Arizona asset protection enjoys a competitive advantage over the laws of many other states because the drafters of the Arizona LLC law omitted creditor friendly portions of the Uniform Laws that allowed creditors to foreclose their charging order liens to realize on the underlying assets owned by the LLC.  This puts Arizona LLCs among the country’s elite LLCs for asset protection.  This enhanced protection is commonly known as the “charging order as the exclusive remedy,” and until recently was thought to be absolute in states like Arizona.  However, this enhanced protection is now being eroded by developing case law, and even in an LLC-friendly state such as Arizona the yellow flag of caution must be out for a Single Member LLC (SMLLC) as protection of its assets from its member’s creditors.

The Battle Between Creditors and SMLLCs

In the 2003 Colorado bankruptcy case Ashley Albright, the Court allowed a bankruptcy trustee to stand in the shoes of the debtor and control the assets of the debtor’s SMLLC.  First thought to be an aberration limited to its facts, in fact that decision was correctly decided and a warning to all SMLLCs.  The true lesson of that case is stay out of bankruptcy court if you expect to protect the assets in a SMLLC because the bankruptcy trustee steps into the place of the debtor and can control the assets inside the SMLLC if there are no other members to protect.

Then in 2005, in an Arizona bankruptcy case case, In re Ehmann, a decision since vacated when the parties settled, Judge Haines articulated a theory that if a limited partner had a passive role in the governance of a family limited partnership, the bankruptcy trustee could under some circumstances succeed to the interest of the debtor limited partner, formulating a theory about the impact of the executory nature of the limited partnership interest.  While not particularly interesting because it broke no new intellectual ground –the bankruptcy trustee always had that bundle of rights, the case is interesting and instructive because the general partner governed the limited partnership to the detriment of the bankruptcy trustee giving rise to a right to dissolve the partnership and reach the underlying assets, the case is nevertheless instructive.  The case is important because it is the vanguard case signaling that the remedy of judicial dissolution can be used by creditors in a variety of circumstances where no other remedies exist.

The next important case is the recently published Florida Olmstead case where the Florida Supreme Court failed to decide the question certified to it by the Federal District Court about the remedies available against a SMLLC, but rather held that a charging order was not the exclusive remedy against a single member limited liability company because single member limited liability companies lacked other members whose interests needed to be protected.

The Florida Supreme Court refused to interpret the state statute and instead chose to fashion a remedy designed to protect creditors against artificial barriers in collection procedures.

It has been suggested elsewhere that a strict reading of exclusive remedy statutes (such as the one in  Arizona) invites judicial activism to shape remedies as did the Florida Supreme Court which has now given it’s imprimatur to the creditor friendly theory.

Arizona-Specific SMLLCs

Although SMLLCs are good asset protection entities protecting a member’s other assets from claims by creditors of the SMLLC (commonly called inside out protection), even that protection is limited if the member has signed a guarantee or can be held directly responsible as the actor giving rise to the claim.

The importance of the omission in Arizona law of the right to foreclose the charging order means a judgment creditor is entitled to a lien against a member’s interest in an LLC, but the creditor is only entitled to receive distributions that would otherwise be made to the member.  If the LLC makes no distributions, then the creditor receives nothing except the satisfaction of making life difficult for the debtor.  In states that follow the Uniform Laws or have their version of the charging order statute, the creditor may foreclose its lien on the member’s interest and force its way into the governance of the LLC; this is not the case in Arizona.

In single member limited liability companies, this means the creditor may have an absolute right to distributions from the SMLLC, but the debtor retains control over the assets of the SMLLC and the timing of distributions.  This is a most undesirable result from the point of view of the debtor.

What Does This Mean For You?

The battle will continue over the distinction between economic rights and governance rights in SMLLCs. How much deference to a plain reading of the statute can asset protectors expect from judges in cases with difficult fact patterns will continue to present a quandary to most.  Practitioners have long argued peppercorn theories of additional members, but the modern genre of reverse piercing and judicial dissolution arguments in an increasingly hostile judicial environment require you to stand up and take notice rather than relying only on statutory constructions.  It will be increasingly important that documents are well drafted in a state with favorable laws and that the ownership and governance provisions of your operating agreements be given particularly attention to achieve your specific goals.  Most importantly specific facts must be analyzed because beginning with the best structure is the key to long term success.

