By Chris Watkins

Oakland Raiders owner, Al Davis, passed away over the weekend.  Forbes Magazine published an interesting article by Mike Ozanian, discussing the fact that Al Davis’s estate could face hundreds of millions of dollars in estate taxes, based on an estimated valuation of the Raiders at $761 Million.  The article predicts that the Davis family will have to sell its interest in the team in order to pay the taxes.

Although you may not feel too sorry for the family of Al Davis, this story is not uncommon for owners of small family businesses, who are rich on paper, but may not have the cash of other liquid assets with which to pay estate taxes.

By Chris Watkins

Well, in typical Washington fashion, the politicians waited until the very last possible moment to deal with the looming tax crisis that was to occur on January 1, 2011, when the Bush tax cuts were set to expire.  In addition to the multitude of other tax increases that would have hit us, we were facing a dramatic increase in the estate tax rate, along with an equally dramatic decrease in the estate tax exemption.  Also in typical Washington fashion, Congress didn’t enact any legislation that would provide long-term, reliable solutions to our problems.  Rather, they passed very temporary relief, forcing the next Congress to deal with this issue in two years.  However, what they did pass, at least in the short term, was pretty good.  Here is a quick synopsis of the new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (or TRA 2010) as it pertains to estate taxes.

Estate Tax Exemptions and Rates.  For the years 2011 and 2012, the new law sets the estate tax exemption amount at $5 Million per person, with a maximum estate tax rate of 35%.  If not for the TRA 2010, the exemption amount would be $1 Million, with a maximum rate of 55%, which is the exemption and rate that will apply in 2013 if the law isn’t changed again.

Gift Tax Exemptions.  Like the estate tax exemption, the gift tax exemption is now $5 Million for the next two years, increased from $1 Million.  The annual exclusion amount remains $13,000.  In other words, you can make a gift of up to $13,000 per person per year with no gift tax obligations.  Beyond that, you are allowed to gift up to $5 Million gift tax free ($10 Million per married couple).  This represents a potentially HUGE opportunity for families to transfer significant wealth to future generations, tax free.   Remember, this $5 Million exemption is tied to both the estate and gift tax exemptions.  So if you use some of it up during your life, your exemption at death is reduced by the same amount.  There is some speculation about what will happen if someone makes a large gift now and how it will be treated if the law sunsets to the $1 Million exemption amount.  Will it be recaptured by the estate at death?  It seems unlikely the IRS will do that, but you never know.

Portability of Exemptions.  One very interesting change has to do with the ability of spouses to take advantage of each other’s estate tax exemptions.  At least during 2011 and 2012, to the extent you have not used up all of your $5 Million estate tax exemption, that amount can be utilized by your spouse at his or her subsequent death.  The downside to this is that both spouses must die before 2013.  Furthermore, the executor for the first spouse to die must file an estate tax return with the IRS to preserve his or her unused exemption, even if no estate tax is due.

Conclusion.  While these are all good changes to the estate tax laws, they provide very limited benefit from the planning side.  We think you still have to plan with the assumption that Congress will fail to make these changes permanent.  The biggest potential windfall may be in the ability of people to make very large gifts – at least in the short term.

By Chris Watkins

For several years, we have enjoyed ever-increasing estate tax exemption amounts.  Last year (2009), the exemption was $3.5 Million.  This year, there is no estate tax at all.  But beginning January 1, 2011, when the so-called Bush tax-cuts expire (also known as the Economic Growth and Tax Relief Reconciliation Act of 2001), we are facing the largest tax increase in the history of our country.  For this you can thank Congress, which has had years to deal with this, but chose to go home rather than do their jobs.  This means there is virtually no chance that this will be dealt with this year.

So what does this mean for estate taxes?  On January 1, 2011, the estate tax exemption (also known as the applicable exclusion amount) will drop to $1 Million per person, and the highest estate tax rate will increase from 45% to 55%.  This means that if you (either by yourself or with your spouse) have an estate greater than $1 Million, then your estate WILL owe estate taxes to the IRS.

