Top 3 Mistakes In Do-It-Yourself Estate Plans

The Internet has allowed families to prepare basic estate planning documents from documents on-line and at affordable prices. However, the increase in affordability and convenience found on the web has created a false sense of security and inadequate planning that has caused disasters for many families as many do it yourself estate plans fail to provide the kinds of benefits and protections that one should typically be afforded in a well drafted and planned estate. Here is a summary of the top three mistakes I’ve seen from individuals who completed their estate plan on their own. The sad reality is that two of these three mistakes listed below are from actual clients who hired me to represent them in a lawsuit with other families/heirs in probate court because their parent made a drastic mistake when completing their estate plan on their own.

1. Improper Signatures and Witnesses for Wills- Most states require the signature of the person creating the will as well as two witnesses to the will. The only exception to the two witness requirement in most states is a holographic will, which is a handwritten will with the signature of the person creating the will. Failure to adhere to the signature and witness requirements invalidates the entire will. It doesn’t matter how good it looks or how many terms you included, if the signature and witness requirements are not followed then the will is invalid.

2. Failure to Fund the Trust- Most individuals who create a revocable living trust on their own fail to actually fund the trust with the assets from their trust. Funding a trust means that you actually put the assets you want to be controlled by the trust in the name of the trust. For example, if you want your home to be subject to the terms in your trust then you need to deed the home out of your personal name and into the name of the trust. If the property is not deeded into the trust it falls outside the trust terms and your heirs will need to go to probate court to get a judge to approve any transfers of title to the property following your death. In addition to real property, stock or LLC ownership needs to be transferred into the trust and insurance, investment, and savings accounts should be put in the trusts name or the trust should be listed as a beneficiary. Failure to properly fund your trust will typically result in probate court for your heirs.

3. The General Forms May Not Address Your Unique Situation- Most families have at least one unique situation to their estate that is typically not covered by standardized documents found on the web. For example, perhaps you have a child who is financially irresponsible but the rest of your children are not. Do you know how to use the forms to create an adequate plan that takes into account the financially troubled child while at the same time not adversely affecting the inheritance of the children without financial problems? Or, maybe you have an estate that has more debt than assets. Do you know how to plan the estate to leave the most to your family and the least to your creditors? Or, perhaps you have assets in multiple states, or are married to a spouse with children from a prior marriage, or are a same sex couple in a state without civil unions or gay marriage. The list could go on and on but the unique situations that arise are rarely handled properly when you’re doing your estate plan on your own.

If you completed your estate plan without the assistance of a lawyer, consider having a lawyer review your documents to get an idea of your estate and your goals to ensure that you have the right estate plan for your family. Or, if you know your in need of a new plan, you can revoke the old do it yourself plan and can replace it with a new plan that has been carefully considered by an attorney experienced in estate planning. Please contact us at the law firm if we can be of further assistance at 435-586-9366.

Do I Need Foreign Corporation Registration?

Many business owners and investors doing business in multiple states often ask the question of whether their company, that is set up in one state needs to be registered into the other state(s) where they are doing business. This registration from your state of incorporation/organization into another state where you do business is called a foreign registration. For example, let’s say I’m a real estate investor in Arizona and end up buying a rental property in Florida. Do I need to register my Arizona LLC that I use to hold my real estate investments into Florida to take ownership of this property? The answer is generally yes, but after reviewing a few states laws on the subject I decided to outline the details of when you need to register your LLC or Corporation into another state where you are not incorporated/organized. (Please note that the issue of whether state taxes are owed outside of your home state when doing business in multiple states is a different analysis).

Analyzing the Need for Foreign Registration

In analyzing whether you need to register your out of state company into a state where you do business or own property it is helpful to understand two things: First, what does the state I’m looking to do business in require of out of state companies; and Second, what is the penalty for failure to comply.

State Requirements for Businesses

First, a survey of a few state statutes on foreign registration of out of state companies shows that the typical requirement for when an out of state company must register foreign into another state is when the out of state company is deemed to be “transacting business” into the other state. So, the next question is what constitutes “transacting business”. The state laws vary on this but here are some examples of what constitutes “transacting business” for purposes of foreign registration filings.