If you think a custom crafted LLC will benefit you, give me a call.

(Photo courtesy of The Guardian)

A typical Thursday night finds me meeting with other lawyers and discussing ideas useful in our respective practices.  Although always trying to find new ideas to help clients, these meetings, reminiscent of old style writer’s salons, are particularly useful because of the opportunity to exchange views in an open setting.  No idea is too simple or outlandish and all opinions are welcome.  It is a refreshing opportunity to be the one asking the stupid question and being amply rewarded with a wealth of knowledge and experience.  The food and drink is usually good, but no match for the companionship.

Recently we were discussing provisions for naming and removing successor trustees and the differences between granting the right to trustees, protectors, and beneficiaries.  I was particularly interested in what powers could be used in what situations with or without running afoul of grantor trust rules that cause assets in an irrevocable trust to be included in the taxable estate of the grantor or beneficiary.

These are important discussions, but often buried in the “black box” of our trusts because the clients lose interest after answering the questions of control, use, and taxes.  My role is to understand the client’s intentions and providing the most flexible rules that still meet the client’s objectives.

Our discussions frequently involve the relatively new “decanting” power under Arizona law, which allows a trustee of an irrevocable trust to make a new trust and add or exclude beneficiaries under certain circumstances.

This evening the point was made that for asset protection purposes attorneys should ensure that there is a power to exclude beneficiaries, and the discussion then quickly turned to whether that was a power best granted to a trustee or a protector in the context of which office could best wield the power in conjunction with a beneficiary’s right to remove and replace the trustee or protector without inadvertently creating a general power of appointment—which would cause estate tax inclusion in the estate of the person wielding the power.

The flash of knowledge that struck me was that although the power to exclude beneficiaries was crucial to a thoughtful asset protection trust, it would almost certainly not sit well with most of my clients that their successor trustee could exclude their chosen beneficiaries, except under very limited circumstances.

That in turn led to the idea of how to design a trust which would grant the power, but include adequate guidelines as to when the power could be exercised, so as to enhance the protection beneficiaries will have from their creditors yet reassure the grantor that the power will not be used to subvert the client’s intentions.

The trusts I create contain many instances of this type of analysis to ensure that my clients are always on the leading edge of what is possible.

If you found this article interesting, please share it with a friend or make a comment.  If you would like to find out more about purposeful planning, please call me.

As a former consumer debtor lawyer who represented many good families through bankruptcy proceedings in the 1980s and 1990s, I have an intense dislike for the predators preying on the most vulnerable members of our economy – those who have lost their jobs and their hope for the future, and who will try anything to avoid further soiling their already shattered self image.  The article describes the feeding frenzy of entrepreneurs taking advantage of this class of consumers desperate for a solution out of their current travails.  It brings to mind the late night television infomercials promising get rich quick schemes where the only ones getting rich are the ones selling the schemes.

What does all this have to do with estate planning?

A competent estate planner likes inquisitive clients, and especially likes clients who question credentials, experience, and pricing.  It helps the lawyer “sharpen the saw,” identify what is important to the client, and to remain relevant in an ever changing world.

Your estate planner should have good answers to all your questions including how much will it cost, how long will it take, why he or she should hire you, and what the client should do if you are not around when they need you.  If you are going to share personal and financial details with your lawyer you need to have confidence and trust in that person, and a good estate planner knows this.

A skeptical client should want to know about the lawyer sitting across the table from him or her before divulging personal information.  In today’s electronic age, a prospective client can a have a wealth of information before the meeting even begins: the lawyer’s web site and other public information such as Martindale Hubbell listing and rating, State Bar information, reported cases, and other commercial listings.  All of these let the prospective client garner a lot of information, but there is no substitute for asking questions and observing the lawyer’s verbal and non-verbal communication skills.  You must like and trust the lawyer in whom you will repose trust – trust in the lawyer’s skill, knowledge, experience, talent, honesty, and demeanor.  Hiring an estate planner is an important personal decision.

