, when people refer to a trust, they are usually referring to the legal document that outlines the trust’s details. There are different types of trusts that can achieve various objectives - such as protecting the Grantor’s accounts and property from the Grantor’s creditors, divorcing spouses, and lawsuits, or providing for the Grantor’s family if the Grantor passes away.

If you are an adult and you own something, then you need an estate plan and could possibly benefit from the use of a trust as part of that plan. The following are some notable athletes who have used trusts to protect themselves and their loved ones.

Allen Iverson
Allen Iverson, also known as “The Answer,” played professional basketball from 1996 until his official retirement in 2013. During his career, he played for numerous NBA teams, including the Philadelphia 76ers, Denver Nuggets, Detroit Pistons, and Memphis Grizzlies. Commentators estimate that Iverson earned over $200 million (including contracts and endorsements) over the course of his career. In 2012, however, rumors circulated that Iverson was experiencing financial troubles due to an outstanding creditor issue.

However, there is a bright side for Iverson. As part of a deal he signed with a shoe company, Reebok, in 2001, Iverson currently receives $800,000 per year.  In addition, Reebok placed a lump sum of $32 million into a trust, which Iverson will be able to access when he turns fifty-five (55) years old in 2030. Now, this strategic planning has protected a large part of the Reebok contract for Iverson’s future use and enjoyment. (Click here for Bloomberg article. Click here for Business Insider article.)

Lesson: Saving money for a rainy day is an excellent strategy, and using a trust can be a perfect way to set aside money or property for a future date. It is never too late to get a proper estate plan in place. Depending on his current legal situation and the terms of the existing trust with Reebok, Iverson should probably consult with an experienced attorney and financial advisor to develop an asset protection strategy for this money before the first disbursement is made in 2030. Through proper planning, this money should be able to go a long way toward ensuring a comfortable retirement.

Michael Carter-Williams
Currently playing for the Orlando Magic, Michael Carter-Williams made headlines in 2013 when he announced that he would place the entire salary that he received from the Philadelphia 76ers into an irrevocable trust managed by his mother and a close family friend. Instead of living off his high salary, he chose to live off his endorsement deals. Per the terms of the trust, Carter-Williams would not have access to the money for three years.

Using a trust in this manner was unique because Carter-Williams was relatively young (22 years old at the time), did not have a family of his own to support, and did not have any known creditor issues. This strategy was a forward-thinking financial decision in light of what was happening in the industry at the time. Today, little is known about the status of the trust, but with proper oversight by his trusted advisors, this shrewd planning should offer him a source of income whenever he may need it. (Click here for ABC News article. Click here for CBS Sports article.)

Lesson: An estate plan is not a one-size-fits-all product. With the multitude of planning strategies available, an experienced attorney can design a plan that will provide what you need for today and the future. During the estate planning process, it is important to consider your priorities. Are you looking to avoid a potentially large tax burden; protect your accounts and property from lawsuits, creditors, or a future divorcing spouse; or protect the inheritance you are leaving your loved ones after you have died?

Kobe Bryant
The legendary professional basketball player Kobe Bryant, his daughter, and a few others died tragically on January 26, 2020, in a helicopter accident. With an estate worth over $600 million, proper estate planning was crucial to ensure that his assets and property were protected for his wife and children.

There are few details about the extent of Bryant’s estate planning for one very good reason: he had an estate plan! The only apparent misstep in the estate planning process was Bryant’s failure to update the Kobe Bryant Trust upon the birth of his youngest child. According to court documents filed by his wife, the trust had been amended each time one of his children was born, but because his youngest child was born in June 2019, Bryant had not yet amended his documents as he had done in the past prior to his death. (Click here for Forbes article.)

Lesson: Estate planning is not a one-and-done task. Your estate plan documents must be up to date to ensure that your wishes are followed in the best possible way. Once you have signed your estate planning documents, we encourage you to review them every year or two. You should ask yourself the following questions often and act accordingly:

●       Have there been any marriages, divorces, births, or deaths that might affect my estate plan?

●       Are the individuals I have chosen as my trustee, executor, guardian for my minor child, agent under a power of attorney, or healthcare decision-maker still the individuals I want?

●       Do I want to change the types of items or amount of money that I am leaving to my beneficiaries?

MM&C Is Here to Help
Estate planning can be a difficult and intimidating process for many people. It forces you to evaluate aspects of your life that may not be ideal. However, by diving in and addressing these concerns, we can help you design a unique estate plan that will protect you during your lifetime and provide for your loved ones upon your death. Give us a call today to schedule your in-person or virtual consultation.

David A. Lucas is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning. Contact David at 301.762.5212 or send him an email.





Estate Planning for Athletes Part 1: Your Financial Game Needs a Winning Strategy Too


In the sports world, success often brings significant monetary compensation. While high earnings are a dream come true for many, it is important to take prudent steps to safeguard this new wealth. Most assume that the biggest challenge is to spend wisely and to live within one’s means. While limiting extravagant spending can be a problem for some athletes, proper planning should consider and address a few other important issues:
 

Taxes: Create a Game Plan for These If You Play in the United States

1.    Gift tax
As you increase your income, it is natural to want to give gifts or support your loved ones. However, be aware that those gifts could generate a tax. The gift tax is a tax on the transfer of property from one person to another when nothing, or less than full value, is received in return. Fortunately, not all gifts are subject to the gift tax because each person has an annual gift tax exclusion amount ($15,000 in 2020). This cap is the amount or value someone can give another person during the calendar year without the IRS (Internal Revenue Service) assessing the gift tax. This amount is per person, meaning that you can give up to $15,000 to as many people as you want in 2020. An easy way to avoid the gift tax is to make sure you are not giving a friend or loved one more than the annual exclusion each year.

Alternatively, if you want to make a larger gift, keep in mind that every US citizen has a lifetime estate and gift tax exclusion of $10 million adjusted for inflation ($11.58 million in 2020). However, this is the maximum aggregate amount you can give during your lifetime; it is not per person like the annual gift tax exclusion. Be aware that this exclusion amount is set to return to $5 million (adjusted for inflation) on January 1, 2026, so if you wish to make large gifts, it is better to do so now while the exemption is high. Although you should file paperwork with the IRS, there should be no gift tax due as long as you have your exclusion. We can discuss your gifting desires and offer ways to make gifts, save taxes, and protect the gift recipient from wasting the money.

