The Corporate (or LLC) Veil: “sufficient corporate formalities were followed”

An interesting article at Lexology, regarding the fact that, as the title says, “Creditors Find Piercing the Corporate Veil is Not So Easy.” The piece tells the story of three different cases involving disgruntled plaintiffs suing either a corporation (2 cases) or an LLC (1 case), under the so-called “piercing the veil” theory. That theory basically says that if someone is basically hiding behind the facade of a corporate business form (or an LLC) when, in fact, the business is really no more than an individual, with one foot inside the corporation and one foot out.

As the opening paragraph explains:

[V]eil piercing is an equitable remedy only rarely allowed by courts and is limited to situations in which the corporation’s principals (or parent company) (i) so dominated the corporation that they can be said to be the “alter-ego” of the corporation; and (ii) misused the corporate entity to perpetrate a fraud or crime or otherwise work an injustice. A number of factors have been found relevant to a veil piercing analysis, including whether the corporation is undercapitalized, whether the corporation failed to observe corporate formalities or failed to maintain corporate records; whether the debtor corporation was insolvent; whether the corporation’s funds were siphoned off by the dominant shareholder; and whether the corporation served merely as a façade for the operations of the dominant shareholder or shareholders. (Emphasis supplied)

Though veil piercing sounds good and reasonable in theory, the veil is more teflon than chiffon. Take the LLC case for example:

The court [in Ossa v. Kalyana Mitra LLC, a New Jersey case noted that “sufficient corporate formalities were followed.” Apparently, the record showed that at least some regular corporate practices had not been observed but the court did not find them troubling, given the “documentation of minutes of meetings, notes, and agendas, and tax and bank records indicating that company funds were not siphoned for personal use.” The documents, in fact, showed that Miller was using the money to repay her husband’s company, which was one of Kalyana Mitra’s creditors. (Emphasis supplied)

Sufficient is apparently sufficient, but my advice continues to be, make the letter (and spirit) of the corporate form your mantra; otherwise, that protective veil may disappear just when you need it most.


Caregivers, Does this Describe You?

Northwestern Mutual recently published a survey of caregivers, those who take care of the infirm and aged. Among other things, this is what they found, according to Financial Advisor magazine:

Caregivers comprise a massive population segment, with 40 percent of the survey’s 1,003 respondents saying they were caregivers. Another 20 percent expect to step into that role.

While only 25 percent of future caregivers thought of financial support as a key attribute of caregiving, 64 percent of current caregivers ended up providing some level of financial support to their charges. Expenses related to giving care comprised nearly one-third of their budgets, according to the current caregivers.

Most future caregivers, 70 percent, expect to incur financial costs, yet only 60 percent said that they were equipped to handle the potential financial aspects of caregiving. (Emphasis supplied)

Just one more reason for people–both caregivers and those who will need it–to plan for the future. Long-term care insurance, life insurance, trust planning anyone?

DAPTs: We’re #10 (Wyoming) or #12 (Utah)! Or Should Everyone Move to Nevada?

Scales of JusticeSo attorney Steve Oshins publishes annual state rankings of virtually all things trusts. Want to know where your state’s decanting statute ranks? Go here.  Interested in establishing a so-called dynasty trust? Look here to see what your state offers–if anything. How does your state treat non-grantor trusts for income tax purposes? Well, some states do better than others, let me tell you. Nevada and South Dakota, for example, are #1 or #2 for both decanting and dynasty trust statutes and have no state income tax.

Which brings me to the subject of this post: Domestic [as opposed to foreign] Asset Protection Trusts or DAPTs. Oshins ranks them as well. How do Utah and Wyoming–the two states I practice in–stack up? Well, the headline gives away the answer. As of April 2016, sixteen states offered some form of a DAPT, including Oklahoma, Virginia, and West Virginia–the three new kids on the block. Wyoming ranks 10th on that list, Utah 12th. Sounds better if you say 10th and 12th out of 50, doesn’t it, especially since 34 states have no DAPT statute on the books. For the record, Nevada and South Dakota rank #1 and #2 among DAPT states.

Which brings me to an important question: If you’re interested in protecting your assets from predators–slip and fall creditors, for example, with a court judgment in hand–should you set your domestic asset protection trust up using your own state’s DAPT statute, if it has one, or should you use another state’s possibly more debtor-friendly statute? No surprise here: The answer is not clear.

