What You Should Know About Estate Planning for Minor Children

 What You Should Know About Estate Planning for Minor Children
by Tom Bouman

1.         How do you name a guardian for minor children in an estate plan?


Parents of minor children should nominate guardians in a properly signed will.  In the event of death, when there is no surviving parent, the local probate court would be responsible for appointing a guardian for any surviving minor children.  The person nominated in the will is the likely choice of the court, provided that the nominated person is willing and able to serve after a background check.

2.         How should money be left for a minor child?


There are three primary methods for the handling of money left to a minor child. 

·         Court-appointed Conservatorship.  In a conservatorship, the probate court appoints an adult as conservator to manage the child’s property until the child turns age 18. The conservator is required to file annual accountings with the court. 

·         Custodianship under Arizona Transfers to Minors Act.  In a custodianship, an adult is authorized by law to manage a child’s property until the child turns age 18 or 21 depending on how the custodianship was authorized.

·         Trust.  In a trust, an adult is appointed as trustee to manage a child’s property in accordance with the provisions specified in the trust document. 

The best option by far is to leave the property in trust for benefit of the child.  A trust provides maximum flexibility and privacy.  To illustrate, note how the other two available options – custodianship and conservatorship accounts – require outright distribution of the asset at age 18 or 21.  A trust can be drafted to retain assets in trust until any age or for the beneficiary’s lifetime.  A trust can also be established for multiple beneficiaries, a feature not available with custodianship or conservatorship accounts.  A trust for a minor child is managed by an adult or trust company (the “trustee”), who does not have to file any reports with the probate court.


3.         How do the assets get into the trust?


After the death of the parents, an asset may only be contributed into trust if the governing document permits it.  The governing document may be a will, living trust, or beneficiary designation.  In some cases the governing document might explicitly choose the trust option.  For example, the deceased parent’s will might say, “My personal representative shall retain the share for Child in trust until Child attains age 30.”  The absence of such language does not necessarily prevent the use of a trust.  A separate administrative provision could give the personal representative discretion to put the funds in trust instead of giving them outright to Child.

The simplest option is for the parents to establish a living trust during their lifetimes.  In the event of their deaths, the trust could just continue for benefit of the children.  Assets outside the trust would be paid directly to the successor trustee and never be subject to court involvement. 


4.         How does a common trust work?


When there are multiple children, a popular option is to funnel all assets into a “common trust” for the children’s mutual benefit instead of splitting the assets into separate equal shares.  The theory is that while at least one of the children is under a specified age, the trustee should allocate funds in the same manner as the parents would if they were alive.  Thus, the trustee of a common trust would be permitted to sprinkle distributions among the children, not necessarily in equal amounts.

The common trust should terminate when the youngest child reaches a specified age (age 23, for example) or possibly when all children have graduated from college.  When the common trust terminates, then the remaining assets, if any, would be divided equally among the surviving children.


5.         May the guardian also serve as trustee?


Parents of minor children should think carefully about whether they want the guardian to also be responsible for managing the assets of the minor children the guardian is raising.  In many cases, if the guardian is entirely trustworthy and responsible, this is the simplest and best option.  However, in some situations it might be better for another person or company to manage the assets.  This will require cooperation between the trustee and the guardian, but it also provides a check-and-balance system for discretionary expenditures. 


6.         Who should be the beneficiary of life insurance?


When there are minor children it does not make sense to name them as beneficiaries of life insurance, or any other assets for that matter.  If the parents have a living trust, the trust should be named as the beneficiary so that life insurance proceeds can be paid to the successor trustee, not directly to the children.  If the parents do not have a living trust, it may be best to name the probate estate as beneficiary so that the life insurance proceeds can pour into a common trust described in the parents’ wills.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Law Offices of Stephen F. Banta, P.L.L.C. 

What You Should Know About Family Limited Liability Companies

Law Offices of Stephen F. Banta, P.L.L.C. 
What You Should Know About Family Limited Liability Companies
by Tom Bouman

1.         What is a Family Limited Liability Company?
The family limited liability company (“family LLC”) is a form of business or investment entity ownership, which seeks to provide its owners with enhanced protection from creditors and, in some cases, substantial estate and gift tax savings.  Its characteristics usually include multiple owners who are related to each other (“family LLC”) and a restrictive operating agreement.