I recently had a conversation with a financial advisor. The purpose of the meeting in her words was for her to find out about my practice.  Near the end of the conversation I asked her to tell me some of her most common frustrations with the lawyers she worked with and how I could improve on their performance if we were to work together.  She was taken aback by my candor and thought talking about her relationships with other lawyers was improper, but I think bluntness is essential for good communication.  Unless I found out why she was looking for more lawyers to work with, I might repeat the same mistakes.  I ask all my clients who come to me with documents drawn by other local lawyers the same question – I want to find out up front if I can do better or if the best advice is to go back or keep looking.

A good estate plan is a living plan.  It is not documents.  A good estate plan is one that sparks a thoughtful discussion of ideas centered on the client’s values, assets, family, desires, and intentions.  An estate plan is a priceless investment and you deserve an estate planner that has spent the time to understand the importance of that process and can communicate ideas that address your innermost concerns in a manner that comforts you.

What does all this have to do with the debt relief firms that cost a lot of money but end up leaving their customers worse off than before they started?  Simply that it brought home to me that estate planners don’t have customers, they have clients, and an attorney-client relationship must be built on trust.

If you want an estate planner who welcomes your questions and takes into consideration your family and your values as well as your assets, call our firm.  As an additional incentive—mention this post to Lisa, my experienced client coordinator, and I will waive the customary $500.00 initial meeting fee.

Who would you like to have with you when you are ill or injured in the hospital?  Most likely you would hope to have your partner of many years there with you to hold your hand when things get rough.  Although many of us take for granted that we would be allowed that luxury, until just recently unmarried couples had no assurance that their partner would be allowed to visit them in the hospital—especially if a “recognized” family member such as a parent or sibling chose to refuse access.

In February 2009, Phoenix passed an important milestone when the City Council adopted an ordinance that gives domestic partners, same sex or not, the right to register as domestic partners and establish the right to hospital visitation until the registration is officially revoked.

Before this ordinance, and in other parts of the state, even if the domestic partners had executed health care powers of attorney and HIPAA releases, the family could still exclude the partner from visitation.  Now however, if the domestic partners reside in Phoenix and have registered, they will have established a paramount right to visitation.  Area hospitals outside Phoenix are not bound by the registration and as of now the only other Arizona city with a domestic partners registry is Tucson.  Mesa’s city council is trying to adopt a similar provision, but opposition forces are organizing against the effort.

The registration conveys no other rights, but might be useful in establishing the credentials necessary to obtain benefits where such benefits are offered.

It appears more opposite sex couples than same sex couples are taking advantage of Phoenix’ ordinance, but the ordinance is hailed as a progressive step toward the recognition of human rights across sexual preference boundaries.

Estate planning for unmarried couples is crucial if property rights are to be inherited and disruption to the survivor’s lifestyle is to be avoided.  Traditional tools such as rights of survivorship, POD/TOD, beneficiary deeds, Wills, trusts, and powers of attorney can all effectively be used to provide an estate plan, but the impact on the decedent’s family and the survivor must be carefully considered.  Even small estates must be carefully planned if disputes are to be avoided.