Without getting too far into the weeds, let’s take a look at few comments that indicate there may be a bump or two in the road ahead for those who may decide to establish a DAPT using another state’s trust laws. First off is the Utah Supreme Court in the recent Dahl v. Dahl case (2015). Mrs. Dahl sued Dr. Dahl to get access to marital assets in a supposedly irrevocable trust established under Nevada law (a DAPT trust we assume, though that’s not clear from the case)–remember, Nevada purportedly has the best DAPT statute on the books.

One question before the court was whether to interpret the trust according to Utah or Nevada law–something the law refers to as a conflicts or choice of law question. The court decided to go with Utah law, saying:

Under Utah choice-of-law rules, we will generally enforce a choice-of-law provision contained in a trust document, unless doing so would undermine a strong public policy of the State of Utah. (emphasis added)

The strong public policy in this case was protecting the divorced spouse. And Utah’s law did just that. As the court said,

. . . to the extent that the Trust corpus contains marital property, Utah has a strong interest in ensuring that such property is equitably divided in the parties’ divorce action.

Who knows what the outcome would have been had the person suing been a slip and fall judgment creditor rather than an aggrieved spouse? Would the court of have interpreted the trust according to Nevada law, in which case, the party suing might have lost? That’s the problem: who knows?

Next up is the Uniform Laws Commission, which adopted amendments to the Uniform Fraudulent Conveyances Act in 2014, changing the name of the act to the Uniform Voidable Transactions Act and adding “a new Section 10 that provides that the law of an individual’s residence is to be the governing law concerning whether such individual has made a voidable transfer,” according a report by Leimberg Information Services. How does that apply to DAPTs? Well, again according to Leimberg,

The revisions to the comments [to the proposed law] erroneously state further that a transfer to a self-settled spendthrift trust [a DAPT in other words] is a voidable transfer per se and, therefore, that an individual who lives in a state that does not recognize asset protection trusts (“APTs”) cannot protect assets by creating an APT in a state that does recognize APTs . . .

Did you get that? According to Leimberg, residents of non-DAPT states can’t use another state’s DAPT statutes to protect their assets. Now, the comment doesn’t have the force of law–it’s just a comment after all. But it does give us some idea of how at least some legal eagles are thinking about asset protection trusts. They don’t like ’em.

All this is not to say that persons wishing to set up a DAPT using the law of another state should not consider doing so. However, it bears repeating that those who choose to do so should be careful, crossing all the T’s and dotting those I’s. That Dahl case I referred to above, the one where the Utah ex-wife got her share from the Dr.-husband’s Nevada-based DAPT? Despite the fact that the trust had “Irrevocable” in its name, that the trust was established under Nevada law, and that it was clearly intended to be a DAPT, the court said the trust was revocable. Why? Because the court wanted to protect the spouse and because a scrivener’s error–an error by the attorney who drafted the trust–gave them an avenue do so. Here’s what the trust said:

Trust Irrevocable. The Trust hereby established is irrevocable. Settlor [the Dr. in this case] reserves any power whatsoever to alter or amend any of the terms or provisions hereof. (emphasis added by the court)

Of course the attorney meant to say “Settlor reserves no power whatsoever,” and the court knew that, else why would the trust say it was irrevocable both just a few words before and in the title and in other places in the document as well? But the court needed an excuse and because a T wasn’t crossed and an I wasn’t dotted, the trust failed to do its duty.

Simple drafting errors aren’t the only thing that can get a DAPT into trouble, but the fact that something so minor can have such huge consequences, should be warning enough to take care of the big issues as well. We’ll discuss those larger issues in another post.

Quote for the Day

“A trust can be an effective foundation for asset protection planning. Trusts have been utilized for centuries as a means of conserving and protecting property for the beneficiaries of the trust. However, most domestic trusts do not provide protection from creditors. The typical revocable living trust, where the trustors are the lifetime beneficiaries and retain the power to revoke, amend and invade the principal of the trust, provides no protection whatsoever against the creditors of the trustors. Accordingly, absent specific legislation to the contrary, self-created or so-called self-settled trusts are ineffective for asset protection planning purposes.”

“A Primer On Asset Protection Planning,” Jeffrey Matson and Jonathan Mintz, WealthCounsel Quarterly, April 2015

Don’t Put Off Till Tomorrow . . .

lightbulbYesterday I read an interview in the April 2016 issue of WealthCounsel Quarterly with Neel Shah, a business and estate planning attorney in Monroe, New Jersey. The last interview question was of particular interest to me, because occasionally I find myself wondering whether I’m simply selling something when I encourage people to do their estate and business planning, preferably with me. By simply selling I mean selling something they don’t really need. I know better, of course. I’ve seen too many cases where what should have been planned hadn’t been, and people got hurt, loved ones left in a lurch as a consequence.