This planning technique is traditionally referred to as a family limited partnership, although the limited liability company (“LLC”) has become the favored entity in Arizona.

The general intent behind the LLC is to encourage business development and investment by offering enhanced creditor protection to its members.  However, an active business is not required; rather any person may transfer personal assets to a LLC and may qualify to receive the same benefits as a business owner.

A family LLC may own almost anything.  The most common assets held by a family LLC are investments such as business property, brokerage accounts and rental properties.

2.         How does a Family Limited Liability Company work?

The owners of the family LLC are referred to as members.  Members are entitled to their respective share of distributions, but they have no control over company operations.  The original owner can maintain day-to-day management control over the assets, if desired; sometimes through a separate management entity.  Thus, a parent can maintain control over the entity, even if children own most or all of the membership interests.

In general, the initial member will be the original owner’s living trust.  Then in future years, the original owner will gift or sell membership interests to children or to trusts for their benefit.

A family LLC is governed by a restrictive operating agreement that defines the terms upon which the company will do business.  For example, the agreement should carefully restrict the rights of a member to withdraw or dissolve the company.  It should similarly restrict the rights of a creditor seeking to enforce a judgment against a member.  As a general rule, a more restrictive operating agreement provides more protection from creditors and higher discounts for tax purposes.

3.         How does a Family LLC protect assets from seizure by a creditor?

A family LLC offers the same benefits as any LLC.  For example, the members can isolate company liability from personal liability.  But when structured properly, a family LLC will provide enhanced protection from seizure of assets by a creditor.  First, the family LLC should be registered in a state with protective laws.  The most protective state laws (including Arizona) provide that a charging order is the only remedy a court can use to seize assets from a LLC.  This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor, but a judge cannot order a distribution of assets.  Second, the family LLC should have more than one member, if possible, because a multi-member LLC provides stronger asset protection than a single member LLC.  Therefore, gifts from the original owner to other family members may be appropriate.  Third, the family LLC should be governed by a comprehensive operating agreement that carefully limits the rights of members and creditors regarding withdrawal, distributions, dissolution, and management of the company.

4.         What are the tax consequences of establishing a Family LLC?

A family LLC may qualify for substantial discounts for estate and gift tax purposes.  The term “discount” means that a membership interest will be valued less for tax purposes than the actual value of the underlying assets.  A qualified appraisal is needed to substantiate the discount, which is usually for lack of control and lack of marketability.  The size of the discount depends on many factors, but may range as high as about 50%.

A family LLC is usually treated as a partnership with flow-through taxation, so income and losses inside the entity are passed through pro rata to the members.

The contribution of business or investment assets to the family LLC is not a taxable event.

5.         How much does a Family LLC cost?

Establishing a family LLC or family limited partnership (either is commonly referred to as an FLP) requires a substantial amount of legal and tax counsel.  The process is much more complicated than establishing a single member LLC to isolate business and personal liability (aka “naked LLC”) and nothing more.  The lawyer who prepares the operating agreement must be familiar with the latest case laws affecting family business entities.  The legal fee may be $5,000 to $10,000 or more.  Ongoing expenses include annual meetings and accounting costs.  Generally, a family LLC is not appropriate unless funded with at least $300,000.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Does Your Bio Impress Others?

If you are a professional, you've likely got a bio page on your company's website.  I'm going to bet that you'd have a hard time topping this one:

Best Lawyer Ever?

What to Do When Your Company Receives A Demand Letter

How to React to a Demand Letter

By Brian P. Sanford (First published on Texas Lawyer)

July 2, 2012

When a demand letter from a plaintiffs employment attorney arrives on an inside counsel's desk, an in-house attorney will want to provide the company with sound legal advice and good business judgment. Exercising both requires carefully examining a demand letter, gathering facts from the plaintiffs attorney at the earliest possible opportunity and exhausting any possibility for immediate resolution.

The best opportunity for in-house counsel to achieve a reasonable settlement is after receiving a demand letter. To provide the best chance for an early resolution, here are a few fundamentals to keep in mind.