2.    Estate Tax
The estate tax is not assessed until death, but you must think about and plan for it now. As mentioned above, the lifetime estate and gift tax exclusion is currently high, but will return to $5 million (adjusted for inflation) on January 1, 2026. Because we cannot predict the future and determine when you are going to die nor can we know what the estate tax exclusion amount will be at that time, we have to plan early and adjust your plan as your career progresses and the laws change. As an athlete, your income potential is great, and you will likely receive income in large lump sums. Invested properly, those large lump sums should grow even larger.

Insurance: Guarding Your Money and Property
Your first line of defense is having a proper insurance plan – you need the right kind of coverages at the proper amounts. This includes homeowner’s, automobile, long-term care, disability, and life insurance. If the need for cash arises to pay a claim or satisfy a judgment, these policies will be available first before looking to the rest of your money and property. You should periodically review these policies with an experienced insurance professional to ensure that you are adequately covered. As your income increases, so should the amount of your life insurance. As you acquire more money, assets, and property, you should also adjust your other policies’ value to reflect these increases.

As a further step, there are sophisticated asset protection planning tools we can use to provide you with more protection. One common strategy is an irrevocable life insurance trust (ILIT). An ILIT is an irrevocable trust created by transferring an existing life insurance policy into the trust or by the trust purchasing a new policy. Using your annual gift tax exclusion, you make cash gifts to the ILIT in order to pay the premiums on the insurance policy. Upon your death, the death benefit is paid to the ILIT, and the money is distributed according to the instructions you have left in the trust document. Not only does this strategy allow you to utilize your annual gift tax exclusion and remove the value of the life insurance policy and death benefit from your estate, but it also allows you to direct and protect the money you are leaving for your surviving loved ones. You can also use an ILIT to provide cash to your loved ones without increasing the value of your accounts and property that are subject to estate tax.

Next Player Up: Managing Your Money and Property If You Cannot
While you may currently manage your money and property yourself or with a professional’s help, have you considered what would happen if you were unable to continue managing your money and property? You may be injured or afflicted with a condition that renders you incapacitated (unable to communicate or make decisions for yourself), or if you play for a team in a state or country other than where you permanently reside, you may be unavailable to handle necessary transactions in your home state.

A revocable living trust (RLT) is a trust that you create during your lifetime and that you can revise at any time prior to your incapacity or death. This planning tool enables you to name yourself as the current trustee (the person or entity charged with managing, investing, and handing out the money and property) and to designate a co-trustee or alternate trustee if you are unable to act as the trustee. An RLT also allows you to: 1) continue enjoying the money and property during your life even if you become incapacitated; and 2) specify what you want to happen to your money and property upon your death.

For RLT to work as intended, however, your financial accounts and property must be funded into the RLT. Funding the RLT involves changing the ownership of the accounts or property from yourself as an individual to yourself as the trustee of the RLT. If the RLT does not own a particular account or property, the trust terms may not control what happens to it.

Finally, not only does an RLT allow for continued management of your accounts and property if you become unable to act for yourself, a properly funded RLT allows those accounts and property to avoid the probate process at death. This means that upon your incapacity or death, the people that you have chosen can handle your financial matters privately and keep the details out of court records and the media. One caveat, however: an RLT will not protect your money and property from your creditors or judgments.

You’ve Been Benched: Caring for Your Physical Well-Being
Since injury often comes with physically demanding occupations, having proper healthcare documents is crucial. These include an Advance Medical Directive (AMD) and a HIPAA authorization form.

An AMD allows you to name a trusted healthcare decision-maker to communicate your medical wishes in the event you are unable to do so. You should name someone who will respect your wishes and enforce them when you are unable to communicate them to the appropriate medical professional.  An AMD also allows you to express your wishes in writing regarding end-of-life decisions. Absent specific instructions from you, your medical decision-maker may not know what you would want to happen in certain circumstances. Uncertainty in this difficult situation can cause additional grief to your loved ones and potentially cause conflicts among your family members.

A HIPAA authorization form allows you to grant certain individuals access to your medical information (e.g., to get a status update on your condition or receive your test results) without giving those individuals the authority to make any decisions on your behalf. Providing your loved ones with access to your medical information can help calm the anxieties and uncertainties that often arise during times of emergency. This may also help alleviate tensions between your medical decision-maker and the rest of your family. Although only one person should be making the healthcare decisions for you, the rest of your family should be able to understand the reasoning behind those decisions.

Let MM&C Be Your Estate Planning Team
Proper estate planning is necessary for everyone. However, athletes and those in other high-risk occupations must also address and manage tax, asset protection, and other financial concerns.  You also need to protect yourself and your family in the event you are injured on the job. We welcome the opportunity to work with you and any other financial professionals on your team to help craft a winning game plan that will have you and your loved ones scoring for years to come. To accommodate your busy schedule, we are available for both in-person and virtual meetings.

David A. Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning. Contact David at 301.762.5212 or send him an email.

To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  



 





Wealth Transfer Strategies to Consider This Election Year


With the Democratic Party pushing to return federal estate taxes to their historic norms, taxpayers need to act now before Congress passes legislation that could adversely impact their estates. Currently, the federal estate and gift tax exemption is set at $11.58 million per taxpayer. Assets included in a decedent’s estate that exceed the decedent’s remaining exemption available at death are taxed at a rate of 40 percent (Note: Maryland adds an additional state estate tax for estates over $5 million). However, each asset included in the decedent’s estate receives an income tax basis adjustment so that the asset’s basis equals its fair market value on the date of the decedent's death. Therefore, beneficiaries realize capital gain upon the subsequent sale of an asset only to the extent of the asset’s appreciation since the decedent’s death.

If this year’s election results in a political party change, it could mean not only lower estate and gift tax exemption amounts, but also the end of the longtime taxpayer benefit of stepped-up basis at death. To avoid the negative impact of these potential changes, it would be prudent to consider a few wealth transfer strategies before the year-end.

Strategy #1: Intra-family Notes and Sales

In response to the COVID-19 crisis, the Federal Reserve lowered the federal interest rates to stimulate the economy. Accordingly, donors should consider loaning funds or selling one or more income-producing assets, such as an interest in a family business or a rental property, to a family member in exchange for a promissory note that charges interest at the applicable federal rate. In this way, a donor can provide a financial resource to a family member on more flexible terms than a commercial loan. If the investment of the loaned funds or income resulting from the sold assets produces a return greater than the applicable interest rate, the donor effectively transfers wealth to the family members without using the donor’s estate or gift tax exemption.

