by Mat Sorensen | Dec 10, 2013 | News
The end of the year is an excellent time to consider whether you should dissolve an unused business entity. Perhaps you have an LLC that once owned a rental property or an s-corporation that once operated a business. If there are no longer operations or assets in your entity and there is no intention to place new business or assets in the entity, then you should consider dissolving your entity.
Dissolution is the legal method of closing an entity and its registration with the state. Following dissolution, the entity is no longer active with the state and you cannot operate a business in the company name. There are a number of reasons to dissolve an inactive entity. First, dissolution will end annual on-going fees that are charged by the state (I’m talking to you California clients). Second, dissolution and the filing of a final tax return (where applicable) for the company will end on-gong tax return reporting. This is of particular benefit to corporations and partnership LLCs as they are all required to file annual tax returns. If the company ends up being dissolved after January 1st then you may end up being required to file a 2014 tax return for the company and may also be subject to 2014 state fees.
If a claim or lawsuit is later filed against the dissolved entity, the corporate veil will still be available to protect the business owner’s personal assets from the business so long as the liability arose when the entity was in good standing. As a result, owners of a dissolved a entity still receive liability protection from the company for liabilities that occurred when the entity was active and registered.
A proper dissolution requires a filing with the state of organization/incorporation as well as the drafting or company minutes documenting the dissolution and wind down of the company. Remember, you will also want to inform you accountant as to the dissolution to insure that a final tax return is filed. Contact the law firm at 435-586-9366 if you are need of a dissolution by year end.
By: Mat Sorensen
by Mat Sorensen | Dec 3, 2013 | News
The IRS recently announced the 2014 retirement plan contributions limits. The only significant changes in contributions amounts were for SEP IRAs Defined Benefit Plans. SEP IRA annual maximum contributions increase in 2014 from $51,000 to $52,000. Defined Benefit contributions increase in 2014 from $205,000 to $210,000.
Contributions limits for Roth and Traditional IRAs remain unchanged with annual contribution limits of $5,500 and an additional $1,000 for those 50 and older. Also unchanged are 401(k) employee contributions which remain at $17,500 annually with an additional $5,500 for those 50 and older.
On the HSA and FSA fronts there are two major changes for 2014. First, amounts placed into an FSA (flexible spending accounts) can now roll over from year to year. Previously, amounts placed in a FSA were subject to a use it or lose type system. HSA contribution limits increase in 2014 for individual accounts from $3,250 to $3,300 and for family accounts from $6,450 to $6,550.
All of these accounts provide tax advantageous ways for an individual to either save for retirement or to pay for their medical expenses. If you’re looking for tax deductions, you should determine which of these accounts is best for you. Keep in mind there are qualification and phase out rules that apply so make sure you are getting competent advice about which accounts should be set up in your specific situation.
By: Mat Sorensen
by Mat Sorensen | Oct 1, 2013 | News
The SEC’s final regulations implementing the JOBS Act and allowing advertising in the raising of capital went into effect last week on September 23, 2013. This is a significant change in the laws relating to the raising of capital and is one that has been discussed and written about extensively. Prior to last week all raising of capital by real estate investors or small business owners needed to consist of private methods whereby the person raising capital could only talk to persons whom they knew or had a prior relationship with. They could not make a “solicitation” for investment from anyone else without having to go and do an extensive and costly public SEC Offering.
Under the new rules in effect last week, those raising capital may now make public solicitations to anyone and may make presentations at meetings or seminars, on websites, or through social media and they don’t have to work with people they know or have a prior existing relationship with.
In order to comply with the new rule, known as Rule 506 (c), those raising capital must create offering memorandum and legal documents in accordance with the new rules and must make a notice filing to the SEC to claim compliance with the new law. Additionally, the new advertising rules will only allow those raising capital to accept funds from accredited investors. Accredited investors are those who have $1M net worth (excluding equity in residence) or $200K annual income single or $300K income married. The person raising capital must take steps to verify an accredited investors status and can’t just rely on the investor stating that they are accredited. While some offerings do allow for up to 35 unaccredited investors, the rule allowing for unaccredited investors cannot be applied when advertising has been used in the offering and as a result is not available under the new rule.
by Mat Sorensen | Sep 10, 2013 | News
Many self directed IRA investors misunderstand or are unaware of the protections afforded to their IRA (Roth or traditional) as it relates to creditors and judgments. This article seeks to address the key areas of the law that every self directed IRA investor should know.