Most people think, “I’m not worth anything near $1 Million.  What’s the big deal?”  One thing many people don’t realize is that you have to factor in the death benefit of life insurance policies you own on your life.  So if you have a house, some retirement savings, and a life insurance policy, you could easily have an estate tax problem.  Actually, the ones who suffer are your children, who will get a smaller inheritance.

For example, if your taxable estate is $2 Million at your death, the estate taxes will be $435,000.   The tax on a $3 Million estate would be $945,000.  And so on and so on.

Fortunately, with a little advance planning, you can prevent a huge amount of your estate being lost to estate taxes.  One common technique is called the “credit shelter trust.”  This allows a married couple to preserve both of their unified credits.  Another technique is called the “Irrevocable Life Insurance Trust” or ILIT.  This involves having an irrevocable trust own life insurance on your life, thus taking it out of your taxable estate.

Unless you are of the mindset that the government SHOULD get more of your money, then you owe it to yourself and to your loved ones to explore your options and do some estate tax planning.  If you would like more information on these or other techniques for reducing your estate, contact us for a consultation.

By Chris Watkins

These days, as many sellers are in a desperate struggle to sell their homes, and many potential buyers are having trouble qualifying for conventional mortgages (because of tougher loan underwriting policies), the result is that seller financing is on the rise.  One form of “seller financing” is the contract for deed.

WHAT IS A CONTRACT FOR DEED?

A Contract for Deed, sometimes referred to as a “land contract” or an “installment sale agreement,” is a form of seller-financing for real estate.  In a typical real estate transaction, the seller transfers title to the buyer (by signing and delivering a warranty deed), and the buyer finances the purchase by borrowing funds from a lender in exchange for a promissory note secured by a deed of trust (or a mortgage).   In some cases, instead of a third party lender getting involved, the seller acts as the “lender” and takes the promissory note and deed of trust.   In either case, title to the property transfers to the buyer at the closing.  If the buyer defaults on the loan, then the lender can foreclose on the property.

With a Contract for Deed, the buyer agrees to make payments to the seller over time, but does not take title until the purchase price is fully paid – often many years in the future (if ever).  If the buyer ever defaults, the seller has the option to take back possession of the property (foreclosure is not necessary because title was never conveyed), and the buyer is out all of the money paid up to that point.

Contracts for Deed are commonly used in situations in which the seller needs to quickly sell the property, but can find no buyer who can qualify for a conventional loan.  In many cases, the seller still owes money on the property and can no longer afford the mortgage payments, so he is looking to the buyer to provide the funds with which to make the monthly payments.  This is very risky, as discussed below.

WHAT ARE THE RISKS?

Whether you are the buyer or the seller, there are numerous risks involved with a contract for deed.

Buyers’ Risks:

• Homes sold through contracts for deed are often sold on an “as is” basis with little disclosure from the seller of defects in the property.  It is highly advisable for buyers to get a thorough inspection.
• If the seller has an existing mortgage/deed of trust on the property, the mortgage document will almost certainly have a “due on sale” clause that will be triggered by a contract for deed.  This means that, unless the lender consents to the contract for deed, the lender can declare the entire loan to be due immediately.  If you are not in a position to pay off the balance of the loan, the property could be foreclosed right out from under you, and you’d have little or no recourse.
• Another risk is that you do everything you are supposed to, and upon making the final payment, you discover that the seller is unable to deliver clean title to you (or any title). For example, there may be liens on the property from the seller’s creditors.  Or perhaps the seller divorces or dies, and various other parties claim ownership.  These are all problems that could require expensive litigation to sort out.
• It is very unlikely that a buyer will be able to get title insurance on the property, at least not until title is conveyed.
• The buyer has no equity in the home until it is fully paid off.  This means that even if you make payments religiously and on time for several years, but if you fall on hard times and fail to make a couple of payments, you could lose the house and all of the money you paid to the buyer.