  1. Employees or storefront located in the foreign registration state.
  2. Ownership of real property that is leased in the foreign registration state. Note that some states (e.g. Florida) state that ownership of property by an out of state LLC does not by itself require a foreign registration (e.g. a second home or maybe land) but if that property was rented then foreign registration is required.

Here is an example of what does not typically constitute “transacting business” for foreign registration requirements.

  1. Maintaining a bank account in the state in question.
  2. Holding a meeting of the owners or management in the state in question.

So, in summary, the general rule is that transacting business for foreign registration requirements occurs when you make a physical presence in the state that results in commerce. Ask, do I have employees or real property in the state in question that generates income for my company? If so, you probably need to register. If not, you probably don’t need to register foreign. Note that there are some nuances between states and I’ve tried to generalize what constitutes transacting business so check with your attorney or particular state laws when in question.

Failure to File Foreign Registration

Second, what is the penalty and consequence for failing to file a foreign registration when one was required? This issue had a few common characteristics amongst the states surveyed. Many company owners fear that they could lose the liability protection of the LLC or corporation for failing to file a foreign registration when they should have but most states have a provision in their laws that states something like the following, “A member [owner] of a foreign limited liability company is not liable for the debts and obligations of the foreign limited liability company solely by reason of its having transacted business in this state without registration.” A similar provision to this language was found in Arizona, California and Florida, but this provision is not found in all states that I surveyed. This language is good for business owners since it keeps the principal asset protection benefits of the company in tact in the event that you fail to register foreign.  On the other hand, many states have some other negative consequences to companies that fail to register foreign. Here is a summary of some of those consequences.

  1. The out of state company won’t be recognized in courts to sue or bring legal action in the state where the business should be registered as a foreign company.
  2. Penalty of $20 per day that the company was “transacting business” in the state when it should have been registered foreign into the state but wasn’t. This penalty maxes out at $10,000 in California. Florida’s penalty is a minimum of $500 and a maximum of $1,000 per year of violation. Some states such as Arizona and Texas do not charge a penalty fee for failure to file.
  3. The State where you should have registered as a foreign company becomes the registered agent for your company and receives legal notices on behalf of your company. This is really problematic because it means you don’t get notice to legal actions or proceedings affecting your company and it allows Plaintiff’s to sue your company and to send notice to the state without being required to send notice to your company. Now, presumably, the state will try to get notice to your company but what steps the states actually takes and how much time that takes is something I couldn’t find. With twenty to thirty day deadlines to respond in most legal actions I wouldn’t put much trust in a state government agency to get me legal notice in a timely manner nor am I even certain that they would even try.
  4. In addition to the statutory issues written into law there are some practical issues you will face if your out of state company is not registered into a state where you transact business. For example, some county recorders won’t allow title to transfer into your out of state company unless the LLC or corporation is registered foreign into the state where the property is located. It is also common to run into insurance and banking issues for your company until you register foreign into the state where the income generating property, employee, or storefront is located.

In summary, you should register your company as a foreign company in every state where you are transacting business. Transacting business occurs when you have a storefront in the foreign state, employees in the foreign state, or property that produces income in the foreign state. Failure to file varies amongst the states but can result in penalties from $1,000 to $10,000 a year and failure to receive legal notices and/or be recognized in court proceedings. Bottom line, if you are transacting business outside of your state of incorporation/organization you should register as a foreign entity in the other state(s) to ensure proper legal protections in court and to avoid costly penalties for non-compliance.

Performing Due Diligence Before You Invest & The Due Diligence Top 10 List

Before you invest your hard earned savings or your self directed IRA into a “non-traditional” business or real estate investment of another you need to ask some hard questions to the person or business receiving your money. Here are some tips to keep you out of legal trouble and to help you avoid bad investments or structures.

