Are your personal assets protected from your business liabilities?

A proprietorship is the business equivalent of nothing. A vacuum. You’re a proprietorship if you never bothered to incorporate or LLC your business. So proprietorships are the cheesecloth of business entities: everything passes through a proprietorship to its owner -- including creditors.

On the asset protection scale of what works, a proprietorship is a zero.

So why would someone want to be in a business as a proprietorship?  Well, it’s seductively easy, a real do-it-yourselfer. Pick a name for your business.  Print up some business cards and stationery showing the name.  Get a website. Voilà. You’re now a proprietorship.  But big deal.

Your assets are protected like Superman was protected from Kryptonite: not at all. And if you have business liability insurance, that’s certainly helpful. But did you ever hear of an insurance company denying a claim? Thought so.

Let’s consider a classic: “Buffalo Bill’s Wild West Show, William F. Cody, Proprietor.”

If Annie Oakley took someone’s eye out while she was performing in the Wild West Show, the injured spectator would have quite the lawsuit. Everyone else in the audience would be a witness.  If the injured person won the jury’s sympathies and got a verdict, the judgment would be against Buffalo Bill himself.

It would not be a verdict against Buffalo Bill’s corporation because there’s no corporation.  It wouldn’t be a judgment against “Wild West Show Limited Partnership” because there isn’t one.  Would it be against “Buffalo Bill’s Wild West Show Limited Liability Company? Wrong again.  Buffalo Bill didn’t put his business in an LLC.

So all of Buffalo Bill’s personal assets would be fair game to satisfy the judgment.  After insurance paid its part – if insurance paid its part – whatever else Buffalo Bill owned would not be protected one whit.  This would include his personal savings, stocks, real estate, even his ownership of his proprietorship.  Say “Adios, Wild West Show.”

What’s going on here?

A proprietorship is a nothing.  It’s a five-syllable word that indicates someone’s in business. And that’s it.

Adding the letters “d/b/a” -- the abbreviation for “doing business as” -- so you present yourself as “William Frederick Cody, d/b/a Buffalo Bill’s Wild West Show,” gives you zero protection.  Using the word “consultant” doesn’t add any protection, either.

So if you want to protect your personal assets from what your business does, start with three basic steps.

• First, your lawyer can show you how to do parts of the formation yourself online.  You'll then want your attorney to guide you through the paperwork to create the liability shield. (The “$49 specials” on the Internet do not begin to do the job, by the way.)
• Second, do what’s required by State and Federal law. Just because you don’t want to deal with little things like the Internal Revenue Code, Wage and Hour law, and Workers Comp, doesn’t make you exempt.
• Third, comply with the annual requirements.  Cinderella’s carriage was transformed into a pumpkin at midnight; something similar can happen to your business if you don’t pay the annual fee to the Secretary of State.  In Georgia, it’s $50.00.  And have an annual meeting, at the least.

So if you want the liability protection given by law for yourself, go get it.  Don’t assume it just happens.  It doesn’t.

Fox+Mattson, P.C. has again provided the Georgia model LLC documents for the 2011-2012 edition of the "Limited Liability Company Handbook" published by West Thomson Reuters as part of their Securities Law Handbook Series. The Handbook is edited by Mark A. Sargent, Dean of the Villanova University School of Law, and Walter D. Schwidetzky,  Professor at the University of Baltimore School of Law.   

New Tax Break for Caregiver Costs

Providing care for someone with Alzheimer’s or dementia can be an expensive, long-term problem.  (You know this already, right?  Or been thinking about it?  Sooner or later, everyone thinks about it.)

Now you can catch a break.

On July 5^th, 2011, the United States Tax Court held that expenses you incur for providing unlicensed caregivers will be deductible on your income tax return.

(For years the IRS didn’t allow this deduction.  The Tax Court said they were wrong.   That happens more often than you think.)