1. Don't assume the claim is frivolous. Representing an employee against an employer is daunting. A successful plaintiffs lawyer will not take a marginal case because even good cases are difficult to win.
Statistics on the Equal Employment Opportunity Commission's website show that in fiscal year 2011 the EEOC received almost 100,000 charges of discrimination in the private sector alone.

Around 20,000 suits based on EEOC claims are filed each year in federal court, of which the employee wins about 11 percent of the time, noted Kevin M. Clermont and Stewart J. Schwab in a 2009 article in the Harvard Law & Policy Review, "Employment Discrimination Plaintiffs in Federal Court: From Bad to Worse?" Of course, employees file other suits alleging mistreatment by an employer that do not relate to an EEOC claim, such as worker's compensation retaliation, failure to pay overtime and whistleblower retaliation.

Employment cases are often as difficult as complex commercial cases, involving numerous key witnesses, thousands of documents, events spanning years and many difficult legal issues. If this was not discouraging enough for employees and their lawyers, most damages are capped.
An attorney who represents employees generally receives inquiries daily from potential clients and can only represent a small fraction of those who request services. The attorney must decide whether to invest resources in a possible long-term commitment of professional guidance and representation that may require litigating for years toward trial and appeal.

The first prerequisite for a plaintiffs attorney to consider taking a case is evidence of a good employee and a bad manager. The second is protection in the law. The law does not prohibit many unfair and immoral actions in the workplace, and redress often is not practical to pursue. Examples of such actions include preying on employees as an equal-opportunity harasser, firing an employee in her first year of employment for attending to her child's hospitalization, and terminating an employee based upon a false accusation of sexual harassment.

Plaintiffs lawyers generally send a demand letter believing they can win the claims at trial, after spending hours interviewing the employee, reviewing documents and talking with other witnesses.

2. Don't assume the manager's reasons are credible. Many employment cases involve proof of intentional violation of the law. Because people rarely verbally disclose their illegal motives and because implicit bias may be partly subconscious, most cases turn on circumstantial evidence.

An in-house lawyer reviewing a demand letter should not discount circumstantial evidence. Quoting Abraham Lincoln in its 1992 decision in Hopkins v. Andaya, the 10th U.S. Circuit Court of Appeals acknowledged: "We better know there is a fire whence we see much smoke rising than we could know it by one or two witnesses swearing to it. The witnesses may commit perjury, but the smoke cannot."

A plaintiff provides circumstantial evidence of discrimination or retaliation by showing disparate treatment excused by reasons that lack credence.

Because an attack against a manager is an attack against the company, many businesses will defend a bad manager against a good employee, sometimes to the detriment of the company's operational success because of the fear of liability and the spread of claims. This fear, combined with a company's bureaucratic decision-making process, often makes it difficult to resolve matters early.

But it's worth in-house counsel's effort to work through this challenge. The people who will make key decisions concerning a settlement should examine a manager's decisions closely. Do those decisions withstand comparison to other managers' decisions or that manager's treatment of similar employees? Do the decisions reflect the complaining employee's true performance? If the answer is no, the time to find out is now, not later.

3. Don't assume a high demand means a reasonable settlement is out of reach. Valuing a case is always difficult. In a country where so many people identify themselves by what they do, a dismissal from employment can be deeply personal. Former employees may seek recovery of their identity after, for example, coming to the realization that, despite their efforts to prove themselves, their employers ultimately judged them by their skin color, gender or age. Legal remedies never fully compensate for a severe loss, and a settlement provides even less restitution and closure.

Because defendants tend to negotiate in smaller increments than plaintiffs and will not tolerate an increase in a plaintiff's offer, plaintiffs attorneys must make the initial demand high enough to provide sufficient room to negotiate — not only at the beginning of the process but also throughout litigation, mediation, and trial.
A plaintiffs attorney may be able to provide in-house counsel with a lower range of settlement possibilities for informal discussion while keeping the official offer high. An in-house lawyer should not be afraid to discuss with the plaintiffs attorney the possible range of an ultimate settlement.

