The Simple Buy-Sell Agreement is a Must - In Layman's Terms

Category: Business Law and Planning

If you have a business and have a partner (or many people with equitable interests) a simple, straight-forward agreement can allow you to retire, keep the business in the family, cash out your family if you die or become disabled, and avoid many an estate administration difficulties (or disasters). The agreement? The oft overcomplicated and mis-understood Buy-Sell.

Now, there are many situations where a Buy-Sell agreement needs to be highly customized and deal with unique fact patterns. But a good, solid, Buy-Sell Agreement really only needs to address what happens in one or more of the following situations:

• An owner wants to walk away/retire
• An owner is forced out for bad behavior (think of the Enron trial starting this week)
• An owner dies
• An owner becomes disabled

Some other considerations:

• Do you want to be partners with your partner's spouse? If not, you need to have a binding agreement that if your partner dies, their estate will sell, and you and the company will buy. Otherwise, welcome your new unintended partner (who likely knows nothing of your business, and will want to sell it at bargain basement prices to get cash) with open arms.
• Can you agree on a way to value your business? If not, can you agree on allowing a third party to value your business? If you can do either of these, you have overcome what is generally the greatest obstacle to preparing a Buy-Sell agreement.
• What can you afford to pay out of earnings to buy out your partner's interest? The answer to this question will create the loan repayment schedule. Another alternative is to fund the obligation with insurance.
• Should a partner be penalized for being "fired" or leaving within a certain time frame? If so, discount the value being paid in the event that a partner engages in "bad acts".

While these are certainly large questions, as long the partners are getting along reasonably well at the time that you asked them, you will likely find that it's easy reach a reasonable consensus. The ability to come to a consensus, and reduced it to writing while everyone is getting along (and is healthy and breathing) is the key to creating a simple Buy-Sell agreement that will allow your business and your family to succeed.

For another perspective - in layman's terms, look at this Kansas City Star article: Buy/sell agreement makes succession a success:

"One of the most important aspects of a buy/sell agreement is that it guarantees the purchase of the business interest for a fair price."

"As important as it is for business owners to tend to their day-to-day operations in order to have a successful enterprise, it’s equally important to institute quality succession planning. That often means having a team of specialists in the areas of tax law, accounting/valuation and insurance. If your business and family are a top priority, you really do not have an option."

Unlikely Connections - Bush Administration, Anna Nicole Smith, and the Supreme Court

Category: Probate and Estate Administration

Anna Nicole Smith will be getting some help as she takes her fight to gain part of her late husband's estate to the Supreme Court - the Bush Administration. The dryly named case of Marshall v. Marshall, Docket No. 04-1544, has the ability to affect the course of probate proceedings across the country in terms of appealing state probate court decisions to federal court. Of course, the nature of the litigants certainly make the case more spicy that your usual probate court or Supreme Court fare.

In the Smith case, much bandied about in the media, a Texas state probate court found that her husband's son, E. Pierce Marshall, was the sole heir to his father's estate, not Smith. When Smith appealed the ruling to federal court, a federal judge at the District Court level reversed the state probate court and awarded $474 million to Smith. This award was reduced to about $89 million, and then reversed again by the 9th Circuit Court of Appeals in San Francisco, which found that the state probate court decision should stand, thus leaving the entire estate to the son, and none to Smith.

Smith has taken her fight to the U.S. Supreme Court, which has scheduled arguments on the case for February 28. The narrow legal issue before the court is a question of federal versus state jurisdiction: when can federal courts can get involved in state probate proceedings? As stated in the Washington Post: At issue is the scope of the probate exception to federal jurisdiction. In other words, was a federal appeals court correct when it ruled last year that only state courts have authority over disputed estates?"

The Bush Administration has taken up the fight not necessarily in support of Ms. Smith, although clarifying points of law can make strange bedfellows, but to assert the jurisdiction of the federal court was proper in this case. Paul D. Clement, Solicitor General, has filed an amicus brief supporting the Bush Administration's position on the issue of federal court jurisdiction which is available here.