  1. If you don’t understand how the business or investment makes the returns being promised, then don’t invest.
  2. If you aren’t given adequate documents outlining what has been explained to you verbally or what has been put into a presentation then don’t invest.
  3. If you’re told that you can get a commission for bringing others to invest into the same company and if you don’t have a license to receive such commissions then don’t invest. If the investment sponsor is willing to violate the law to pay an un-licensed person to raise money from others then what’s stopping them from misappropriating your money you invested? It is only the law preventing them, which they’ve proved they will disregard.
  4. If you are loaning money for a real estate venture, then demand a deed of trust or mortgage on title to the property protecting your investment. Also, make sure that you get a copy of the title report or commitment showing what position your loan is being placed into when the deed of trust or mortgage is recorded. Many savvy investors (and what all banks do) create lending instructions to the title company closing the real estate transaction and tell the title company to only use the funds being loaned when the borrower signs the note/loan documents, when the title company verifies the priority of the deed of trust you are getting (1st position, 2nd, etc.), and whether all other defects to title have been cleared (and if not cleared, disclosure of what they are).
  5. If you’re investing into a PPM or private offering you should receive lots of documents outlining the investment, the use of funds, the background of those managing the company, and also documents regarding your rights as an investor (e.g. offering memorandum and LLC operating agreement or LP limited partnership agreement). Also, check to see if the PPM or private offering was properly filed with the SEC by going to SEC.gov and checking the company name in the SEC database. If no filing record exists for the PPM or private offering with the SEC then the person raising the funds has possibly disregarded the law. As stated earlier, if someone is willing to disregard the law to get your money what is stopping them from disregarding the law to not pay you back (it’s just the law)?
  6. Investigate the background of the person you are entrusting your money with. When you are investing with others you need to think like the bank and do what the bank does. What is this person’s credit worthiness? What is their employment or prior business experience? What is their business or investment plan? What are the terms of the investment? Is there a realistic rate of return that fairly recognizes the risk being taken?
  7. If you are pressured that this opportunity will pass if you don’t invest now, then let the opportunity pass. Most scams use this technique and most legitimate investments never have this funding crisis.
  8. Make sure a lawyer representing your interests reviews the documents. If a lawyer drafted the documents already it is still important to have a lawyer look at the documents as they relate to your interests and with an eye towards protecting you. Sometimes, unfortunately, the devil is in the details and many investments have clauses that can significantly impact your ability to get your money back out or that give the company raising the money the ability to pay whatever compensation to themselves they desire. These are obvious problems that will eat into the bottom line of the profits you may be expecting.
  9. Seek the opinion of another investor, business owner, or friend whose opinion you trust. Sometimes, when you explain the investment to someone else they can help you find issues to consider and questions you should be asking.
  10. Be comfortable saying no and only invest what you are willing to lose. Non-traditional investments have made many millionaires over the years but they have also caused lots of financial ruin. Just keep the risk in perspective and don’t “bet the farm” in one deal.

Don’t be scared about investing into non-traditional investments. Just remember though that you may need to get out of your comfort zone by asking lots of questions, by demanding additional documentation, or by simply saying no. Remember, you are the best person to protect yourself.  So do it.

Obama Budget Includes Wish to Limit Retirement Account Size to $3 Million

Many clients have e-mailed me about President Obama’s new budget proposal which seeks to limit the collective size of an individuals retirement accounts (including IRAs and 401(k)s) to $3 Million dollars. This measure does not contain specifics but does indicate that it will raise $9 Billion dollars over a decade for the federal government to spend. Opposition to this measure has been significant and I was surprised to hear that the government would seek to limit how much one could save and invest for their retirement in a retirement account. As I heard about the proposal and read other articles on this new cap on retirement plans I realized that I needed to go to the actual budget proposal to see for myself what it contained. When I read the actual budget I learned two important things.

First, the budget proposal as a whole actually has some provisions that are good for retirement plans and encourages American savings. Obama’s budget includes a proposal to exempt accounts with $75,000 or less from required minimum distribution rules. Also, the budget proposal provides rules requiring employers with 10 or more employees who do not offer a retirement plan to at least offer direct deposit IRA accounts to their employees to be funded by employee contributions. Also, the IRS would double the federal credit from $500 to $1,000 to employer’s who offer employer sponsored plans such as 401(k)s to their employees. So, there are some good things for retirement plans in the President’s agenda. The $3 Million cap has understandably overshadowed everything else though.

The second thing I learned is that the budget is a wish list of sorts for President Obama that doesn’t reflect reality of what he has already signed into law and what is politically practical. For example, the budget proposal includes measures to reduce the estate tax exemption to $1M and to increase taxes on individuals making more than $200,000 a year. If you recall, President Obama signed into law an estate tax exemption of over $5M and raised taxes only on individuals making $400,000 or more.  And this was only three months ago. So, keep this proposal in context, as it requires the approval of house republicans and a closely divided senate. Bottom line, many of these provisions, including the retirement plan cap proposal, amounts to a long shot wish list and we will have to see how the proposal gets sorted out over the coming months. In the meantime, write your Congressman and Senator if you don’t like having a cap on how much you can invest and grow your retirement account.