Sellers’ Risks:

• One obvious risk is that the buyer in a contract for sale transaction is typically someone who could not qualify for a conventional loan.  There are all kinds of reasons why a buyer would not qualify for a loan (poor credit scores, little or no income, high debt, etc.), but they all mean that there is a pretty good risk that the buyer will default at some point.
• If the seller has a mortgage on the property and the buyer fails to make payments or if a “due on sale” clause is triggered, the seller’s lender/mortgage holder may accelerate the loan, thus forcing the seller to come up with funds to pay off the loan or risk foreclosure.
• If there is a fire or other casualty on the property, there may be a dispute about who is entitled to the insurance proceeds.  The seller needs to make sure his interest is insured.  Furthermore, the seller, whose name is on the title, could be forced to defend himself in a lawsuit if someone is injured or killed on the premises.

CONCLUSION

The risks associated with a contract for deed are great and neither buyers nor sellers should enter into such a transaction without careful consideration, and it is advisable for all parties to seek legal counsel.  Even if conventional financing is not an option, there are other alternatives that may be better, such as a simple lease or a lease with an option to purchase, or even seller financing in which the seller conveys title and takes back a promissory note and deed of trust.

By Chris Watkins

As the economy continues to struggle along, thousands of people find themselves getting deeper and deeper into debt-related financial problems – credit cards, mortgages, car loans, and the list goes on and on.  When debt piles up, inevitably you will find yourself having to deal with debt collectors, who sometimes can be rude, deceptive, and abusive.  This article discusses a law passed by Congress as a means to curb such unfair collection practices – the Fair Debt Collection Practices Act.

TO WHOM DOES THE FDCPA APPLY?

The FDCPA generally does not apply to creditors collecting debts owed to them (with the exception described below).  It applies only to “debt collectors” – people whose business is to collect debts for others.  The term “debt collector” also includes any creditor who, while trying to collect his own debts, uses another name to suggest that a third person is collecting or attempting to collect the debt.

Besides creditors collecting for themselves, who else is not considered a “debt collector”?  The law contains several exceptions, including (a) any officer or employee of a creditor who is collecting debts in the name of the creditor for the creditor; and (b) United States or State officials to the extent that collecting debt is in the performance of his official duties.

WHO DOES THE LAW PROTECT?

The FDCPA applies to “consumer debt.”  In other words, it only protects debtors who are natural persons (i.e., human beings, as opposed to business entities), and only with regard to debt that was incurred in a transaction primarily for personal, family, or household purposes.  So if the debt was incurred for a business, or if the debtor is a corporation, LLC, or some other entity, then the FDCPA does not apply.

HOW DOES THE LAW PROTECT DEBTORS?

There are numerous ways in which the law protects consumers from abusive or deceptive behavior from debt collectors.  Here are a few of the key protections:

• Debt collectors cannot harass, oppress, or abuse any person in connection with the collection of a debt.  This means, among other things, that they cannot use or threaten to use violence; use profane or abusive language; publish a list of people who refuse to pay their debts; and call people on the phone repeatedly with the intent to annoy, abuse, or harass them.
• Debt collectors may not use any false, deceptive, or misleading statements or conduct. This would include, for example, falsely implying that he is an attorney; stating or implying that failure to pay a debt could result in the arrest or imprisonment of the debtor; or threatening to take any action that is not intended to be taken, or that is illegal.
• A debt collector cannot call a debtor at any unusual or inconvenient time or place without the debtor’s consent.  Generally this means that they cannot call before 8:00 a.m. or after 9:00 p.m., and must not call you at your workplace if they have reason to know that your employer prohibits such calls.
• Communication with third parties about the debtor is heavily restricted – for the most part it is limited to seeking information about the debtor’s location, and in doing so the debt collector must follow strict guidelines, including not disclosing that the he is collecting a debt.
• Within five days after an initial communication with a consumer about a collection matter, the debt collector must send the consumer a written notice containing the amount of the debt, the name of the creditor, and a statement that if the consumer notifies the collector within 30 days that the debt is disputed, the collector will send to the consumer verification of the debt.  If, within the 30 day time period, the debtor disputes the debt or asks the collector to validate the debt or provide the identity of the original creditor, then the collector must cease collection efforts until the information is provided to the debtor.

WHAT ARE THE LEGAL REMEDIES FOR VIOLATIONS OF THE FDCPA?