Waiting for your Refund?- IRS to Review Anti-Fraud Program the Freezes Refunds

Category: Tax Law and Planning

From Yahoo News: IRS to Review Anti-Fraud Program - "WASHINGTON - IRS Commissioner Mark Everson ordered a review Tuesday of a tax fraud detection program criticized for freezing thousands of refunds without notifying taxpayers.

Everson said the tax agency will soon announce new procedures to advise taxpayers when a refund has been frozen. The agency will also revise its fraud screening procedures so that it withholds fewer refunds owed to innocent taxpayers."

Of course, why are you expecting such a large refund in the first place? One way to look at a refund is an interest free loan to the government. After all - all a refund is is a return of your own money that you haven't been able to spend because you voluntarily gave too much to the government in taxes. See my prior post Review your withholding - A Tax Refund is an Interest Free Loan to the IRS about adjusting your withholding to maximize your paycheck.

The article goes on to claim that: "Refunds claimed on tax returns determined to be fraudulent remain frozen for a number of years until the IRS sees the taxpayer file a number of legitimate returns.

The tax agency said it's fighting a rising tide of refund fraud, which it now estimates to be more than $500 million a year. A significant portion involves false earned income tax credit claims, which can amount to $4,400 on a tax return, the IRS said.

Nearly 75 percent of the pool of frozen refunds studied by the taxpayer advocate were low-income families claiming the earned income tax credit, designed to reduce poverty among the working poor.

The IRS issues more than 100 million refunds each year, and the Questionable Refund Program withholds less than 1 percent for further scrutiny. The IRS said about 200,000 refunds are held longer than a week, but many of those can be held for months or years."

The IRS admits is does not normally inform taxpayers they are suspected of fraud during the time they are investigating the return - with the result that unless you keep pushing for where your refund is, you may not know why you don't have it.

Having said that, statistics show that the frozen refunds are only a drop in the refund bucket: "The IRS issues more than 100 million refunds each year, and the Questionable Refund Program withholds less than 1 percent for further scrutiny."

Best of the Blawgs - Dennis Kennedy's Blawggies

Dennis Kennedy is a pioneer of attorneys using the internet - I remember going to his site around the first time I had access to the internet (back in the dark ages of 95 or so). His bio explains: "Dennis Kennedy is a well-known lawyer, consultant, speaker and writer who is considered among the most influential experts on the application of technology in the practice of law." And its not just hype.

So, when I recently came across this list of

"Dennis Kennedy's 2005 Best of Legal Blogging Awards (the Blawggies)

Welcome to the 2005 edition of Dennis Kennedy's annual Best of Legal Blogging Awards, celebrating a tradition that began nearly one full year ago. These awards, which have become affectionately known as the "Blawggies," celebrate the best of law-related blogs as determined from my personal and highly-opinionated perspective."

Note: This is an archive of posts, so when you get to the site hit CNTRL+F and type "Blawggies" to get to the main post.

Part of my personal "continuing legal education" as it were is to review the thoughts and ideas that my fellow attorney/bloggers cast out into cyberspace. There are jewels of information out there for the mining if you go to the right places (defined for me as fonts of information for the sake of the belief that more knowledge by more people is better, not to advocate for personal, political or other gain). For those who are interested in furthering their quest for knowledge beyond the limited areas of this blog, the "Blawggies" winners and runner-ups are a great place to start. If you like what you see, sign up for an RSS feed and increase your slice of the knowledge pie.

The post goes on to list the following winners.

I. List of 2005 Blawggie Award Categories and Winners.

1. Best Overall Law-Related Blog - Tom Mighell's Inter Alia
2. Best Legal Blog Category - Law Librarian Blogs
3. Best Practice-Specific Legal Blog - Marty Schwimmer's The Trademark Blog
4. Best Legal Blog Digest - Stark County Law Library Blog
5. Best Blog About Legal Blogging - Kevin O'Keefe's Real Lawyers Have Blogs
6. Best Legal Podcast - Evan Schaeffer's Legal Underground Podcast
7. The Sherry Fowler Best Writing on a Legal Blog Award - Ernest Svenson's Ernie the Attorney Blog
8. Best Law Professor Blog - James Maule's Mauled Again
9. Best New Legal Blog - (Tie) Between Lawyers; Rethink(IP)
10. Best Legal Technology Blog - DennisKennedy.Blog
11. Best Legal Blogging Trend - Bloggers Making Money from Blogging

The post goes on to post the transcript of the "awards show" discussing the value of these blogs, as well as listing some honorable mentions. Happy Blawging!