Strategy #2: Swap Power for Basis Management

Assets like real estate, stocks, and mutual funds gifted to an irrevocable trust do not receive a step-up in income tax basis at the donor’s death. Gifted assets instead retain the donor’s carryover basis, potentially resulting in significant capital gains realization upon the subsequent sale of any appreciated assets. Exercising the swap power allows the donor to exchange one or more low-basis assets in an existing irrevocable trust for one or more high-basis assets currently owned by and includible in the donor’s estate for estate tax purposes. In this way, low-basis assets are positioned to receive a basis adjustment upon the donor’s death, and the capital gains realized upon the sale of any high-basis assets, whether by the trustee of the irrevocable trust or any trust beneficiary who received an asset-in-kind, may be reduced or eliminated.

Example: Jim purchased real estate in 2005 for $1 million and gifted the property to his irrevocable trust in 2015 when the property had a fair market value of $5 million. Jim dies in 2020, and the property has a date-of-death value of $11 million. If the trust sells the property soon after Jim’s death for $13 million, the trust would be required to pay capital gains tax on $12 million, the difference between the sale price and the purchase price. But, let’s assume that before his death, Jim utilized the swap power in his irrevocable trust and exchanged the real estate in the irrevocable trust for stocks and cash having a value equivalent to the fair market value of the real estate on the date of the swap. Now, at Jim’s death, the property is part of his gross estate, resulting in the property receiving an adjusted basis of $11 million. If his estate or beneficiaries sell the property for $13 million, they will only pay capital gains tax on $2 million, the difference between the adjusted date-of-death basis and the sale price. Under this scenario, Jim’s estate and beneficiaries avoid paying capital gains tax on $10 million by taking advantage of the swap power.

Strategy #3: Installment Sale to an Irrevocable Trust

This strategy is similar to the intra-family sale, except that the income-producing assets are sold to an existing irrevocable trust instead of directly to a family member. In addition to selling the assets, the donor also seeds the irrevocable trust with assets worth at least 10 percent of the assets sold to the trust. The seed money demonstrates to the Internal Revenue Service (IRS) that the trust has assets of its own and that the installment sale is a bona fide sale. Without this seed money, the IRS could re-characterize the transaction as a transfer of the assets with a retained interest instead of a bona fide sale, which would result a very negative outcome: the entire interest in the assets are includible in the donor’s taxable estate. This strategy not only allows donors to pass appreciation to their beneficiaries with limited estate and gift tax implications, but also gives donors the opportunity to maximize their remaining gift and generation-skipping transfer tax exemptions if the assets sold to the trust warrant a valuation discount.

Example: Sally owns 100 percent of a family business worth $100 million. She gifts $80,000 to her irrevocable trust as seed money. The trustee of the irrevocable trust purchases a $1 million dollar interest in the family business from Sally for $800,000 in return for an installment note with interest calculated using the applicable federal rate. It can be argued that the trustee paid $800,000 for a $1 million interest because the interest is a minority interest in a family business and therefore only worth $800,000. A discount is justified because a minority interest does not give the owner much, if any, control over the family business, and a prudent investor would not pay full price for the minority interest. Under this scenario, Sally has removed $200,000 from her taxable gross estate while only using $80,000 of her federal estate and gift tax exemption.

Strategy #4: Spousal Lifetime Access Trust

With the threat of lower estate and gift tax exemption amounts, a Spousal Lifetime Access Trust (SLAT) allows donors to lock in the current, historic high exemption amounts to avoid adverse estate tax consequences at death. The donor transfers an amount up to the donor’s available gift tax exemption into the SLAT. Because the gift tax exemption is used, the value of the SLAT’s assets is excluded from the gross estates of both the donor and the donor’s spouse. An independent trustee administers the SLAT for the benefit of the donor’s beneficiaries. In addition to the donor’s spouse, the beneficiaries can be any person or entity including children, friends, and charities. The donor’s spouse may also execute a similar, but not identical, SLAT for the donor’s benefit. The SLAT allows the appreciation of the assets to escape federal estate taxation and, in most cases, the assets in the SLAT are generally protected against creditor claims. The SLAT is a powerful wealth transfer tool because it transfers wealth to multiple generations of beneficiaries and provides protection against both federal estate taxation and creditor claims.

Example: Mary and Bill are married, and they are concerned about a potential decrease in the estate and gift tax exemption amount in the upcoming years. Mary executes a SLAT and funds it with $11.58 million in assets. Karen’s SLAT names Bill and their three children as beneficiaries and designates their friend, Gus, as a trustee. Bill creates and funds a similar SLAT with $11.58 million that names Mary, their three children, and his nephew as beneficiaries and designates Friendly Bank as a corporate trustee (among other differences between the trust structures). Mary and Bill pass away in the same year when the estate and gift tax exemption is only $6.58 million per person. Even though they have gifted more than the $6.58 million exemption in place at their deaths, the IRS has taken the position that it will not punish taxpayers with a “clawback” provision that pulls transferred assets back into the taxpayer’s taxable estate. As a result, Mary and Bill have saved $2 million each in estate taxes assuming a 40 percent estate tax rate at the time of their deaths.

Contact an MM&C Estate Planning Attorney

If any of the strategies discussed above interest you, or you feel that potential changes in legislation will negatively impact your wealth, we strongly encourage you to call Miller, Miller & Canby at your earliest convenience and definitely before the end of the year. We can review your estate plan and recommend changes and improvements to protect you from potential future changes in legislation.  

David A. Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.
Contact David at 301.762.5212 or send him an email.

To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  


 





Estate Planning Tip: Be Aware of a Recent Tax Court Ruling that “Loan” Is Actually a Gift


In a recent tax court case, Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, 119 T.C.M. (CCH) 1502 (June 1, 2020), the court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan. Many people use trusts and gifts as estate planning tools. Be aware of the requirements of “loans” v. “gifts” when using lending as an estate planning tool.

Background
Mary Bolles made numerous transfers of money to each of her children from the Bolles Trust, keeping a personal record of her advances and repayments from each child, treating the advances as loans, but forgiving up to the annual gift tax exclusion each year. Mary made numerous advances amounting to $1.06 million to her son Peter, an architect, between 1985 and 2007. Peter’s architecture career initially seemed promising, and during his early career, it seemed that Peter would be able to repay the amounts advanced to him by Mary. However, his architecture firm, which had begun to have financial difficulties by the early 1980s, eventually closed. Although Peter continued to be gainfully employed, he did not repay Mary after 1988. By 1989, it was clear that Peter would not be able to repay the advancements.