Violation of the FDCPA by a debt collector gives the debtor a civil claim against the collector for: (1) actual damages sustained by the debtor; (2) such additional damages as may be allowed by the court, up to $1,000; and (3) the costs of bringing the action, including reasonable attorney’s fees.  The suit must be filed within one year from the date on which the violation occurs.   The Federal Trade Commission also has the power to enforce compliance with the FDCPA.

HOW CAN AN ATTORNEY HELP ME?

Retaining an attorney is a very effective way to get a debt collector to stop harassing you.  The FDCPA states that a debt collector cannot communicate with a consumer or anyone else (family members, co-workers, etc.) in connection with the collection of a debt if the debt collector knows that the consumer is represented by an attorney with respect to such debt (unless the attorney fails to respond within a reasonable period of time to a communication from the collector).  An attorney can also help facilitate a settlement and hopefully help you avoid a lawsuit.  And of course, if a collector violates the FDCPA, an attorney can help you file suit against the collector.

CONCLUSION

If you are being harassed by debt collectors, be aware that you may have some protections available to you under the FDCPA.  The FDCPA does not relieve you from the responsibility to pay your debts, but it can give you some relief from endless phone calls and other abusive behavior.  For more information, the Federal Trade Commission (the government body responsible for enforcing the FDCPA) has published a Debt Collection FAQ for consumers, or contact our office to set up an appointment.

By Chris Watkins

Limited Liability Companies have become extremely popular entity forms since their inception.  The primary reasons for this are their flexible structure and their liability/creditor protection aspects.  When most people think of the liability protection that LLCs provide, they are thinking about the protection enjoyed by the owners (or members) of the LLC from the LLC’s liabilities.  For example, if an LLC is sued for breach of contract or for damages caused by an employee of the LLC, the LLC’s owners are normally safe from being held personally liable.  A common exception to this is if an owner has personally guaranteed a debt (which commonly occurs when a business takes out a loan or enters into a lease). However, another equally beneficial characteristic of an LLC is the protection afforded to the LLC (and its assets) from the creditors of the owners, through what is known as a “Charging Order.”

The Charging Order

If a business owner has creditors or gets personally sued for some reason or another, and a judgment is entered against him, the judgment creditor often will start looking for assets to satisfy the judgment, and may seek to execute against the owner’s interest in the business.  From the point of view of the business owner and the business itself, the fear is that the creditor will, in the collection process, acquire the debtor/owner’s interest in the business and, in effect, step into his shoes.  Depending on the extent of the debtor/owner’s ownership interest and management rights in the business, the creditor will likely seek to dissolve the business and liquidate its assets.  In the case of a corporation, this is a real threat.  However, in the case of an LLC, the creditor’s only real remedy is to obtain a “charging order” against the debtor/owner’s interest in the LLC.  This is, in effect, a lien on the debtor/owner’s right to receive distributions.  However, a charging order does not give the creditor any voting or management rights in the LLC, so he cannot force a liquidation or even control when and to what extent distributions are made.

In conclusion, the limited liability company is an entity form that should always be considered by business owners who are concerned about protection not only from the creditors of the business, but also protection of the business from the creditors of the owners.

By Greg Jones
You are bound to have seen a number of companies with software and self-help online products allowing you to create your own Will.  First, let us thank these companies for highlighting that nearly every adult should have a Will — and, possibly, other estate planning documents.  We agree!  We also admit that the initial cost of using a “do-it-yourself” piece of software or an online service is less than the initial cost of utilizing the services of a licensed attorney — though usually not as much as they might lead you to believe.  With a background in economics, I understand that attorneys better add value to the process to justify the price difference.  I believe we do this in a number of ways:

1)    We are here in your community.  Discussion with one of us, someone who will come to know and care about you and your family, is only a phone call (or short drive) away.

2)    We have a full understanding of the terminology used in Wills, Trusts and Powers of Attorney, and we can explain the implications of including and excluding certain provisions.  After learning more about your family and your goals, we advise you on what we believe are the right choices for your family.  The do-it-yourself software and services are very clear in their disclaimers that they are “not a substitute for an attorney,” and that they are further “prohibited from providing any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options, selection of forms or strategies.”  (Click here for an example of where competent legal advice could have made a huge difference.)