Sketch of New Medicaid Rules - Don't like them? Call your Congressman!

Category: Elder Law

Given Florida's senior population, the proposed changes to the Medicaid laws is a topic that is receiving great coverage. From the South Florida Sun-Sentinel - a layman's thumbnail sketch of the new rules.

The House of Representatives will vote to finalize the new Medicaid Transfer Penalty Rule this on February 1. Contact your congressman to express your concerns about transfer penalties that will leave vulnerable seniors in need of nursing home care no where to go as no funds will exist to pay for their care.

"Currently, making a significant financial gift to friends or family within the past three years would disqualify you from receiving Medicaid coverage for nursing home care. The new law, pending before Congress, extends this so-called 'lookback' period to five years.

If you do make a gift, there is a 'penalty period' before you can reapply for Medicaid, calculated on a formula based on average nursing home cost and the size of the gift. Currently, the penalty period begins when the gift was made. But under the new law, it would begin when the Medicaid application was made, meaning you could wait for many months before you were eligible to reapply.

Anyone with $500,000 or more equity in their home would be disqualified from applying for Medicaid, which might hurt those with modest incomes living in South Florida's inflated housing market. [Similar to New Jersey's highly inflated housing market]

The government would become the prime beneficiary, before children or relatives, on some annuities if the holder applies for Medicaid. Mortgages and promissory notes would be counted as assets.

Nursing home residents, or the homes themselves on behalf of their residents, could ask Medicaid to pay for care by showing a hardship exists. Each state would establish its own hardship process."

NY Budget Proposal - Eliminate Estate Tax; State Takeover Medicaid Costs

Category: Elder Law, Estate and Inheritance Tax

From Newsday.com - Pataki proposes $110.7 billion budget: "Gov. George Pataki proposed a $110.7 billion state budget plan Tuesday that would reduce property, income and business taxes by $3.2 billion even while pumping up spending on education and energy independence." This article outlines the basic budget package proposal.

Key agenda items are (1) elimination of the New York Estate Tax, and (2) a state takeover the Medicaid program, which is currently administered on the county level, and funded through through the joint efforts of the county, the state and the federal government.

One response to the proposed elimination of the New York Estate Tax from Newsday.com - Elimination of estate tax will cost state millions:

"In the budget unveiled Tuesday, Pataki proposed doubling the amount free from the state's estate tax to $2 million starting in 2007, bringing the exemption in line with federal rules. The exemption would rise to $3.5 million in 2009, and the tax would be eliminated in 2010. While federal law calls for the federal estate tax to be restored in 2011 with a $1 million exemption, New York's tax would disappear permanently.

It could be difficult, however, to get the plan through the state Legislature, where Democrats are looking at it with a critical eye. The state estate tax is expected to bring in $868 million during the fiscal year ending March 31."

One response to the Medicaid issue from ABC affiliate weny.com : 'At the county level, Pataki proposed a $1.1 billion state takeover of Medicaid costs.
"Counties will no longer have spiraling Medicaid costs that push county property tax higher," said Pataki.
"It's good news," said Chemung County Executive Tom Santulli. "But we've got a lot of work to do."
Santulli says the county will still have to foot a $120 million Medicaid bill despite Pataki's proposal.
"That's in growth, not in existing program," Santulli explained. "The program is no smaller than it was before."'

US Supreme Court - Oregon's Assisted Suicide Law Legal

Category: Elder Law, Estate Planning, Miscellaneous Musings

From Wills, Trusts & Estates Prof Blog - the United States Supreme Court Upholds Oregon's Assisted Suicide Law:

"The United States Supreme Court has upheld Oregon's assisted suicide law in a 6-3 opinion released today (January 17, 2006).

In 2001, United States Attorney General John Ashcroft determined that assisted suicide was not a legitimate medical practice and thus doctors who prescribe the deadly drugs would be in violation of the Controlled Substances Act (CSA)...