Although Mary was aware of Peter’s financial troubles, she continued to advance him money, recording the sums as loans and keeping track of the interest. However, she did not require Peter to repay the money and continued to provide financial help to him despite her awareness of his difficulties. Although Mary created a revocable trust in 1989 excluding Peter from any distribution of her estate upon her death, she later amended the trust, including a formula to account for the loans made to him rather than excluding him. Peter signed an acknowledgment in 1995 that he was unable to repay any of the amounts Mary had previously loaned to him. He further agreed that the loans and the interest thereon would be taken into account when distributions were made from the trust.

Upon Mary’s death in 2010, the IRS assessed the estate with a deficiency of $1.15 million on the basis that Mary’s advances to Peter were gifts. Mary’s estate asserted that the advances were loans. Both parties relied upon Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997).

Requirement for Advances to be Considered a Loan
The case of Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997) spells out the traditional factors that should be considered in determining whether an advance of money is a loan or gift. To establish that an advance is a loan, the court should consider whether:
(1) there was a promissory note or other evidence of indebtedness,
(2) interest was charged,
(3) there was security or collateral,
(4) there was a fixed maturity date,
(5) a demand for repayment was made,
(6) actual repayment was made,
(7) the transferee had the ability to repay,
(8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and
(9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.

Court Ruling
In the Estate of Bolles case, the tax court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan.

The court found that the evidence showed that although Mary recorded the advances to Peter as loans and kept records of the interest, there were no loan agreements, no attempts to force repayment, and no security. Because it was clear that Mary realized by 1989 that Peter would not be able to repay the advances, the court held that although the advances to Peter could be characterized as loans through 1989, beginning in 1990, the advances must be considered gifts. In addition, the court found that Mary did not forgive any of the loans in 1989, but merely accepted that they could not be repaid. Thus, whether an advance is a loan or a gift depends not only upon the documentation maintained by the parties, but also upon their intent or expectations.

Lending as an Estate Planning Tool
As the Estate of Bolles case demonstrates, intra-family loans can be a smart estate planning tool for many families IF properly structured and well-documented. Lenders (usually grandparents or parents) can essentially give access to an inheritance without any immediate gift or estate tax problems, generate a better return on their cash than they could with bank deposits, and borrowers (usually children or grandchildren) can take out loans at interest rates lower than commercial rates and with better terms. In fact, the Internal Revenue Service allows borrowers who are related to one another to pay very low rates on intra-family loans. Furthermore, the total interest paid on these types of transactions over the life of the loan stays within the family. These loans may effectively transfer money within the family, for the purchase of a home, the financing of a business, or any other purpose.

There are several points to keep in mind regarding these types of loans: the loan must be well-documented, lenders should usually ask for collateral, the lender should make sure the borrower can repay the loan, and the income and estate tax implications should be examined thoroughly.

Express Intent in Estate Documents
While you were kind enough to help a member of your family by lending him or her money, do not let this become a legal dilemma in the event of your incapacity or after your death. Instead, use your estate plan to specifically express what you want to have happen regarding these assets. Before lending money, it is important to carefully consider how the loan should be structured, documented, and repaid.

We are Here to Help
If you or someone you know has lent money and has questions about how this affects your estate plan, contact MM&C estate planning attorney Dave Lucas today to discuss the options.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  

 





How the CARES Act Affects Your Retirement Plan


The Internal Revenue Service (IRS) recently published questions and answers (click here) regarding retirement provisions in Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to providing the well-known stimulus aid for individuals and the Payroll Protection Program and Economic Injury Disaster Loan programs for businesses, the CARES Act increases accessibility to funds and loans from certain retirement plans and accounts. The information the IRS published clarifies which individuals may benefit from the legislation and which plans and accounts are covered.

Retirement Account Rules Established by the CARES Act
Under Section 2202 of the CARES Act, individuals may withdraw up to $100,000 in “Coronavirus-related” distributions from certain retirement accounts. Distributions are deemed “Coronavirus-related” if they are withdrawn from approved plans between January 1, 2020, and December 30, 2020, by individuals who have been adversely affected by COVID-19 in a number of specified ways (discussed below). Individuals may take distributions from 401(k), 403(b), and individual retirement accounts (IRAs). Under normal circumstances, a 10 percent penalty is imposed on distributions made from these accounts by account owners under the age of 59.5 - the CARES Act now waives this penalty.

In addition to expanding access to retirement distributions, eligible individuals may also take loans of up to $100,000 from their employer-sponsored retirement plans. Prior to the CARES Act, the limit was $50,000 or 50 percent of the vested account balance. Loans taken under this CARES Act provision must be entered into by September 22, 2020. For existing loans, payment due dates have been extended, and repayment is not required through December 31, 2020.

Qualified Participants
Like much of the legislation pertaining to COVID-19, the retirement relief sections were specifically designed to provide broad coverage. According to the IRS information, a qualified participant is eligible for the expanded access set forth in Section 2202 if the participant, the participant’s spouse, or the participant’s dependent was either diagnosed with COVID-19 using a test approved by the Centers for Disease Control and Prevention (CDC) or has experienced “adverse financial consequences” caused by COVID-19. The “financial adverse consequences” experienced by the participant must be the result of one of the following:

  • The participant has been quarantined, furloughed, laid off, or has experienced a reduction of work hours due to COVID-19;

  • The participant has been unable to work due to the lack of child care caused by COVID-19; or

  • The participant has had to reduce business hours or close a business the participant owns or operates due to COVID-19.

An individual who falls within any of these categories is eligible for the expanded distribution and loan options available under the CARES Act.


Additional Benefits for Individuals of Retirement Age
The CARES Act also temporarily suspends required minimum distributions (RMDs) from IRAs, and 401(k) and 403(b) retirement accounts. In general, once an individual reaches a certain age (currently 72 years old per the SECURE Act – click here to learn more about SECURE), the government mandates that the individual begin taking out a minimum distribution to ensure that these retirement funds are not left untouched indefinitely. This temporary suspension of RMDs is unique because it is not limited to retirees impacted by COVID-19. The suspension also applies to:

  • individuals who turned 70.5 years old in 2019 and did not take their RMDs in 2019,

  • individuals who are 72 years old or older, and

  • beneficiaries of inherited IRAs for Decedents who died before 2020.