3)    While no family is the same, we have likely dealt with family situations similar to yours.  Provisions that sound good while you are creating your own documents might have serious complications down the road—including family conflict, accidental disinheritance of a loved one, taxes unnecessarily being incurred, and friends & relatives contesting the validity of your Will.  Often times we can suggest alternative ways to help you accomplish your estate planning goals, yet avoid the potentially negative consequences.

4)    We drive the process to completion.  Many people buy estate planning software or intend to complete the online Wills, but get intimidated by the process or put it off until “tomorrow,” and it never gets done.  And, in those situations where the completion of your estate plan is an urgent matter due to an upcoming trip or surgery, we can often hold the meeting to sign your documents within a few days of our initial meeting.

5)    When/if something happens to you, we will already know your estate plan and be able to help your surviving spouse or other loved ones in carrying out the plan.

6)    We are constantly monitoring the changes in the law that could impact your estate planning, and we are available to answer any questions that you have as those laws or your personal/financial situation changes.

7)    We are with you at the time you sign the documents to ensure that all requisite formalities are followed.  These vary from state to state.

8)    We are accountable.  As the do-it-yourself services state, you are on your own when you use them. If you make an error in creating your documents that results in an unintended consequence, you and/or your loved ones will have no recourse against them—or anyone.

At Jones & Watkins, we offer an initial one hour consultation at no cost to discuss and assess your situation and advise you on your options.  At the end of that session, we will viagra you a flat fee to draft and implement an estate plan that is appropriate for you.  We believe that the value we add to the process is well worth it.

Call us at 573.234.1130 or use our Contact Form to make an appointment or get our complimentary informational packet.

With few exceptions, almost everyone we meet with to discuss estate planning has one overriding goal if they should pass away unexpectedly – to make sure their children will be cared for. Oftentimes, we hear how people have taken their own “informal” measures to accomplish this goal. Unfortunately, such informal” measures can have unwanted and unexpected consequences.

One example is when a parent with young children names a sibling or other relative as the beneficiary of a life insurance policy, with the expectation that he or she will use the money to take care of the children. The reason for doing this is valid – children are not able to manage their own finances, particularly the large sums of money that are usually paid out under life insurance policies. However, although the intent is good, there are all kinds of reasons not to do this type of planning. Here are just a few examples:

1. There is no assurance that the life insurance beneficiary (the relative) will use the money for the child’s benefit in the manner that the parents envisioned. In fact, there is nothing to prevent the sibling from keeping the money all for himself or herself – he or she has no legal obligation to spend it on the child. If the relative wants to go blow it all at the gambling boat, there’s nothing to stop him.

2. The funds are subject to the debts and liabilities of the relative. If he or she has significant debts or gets sued for some reason, then the life insurance money could all be lost.

3. Since the funds are legally the property of the relative, the income that is generated from the funds (assuming they are invested) is taxable income to the relative, and could potentially push the relative into a higher tax bracket.

4. Even if the relative fully intends to spend the money on the children, he/she would have complete discretion as to how and when the money is spent, and this may not be what the parents would want. What’s to prevent the relative from buying the child a Ferrari when he turns 16, rather than spending it on college?

5. What if the relative has his own children? He may think it unfair that he be expected to spend the money on your children, but not his children. And of course, there’s nothing to stop him from spending it on his own family.

6. What if the relative gets a divorce? The insurance funds might be deemed marital property and end up in the hands of the ex-husband or ex-wife.

What’s A Better Solution?

As you can see, this kind of “informal” planning can lead to all kinds of unintended problems. Fortunately, there is a fairly simple way to accomplish your goal of making sure that the insurance funds are held for your kids benefit without all of the problems listed above – CREATE A TRUST AND MAKE IT THE BENEFICIARY OF YOUR LIFE INSURANCE.

You can create a trust for the benefit of your kids, which contains specific instructions as to how the trust funds will be managed and spent. You have practically unlimited say in how you want the money spent. Upon your death, your life insurance proceeds will be paid to the trust, and the trustee (whomever you designate to manage the trust) will have a fiduciary duty to the beneficiaries (your children) and will be legally obligated to follow the terms of the trust. Furthermore, if properly drafted, then as long as those funds are held in the trust, they will be protected from your children’s creditors.