In today's opinion, authored by Justice Anthony Kennedy, the court recognized that the federal government has the authority to punish drug dealers and pass rules for health and safety but that in the case of Oregon's"

See also: Supreme Court Upholds Oregon Suicide Law, AP, Jan. 17, 2006.

"The Supreme Court upheld Oregon's law on physician-assisted suicide yesterday, ruling that the Justice Department may not punish doctors who help terminally ill patients end their lives.

By a vote of 6 to 3, the court ruled that Attorney General John D. Ashcroft exceeded his legal authority in 2001 when he threatened to prohibit doctors from prescribing federally controlled drugs if they authorized lethal doses of the medications under the Oregon Death With Dignity Act....

A Pew Research Center for the People and the Press poll released Jan. 5 found that 46 percent of Americans support a right to assisted suicide while 45 percent oppose it. Assisting suicide is a crime in 44 states, including Maryland, as well as the District. It is a civil offense in Virginia. In three states -- North Carolina, Utah and Wyoming -- the law neither prohibits nor permits assisted suicide. Ohio's Supreme Court has decriminalized assisted suicide, but state regulations do not condone it.

State referendums supporting assisted suicide have failed in California, Maine, Michigan and Washington. A bill failed in Maryland in 1995 and 1996."

Medicare Drug Program Creates Health Care Crisis - Seniors denied Rx drug benefits

Category: Elder Law

From USA Today: Seniors denied Rx drug benefits: "Medicare's new prescription-drug program is causing thousands of low-income seniors and disabled Americans to lose their drug benefits, prompting at least 14 states to pay for their prescriptions.

The problem affects thousands of the 6.2 million people whose drug coverage was automatically transferred from Medicaid to Medicare this month. At drugstores nationwide, pharmacists are telling beneficiaries that they're not enrolled, or their drugs aren't covered, or they must pay deductibles and larger co-payments than they can afford, interviews with federal, state and local officials show. (Related story: Benefit costly for some poor)"

Mummy of Woman Who Died in '03 Found in Front of TV

Category: Elder Law, Miscellaneous Musings

This story definitely falls into the category of strange but true:

Woman Who Died in '03 Left in Front of TV - Yahoo! News: "The mummified body of a woman who didn't want to be buried was found in a chair in front of her television set 2 1/2 years after her death, authorities said. "

The story goes on the say that the elderly woman instructed her caregiver to allow her body to stay at home, and the caregiver was merely acquiescing to the request, so this isn't necessarily shades of the movie Psycho.

The tale does make you think about the plight of the homebound elderly, as this could easily have been a news item about neglect instead of adhering to a person's wishes (unusual though they may be).

Is the AMT Coming to get You??

Category: Tax Law and Planning

Much has been written about how the Alternative Minimum Tax (AMT) - including my prior post: AMT - What is it and Why Should You Care?. This parallel tax to the income tax was originally designed to capture very-high income taxpayers and ensure that they pay their fair share by limiting their deductions. Unfortunately, it has been creeping down the tax brackets over the years, until it is now a tax faced by more and more taxpayers.

Don't laugh, but the IRS is coming to your assistance in answering the question "Do I owe AMT?". At the IRS Website at http://apps.irs.gov/app/amt/ there is an "AMT Assistant" - a tool designed to determine whether or not you might be subject to the AMT. The instructions claim: "Most people using the AMT Assistant can complete the AMT worksheet using this tool in 5-10 minutes."

The US tax system is self-reporting, so you the taxpayer need to know not only what taxes you are subject to, but the liability generated by those taxes.

Gov. Pataki Pledges To Eliminate New York Estate Tax

Category: Estate and Inheritance Tax

Pataki Pledges To Cut Taxes, Reliance on Oil - January 5, 2006 - The New York Sun - NY Newspaper: "Entering his final year in office, Governor Pataki yesterday pledged to cut an array of state taxes..."

Included in the proposed tax cuts will be the elimination of the the New York estate tax.

Currently, the New York estate tax is "de-coupled" from the federal estate tax tax. The federal estate tax allows a $2 million exemption per person, while New York only allows a $1 million exemption. The calculation of the New York estate tax is similar to the calculation of the federal estate tax, as the New York estate tax relies on the Federal estate tax laws in effect in 2002. Elimination of the New York estate tax would have a huge impact on the strucutre of estate plans of New York residents, and would also likely encourge New York retirees to remain New York residents instead of changing residence to Florida or another state that does not have a state level estate tax.