These law changes allow retirees to keep their money invested for a longer time. If you have already taken an RMD that you were not required to due to the CARES Act, please note that you may be able to redeposit these distributions via rollover provisions, but you must act quickly. In the past, the IRS allowed the rollover of funds within sixty days of withdrawal. Under the CARES Act, however, the sixty-day rollover period has been extended to July 15, 2020.

A Word of Caution
Despite the various new options available under the CARES Act, it is critical to carefully consider whether distributions should be taken from any accounts. The tax implications of these options vary, and action should be taken only after careful consideration of an individual’s personal goals and capacity.

Schedule a Meeting
We know that these are trying times. Let us help you choose the best course of action.  We are more than happy to meet with you by phone or video conference.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  


 





Don’t Procrastinate: Answer these 4 Questions to Get a Quick Jump-Start on Your Estate Plan


As the coronavirus pandemic continues to disrupt daily life and leave Americans uncertain of the future, you do not have to feel helpless. In fact, now is a great time to be proactive and organize your affairs in the event you or a loved one should fall ill. One of the most important things you can do (and should do) is get your estate plan in place. If you can answer the following questions or at least begin to think them through, you can get a jump-start on the estate planning process today.

1.    Who Do You Want to Handle Your Financial Affairs?
One major issue that must be addressed during the estate planning process is the control of your money and property. This includes what will happen while you are alive and what will happen at your death. The person(s) you choose to put in charge of your money and property should be trustworthy, detail-oriented, financially savvy, and organized. To assist you with your financial affairs, you may decide to appoint someone to serve as your Agent (aka attorney-in-fact) under a financial power of attorney and/or a successor Trustee of your revocable living trust.

The agent is responsible for carrying out the financial transactions listed in the financial power of attorney document on your behalf while you are alive. The document can be tailored to meet your needs, granting your agent as much or as little authority as necessary or desired. You could grant your agent the authority to do everything you could do (known as a general durable power of attorney), or the agent could be instructed to only open a bank account for the purposes of depositing a specific check (known as a limited power of attorney). You also have the ability to specify when your agent’s authority to act on your behalf becomes effective. With a “springing” power of attorney, the agent can act only if you become incapacitated. The method used to determine whether you are incapacitated is stated in the power of attorney (note: in general, “springing” powers of attorney are not recommended). Alternatively, an immediately effective power of attorney allows your agent to act the moment you sign the document, even though you are still able to conduct your own financial affairs. This feature, however, does not limit your ability to carry out your own transactions - it merely provides that another person can carry them out in addition to you.

Another way a trusted individual can assist you is by serving as a successor trustee of your revocable living trust. When the trust is first created and you transfer money and property to the trust, you will likely serve as the initial trustee and will be in full control of the money and property, just as you were before your transferred it to the trust. In addition to being the trustee, you will also be the current beneficiary, allowing you to continue to enjoy the money and property even though they are technically owned by the trust. For the foreseeable future, this situation will work well. However, the true benefit of the trust arises when you are no longer able to fulfill the role of trustee. At that point, the trusted individual you have appointed as your successor trustee will step in and manage the money and property for you, without court involvement. Your successor trustee can also step up at your death without court involvement. But no matter when the successor trustee takes over, i.e., when you are unable to manage your affairs or upon your death, he or she is required to follow the instructions that have been detailed in the trust document. This means that the money and property will continue to be used for your benefit during your lifetime and for the benefit of those you have chosen at your death.

2.    Who Will Communicate Your Medical Decisions to the Appropriate Medical Personnel?
In the event you are unable to communicate your medical wishes, your agent under an advance medical directive or medical power of attorney is the person who can make the life or death decisions on your behalf. Your health care agent should be level headed, able to act under pressure, and most importantly, able communicate your wishes, even if their own wishes or beliefs differ from yours. If you have family members that disagree with your choices, you may want to rethink before giving them the authority to make medical decisions on your behalf. It is also essential that you consider the individual’s availability to act for you. Medical emergencies can happen without warning. It is necessary that the person you choose as your agent is available in the required capacity to make those decisions for you. If the person you would like to choose is across the country, do they have the time and finances to travel? If your first choice has a demanding job or home life, can he or she be reached in a reasonable amount of time in the event a decision can be made over the phone?

Medical decisions are very personal. Even if you have the most capable person appointed as your health care agent, it is helpful if you can provide him or her with your wishes in writing. This can be a valuable tool for your agent. An advance medical directive or ‘living will” allows you to state your wishes regarding your end-of-life care: Do you want medication to help manage any pain? Do you want to be put on a ventilator if needed, etc.? While these decisions may take some soul searching, this information may be crucial in allowing your agent to make the best decisions on your behalf.
 
3.    Who Will Look After Your Minor Children, Even if it is Just Temporary?
If you have a minor child, you know that they require some level of supervision. In case you are not able to take care of your minor child, and the other custodial parent is not available, you must make sure to appoint someone to step in and take care of your child, even if it is just for a short period of time. This person should have the ability to take on the mental, emotional, and possibly financial day-to-day responsibilities of raising your child. Because it is impossible to know in advance the amount of time your child would need to spend with them, you will also need to consider whether the person is geographically desirable or if your child would be required to move, even temporarily.

4.    How Do You Want Your Money and Property Divided at Your Death?
When considering how to divide your money and property, think about what is in the best interests of each person. You do not have to give the money and property to your loved ones outright: You have options.

If you are concerned about giving a chosen beneficiary access to 100% of the money and property they will inherit, you could choose to stagger distributions over a period of time. For example, the beneficiary could receive 25% at age 25, 50% at age 40, and the remaining 25% at age 60. By staggering the distributions in this fashion, your younger beneficiary may be able to use the last portion as a nest egg for retirement.

In the event you would like to incentivize certain behaviors, you can set aside money or property to be distributed when a beneficiary accomplishes certain milestones (i.e., graduates college, stays sober for 180 days, gets their first full-time job). This can be helpful if you are concerned that the inheritance might derail a beneficiary from a productive path. By making the distributions contingent on certain behaviors, you can help ensure that they are staying on the right track even after you are gone.