4. Do not assume the plaintiffs attorney will give up. Compensation for plaintiffs attorneys usually comes at the end of the case — if at all. The more an attorney works on a case, the more he or she is invested. A contingent fee from a settlement often will leave the attorney not fully compensated, compared to how much she would have earned based on a lodestar hourly calculation. An early settlement is much more likely to provide adequate compensation, providing incentive for an attorney to negotiate early.

But it's not all about the money. Many plaintiffs attorneys represent employees not just for the tangible compensation but also for the intangible rewards that come from choosing to help good people during tough times and knowing that efforts to enforce the law ultimately will benefit others.

What You Should Know About Small Estate Affidavits in Arizona

What You Should Know About Small Estate Affidavits in Arizona
by Tom Bouman

1.         What are Small Estate Affidavits?
Small Estate Affidavits are used in Arizona to transfer assets from a deceased person to the heirs when the total value of the assets is below the minimum value requiring a traditional probate.
Under Arizona law, the general rule is that if a deceased person owned more than $75,000 of equity in real estate, or more than $50,000 of personal property (including physical possessions and money), then a traditional probate is required to transfer the assets to the heirs.  A Small Estate Affidavit may only be used when a traditional probate is not required.
2.         How do you transfer real estate by Small Estate Affidavit?  
If the entire value of the deceased person’s equity interest in real estate is worth less than $75,000, then each property otherwise subject to traditional probate may be transferred using an Affidavit of Succession to Real Property.

When determining the value of real estate for this purpose, the amount of equity interest is calculated by using the current year’s assessed value for property tax purposes less any outstanding debt.  This amount is usually, but not always, substantially lower than the property’s fair market value.  For example, the fair market value may be $250,000, but the assessed value for property tax purposes only $195,000.

Filing the affidavit is a three step process.  First, the affidavit is filed in the probate court in the county where the property is located, along with a certified copy of the death certificate, and the original will if there is one.  Second, after the court returns a certified copy, the affidavit and a certified copy of the death certificate are published in a newspaper of general circulation in the same county.  Third, the as-filed affidavit is recorded in the county where the property is located.  The recording officially transfers the property to the person or persons identified in the affidavit.

3.         What if the property has an outstanding mortgage?

The typical mortgage document will state any transfer of the property will trigger a due-on-sale clause.  Thus, the beneficiary of property subject to a mortgage should contact the lender before making a transfer using the Affidavit of Succession to Real Property.  The mortgage lender does not have to agree to use of the affidavit procedure.  It may prefer a traditional probate action in order to refinance the mortgage.
 
4.         What are the problems with using a Small Estate Affidavit for Real Estate?

The main drawback of using an Affidavit of Succession to Real Property is the person using the affidavit must wait six months after the owner’s death before filing it.  Often the better approach – although more expensive – is to petition for informal probate anyway because it can be opened (and closed) before the six month waiting period would have ended.  Using an informal probate will permit a faster closing than using the Small Estate Affidavit.

When filing the affidavit, the signer must also verify that no estate taxes are due and that funeral expenses, expenses of last illness, and all unsecured debts of the owner have been paid.  In some cases – where the home is basically the only substantial asset – this last item may prohibit the use of the Small Estate Affidavit because sale proceeds are needed to pay these expenses first.
5.         How do you transfer cash accounts and cars by Small Estate Affidavit?
The counterpart to the Affidavit for Succession to Real Property is the Affidavit for Collection of Personal Property.  It is a highly useful tool for closing out small accounts and transferring car titles without much hassle; provided the total value of personal property subject to probate is less than $50,000.  Most financial institutions and the DMV will be eager to accept it.

Unlike the six month waiting period applicable to the Affidavit for Succession to Real Property, the waiting period to use the Affidavit for Collection of Personal Property is only 30 days after date of death.

The Affidavit for Collection of Personal Property is not filed anywhere, but instead is presented to the financial institution or DMV office.  By law, a financial institution is released from liability when it transfers an account to the person or persons identified in a Small Estate Affidavit.

