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

Trade Secret Misappropriation Remedies

Considerations In Determining Whether To Grant To A Prevailing Trade Secret Misappropriation Plaintiff A Permanent Injunction In Addition To Substantial Damages

By Paul E. Freehling on August 7th, 2012 Posted in Trade Secrets

When a plaintiff alleging trade secret misappropriation obtains a judgment for substantial damages, the award may serve solely to compensate for past wrongs, or it may redress both past and future injuries.

The plaintiff filing a post-trial motion for the entry of a permanent injunction presumably is claiming that the defendant’s continued use of the misappropriated trade secrets will cause damages that were not included in the judgment. Under what circumstances should this post-trial motion be granted?
There are prerequisites that apply to every motion for an injunction. These include a showing of irreparable harm in the absence of an injunction, inadequate remedy at law, balance of the hardships favoring the moving party, and little or no injury to the public interest. Further, the injunction must be tailored to the specific case and no broader than necessary to provide complete relief. Some jurisdictions require proof by clear and convincing evidence that each of the foregoing requirements is satisfied.

Having just been tagged with an award of money damages, the party opposing the motion for a permanent injunction is likely to argue that any alleged future grievance — just like past harm — can be remedied by suing at law. An additional argument could be that the damages award constituted adequate relief for both past and future injuries. For example, if the trade secret involved in the case is a compilation of customer and market data that becomes stale over time, and if a period of years has elapsed between the misappropriation and the judgment, there may be no future injury for which compensation will be owed. On the other hand, highly technical and sensitive data may have a longer useful life that continues for an extended period.
A requested injunction, following a substantial damages award, that prevents a former employee — even one who misappropriated trade secrets — from pursuing the occupation for which she or he is trained may be scrutinized more closely than an injunction ordering that confidential information be returned or not used. Similarly, a request for an injunction that would prevent the defendant from doing business with a customer whose relationship with the defendant pre-dates the misappropriation may be suspect.

In a few recent decisions, courts have indicated more reluctance to enter an injunction with respect to a trade secret developed not by the party seeking the injunction but by an entity that merged with or was acquired by the movant. Some courts presented with a motion for entry of a permanent injunction after a large damages judgment in a misappropriated trade secrets case also have expressed skepticism about the need for the requested injunctive relief if there was no earlier attempt to obtain a preliminary injunction.
In short, there can be obstacles to obtaining both a lot of money and a permanent injunction as a result of a trade secret misappropriation. However, in an appropriate case, those obstacles may be overcome.

How Should You Title Your Bank Accounts?

What You Should Know About Ways to Title a Bank Account
by Tom Bouman

1.         What is the importance of bank account titling?
 

In the context of estate planning, the way an account is titled is critical.  The choice often determines who will inherit the account after the account owner’s death.  In many cases, the account owner’s will or living trust is irrelevant.

For example, consider an account that is titled jointly between Parent and Child A.  If Parent dies, Child A inherits the account regardless of whether Parent’s will directs equal distribution to Child A and Child B.    
 

2.         What are the ways to title a bank account?
 

Arizona law permits several ways to title a checking account, savings account, or Certificate of Deposit, whether at a bank or credit union:

• Single party account.  This type of account is owned by an individual person.  If the owner dies, the account is subject to probate and would be distributed in accordance with a valid will.     
   
• Single party account with Pay-on-Death designation.  Also owned by an individual person, this account is paid directly upon death to the named beneficiary.     
   
• Multiple party account without right of survivorship.  This type of account is owned by two or more persons.  If one of the owners dies, the surviving owner or owners still have access to the account, but the portion contributed by the deceased owner is subject to probate. 
   
• Multiple party account with right of survivorship.  Also owned by multiple persons, this account passes without restriction to the surviving owner or owners.  When there are no surviving owners, the account is subject to probate and would be distributed in accordance with a valid will of the last owner to die.      
   
• Multiple party account with right of survivorship and POD designation.  This type of account adds a pay-on-death designation, which pays the account directly to the named beneficiary when all account owners have died.     

• Trust.  This type of account is technically held by a trustee.  Although the trust never dies, control of the account will transfer to a successor trustee in accordance with provisions outlined in the trust document. 

3.         What is a Pay-on-Death Designation?
 

A Pay-on-Death Designation (“POD”) is a probate avoidance technique that can be added to the titling of a bank account.  If used, the bank will have a record of the death beneficiary for the account.  Upon the death of the account owner, assuming the named beneficiary is alive, the funds in the account belong to the beneficiary.  If there are multiple beneficiaries, then the funds in the account belong to the named beneficiaries in equal amounts.  If there are no surviving named beneficiaries, then the POD designation is disregarded and the funds in the account belong to the estate of the deceased owner; i.e., subject to probate. 
 

4.         May an Investment Account have a Pay-on-Death Designation?
 

Yes, an investment account may have a POD designation, although it is properly described in Arizona as a transfer-on-death (“TOD”) designation.  Some financial institutions may use the term “in trust for” (ITF) to describe the same concept as the POD or TOD designation. 
 

5.         Why not name Child as joint owner of all accounts owned by Parent?
 

Many elderly persons add a child as joint owner of bank or credit union accounts during their lifetime.  Estate attorneys rarely recommend this strategy for many reasons including:

• Exposes the parent’s assets to the child’s creditors.  If the child is sued, the child must disclose the joint account to the court.  The burden falls on the child to convince a court that the child contributed nothing and that the account really belongs to the parent.  Similarly, the account would be a reportable asset if the child filed for bankruptcy.
• Parent loses full control of the account.  Although intended to facilitate a child helping the parent, a controlling child or the jealousy of other siblings could spoil the arrangement.  Similarly, if the child needs money, there is nothing to prevent the child from taking it without permission. 
• Assumes the child is a saint.  The parent can only hope the child “does the right thing” and uses the joint account to pay estate bills and then shares it with other beneficiaries as directed in the parent’s will or living trust.  The child’s attorney would be correct under the law to counsel the child otherwise.

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

"The renown that riches or beauty confer is fleeting and frail; mental excellence is a splended and lasting possession."  Sallust