Here’s the story. A woman was diagnosed with dementia in 2004, so her doctor prescribed appropriate medications and sent her home, where she lived by herself.  But the woman was hospitalized again, and the hospital noted that the woman had not been taking her medicines.  She was hospitalized once again, and the question came up: was it really safe for her to live alone?

By 1996, the question was resolved in writing.  Her physician wrote that the woman’s ability to communicate orally was impaired.  She was confused.  She needed assistance with normal activities.  She needed supervision because of her failed memory.  And she couldn’t be left alone for fear of her falling.

Thus, the doctor concluded she required homecare services; she required assistance and supervision all day every day for both medical reasons and to insure her personal safety.

The woman’s brother had her power of attorney, and so he took over her personal and financial affairs.  That included his hiring two 24-hours-a-day caregivers, who were not licensed healthcare providers.  But they did just fine, helping the woman with her bathing, dressing, trips to the doctor, taking her medications, and getting in and out of her wheelchair.

The woman eventually passed away, and her brother dealt with her final affairs, including her final income tax return.  And that’s when the problems started.

The brother had paid the caregivers just short of $50,000 for their services.  He treated that amount as an itemized deduction on his sister’s tax return.

The IRS took the position that he couldn’t do so.  Part of the Internal Revenue Code says “long term care services” are “services [are] required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.”

The brother read the whole definition carefully.  He decided that the Service’s denial of the deduction for his sister’s care was flat-out wrong because:

●      His sister was chronically ill,

●      the doctor was a licensed healthcare practitioner, and

●      the doctor had laid out a plan.

The evidence: the doctor, the licensed health care practitioner treating the woman, determined that she was chronically ill.  The doctor also had determined that 24-hour-a-day supervision for the woman’s health and safety was necessary to protect her from the consequences of her dementia – a plan.

(By the way, you don’t need to be a doctor to be a “licensed health care practitioner.”  Registered professional nurses, licensed social workers and others are covered by the definition.)

But didn’t the 24-hour-a-day caregivers have to meet this “licensed practitioner” definition?  Nope. They just had to be operating under the plan which the doctor devised.

The bottom line: the Tax Court held that the woman’s final tax return was entitled to deduct that $49,580 paid to her ‘round-the-clock caregivers. 

There are two morals of this true case.

First, whoever’s paying the non-licensed caregivers may be entitled to deduct 100% of what they paid. 

Second, assume nothing and don’t believe a non-expert’s opinion. It’s worth checking out the law, regulations and cases; you never know what’s in place – here, as recently as July 5^th, 2011.

The Pet Trust: Protecting your animal after you're gone

The widowed aunt had written in her Will: "I give $5,000 to [nephew] if he takes care of my cat." 

The nephew put the cat to sleep.  He then demanded the five grand from his aunt’s estate. His reason: "I took care of the cat.” 

They ended up in court.  And the judge wisely decided that what the aunt had meant by taking care of the cat was markedly different from what the nephew claimed she meant. 

Now before you groan, it would only be fair to tell you the other side of the case. A witness testified how much the aunt had loved her cat.

But there was also evidence that the aunt knew that her nephew didn’t like her cat at all. So the aunt was picking a fight by putting this provision in her will.

We all can wince at incidents like these. They can be avoided:  Rule #1: Don’t entrust your pet’s care to someone who hates your pet.  Rule #2: Don’t leave your pet to someone who’s allergic to your pet. You get the idea. 

A much better route: create a Pet Trust.  A new statute now allows for them.  And a court can be used to oversee what you provide in the Trust.

Here’s the big picture:

You can choose the right person to receive a bequest to provide for your animal if you are dead or disabled. You can even provide for a succession of persons.

Or you can provide for one person to provide a home and care for your animal, using funds which you’ve entrusted to another person to hold, invest, etc. (“My pet is to live with X, and my trustee shall give X the  funds to pay for all the expenses of caring for my pet.”)

And yes, the Georgia Code allows for a trust to provide for the care of more than one animal. 