6.         How much does a typical Small Estate Affidavit cost?

An estate attorney will usually agree to handle the process of filing an Affidavit for Succession to Real Property for about $750 to $1,000, plus expenses of several hundred dollars more.  The typical fee for preparation of an Affidavit for Collection of Personal Property is about $250 to $400, with no additional expenses.  Many financial institutions – and the Department of Motor Vehicles – will have pre-printed forms of the Affidavit for Collection of Personal Property available for ready use.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

What You Should Know About Ways to Title a Car or RV in Arizona

What You Should Know About Ways to Title a Car or RV in Arizona
by Tom Bouman

1.         How do I verify ownership of a motor vehicle?

The Motor Vehicle Division (“MVD”) of the Arizona Department of Transportation issues titles for automobiles, recreational vehicles, and mobile homes not affixed to the land.  These titles are evidence of ownership and are the basis for determining who will inherit the asset upon the death of its owner.  There is no public registry of title information, so it is important to keep the title in a safe place.

2.         What are the ways to title a motor vehicle?

Arizona law permits three types of joint ownership on motor vehicle titles.  Presumably they are intended to simplify the choices available, but they can be rather difficult to tell apart.  The types of joint ownership are as follows:

• “John Williams or Susan Williams” – This form of ownership – commonly used by auto dealerships when they sell a vehicle to a married couple – is better described as joint tenancy.  Upon the death of a joint owner, the surviving owner does not need to update the title because it is assumed that either owner has full authority to transfer the motor vehicle.  Upon the death of the remaining owner, the motor vehicle is subject to probate.
• “John Williams and Susan Williams” – This form of ownership is better described as tenancy-in-common.  Upon the death of either joint owner, the interest of the deceased owner is subject to probate.
• “John Williams and/or Susan Williams” – This form of ownership is better described as joint tenancy with right of survivorship.  Upon the death of a joint owner, the surviving owner does not need to update the title because it is assumed that either owner has full authority to transfer the motor vehicle.  Upon the death of the remaining owner, the motor vehicle is subject to probate.  The only substantive difference between the AND/OR and OR designations occurs when a surviving owner wants to transfer the title.  Under the AND/OR designation, the surviving owner must present a death certificate for the deceased owner.  This would not be required when the title uses the OR designation.  

3.         What is the best way to hold title?

From an estate planning perspective, most people – when given a choice – prefer the AND/OR designation to prevent unauthorized transfers during lifetime.  However, auto dealerships regularly suggest the OR designation because it provides the most flexibility, especially useful when a married couple assigns a used car back to the dealership in exchange for a new car. 
 

4.         Is it possible to name a “pay-on-death” beneficiary with the MVD?

Although rarely used, the MVD does offer a form to designate a beneficiary of a motor vehicle.  The form only works if the total net value of the owner’s personal property does not exceed $50,000 at death.  If the form is on-file, the MVD will reissue title in the name of the beneficiary upon presentation of a certified copy of the death certificate.  The form and its instructions are bare-bones simple, which diminishes the usefulness of the form as a flexible planning tool.

For example, the MVD does not permit use of a beneficiary designation when the title is held by more than one person.

5.         What about titling a car in the name of a living trust?

Many people who establish living trusts want to know whether they should transfer their cars into trust.  As a general rule, the answer is no.   It is relatively simple to transfer a car after a death, provided the total equity in all of the deceased’s personal property is less than $50,000.  A rule of thumb is to title a newly acquired car in trust if it is expensive and paid for with cash.

6.         What about leased cars?

A leased car is a liability, not an asset.  The car is titled in the leasing company’s name throughout the duration of the contract.  In the event the lessee (the driver) dies, the lessee’s estate still has an obligation to pay the balance of the contract whether anyone drives the car or not.  There are a few options.  The person responsible for administering the estate could ask if the leasing company will assign the balance of the lease to someone else, or could negotiate a lump sum payment to end the lease.  The amount of the lump sum is usually determined according to a formula in the fine print of the lease contract.  The latter option could be rather expensive, and feel unfair, but it generally is the best option.  As for assigning the lease, there is a small but growing market for lease assignments.

If the deceased person has no assets subject to creditor claims, another option is to just bring the car back to the leasing company and refuse to pay the remaining obligation.  Although the leasing company could sue the estate, there would be nothing for them to get.  But this only works when the deceased person was unmarried and left no assets subject to the claims of creditors.


About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558