Keating Law Blog

When giving to a charity for tax purposes, your clients are not being Scrooges if they make sure they're following the letter of the law. They want a donation to do good for the charity - and for themselves - by avoiding mistakes.  Read more about it at the Daily Plan It!:

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Financing and Growing Your Small Business Through Crowdfunding

What is crowdfunding? Part social networking and part capital accumulation, crowdfunding is simply the collective cooperation, attention and trust by people who network and pool their financial resources together to support efforts initiated by others.

Inspired by crowdsourcing, this innovative approach to raising capital has long been used to solicit donations or support political causes. This method has also been successfully implemented to raise capital for many different types of projects, including art, fashion, music and film.

Entrepreneurs can also tap the internet as a way to raise financing from a broad base of investors without turning to venture capitalists. With crowdfunding, you can raise small amounts of capital from many different sources, while retaining control over your business venture. Crowdfunding for business ventures, however, is not without its risks, and likely requires advice of an attorney.

In the traditional crowdfunding model, donations are pledged over the internet to fund a particular project or cause. The contributors are supporting the project, but receive no ownership interest in return for their monetary donation. This type of arrangement can exist with non-profit ventures and political campaigns, as well as start-up businesses. The person or entity soliciting the funding utilizes existing social networks to leverage the crowd and raise contributions in exchange for a reward, which is typically directly related to the project being funded, such as a credit at the end of a movie. With this type of arrangement, the contributor does not receive any ownership interest in the venture in exchange for the donation.

However, when for-profit companies solicit funds from a large number of individuals to raise capital in exchange for shares of ownership in the company, care must be taken to ensure the arrangement does not run afoul of federal and state securities laws.

Various companies and websites have popped up to assist entrepreneurs in raising capital through crowdfunding. Some operate on a flat fee, others charge a percentage of funds raised.  Keep in mind that any securities in a company sold to the public at large must be registered with regulatory authorities, unless they qualify for a specific exemption from the registration requirement. Selling shares of ownership to low-net-worth individuals (“unaccredited investors”) can trigger numerous registration and disclosure obligations. Additionally, state laws may also affect the transaction. As the number of investors and states involved increases, so do the cost and complexity of obtaining this type of capital financing. The various rules can be difficult to navigate, and missteps can result in significant penalties.
 

Estate Planning Don’ts

Preparing for the future is an uncertain business, but there are steps you can take during your lifetime to simplify matters for your loved ones after you pass, and to ensure your final wishes are carried out. Planning for what happens to your property, or who cares for your family members, upon your death can be a complicated process. To simplify things, we’ve created the following list to help you avoid some of the pitfalls you may encounter before, or even long after, you create your estate plan.

Don’t assume you can plan your estate by yourself. Get help from an estate planning attorney whose training and experience can ensure that you minimize tax implications and simplify the process of settling your estate.

Don’t put off your estate planning needs because of finances. To be sure, there are upfront costs for establishing the estate plan; however establishing your estate plan is an investment in the future well-being of your family, and one which will result in a far greater cash savings over the long term.

Don’t make changes to your estate plan without consulting your attorney. Changes in one area of your estate plan could impact other provisions you have made, triggering legal or tax implications you never intended.

Don’t assume your children will intuitively know your wishes, and handle the situation appropriately upon your death. Money and sentimental items can cause a rift between even the most agreeable siblings, and they will be especially vulnerable as they deal with the emotional impact of your passing.

Don’t assume that once you’ve prepared your estate plan it’s set in stone. Estate planning documents regularly need to be revised, often due to a change in marital status, birth or death of a family member, or a significant change in the value of your estate. Beneficiary designations should be periodically reviewed to ensure they are up to date.

Don’t forget to notify your family members, friends or other beneficiaries of your estate plan. Make sure your executor and successor trustee have access to your end-of-life documents.

Don’t assume your spouse will handle everything if something happens to you. It’s possible your spouse may be incapacitated at the same time, for example if you both are injured in the same accident. A proper estate plan appoints alternate representatives to handle your affairs if both you and your spouse are unable to do so.

Don’t use the same person as your agent under both the financial and healthcare powers of attorney. Using the same individual gives that person an incredible amount of influence over your future and it may be a good idea to split up the decision-making authority.