Now in “human” trusts, the beneficiary can go to court if the trustee is not abiding by the trust’s terms.  Or the trustee can seek a judge’s help if the beneficiary is missing,  or the trustee is concerned about distributions to a beneficiary being squandered on drugs. 

And if alive, a trust’s creator (i.e., the “grantor” or “trustor”) can ask for a court’s help if this person thinks that the trust isn’t being administered according to his or her wishes.

It’s not this easy in a Pet Trust.   Your pet is never, ever going to file a suit for a protective order, or to ask for a change in guardian. This isn’t some courtroom scene out of a cartoon, the Honorable Scooby-Doo presiding.

But Georgia law does provide that any person who’s interested in an animal’s welfare can go into court on the animal’s behalf.

This caring soul could ask the court to change the trustee because the trustee isn’t doing what the trust specifies.  Or if someone named in the Pet Trust needs to be replaced for any other good reason.

Here’s one big caution, though. The Pet Trust terms need to be done correctly and will need to be integrated with your other legal documents.  This doesn’t happen in a fill-in-the-blank form

And no form language covers the situation if your pet is a horse, coatimundi, or spider.

Bottom line: if you want the law to help protect your pet if you’re gone, or if you’re totally disabled and not able to care for your pet, now you have a way.

Who gets the assets if your spouse dies without a will? You might be surprised.

The financial planner thought he knew everything.  And with that confidence, he downloaded a form will. It wasn’t a bad will, actually. But he made one enormous mistake: he didn’t sign it right.

So when he died, his wife went to an attorney to find out how she would collect everything. She got a shock: she wasn’t going to. The will was useless. Void. Non-existent. Consequently, the law says that she and the child had to split the assets. The scorecard: Child: 50%. Mother 50%. Game, set, match.

Would it matter if it was his child, and not their child? Not a whit. Could they fudge the distribution? Nope.

What if parent and child didn’t get along? Doesn’t matter. They were chained legally to 50% each. They may not have spoken in years . . . but now they sure were going to.

The key: if the once-good will is not good now, or if there’s no will, then the spouse and the children divide the estate assets equally. Example: Remarried mother has two children from her first marriage. She dies with a faux will. We have three people, right? Two kids plus spouse. Since the will is garbage, each child inherits one-third of the dead mother’s assets. The surviving husband gets the final one-third.

There’s a small legal protection for the surviving spouse: he or she can’t get less than one-third.

What this means: imagine that Snow White married the prince, they adopted the seven dwarfs, and then he died sans will. Snow White gets one-third of the prince’s assets, and the seven dwarfs split the other two-thirds.Not too bad, right? Well, it is pretty bad: Doc-through-Dopey together get twice as much as Snow White. She certainly won’t live happily ever after.

The situation gets more complicated if a minor child is getting a piece. The surviving parent may not be appointed the legal guardian for the receiving child; being mother or father isn’t decisive. Periodic inventories can be required. And the child gets his or her share as a much-too-young age.

So do you really want to share ownership of your house equally with two teenage kids? It can (and would) happen.

What else can trigger this besides the financial planner’s defective signing? If particular events happen with a lawyer-drawn will. And of course, if there’s no will.

Consider the parent who recently remarried, who didn't do a new will in the midst of planning the wedding and honeymoon.

How about the parents who did the right documents for their children, but later decided to have or adopt one more . . . and the old will didn’t contemplate more kids.

Or the person who typed up an old will, or copied a neighbor’s will. The document may have had the title "Will" at the top, but it wasn’t any good.

In each of these examples, the surviving spouse took it in the ear: take a half, take a third. Do not take all, do not pass "Go," do not collect even an extra $200.

The bottom line: having a document-gone-bad, or no document, can mean you'll be looking to your kids (or your dead spouse’s kids) for spending money, instead of the other way around.

Your documents are only good if people can find them. Just ask Jack.

This is the House that jack left.

This is the basement, dingy and dark
In the house that Jack left.

This is the chest, so rarely opened,
Covered by carpets and dust and webs
In that basement, dingy and dark
In the house that Jack left.

Read the complete poem here