And I’m not alone, I discovered–yet again. In response to the question, “Can you point to a particular experience that has changed the way you approach your practice?” Shah told the story of a client who had come to him to do some simple will planning. He was young, in the prime of his life. He had some 20 interconnected businesses. They all seemed to be doing well, and the client, Shah says, “looked like he was on top of the world.”

Less than six weeks later, the client was dead–before Shah and he had been able to do much planning. It was then that Shaw discovered that all was not well. The client’s businesses were in hock–for those unfamiliar with the term, they were in debt up to their gills. His personal life wasn’t much better. He had a child from a short-term relationship and other family members he wanted to provide for with his wealth, but in short order his “empire” came crashing down, his dreams for others unfulfilled. As Shaw reports:

“What I saw in that client was the prototypical business owner who simple couldn’t make time to get his planning in order. He had told me that he wanted to provide for his nieces and nephews and he believed–and all evidence supported–that he had many more years ahead of him. His example showed me just how quickly and dramatically things can change.

“By seeing through that client how fragile life can be, now I don’t hesitate to grab a client by the collar and shake them into reality. I also don’t feel like I’m ‘selling’ anything anymore. I feel a lot more like an emergency room physician, telling clients that their business is in dire need of help. After seeing what happens when clients drag their feet, I now have a greater sense of urgency on their behalf. It has made me more passionate in my conversations with clients, and more aggressive in advocating the importance of moving ahead to get good planning in place.”

Somewhere else on this site, I write that the cost of planning is greatly outweighed by the cost of not planning. This story vividly illustrates that point. I could tell more. Want to hear them?

When Dave Ramsey’s Wrong, He’s Really Wrong

Zander_2016-04-15_1200I’ve listened to Dave Ramsey. My wife owns a couple of his books. I get what he does, and I think he probably does a some good–in the debt area, at least. But he’s not always right. For example, I don’t care for some of his opinions about life insurance and much of his investment advice is off the mark as well. Further, his one-size-fits-all approach and his dismissive attitude towards insurance agents and other financial advisors are a real turn off for me. Seems that everybody’s out to get you but Dave and those he recommends. (I have more to say on this point, but I won’t.)

In short, I’m basically not a fan.

So you will not be surprised that I’m posting this link to a blog post by attorney Richard Chamberlain in response to a wildly uniformed excerpt about living/revocable trusts from one of Dave’s books. Make sure to read the entire post and the links in the post.

I must add my two cents on living/revocable trusts: Though they are just one part of a well-executed estate plan, they are an important part. Among many good reasons to establish a living/revocable trust, there’s this: setting one up and funding it will help you and yours get your minds around what you own, how you own it, and how you want it distributed or handled upon your death or incapacity. Mind you, I could add more than two cents to this conversation, but I’ll stop here.

Quote for the Day

One of 12 reasons Edwin P. Morrow III, J.D., LL.M. gives for keeping assets in a trust rather than distributing them outright to beneficiaries at death, from his outline, The Optimal Basis Increase and Income Tax Efficiency Trust:

A trust allows the grantor to make certain that the assets are managed and distributed according to his/her wishes, keeping funds “in the family bloodline”. Sure, spouses can agree not to disinherit the first decedent’s family, but it happens all the time – people move away, get sick and get remarried – the more time passes, the more the likelihood of a surviving spouse remarrying or changing his or her testamentary disposition.

Stretch IRAs Under Seige?

What’s a stretch IRA, you say? Well, it’s not a new type of IRA, rather it’s a strategy to preserve the value of an inherited IRA, to defer the tax on as much of the IRA as possible for as long as possible. As the law now stands, the owner of an IRA has to begin taking required minimum distributions (RMDs) for his or her IRA at 70 1/2. Those RMDs are based on the person’s life expectancy at that time.

Should the IRA owner die, the beneficiary of the IRA must then take RMDs based on the beneficiary’s life expectancy–regardless of how old the beneficiary is at the time. Typically, beneficiaries are spouses, people of roughly the same age as the owner, so their RMDs will be more or less the same as the IRA owner’s.

To “stretch” the tax deferral benefits of an IRA, some advisors suggest their clients change the beneficiary designation on their IRA from their spouse to their children, that is, if their spouse has other income and will have no need for the income from the IRA. Though the children beneficiaries will have to take RMDs as well, those RMDs will be “stretched” out over a longer life expectancy and therefore will be much smaller and therefore more dollars will remain in the IRA for a longer period, safe from the tax man–for now.