Don’t forget to name alternate agents, executors or successor trustees. You may name a family member to fill one of these roles, and forget to revise the document if that person dies or becomes incapacitated. By adding alternates, you ensure there is no question regarding who has the authority to act on your or the estate’s behalf.

Exemption Requirements for Non-Profit Public Benefit Corporations

A public benefit corporation is a type of non-profit organization (NPO) dedicated to tax-exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code which covers: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  Public benefit NPOs may not distribute surplus funds to members, owners, shareholders; rather, these funds must be used to pursue the organization’s mission. If all requirements are met, the NPO will be exempt from paying corporate income tax, although informational tax returns must be filed.

Under the rules governing public benefit NPOs, “charitable” purposes is broadly defined, and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. These NPOs are typically referred to as “charitable organizations,” and eligible to receive tax-deductible contributions from donors.

To be organized for a charitable purpose and qualify for tax exemption, the NPO must be a corporation, association, community chest, fund or foundation; individuals do not qualify. The NPO’s organizing documents must restrict the organization’s purposes exclusively to exempt purposes. A charitable organization must not be organized or operated for the benefit of any private interests, and absolutely no part of the net earnings may inure to the benefit of any private shareholder or individual.

Additionally, the NPO may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.

All assets of a public benefit non-profit organization must be permanently and irrevocably dedicated to an exempt purpose. If the charitable organization dissolves, its assets must be distributed for an exempt purpose, to the federal, state or local government, or another charitable organization. To establish that the NPO’s assets will be permanently dedicated to an exempt purpose, the organizing documents should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. If a specific organization is designated to receive the NPO’s assets upon dissolution, the organizing document must state that the named organization must be a section 501(c)(3) organization at the time the assets are distributed.

If a charitable organization engages in an excess benefit transaction with someone who has substantial influence over the NPO, an excise tax may be imposed on the person and any NPO managers who agreed to the transaction. An excess benefit transaction occurs when an economic benefit is provided by the NPO to a disqualified person, and the value of that benefit is greater than the consideration received by the NPO.

To apply for tax exemption under section 501(c)(3), the NPO must file Form 1023 with the IRS, along with supporting documentation, including organizational documents, details regarding proposed activities and who will carry them out, how funds will be raised, who will receive compensation from the NPO, and financial projections. If approved, the IRS will issue a Letter of Determination. Public charities must also apply for exemption from state taxing authorities, a process which varies from state to state.

Beware of “Simple” Estate Plans

“I just need a simple will.”  It’s a phrase estate planning attorneys hear practically every other day.   From the client’s perspective, there’s no reason to do anything complicated, especially if it might lead to higher legal fees.  Unfortunately, what may appear to be a “simple” estate is all too often rife with complications that, if not addressed during the planning process, can create a nightmare for you and your heirs at some point in the future.   Such complications may include:

Probate - Probate is the court process whereby property is transferred after death to individuals named in a will or specified by law if there is no will. Probate can be expensive, public and time consuming.  A revocable living trust is a great alternative that allows your estate to be managed more efficiently, at a lower cost and with more privacy than probating a will.  A living trust can be more expensive to establish, but will avoid a complex probate proceeding. Even in states where probate is relatively simple, you may wish to set up a living trust to hold out of state property or for other reasons.

Minor Children - If you have minor children, you not only need to nominate a guardian, but you also need to set up a trust to hold property for those children. If both parents pass away, and the child does not have a trust, the child’s inheritance could be held by the court until he or she turns 18, at which time the entire inheritance may be given to the child. By setting up a trust, which doesn’t have to come into existence until you pass away, you are ensuring that any money left to your child can be used for educational and living expenses and can be administered by someone you trust.  You can also protect the inheritance you leave your beneficiaries from a future divorce as well as creditors.

Second Marriages - Couples in which one or both of the spouses have children from a prior relationship should carefully consider whether a “simple” will is adequate. All too often, spouses execute simple wills in which they leave everything to each other, and then divide the property among their children. After the first spouse passes away, the second spouse inherits everything. That spouse may later get remarried and leave everything he or she received to the new spouse or to his or her own children, thereby depriving the former spouse’s children of any inheritance.  Couples in such situations should establish a special marital trust to ensure children of both spouses will be provided for.