By Greg Jones

About 70-80% of people give to charitable causes during their lifetime; however, only 7-8% include a provision for charity in their estate plans. Why is this? Frankly, I don’t believe the idea of supporting charity is often prompted by the attorney during the estate planning process. Lawyers generally have the goal of helping their client pass “as much as possible” to the next generation, and while there are tax incentives associated with making gifts to qualifying charities, you are almost never better off financially after making a gift to charity – the bite against your assets has just been lessened.

Many clients do want to maximize the amount given to children and grandchildren, but if you have supported a charitable cause during your life, don’t hesitate to tell your estate planning attorney that you want to provide for it in the event of your death, as well.

One simple way to give. For those who do want to make an estate gift to a charity, they often initially request just putting a flat dollar figure in their Last Will and Testament. STOP! There may be a better way. First, if you ever want to change this gift, you will have to go through the legal formalities & expense of creating and executing a codicil (or amendment) to your Will. This will require drafting the codicil, lining up witnesses and a notary, and signing the codicil in the same manner prescribed by Missouri law for signing a Will. The second reason to consider an alternative to making a charitable bequest in your Will is that there may a more tax-efficient way to do so.

Retirement assets are some of the most heavily-taxed assets when they are passed to the next generation. Consider, instead, naming your favored tax-exempt charity as the beneficiary of part or all of your retirement assets. Since these organizations will not pay taxes on the receipt of assets, they get the full value of your gift. In addition, if you have a change of heart about the charity, or if you wish to leave more or less to it, it is usually much easier to simply change the beneficiary designation on these retirement assets than it is to amend your Will.

If you would like a complimentary consultation on making charitable gifts in your estate planning – or on your estate planning, in general – please call one of the attorneys at Jones & Watkins at (573) 234-1130 or email us through our Contact Form.

By Greg Jones

Research abounds about the positive health benefits that are afforded by pet ownership—not just to the owner, but also to the animal.  In particular, the Research Center for Human-Animal Interaction at the University of Missouri is doing amazing work in this area.

Some of the individuals who benefit the most from human-animal interaction are seniors.  However, many of the seniors that I have encountered are reluctant to get pets.  They fear that they will outlive their beloved companion and that nobody will be there to adopt the animal and care for it in the manner to which they believe the pet deserves.  Sadly, those fears are well-founded.  In fact, it is estimated that approximately 500,000 pets per year are euthanized when their owners predecease them.  There is a legal solution to this, however.

In 2004, Missouri became one of nearly 40 states which specifically authorizes the creation of a trust for the care of an animal, see Mo. Rev. Stat. §456.4-408.  While it was always possible to create a trust to accomplish this, this statute provides a simplified answer to what is a very important concern for many people.  Of benefit, as well, it has generated greater awareness of pet trusts among the animal-owning public and the legal profession.

As one considers the creation of a pet trust or the inclusion of a bequest in their Will to someone who has agreed to adopt their animal(s), there are a number of questions which should be addressed.  These questions include: 

• Who will care for the pet?  What if something happens to this person?
• Should the caregiver be paid to provide such care?
• Should a separate individual or company be named to manage the pet’s “trust fund”?
• What is the appropriate standard of care for the animal?
• How large should the gift or trust fund be to ensure the animal’s proper care?  (While dogs live 10 to 15 years, parrots can live to be 100!)
• How will trust funds be distributed to the caregiver?  Monthly stipend?  Only as expenses are incurred?
• Who should receive any funds remaining in the trust after the pet’s death?  (In general, this should NOT be the caregiver, but, perhaps, a charitable organization that works in the area of animal health.)

In summary, it is important to work with an attorney versed in this budding area of the law to create the right plan—a plan which will ensure the proper care of Fido or Fluffy long after the owner’s death or disability.
For more information on this subject, please listen to my interview about pet trusts on The Law in Your Life, The Missouri Bar’s podcast for the public.