Avoid the Pitfalls of Joint Accounts with a Durable Power of Attorney and Living Trust

Avoid the Pitfalls of Joint Accounts with a Durable Power of Attorney and Living TrustMany people employ the use of joint financial accounts as a matter of convenience, such as an elderly parent placing a child’s name on the parent’s checking account so that checks and deposits can continue if the parent is travelling or incapacitated. There is nothing necessarily wrong with this, but many well-meaning people are uninformed about the consequences of placing a non-spouse on their financial accounts.

Losing Control of the Account.
Requiring that withdrawals from the account require all the signatures of all the joint owners is entirely inconvenient, but allowing withdrawals upon the signature of any single owner of the account subjects the account to being emptied on the action of any one individual. This can leave a parent’s funds at risk of being depleted without any authorization from the parent.

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Treat Your LLC Like a Business to Protect Your Assets

Treat Your LLC Like a Business to Protect Your AssetsMany business owners form several types of business entities to hold their assets and operate different aspects of their businesses. A common strategy is to form limited liability companies to hold real estate. The operating entity, such as a manufacturing entity, pays monthly rent to the real estate LLC and this can work to keep liability of the operating entity separate from the real estate LLC. Some LLCs are formed to hold other assets, such as personal property that is leased to the operating entity. Also, LLCs are commonly used to manage family-owned assets and facilitate transfers among family members. LLCs are not required to have the formalities of meetings, minutes, and notices which are required for corporations. However, for an LLC to maintain its liability protections and protect itself from IRS attacks, it is prudent to exercise some formalities to evidence that the LLC is maintained as a separate entity and is not the alter ego of its owner(s). We advise many of our Cottage Law clients and business owners and families who use LLCs to hold and manage assets that they should treat the LLC as a business by following the pointers below.

  • form the entity in strict compliance with the law of the state where it is formed
  • apply for and obtain a federal ID number
  • fund the LLC with assets immediately upon formation or soon after forming the entity
  • the assets transferred to the LLC should be titled in the name of the LLC and ensure that insurance policies reflect the proper ownership
  • the LLC should have its own bank accounts that are not used as the members’ (the owners’) personal cash registers
  • all LLC related funds should go in and out of LLC accounts; any distributions to the members should be from the funds held in the LLC’s accounts
  • the LLC’s assets should not be for the personal use of the members unless the members compensate the LLC for the use of the assets
  • personal assets should not be transferred to the LLC unless those assets are for a business purpose and no longer to be used personally
  • if the LLC has a manager, the manager should respect the fiduciary duty he or she has to the owners in conducting the affairs of the LLC
  • if a member dies, the LLC should continue to operate as usual, as opposed to dissolving, because the IRS could argue the LLC was solely formed for the avoidance of taxes and not legitimate business purposes
  • the Operating Agreement should provide a roadmap as to how distributions are to be made and no deviation from this should occur
  • the LLCs books and records, corporate and financial, should be attended to on a timely basis and with professional care
  • the Operating Agreement should provide for how voting rights are allocated, and while different voting requirements can be established to suit the needs and concerns of the members, the voting requirements should be respected at all times
  • the members of the LLC should receive K-1s to attach to their income tax returns
  • the members should hold annual meetings and keep minutes of those meetings, filing them in the record book
  • the members should hold special meetings for important decisions or provide signed consent resolutions, filing those documents in the record book

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Perils of Unprotected Business Credit Cards

The Hazards of Company Credit CardsWith all the publicity of the new protections afforded consumers with the passing of the Credit CARD Act of 2009, business owners can be surprised to learn that the business credit card in their wallet is not covered by the CARD Act. Business credit cards do not fall under the protections of the Truth in Lending Act and the Credit CARD Act of 2009. This means that card issuers can raise rates at will (even on existing balances), bill on any date each month, and squeeze the time frame between the receipt and payment date–all practices that have been banned on consumer cards.

Business cards, however, can offer benefits that are attractive to business owners, such as more flexible payment options, business reward programs, and the ability to detail and break out spending records for accounting purposes. To be fair, some business card issuers voluntarily incorporate many consumer protections into their fine print policies.

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What Happens to Credit Card Debt After Death?

Credit card debt after deathYou can’t take it with you, but do credit card bills follow you into the grave? Does the debt die with you? Or, can it come back and haunt those you leave behind?

General Rule:
The general rule is that any debt of a deceased person, including credit cards and medical bills, are solely the responsibility of the decedent or the decedent’s estate. The general rule assumes that no other person was the signer or joint obligator on any particular account or debt of the deceased person. If an account is the deceased person’s alone, the debt is the deceased person’s alone.

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When Employers Can Be Liable for an Employee’s Debt

Creditors use employer garnishment errors to collect entire debt from employers
Creditors use employer garnishment errors to collect entire debt from employersEmployee wage garnishments appear to be informal and somewhat routine proceedings from the perspective of the employer. Employers are routinely sent writs of garnishment on printed forms, and employers can simply respond to writs of garnishment without using an attorney. Employers, however, face a huge risk relative to its employees’ garnishment proceedings because in the State of Michigan, employers can be held liable for the entire debt of the employee that is subject of the garnishment, including court costs and attorney’s fees, if the employer fails to comply with certain requirements. Some creditors are paying attention to the small details that the employer may overlook, because the creditor wants to be repaid and rather than wait around to be paid from the debtor, creditors are using employer garnishment errors to collect the entire debt from the employer. Employers are commonly not represented by counsel in this process and creditors are represented by counsel, providing the creditor a significant advantage.

Failure by employers to respond within 14 days could cause courts to take action against the employer
Failure by employers to respond within 14 days could cause courts to take action against the employer for full amount owedIf an employer is named as the garnishee in a writ of garnishment, the employer must provide information as to the debtor-employee’s money that the employer controls on the Garnishee Disclosure Form, including a calculation of the amount that is available for garnishment from the employee’s paycheck. The properly completed form must be mailed to the court and the parties within 14 days after the employer receives the writ of garnishment. If the employer fails to disclose within the 14 days, the court can take action against the employer and can order the employer to pay the full amount owed on the judgment as stated in the writ of garnishment. A friendly letter to the creditor stating that the employee is no longer in the employer’s records or other information is unavailable is insufficient. The creditor can go to court and obtain a default judgment for the entire amount of the debt because the employer did not properly respond to the writ.

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