Taxes - Although in 2011 and 2012, federal estate taxes only apply to estates over $5 million for individuals and $10 million for couples, that doesn’t mean that anyone with an estate under that amount should forget about tax planning. Many states still impose a state estate tax that should be planned around. Also, in 2013 the estate tax laws are slated to change, possibly with a much lower exemption amount.

Incapacity Planning – Estate planning is not only about death planning.  What happens if you become disabled?  You need to have proper documents to enable someone you trust to manage your affairs if you become incapacitated.  There are a myriad of options that you need to be aware of when authorizing someone to make decisions on your behalf, whether for your medical care or your financial affairs.  If you don’t establish these important documents while you have capacity, your loved ones may have to go through an expensive and time-consuming guardianship or conservatorship proceeding to petition a judge to allow him or her to make decisions on your behalf.  

By failing to properly address potential obstacles, over the long term, a “simple” will can turn out to be incredibly costly.   An experienced estate planning attorney can provide valuable insight and offer effective mechanisms to ensure your wishes are carried out in the most efficient manner possible while providing protection and comfort for you and your loved ones for years to come.

Family Business: Preserving Your Legacy for Generations to Come

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

• Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
• Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
• Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
• Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
• Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
• Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
• Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
• Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.

Do I Really Need Advance Directives for Health Care?

Many people are confused by advance directives. They are unsure what type of directives are out there, and whether they even need directives at all, especially if they are young. There are several types of advance directives. One is a living will, which communicates what type of life support and medical treatments, such as ventilators or a feeding tube, you wish to receive. Another type is called a health care power of attorney. In a health care power of attorney, you give someone the power to make health care decisions for you in the event are unable to do so for yourself. A third type of advance directive for health care is a do not resuscitate order. A DNR order is a request that you not receive CPR if your heart stops beating or you stop breathing. Depending on the laws in your state, the health care form you execute could include all three types of health care directives, or you may do each individually.

If you are 18 or over, it’s time to establish your health care directives. Although no one thinks they will be in a medical situation requiring a directive at such a young age, it happens every day in the United States. People of all ages are involved in tragic accidents that couldn’t be foreseen and could result in life support being used. If you plan in advance, you can make sure you receive the type of medical care you wish, and you can avoid a lot of heartache to your family, who may be forced to guess what you would want done.

Many people do not want to do health care directives because they may believe some of the common misperceptions that exist about them. People are often frightened to name someone to make health care decisions for them, because they fear they will give up the right to make decisions for themselves. However, an individual always has the right, if he or she is competent, to revoke the directive or make his or her own decisions.  Some also fear they will not be treated if they have a health care directive. This is also a common myth – the directive simply informs caregivers of the person you designate to make health care decisions and the type of treatment you’d like to receive in various situations.  Planning ahead can ensure that your treatment preferences are carried out while providing some peace of mind to your loved ones who are in a position to direct them.

Which Business Structure is Right for You?

Which entity is best for your business depends on many factors, and the decision can have a significant impact on both profitability and asset protection afforded to its owners. Below is an overview of the most common business structures.

Sole Proprietorship
The sole proprietorship is the simplest and least regulated of all business structures. For legal and tax purposes, the sole proprietorship’s owner and the business are one and the same. The liabilities of the business are personal to the owner, and the business terminates when the owner dies. On the other hand, all of the profits are also personal to the owner and the sole owner has full control of the business.

General Partnership
A partnership consists of two or more persons who agree to share profits and losses. It is simple to establish and maintain; no formal, written document is required in order to create a partnership. If no formal agreement is signed, the partnership will be subject to state laws governing partnerships. However, to clarify the rights and responsibilities of each partner, and to be certain of the tax status of the partnership, it is important to have a written partnership agreement.

Each partner’s personal assets are at risk. Any partner may obligate the partnership, and each individual partner is liable for all of the debts of the partnership. General partners also face potential personal legal liability for the negligence of another partner.