The Not So Well Known Benefits of Roth IRAs

Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that after you pay taxes on the money going into the Roth IRA that the plans investments grow tax free and come out tax free.  That being said, there are so many more benefits to the Roth IRA that need to be noted. I’ll note just three.

First, Roth IRAs are not subject to RMD. Traditional retirement plan owners are subject to rules known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time.

Second, a surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or can combine that Roth IRA into their own Roth IRA.  Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. A traditional IRA on the other had cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account. Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.

Third, Roth IRA owner’s are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and to taxes too but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out funds penalty and tax free).

Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.

Utilizing Multiple LLCs & A New Series LLC State

Last year Kansas became the ninth state to adopt a Series LLC statute and their law is now in full effect. A Series LLC allows a real estate investor with multiple properties to increase their asset protection by minimizing their liabilities between properties.  But before we explain how Series LLCs work and the states where it is available it is helpful to first explain how many properties you should hold in a regular LLC.

Most real estate investors use a limited liability company (“LLC”) to hold their properties as the LLC protects the owner of the LLC from the liabilities of the business/property. In other words, if something goes wrong on a property the tenant/plaintiff is forced to sue the LLC and cannot sue the owner of the LLC personally or get at the LLC owner’s personal assets. However, the plaintiff in a suit against an LLC is able to go after the assets of the LLC, which would include the property and anything else in the LLC. So, if you have multiple properties in one LLC the plaintiff can go after all properties. In order to avoid this liability situation investors can separate out the properties among multiple LLCs so that if something goes wrong in one property that liability is contained in the LLC that holds only that property and the other properties held in their own separate LLCs are outside the reach of the plaintiff. The benefit to multiple LLCs is that you can have separate liability protection for each property but the downside is that you have additional costs in setting up and maintaining additional LLCs.

When determining whether to put multiple properties in one LLC or whether to put separate properties into their own LLC the primary issue is how much equity is between the properties because the equity in the properties is what is being protected in a multiple LLC scenario. As a general rule we typically advise clients to use multiple LLCs when they have $200,000 in equity between properties in an LLC (or will have with a new property).  At this level of equity there is enough value to protect between the properties to outweigh the cost of the new LLC set up. If there is only $10,000 in equity between multiple properties in an LLC, because each property is fully mortgaged, then there is less equity to protect and we wouldn’t recommend separate LLCs for asset protection purposes. Additional factors to consider in determining whether to establish multiple LLCs for your properties are the type of properties (e.g. multi-family would be more in need versus single family) and the location of the properties.

In nine states as well as the District of Columbia and Puerto Rico, a real estate investor can set up what is called a series LLC. A series LLC provides for what are called sub-series and each sub-series (essentially its own LLC) holds its own property and gets separate liability protection. This is all accomplished in one Series LLC filing to the state and then one tax return for the series LLC but allows for an unlimited amount of sub series and as a result allows real estate investors to have each property they own treated separately for asset protection purposes. So, for example, a series LLC owner would own one property in Series 1 of ABC Investments, LLC, a series LLC, and then Series 1 would own one property. If something happens on the property in Series 1 then the liability is contained there and Series 2, 3, 4,5 etc. cannot be attached or otherwise subject to the liability of Series 1.

The Nine states with a true Series LLC statue are; Delaware, Iowa, Nevada, Utah, Illinois, Oklahoma, Texas, Tennessee, and now Kansas.

I should note that Minnesota, Wisconsin, and North Dakota offer an LLC called a Series LLC but it is confusingly different from what I have described as a Series LLC as these states only allow for different interests of ownership of the LLC but don’t allow for separate treatment of each series for assets and liabilities. Be weary in these three states when creating a Series LLC, as it may not be what you are expecting.

Keep in mind that the Series LLC structure only works when you have properties in the states that recognize Series LLCs. For those with properties in states without a Series LLC statute, we recommend the traditional multiple LLC structure described above to obtain the increased asset protection amongst multiple properties. For assistance in analyzing whether your asset protection structure would benefit from multiple LLCs or a Series LLC please contact the Law Firm at 435-586-9366.