For some beneficiaries, it may be more appropriate for any distribution to be solely within the complete discretion of the named successor trustee. Although this may sound harsh, there are many types of beneficiaries that can be safely provided for using this strategy. If your beneficiary has creditor issues, their creditors can only take the money or property that has been given to the beneficiary. So long as the money and property remain in the trust, and the trustee is not required to make distributions to the beneficiary, the money can stay out of the hands of the creditors. Additionally, a properly structured trust can prevent the beneficiary’s former spouse from taking the inheritance due to the limited control your beneficiary has over the money. This does not mean that your beneficiary will never receive any benefit from the trust - it just means that the trustee has the ability to ensure that distributions are truly in the best interest of the beneficiary, at the best time, and in the right amount.

We Are Here to Help
We are here to help you navigate through the estate planning process during these unprecedented times. Let us help you be proactive and get your affairs in order.

David Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.





COVID-19: A Reminder of Why Estate Planning Is Important


The past few weeks have been incredibly difficult for many people in communities around the world. It is crucial for everyone, particularly those who are in good health, to continue to take all the steps necessary to protect those around us who are more vulnerable to becoming seriously ill if exposed. We should all care for our neighbors and communities by staying home, washing our hands frequently, sanitizing frequently-touched surfaces, and implementing any other steps recommended by health experts.

Although most people are not likely to be in serious danger, even if they come down with the coronavirus, it is a wake-up call to those who have been putting off creating or updating an estate plan. None of us knows what tomorrow will bring, so for your own peace of mind and the good of your loved ones, it is important to stop procrastinating.

There are several key documents an estate plan should include to protect you and your family if you should suddenly become very ill or pass away:

Last Will and Testament and/or a Trust
A will enables you to specify the individuals you would like to receive your money and property. In addition, you can name a guardian(s) to care for your children or other dependents if you are unable to do so and a conservator to handle their financial needs. For many, however, a will alone is not the best solution, as it is only effective after you pass away.

In a revocable living trust, you can name yourself as a trustee and continue to exercise control over the money and property you transfer to the trust. However, it also enables you to name a co-trustee or successor trustee who can manage your money and property for your benefit and the benefit of any other beneficiaries of the trust if you become too ill to do it yourself. In addition, your trust can specify when and how the funds should be distributed to your beneficiaries when you pass away. Further, if you have transferred all of your property into the trust, it will not have to go through the probate process—which can be expensive, time consuming, and transparent to any member of the public.

For some, other types of trusts may be appropriate to achieve particular goals, for example, protecting assets from creditors or providing for a child with special needs.

  • Note: If you do not create a will or trust specifying who you would like to receive your money and property when you die, it will pass to the individuals specified in the state intestacy statute, who will receive the shares mandated by the statute. Obviously, this is not optimal, as the people and shares spelled out in the statute may be vastly different from what you would have specified in your estate planning. Moreover, probate is required for the administration of your estate if you die without a will or trust. In addition, a court will have to appoint a guardian and/or conservator to care for your children—and the person appointed may not be the individual you would have chosen.

Powers of Attorney
Using a power of attorney, you can name people you trust to make decisions on your behalf if you become ill and are unable to make them for yourself. Even if you are married, your spouse may not have the authority to make all of these types of decisions for you without the proper documentation.

A durable financial power of attorney will allow the person you have named as your agent to make financial decisions and conduct business on your behalf if you cannot handle these matters for yourself. It can be as broad or as limited as you choose: For example, you could authorize a trusted individual to run your business for you, or you could simply authorize another person to write checks and pay your bills on your behalf.

An advance medical directive/medical power of attorney/living will can be used to name a trusted person as your agent to make medical decisions on your behalf if you are unconscious or otherwise unable to communicate them to your health care provider. As your agent, the person you have named is required to act in accordance with your wishes to the extent that they are known to that individual, so it is important to communicate important information regarding your preferred providers, medical conditions, treatments you do not want, religious convictions, and other pertinent information. You can also clearly spell out your wishes for the end of your life, for example, whether or not you want to be placed on life support if you are in a vegetative state or have a terminal condition. These important documents allow your family and health care providers to understand your wishes even if you are no longer able to communicate them.

  • Note: If you do not name trusted individuals to act for you in medical and financial powers of attorney, your family members, including your spouse under some circumstances, will have to go to court to be appointed to this role. As in the situation in which you do not have a will or trust, you no longer have any control over who is named to act on your behalf. The person appointed by the court may not be the person you would have wanted to take on these important roles.

Funeral Planning
You can use a memorial and services memorandum to provide information to your family and loved ones about your wishes for your service, people who should be notified when you pass away, instructions regarding your remains, and information you would like to be included in your obituary. If you do not provide this information in advance, your grieving family will be left to guess about what you would have wanted after you pass away. This could lead to unnecessary stress and conflict at a time when they are likely to be feeling emotionally overwrought.

Give Us a Call
Certain situations can bring our own mortality to the forefront of our minds, even if they are unlikely to have a severe or direct effect on us. The pandemic provides an important reminder of just how important it is, not only to us, but also to our family members and loved ones, to have an estate plan in place in case the unexpected happens. Our foremost goal is to help you have confidence that if you become ill, your own care and the needs of your family will be addressed. Call us today at 301-762-5212 to set up a meeting, which can occur virtually or in person at your convenience. Let us help provide you and your family the peace of mind that comes with knowing you have an estate plan that accomplishes your goals and will avoid unnecessary attorneys’ fees, headaches or conflict.

David Lucas is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here
 





Top 5 Common Mistakes with DIY Estate Plans


The internet offers all the information and tools we need at our fingertips to create our own estate plan, right? For most people, this is simply not true. Several years ago, Consumer Reports®, an independent nonprofit consumer watchdog group, created wills using the forms provided by DIY websites and asked three law professors to review them. Although the professors found that the wills drafted using the DIY services were better than wills drafted by non-lawyers on their own, they were inadequate to fully meet the needs of most consumers. Although your DIY “estate plan” may initially cost only $49.95, it may end up being much more costly than an estate plan designed by an experienced estate planning attorney.  

The fact is, wills are only one part of a comprehensive estate plan that fully protects you and your family. Even if your DIY will meets all your state’s requirements and is legally valid, the will alone is unlikely to be sufficient to address all of your estate planning needs. Furthermore, DIY packages you can buy online that purport to be comprehensive may not include important documents you may be unaware that you need. Without expertise in a particular area, we simply don’t know what we don’t know—and this could lead to unnecessary heartache for you or the family and loved ones you will one day leave behind. 