Limited Partnership
A limited partnership is similar to a general partnership, but has two types of partners: general partners and limited partners. General partners have broad powers to obligate the partnership (as in a general partnership), and are personally liable for the debts of the partnership. If there is more than one general partner, each of them is liable for the acts of the remaining general partners. Limited partners, however, are “limited” to their contribution of capital to the business, and must not become actively involved in running the company. As with a general partnership, limited partnerships are flow-through tax entities.

Limited Liability Company (LLC)
The LLC is a hybrid type of business structure. An LLC consists of one or more owners (“members”) who actively manage the company’s business affairs. The LLC contains elements of both a traditional partnership and a corporation, offering the liability protection of a corporation, with the tax structure of a sole proprietorship (if it has only one member), or a partnership (if the LLC has two or more members). Its important to note that in certain states, single-member LLCs are not afforded limited liability protection.

Corporation
Corporations are more complex than either a sole proprietorship or partnership and are subject to more state regulations regarding their formation and operation. There are two basic types of corporations:  C-corporations and S-corporations. There are significant differences in the tax treatment of these two types of corporations, however, they are both generally organized and operated in a similar manner.

Technical formalities must be strictly observed in order to reap the benefits of corporate existence. For this reason, there is an additional burden of detailed recordkeeping. Corporate decisions must be documented in writing. Corporate meetings, both at the shareholder and director levels, must be formally documented.

Corporations limit the owners’ personal liability for company debts. Depending on your situation, there may be significant tax advantages to incorporating.

Avoid Family Feuds through Proper Estate Planning

A family feud over an inheritance is not a game and there is no prize package at the end of the show. Rather, disputes over who gets your property after your death can drag on for years and deplete your entire estate. When most people are preparing their estate plans, they execute wills and living trusts that focus on minimizing taxes or avoiding probate. However, this process should also involve laying the groundwork for your estate to be settled amicably and according to your wishes. Communication with your loved ones is key to accomplishing this goal.

Feuds can erupt when parents fail to plan, or make assumptions that prove to be untrue. Such disputes may evolve out of a long-standing sibling rivalry; however, even the most agreeable family members can turn into green-eyed monsters when it comes time to divide up the family china or decide who gets the vacation home at the lake.

Avoid assumptions. Do not presume that any of your children will look out for the interests of your other children. To ensure your property is distributed to the heirs you select, and to protect the integrity of the family unit, you must establish a clear estate plan and communicate that plan – and the rationale behind certain decisions – to your loved ones.

In formulating your estate plan, you should have a conversation with your children to discuss who will be the executor of your estate, or who wants to inherit a specific personal item. Ask them who wants to be the executor, or consider the abilities of each child in selecting who will settle your estate, rather than just defaulting to the eldest child. This discussion should also include provisions for your potential incapacity, and address who has the power of attorney.

Do not assume any of your children want to inherit specific items. Many heirs fight as much over sentimental value as they do monetary items. Cash and investments are easily divided, but how do you split up Mom’s engagement ring or the table Dad built in his woodshop? By establishing a will or trust that clearly states who is to receive such special items, you avoid the risk that your estate will be depleted through costly legal proceedings as your children fight over who is entitled to such items.

Take the following steps to ensure your wishes are carried out:

• Discuss your estate planning with your family. Ask for their input and explain anything “unusual,” such as special gifts of property or if the heirs are not inheriting an equal amount.
   
• Name guardians for your minor children.
   
• Write a letter, outside of your will or trust, that shares your thoughts, values, stories, love, dreams and hopes for your loved ones.
   
• Select a special, tangible gift for each heir that is meaningful to the recipient.
   
• Explain to your children why you have appointed a particular person to serve as your trustee, executor, agent or guardian of your children.
   
• If you are in a second marriage, make sure your children from a prior marriage and your current spouse know that you have established an estate plan that protects their interests.
   

Year End Gifts

If you’re like most people, you want to make sure you and your loved ones pay the least amount of tax possible. Many use year-end gift giving as a way to transfer wealth to younger generations and also reduce the overall potential estate tax that will be due upon their death. Below are some steps you can take to make gifts to your heirs without triggering any gift tax liability. Some of these techniques may also reduce your own income tax liability.