First, your IRA is not always exempt from creditors up to $1Million. Many IRA owners believe that federal law protects their IRA from creditors up to $1M. While Section 522(n) of the federal bankruptcy code protects an IRA owner’s IRA from creditors up to $1M, this protection is only provided to IRAs when an account owner is in bankruptcy. If the IRA owner is not in bankruptcy then the creditor protections are determined by state law and the laws of each state vary. For example, if you reside are a resident of Arizona then your IRA is still protected from creditors up to $1M even without filing bankruptcy. The approach Arizona takes is the most common, however, many states protections for IRAs outside of bankruptcy are extremely weak. For example, if you are a resident of California then your IRA is only protected in an amount necessary to provide for the debtor and their dependents. That’s a pretty subjective test in California and one that makes IRAs vulnerable to creditors.
Second, while your IRA can be exempt from your personal creditors, as explained above, it is not exempt from liabilities that occur in the IRAs investments. For example, if your IRA owns a rental property and something happens on that rental property then the IRA is responsible for that liability (and possibly the IRA owner). As a result, many self directed IRA owner’s who won real estate or other liability producing assets utilize IRA/LLC’s which protect the IRA and the IRA owner from the liability of the property.
Third, if the IRA engages in a prohibited transaction under IRC Section 4975 then the IRA is no longer an IRA and is no longer exempt from creditors. Despite the bankruptcy and state law protections outlined in my first point above, if a creditor successfully proves that a prohibited transaction occurred within an IRA then account no longer is considered a valid IRA and therefore the protections from creditors vanish. There seems to have been an increase in creditors who are pursuing IRAs, particularly self directed IRAs, and I have been representing more and more self directed IRA owners in bankruptcy and other creditor collection actions in defending against prohibited transaction inquiries.
In summary, the best way to protect your self directed IRA from creditors is to understand the rules that govern your self directed IRA and to seek counsel and guidance to ensure that your retirement is available for you and not just your creditors.
by Mat Sorensen | Aug 27, 2013 | News
Many business owners and investors are entering into contracts for investments, equipment, services, and other business needs. Many of these contracts contain “boilerplate” clauses at the end of the contract that are often overlooked and are taken for granted. This article outlines some of those key terms and explains why you should seek to have them in your contracts.
1. Indemnification. You’ve seen this clause and you’ve maybe even read the language and thought, what does this cover? Let’s take a contract between a Buyer and Seller in a business sale. In that contract the indemnification clause may read something like this, “Buyer agrees to indemnify Seller from all causes of action, losses, damages, and claims made against Seller that are a result of Buyer’s actions.” In other words, if the Seller is sued by a third party for something that the Buyer did then the Seller has a contractual claim to bring against Buyer to make the Buyer responsible for the damages or claims they caused. This is an important contractual term between service providers, customers, joint venture partners, and buyer’s and seller’s of investments or assets, and it essentially shifts the burden from the innocent party to the party responsible for creating the liability. Now, in the example outlined above the clause is between Buyer and Seller but the clause as written only protects Seller from Buyer’s actions. What about the Buyer? Are they protected from Seller’s actions. When reviewing contracts make sure that the indemnification clause provides protection for you and your business and not just for the other guy. Often times the indemnification clause will only provide the indemnification protection to one party and leaves the other party to fend for themselves. This can be remedied by creating a similar clause in favor of the other party.
2. Severability. This clause usually says something like, “If a Court holds that there is an invalid or illegal term in the contract that specific provision shall be severed from the contract but the rest of the contract’s terms shall have full effect.” Generally, if a contract has an invalid or illegal term it typically makes the entire contract invalid, unless the contract contains a severability clause as explained above. For example, lets say you loan money to someone and your promissory note to the borrower contains an interest rate that is too high and is usurious under law. If that happens, the contract would be ineffective entirely, however, with a properly drafted severability clause, the contract can survive and the usurious rate itself would be reduced to the maximum rate allowed by law.