Got that?

Well apparently stretch IRAs are under attack, according to a piece at Here’s the first paragraph, with a teaser at the end. Yes Virginia, there are some possible solutions to the problem.

The stretch IRA is under siege.

If it’s eliminated, a non-spouse beneficiary of an IRA will be required to pay income taxes on the entire inherited IRA within five years of the IRA owner’s death. Here are two promising solutions using tax-free income that your clients can act on before the law changes. Let’s discuss Roth IRA conversions and life insurance.

There’s much to talk about with regard to IRAs, so check back later.

Joint Trust or Individual?

You and your spouse have decided you need to do some estate planning, and you’re finally sitting down with an attorney to do same. He or she starts talking about a will for you and a will for your spouse. A trust for you and a trust for your spouse. And a . . . .

“Wait a minute!” you almost shout. “Two trusts? What’s up with that?”

In brief, here’s what’s up with that.

Community Property StatesFirst, if you live in a community property state and you’re married, the joint trust is almost certainly the way to go, both to preserve the community property character of property contributed to the trust and to take advantage of a 100% step-up in the basis of the property on the death of either spouse. That is, when a spouse dies, property in the hands of the surviving spouse has a basis for tax purposes of the market value of the property at the date of death. For example, suppose the couple bought the property for $100,000 ten years ago. On the day before the death of the first spouse, the property was worth $500,000. If they had sold the property on that day, they would have a capital gain of $400,000, a gain they would have to pay tax on.

Now suppose they didn’t sell and the first spouse died. On the day after that death, the surviving spouse could sell the property for $500,000 and pay no capital gains tax because the basis in the property had “stepped up” to the market value on the date of death–$500,000. Voila!

For separate property states, the question of joint trust vs. individual trust is not so clear. If a married couple has lots of jointly owned property, the joint trust may still be the best choice. May. But if the couple has little jointly held property or if one of them has asset protection concerns–a doctor maybe?–then individual trusts are probably the better choice.

Unmarried couples? Individual trusts all the way because of big gift tax issues caused by no unlimited marital deduction, a deduction available to only married couples.

Image courtesy of Wealth Counsel.



Some Things I Learned Answering Questions on a Forum for Asking Legal Questions

Yikes_2016-03-07_0843So I sometimes forget that everybody’s smart, just on different subjects. For example, I don’t know much about physics. My teachers tried, but my head could only hold so much gravity and speed of light and such. Well, today I was online in an online forum where non-lawyers posed legal questions to attorneys. These were real life people experiencing real life problems that involved the law in some way or the other.

Now let me be crystal clear: I don’t think these people are dumb. To repeat: we are all “smart,” just on different things. I happen to know a lot about the law, but boy am I at a loss about some other subjects (heck, even about some legal subjects). With that, here are a few things I learned while answering questions:

  1. Many, if not most people, don’t realize that estate taxes are no longer a concern for most of us. Did you know that you and your spouse must be worth almost $11 million before the tax man comes knocking? Yes, you may need to do some planning to make sure you take full advantage of that $11 million threshold, but still.
  2. Many people don’t realize that the First Amendment doesn’t protect them from employers, friends, parents, and the like from infringing on their free speech rights. No, the First Amendment protects us from the government infringing on our rights. And even then the right is not absolute.
  3. More than a few people confuse a living will with a plain old will, also known as a last will and testament. A living will is a document that tells your family and doctor whether you want life support and such should you become incapacity and unable to speak for yourself. A will or last will and testament is what you use to appoint guardians for your children and to give your property away when you die. You can read more here.
  4. A lot of people–especially people down on their luck financially–aren’t aware of the legal resources available to them that are free or at a reduced cost, nor are they aware of the state agencies that might be of help to them–child protective or family services, for example. For the record, in Wyoming you can go to the Wyoming State Bar to find free or reduced-rate legal services. In Utah, you should go here.  In Wyoming, you can find child and family services here.  In Utah, you’ll find them here.
  5. Finally, too many people are way too quick to pull the trigger; that is, they get angry and immediately shout “Medic!!!” I mean, “Lawyer!!!” To those I say, try to work out your problems by yourself and amicably first, especially if it’s family, then resort to the law. But the corollary to that is, if the proper response is legal, then hire an attorney. Trust me on that one.

Now where do I go to find out how fast the speed of light was back in the days of horse and buggy?

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