One Trust, Two Trusts, Can you Merge Trusts?

Category: Estate Planning, Tax Law and Planning, Probate and Estate Administration

From the blog Rubin on Tax, a summary of PLR 200552009, issued December 30, 2005, discussing the tax consequences of two trusts with similar trust merging for administrative reasons (who wants to administer and pay administration expenses on 3 trusts when you can do it for just one?):

"In a recent Private Letter Ruling, the IRS provided that where several identical trusts combined into one trust with similar terms, and all the trusts held similar assets, the merger would not generate gain or loss to the trusts or their beneficiaries. The IRS further went on to provide that the tax attributes of the trusts merged into the new trust, such as net operating loss carryforwards and tax basis, would carry over to the new trust."

Note that a private letter ruling or PLR is only authority for that taxpayer, and cannot be relied upon by any other taxpayer. However, it is an example of the IRS's analysis of certain issues.

In doing estate planning, consider how well the distributive terms of any irrevocable trust you create, such as a life insurance trust or ILIT, match the distributive terms of your Will, or other testamentary document. To the extent that the trust terms for your children match, for example, then the Trustee may be able to combine the insurance trust with the trust created under your Will and only administer one trust per child. The key to being able to match these terms over time is to give someone a power over your irrevocable trusts to modify the distribution terms to the beneficiaries, so that as you modify your will over time, the trust terms can follow.

Key 2005 Tax Filing / 2006 Tax Payment Deadlines

Category: Tax Law and Planning

From James Jimenez, CPA, of Fass and Associates:

"Mark These Tax Deadlines in Red

Circle these dates on your 2006 calendar if any of the following upcoming tax deadlines apply to you or your business.

January 17 – Due date for the fourth and final installment of 2005 estimated tax (unless you file your 2005 return and pay any balance due by January 31).

January 31 – Employers must furnish 2005 W-2 statements to employees. 1099 information statements must be furnished to payees by banks, brokers, and other payors.

January 31 – Employers must generally file 2005 federal unemployment tax returns and pay any tax due.

February 28 – Payors must file information returns (such as 1099s) with the IRS. (March 31 is the deadline if filing electronically.)

February 28 – Employers must send W-2 copies to the Social Security Administration. (March 31 is the deadline if filing electronically.)

March 1 – Farmers and fishermen who did not make 2005 estimated tax payments must file 2005 tax returns and pay taxes in full.

March 15 – 2005 calendar-year corporation income tax returns are due.

April 17 – Individual income tax returns for 2005 are due unless you file for an automatic extension. Taxes owed are due regardless of extension.

April 17 – 2005 partnership returns are due.

April 17 – 2005 annual gift tax returns are due.

April 17 – Deadline for making your 2005 IRA and education savings account contributions.

April 17 – First installment of 2006 individual estimated tax is due.

June 15 – Second installment of 2006 individual estimated tax is due.

September 15 – Third installment of 2006 individual estimated tax is due.

October 16 – Deadline for filing your 2005 individual tax return if you filed for an extension of the April 17 deadline. "

Another Blogger with Similar Themes - Andrew Ewalt from CT

Category: Miscellaneous Musings

I have recently come across and been enjoying reading Andrew Ewalt's Law Blog, described as: "Helping individuals, families, and business control their affairs, protect their families and preserve their assets, through effective, prompt and reasonable legal services, including wills, trust, powers of attorney, living wills, probate and estate administration, buy sell agreements, asset protection, elder law, nursing home, Medicaid planning, business law, contracts, establishing LLC's and corporations, not-for-profits, residential real estate, commercial real estate, reverse mortgages." Andrew practices in Hartford, Connecticut.

As the postings in Andrew Ewalt's Law Blog have similar themes to the postings here (see a recent list below) this can be another source of information on planning issues.

Recent Posts
Picking A Guardian For Your Children: Part 1
Trademark Infringement: Part 2
Trademark Infringement: Part 1
Charitable Giving Tax Benefits
PRotection For Key Employees
Amending A Will
A Client Thank You