A combination of estate and gift tax exemptions can be used to significantly reduce the overall tax liability of your estate. Upon your death, federal estate tax may be owed. A portion of your estate is exempt from the tax. That exemption amount is set by Congress and can change from year to year. 

Many taxpayers make annual gifts to loved ones during their lifetimes, to reduce the overall value of the estate so that it does not exceed the exemption amount in effect at the time of death. It is important to consider that gifts made during your lifetime are subject to a gift tax (equal to the estate tax). However, certain gifts or transfers are not subject to the gift tax, enabling you to make tax-free gifts that benefit your loved ones and reduce the overall taxable value of your estate upon your death.

The annual gift tax exclusion allows each individual to make annual gifts of up to $14,000 to each recipient. There is no limit to the number of recipients who may each receive up to $14,000 totally tax-free. Married couples may gift up to $28,000 to each recipient without triggering any tax liability. This annual exclusion expires on December 31 of each year, and larger gifts may be made by splitting it up into two payments. By making a payment in December and one the following January, you can take advantage of the gift tax exclusion for both years. Keeping annual gifts below $14,000 per recipient ensures that no gift tax return must be filed, and that there is no reduction in the estate tax exemption amount available upon your death.

Annual gifts may also be made in the form of contributions to a §529 College Savings Plan. These, too, are subject to the $14,000 annual gift tax exclusion. Additionally, such contributions may afford the giver with a state tax deduction.

Payment of a beneficiary’s medical expenses is also excluded from the gift tax. There is no limit to the amount of medical expense payments that may be excluded from tax. To qualify, the payment must be made directly to the health care provider and must be the type of expenses that would qualify for an income tax deduction.

If you have a large estate that may be subject to taxes upon your death, making annual gifts during your lifetime can be a simple way to reduce the size of your estate while avoiding negative tax consequences.

You’ve Planned for Your Business, But Do You Have an Adequate Business Plan?

Much like the blueprints that help a contractor build a house, your business plan is an essential component of your start-up activities, helping you define where you want your company to be within a few years and how you plan to get there. Business plans can vary from simple, one-page documents to lengthy tomes.

Once created, your business plan is not set in stone. Your company will naturally evolve over time and be influenced by outside factors. As such, successful entrepreneurs consider their business plans to be a work-in-progress, to be updated to reflect changes in the marketplace. The important thing to remember is that a good plan includes only the information you need, nothing more and nothing less.

Some successful entrepreneurs have abandoned the old notion of lengthy business plans containing extraneous information. As the company evolves, much of a comprehensive document may become obsolete and have to be discarded. Or, worse, you might find yourself so invested in the plan itself that you resist changes that may be beneficial to the company. Instead, think of a business plan as the following four items:

• A description of the business and leadership team
• A well-defined target market
• Competitive advantage(s) of your product or service
• Three years of projected financial statements

When you are in the early stages, attempting to secure the first round of capital financing, investors are most concerned with the leadership team and what they are going to do. In later stages, the financial data takes on a more pivotal role. Care should be taken to focus on your target market and the overall concept, rather than getting bogged down in the details of a complicated business plan. Potential investors will be closely examining many areas of your business plan, including the team, target market, product or service you offer and financial projections.

Your Leadership Team
The best start-up business teams include a mix of varied strengths that complement each other. The individual who will be managing the business and developing the products or services offered are of the utmost importance.

The Target Market
Your business plan must describe the target market sufficiently to convince investors that you will have customers and that there is a need for whatever it is you have to sell. Be realistic, and include parameters such as the size of the market and the competition.

Competitive Advantage
What is your competitive advantage?  Is it something unique about the product or service your company offers?  And if you do have a killer concept, what prevents a competitor from copying it?  What is the barrier to entry? If the product or service itself is not unique, be sure to demonstrate how you intend on marketing it in a way that sets it apart from the competition.  

Financial Projections
Provide a reasonable estimation of what your profit and loss will be over the course of the first few years of business operations. Of course, this estimate is subject to change, but it will provide some guidelines to let investors, and your leadership team, know what milestones you expect to meet along the way.

Above all, make sure you demonstrate to potential investors that you have carefully and realistically thought through your business plan, and that you are prepared to make changes along the way when adjustments are necessary.