3. Attorney’s Fees. Many investors and business owners who win cases in Court are often disappointed with the legal process because even though they’ve won their case they are typically left with a large legal bill that they end up having to pay. However, if the lawsuit is regarding a contract and if the contract contains a provision for attorney’s fees then the party who wins in court not only wins the case but can also get their attorney’s fees paid by the other party.
Understanding your contracts is vitally important and having clauses that protect your interests will limit your liability and will allow you to more fully recover your losses. Remember, in cases between parties in a contract, the terms of the contract are the law. You might as well write them in your favor.
by Mat Sorensen | Aug 20, 2013 | News
When an owner of a retirement account passes away, their retirement account is passed on to the heirs of that account as they are designated on the account owner’s beneficiary designation form. The taxation and distribution rules are different depending on whether the beneficiary of an account is a spouse or a non-spouse beneficiary. If the beneficiary is a spouse, there are additional tax deferral options. The recently enacted Pension Protection Act took effect a few years ago and significantly changed the rules with respect to taxation and distribution of retirement accounts. Please find a summary of the new options below.
Stretch Option only for Spouse
1. Stretch Option. A spousal beneficiary has the most opportunity to continue to defer payment of tax since a spouse can roll their deceased spouses account over to a new or existing IRA in the surviving spouse’s name. If the surviving spouse has not yet reached the date by which he or she is required to take distributions from the IRA account (age 70½), the assets can remain in the account and can continue to grow tax-deferred until the surviving spouse reaches 70½. If the surviving spouse is years away from age 70½ , naming the spouse as a beneficiary is the best strategy to take advantage of the continued tax deferral because you delay the payment of tax and can continue with tax deferred growth until the surviving spouse reaches age 70½.
Options for All Beneficiaries
1. Disclaim the IRA. Any beneficiary can disclaim his or her interest in the deceased persons retirement account and thereby pass the account to secondary beneficiaries who may be in a lower income tax bracket. This may be beneficial to a surviving spouse who is already 70½ and cannot stretch out the tax deferral benefits of the account and who is also in a high income tax bracket. By disclaiming the account interest, the account would go to the secondary beneficiaries (typically children) who may be in a lower income tax bracket.
2. Lump Sum. Any beneficiary can take a lump sum distribution from the account free of penalty but if you take a lump sum distribution you will also take a lump sum tax bill.
3. Five Year Rule. Any beneficiary can take distributions from the retirement account over a five year period. This is beneficial because it allows for continued tax deferral over a period of five years and will help a beneficiary avoid taking a large lump sum distribution which will likely push that beneficiary into a high income tax bracket.
4. Life Expectancy Rule. This option is available when the retirement account holder passes away before he or she reaches age 70½. A beneficiary may take distributions from the retirement account based on the life expectancy of the inheriting beneficiary. If the inheriting beneficiary is younger in age the inheriting beneficiary will be able to maximize tax deferral over a longer period of time because the IRS gives them longer to live and therefore more time to make distributions. If the beneficiary is older in age, the IRS will require larger yearly distributions to make it more likely that the funds will be distributed over the inherited beneficiary’s life time.
See Through Trusts
The IRS has indicated that a “see through” trust may be named as a beneficiary of the retirement account and the IRS will “see through” the Trust itself directly to the Trust’s beneficiaries. Because Trusts pay taxes at higher rates than individuals, we need to make sure that the Trust is considered “see through” so that the account may pass directly through the Trust to the beneficiaries. The requirements of a “see through” Trust are as follows:
1. Trust must be valid under state law;
2. Beneficiaries must be determined from the Trust;
3. The Trust must be irrevocable or become irrevocable at the death of the retirement account owner;
4. Documentation of your trust must be provided to your plan administrator;
5. All Trust beneficiaries must be individuals.
If you are uncertain as to whether your Trust qualifies as a “see through” Trust, please contact the law firm for an analysis. If your Trust requires an Amendment so that it qualifies as a “see though” Trust, we can prepare an Amendment to the Trust.
When naming beneficiaries to your retirement accounts, we typically recommend that you name your spouse as a beneficiary first (if you have one) and then your “see through” Trust or your children second. There are some important estate planning considerations here when naming a trust so make sure you consult with a competent attorney.