Here are the top 5 most common pitfalls of the DIY approach:

1.  DIY estate plans may not conform to the applicable law. The law that applies to estate planning is determined by each state—and there can be wide variations in the law from state to state. Although the forms you can find on the internet may claim to conform to your state’s law, this may not always be the case. In addition, if you own property in another state or country, the laws in those jurisdictions may differ significantly, and your DIY estate plan may not adequately account for them.

2. A DIY estate plan could contain inaccurate, incomplete, or contradictory information. For example, if you create a will using an online questionnaire, there is the possibility that you may select the wrong option or leave out important information that could prevent your will from accomplishing your goals. In addition, some online services allow users to insert additional information not addressed by their questionnaire that could contradict other parts of the will.

3. Your DIY estate plan may not account for changing life circumstances and different scenarios that could arise. For example, if you create a will in which you leave everything to your two children, what happens if one of those children dies before you? Will that child’s share go entirely to his or her sibling—or will it go to the child’s offspring? What if one of your children accumulates a lot of debt? Is it okay with you if the money or property the indebted child inherits is vulnerable to claims of the child’s creditors? What if your will states your daughter will receive the family home as her only inheritance, but it is sold shortly before you die? Will she inherit nothing? As opposed to a computer program, an experienced estate planning attorney will help you think through the potential changes and contingencies that could have an impact on your estate plan and design a plan that prevents unintended results that could frustrate your estate planning goals.

4. DIYers frequently make mistakes in executing the plan. Under the law, there are certain requirements that must be met for wills and other estate planning documents to be legally valid. For example, a will typically requires the signatures of two witnesses, but state law differs regarding what is necessary for a will to be validly witnessed. Some states require not only that the will be signed by the will maker and the witnesses, but also that they all must sign the will in each other’s presence. In other states, witnesses are not required to be in the same room when the will maker signs the will, and they can even sign it later if the will maker tells them his or her signature is valid.  Similarly, for a valid power of attorney, some states require only the signature of the principal (the person who is granting the power of attorney) to be notarized, but some states require the signatures of both the principal and the agent (the person who will act on behalf of the principal) to be notarized. In other states, one or more witnesses are required—and these requirements may also differ depending upon the type of power of attorney (financial vs. medical) you are trying to execute. If you seek the help of an estate planning attorney, you can rest assured that all of the “i’s” are dotted and the “t’s” are crossed, and that your intentions will not be defeated because of mistakes made during the execution of your documents.

5. Assets may be left out of your estate plan. Many people do not realize that a trust is frequently a better estate planning tool than a will because it avoids expensive, time-consuming, and public court proceedings (i.e., the probate process) that would otherwise be necessary to transfer your money and property to your heirs after you pass away. Even if you have created a DIY trust, if you do not fund it, that is, transfer title of your money and property into the name of the trust, it will be ineffective, and your loved ones will still have to endure the probate process to finish what you started. Further, if you do initially transfer title of all your assets to the trust, it is likely you will acquire additional property or financial accounts over the years that must go through probate if title is not transferred to the trust. Regular meetings with an estate planning attorney can help ensure that your plan accomplishes your goals and that your grieving family members are not left with stressful decisions and challenges.

We Can Help

A DIY estate plan can lead to a false sense of security because it may not achieve what you think it does. If your DIY will is not valid, your property and money will go to heirs specified by state law—who may not be the people you would have chosen. An unfunded trust will be ineffective. Banks may not accept a generic power of attorney you found on the internet. Laws affecting your estate plan may change. These are just some of the mistakes or unforeseen issues that could cost your family dearly. An experienced estate planning attorney is aware of any trends in the law that could dramatically affect your estate plan and has the expertise needed to help you design and create a comprehensive plan.

Call Miller, Miller & Canby today at 301-762-5212 to schedule a meeting so we can help provide you and your family with the peace of mind that comes from knowing that you have an estate plan that accomplishes your goals and will avoid unnecessary attorneys’ fees, headaches, or conflict.

David A. Lucas
is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.

Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.  


 





Four Incentives the SECURE Act Gives Small Business Owners


The “Setting Every Community Up for Retirement Enhancement” Act (“SECURE Act”) was signed into law at the end of 2019. The SECURE Act takes small, but impactful, steps towards addressing this country’s retirement crisis by incentivizing small business owners to sponsor retirement plans for their employees.

If you are a small business owner who has considered, or wanted, to offer a retirement plan for your employees but declined to do so because of costs or administrative burdens, now may be a good time to revisit this valuable employee benefit option. Below are four significant incentives the Act provides:

1. Broader Access for Employers
Historically, the cost, administrative burdens, and liability risks of running a sponsored retirement plan have been difficult for smaller companies to manage. Multiple-Employer Plans (MEPs) are appealing to business owners because they can reduce these problems, but many employers were left out due to the “common interest” requirement. Beginning in 2021, the “common interest” requirement will be removed and unrelated companies will be permitted to participate in and run MEPs through a pooled plan administrator. The SECURE Act also eliminates the “One Bad Apple” rule. Previously, this rule provided that a violation by one MEP participant disqualified the entire pool – this made employers understandably uneasy about joining a MEP. As a further boost, small business owners will see a substantial hike from the previous $500 tax credit offered to defray retirement package start-up costs. The tax credit has been increased to $5,000 a year for the next three tax years!
 
2. Incentives for Automatic Enrollment

Automatic enrollment is a great way to increase employee participation by encouraging them to start - and continue - saving. There is no doubt that lawmakers are pushing employers in that direction. An employee’s auto-enrollment contribution rate for certain plans used to be capped at 10%, but the cap has now been increased to 15% after an employee’s first year. By waiting until the employee’s second year for the increase, the SECURE Act is expected to reduce the number of individuals who drop out of plans due to high initial contribution amounts. The legislation also introduced a new tax credit (up to $500 a year for three years) for employers who launch new 401k and SIMPLE IRA plans with automatic enrollment.
 
3. Greater Inclusion for Part-time Employees
Many small businesses are staffed by part-time personnel, who, until now, had been essentially excluded from participating in their employer’s retirement benefits. Prior to the SECURE Act, part-time employees were required to log a minimum of 1,000 hours per year in order to qualify for their employer’s sponsored retirement plan. Beginning in 2021, a part-time employee will be allowed to participate in the retirement plan so long as they have worked at least 500 hours annually for three consecutive years. Although it may seem like an additional cost to add more individuals to a retirement plan, the SECURE Act does not require an employer to offer the same 401(k) benefits to a part-time employee as it would to a full-time worker. For example, an employer can choose to make matching contributions for its full-time employees, but opt to not offer matching to its part-time staff.
 
4. Safe Harbor for Annuities
While the benefits of annuities have been widely debated, some advisors find them to be helpful investment tools for retirement because they can provide a consistent stream of income at a future date. However, for the most part, annuities have been ignored in company-sponsored retirement packages due to the potential legal liability an employer could face in the future. Under prior law, an employer remained liable if an insurer didn’t follow through with making guaranteed payments to the employee - leaving the employer vulnerable to a future lawsuit. The SECURE Act now shifts this liability risk back to the insurance company (but only if the employer selects an annuity provider that meets several requirements). This feature now makes annuities a friendlier option for employers to include in a benefits plan.

The bottom line is: The incentives provided by the SECURE Act should encourage employers who may have been considering sponsoring a retirement plan, or were hesitant to look into it in the past, to take action.

David A. Lucas
is an attorney in Miller, Miller & Canby’s Estates & Trusts and Business & Tax practice groups. Give David a call today at 301-762-5212 to discuss how your business may benefit from the new provisions of the SECURE Act.

To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.

 





Three Liability Planning Tips for Business Owners


The risk of liability is a very real concern for today’s business owners.  There are employment-related issues including wrongful termination, sexual harassment, and discrimination; careless business partners and employees; and contractual obligations that may include personal guarantees, leases, business agreements, etc.  There are also personal liabilities like divorce, vehicle accidents, and rental real estate.

Unfortunately, our litigious society necessitates that a broad range of people, including business owners, board members, real estate investors, private practitioners and retirees, should protect their hard-earned assets from a variety of liabilities. We have outlined some strategies for business owners and practitioners that may help provide protection from risk.

Key Take-aways to Protect Yourself from Risk:

●    Types of liability insurance you need to have in place;
●    State exemptions that will protect certain assets from the claims of creditors; and
●    The role of business entities in liability planning.

Tip #1 – Insurance is the First Line of Defense Against Liability

Liability insurance is the first line of defense against any claim.  Liability insurance provides a source of funds to pay legal fees as well as settlements or judgments.

The types of insurance you should consider include:

●    Homeowner’s insurance
●    Property and casualty insurance
●    Excess liability insurance (also known as “umbrella” insurance)
●    Automobile and other vehicle (motorcycle, boat, airplane) insurance
●    General business insurance
●    Professional liability insurance
●    Director and officer insurance

Planning Tip:  Never rely on insurance as your sole means of liability protection since the cost of a comprehensive policy may be prohibitive, and each type of policy has numerous exceptions to coverage.  Instead, you should use insurance as one of a multiple layer of strategies designed to place a barrier between your business and personal assets and the claims of a plaintiff.  Moreover, it is important to work with an insurance professional who can explain the purpose of each type of coverage, make recommendations for liability limits and deductibles, and help you consider the most cost-effective coverage on an annual basis.

Tip #2 – State Law Exemptions Protect a Variety of Personal Assets from Lawsuits

Each state has a set of laws or constitutional provisions that partially or completely exempt certain types of assets from the claims of creditors.  While these laws vary widely from one state to the next, in general, the following types of assets may be protected from a creditor seeking to enforce a judgment against you:

●    Primary residence (referred to as “homestead” protection in some states)
●    Qualified retirement plans (401(k)s, profit sharing plans, money purchase plans, IRAs)
●    Life insurance (cash value)
●    Annuities
●    Property co-owned with a spouse as “tenants by the entirety” (only available to married couples; and may only apply to real estate, not personal property, in some states)
●    Wages
●    Prepaid college plans
●    Section 529 plans (“college savings plan”)
●    Disability insurance payments
●    Social Security benefits

Planning Tip:  If you reside in Maryland or the District of Columbia, Miller, Miller & Canby’s attorneys can help you determine which exemptions are available to you and how much protection they provide.  Our business and estate planning attorneys can also help you understand the pros and cons of each type of exemption.  For example, while tenants by the entirety co-ownership of real property between you and your spouse is simple and may make sense in the short term; in the long run, if you divorce or one spouse dies, the protection provided by tenants by the entirety co-ownership ends, thus making it completely useless.  As with liability insurance, exemption planning is best used as one layer of an overall asset protection strategy.

Tip #3 – Business Entities Protect Business and Personal Assets from Lawsuits

The various types of business entities include partnerships, limited liability companies, and corporations.  Business owners need to mitigate the risks and liabilities associated with owning a business. Business entities can also help real estate investors mitigate the risks and liabilities associated with owning real estate.  The right structure for your enterprise should take into consideration asset protection, income taxes, estate planning, retirement funding, and business succession goals.

Business entities can also be an effective tool for protecting your personal assets from lawsuits.  In many states, in addition to the protections offered by incorporating, assets held within a limited partnership or a limited liability company are protected from the personal creditors of an owner.  Depending on the type of business entity and the state of formation, the personal creditors of an owner may be prevented from taking control of the business.  Instead, the creditor is limited to a “charging order” which only gives the creditor the rights of an assignee.  This is beneficial to the owners, because an assignee generally only receives distributions from an entity if, and when, the distributions are made.
 
Planning Tip:  Creating a business entity that protects your assets from lawsuits involves much more than just filling out some forms with the state and paying an annual fee.  Business formalities must be observed and documented, otherwise a creditor can attack the entity through “veil piercing” or “alter ego” arguments, which could result in personal liability for your business’s actions or debts.  Additionally, state laws governing business entities vary widely and are constantly changing due to legislative action and court decisions.  As a result, it is critical to properly chronicle business activities and modify the business’s governing documents as applicable laws change. 

Miller, Miller & Canby’s business law attorneys can help you remain in compliance to thwart any potential challenges to your entity.  And remember, as with liability insurance and state law exemptions, the use of business entities is just another layer of an overall asset protection strategy that should coordinate with other asset protection strategies.

Protecting Your Assets

We highly recommend that liability insurance, state law exemption planning, and business entities be used together to create a multi-layered asset protection plan.  The business & estate planning attorneys at Miller, Miller & Canby are experienced with helping business owners, real estate investors, board members, retirees, physicians, practitioners, and others create and maintain effective liability protection plans.

David A. Lucas
is an attorney in the MM&C's Estates & Trusts and Business & Tax practice groups, focusing his practice in Estate Planning, and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.
 





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