1. No creditor protection is available when property passes by joint tenancy.  Creditors come in many shapes and sizes these days.  Jury verdicts in even the most common accidents easily exceed insurance limits.  Aging survivors are more susceptible to lapses of concentration while driving or otherwise.  All of the survivor’s assets are exposed to creditors when assets are in joint tenancy.  A trust based plan can provide creditor protection to your spouse or your descendants.  This valuable protection can not be purchased at any price if you miss this planning opportunity.
2. Defeats an Estate Plan. Property in joint tenancy passes to the joint tenant even if your Will indicates a different result.  Heirs other than the joint tenant get nothing.  If the joint tenant tries to distribute property to other heirs there will be a gift tax consequence.
3. No estate tax protection for post-death appreciation is available if joint tenancy is used.  Although the asset will pass to your spouse estate tax free; upon the death of the survivor the entire estate is exposed to estate taxes and the tax exemption normally available to the first decedent will be lost.  If your estate (including life insurance) is likely to exceed the Applicable Exclusion Amount (scheduled to return to only $1,000,000 in 2011) then you have unnecessarily benefitted the government at the expense of your descendants.  However, if a “credit shelter” trust plan is utilized, the decedent’s estate, will escape taxation no matter how much it appreciates before the death of the surviving spouse.
4. Reduced protection from accumulated capital gains. Individually owned or community property receives a “step up” basis to fair value at the date of death and your heirs can sell the property and pay no capital gains.  If property is held as joint tenants, the joint tenant avoids probate, but receives the favorable “step up” basis treatment on only one-half of the property.
5. Lack of control. A joint tenant has no control over what happens to the property after death.  A surviving joint tenant can sell or transfer the property, or can pass it to the survivor’s choice of heirs, including subsequent spouses.  Joint tenancy deprives you of the assurance that your property stays in your bloodline.  Without any further planning, property owned by a surviving joint tenant will pass automatically to the heirs of the survivor.  If the survivor’s heirs are not the same as the decedent’s heirs, an undesirable result may occur.
6. Guarantees public probate proceedings. Although there will be no probate administration when the first joint tenant dies, then (unless the survivor creates a new plan) a public probate proceeding will be necessary to complete the transfer of the property upon the death of the survivor.
7. May subject you to expensive and potentially devastating results. Joint tenancy property is fair game for your joint tenant’s creditors.  Although you may have an opportunity to prove your property was placed into joint tenancy for convenience and that the property really does not belong to the debtor, you are exposed to the expense and uncertainty of litigation.

Don’t let any of these fatal problems befall your family.  Call our office today to discuss other, more reliable options for passing on your assets.

Does your estate plan include a digital Will?

Last night while I was having dinner with a friend who also works in the legal world, talk turned to the digital age, and one of our dinner partners remarked about how interesting it was that our friend had recently moved and had acquired modern technology like digital cable TV.  The punch line was that when asked if he was online, he replied he had something better, a secretary who was online.

Not many people I meet in my practice have personal secretaries any more.  Almost all of them are “online.”  Whether you use the internet for email, online banking, bill paying, photo or data storage, medical information, or social networking, it is likely that you have a myriad of usernames and passwords that ought to be regularly changed.

What happens to those online accounts when you die?

Andrea Coombes recently wrote an interesting article Don’t Take Your Passwords to the Grave that describes some of the common risks associated with estate plans that do not adequately address internet accounts.

A somewhat more well known problem was documented in 2005 in A Corporal’s Death on Law.com which described the problems the parents of a deceased soldier had accessing their son’s email account to retrieve his son’s contacts and preserve a record of his correspondence.

To add to the mix, social networking sites such as Twitter, Facebook, MySpace, LinkedIn, etc, sometimes have their own policies regarding what happens to a user account when the owner passes away.

You can protect against the loss of the electronic paper trail as a result of your death by leaving behind a list of accounts, usernames and passwords.  You can download my suggested form for this purpose at www.bregmanandburt.com.  But because of the confusing privacy rules, this may not be enough.  Your trust, Will, and powers of attorney should all include provisions addressing who owns or can access your online accounts after your death.  You also have the option of creating an “online will” to deal with your online assets such as accounts and passwords.

If you use the internet and your estate plan does not contain these important provisions, seek the help of a competent estate planner who understands the digital world.  I welcome your call to review your estate plan or discuss these issues with you.

Social capital is the money or time you contribute to worthy causes that improve society.  A favorite saying around charitable causes is the phrase “give or get” which means members can either contribute an amount of money toward the goal or they can go out and raise that sum of money from people they know.  The saying recognizes that the time expended raising money is often as important as contributing the money itself.

But the social capital I want to talk about in the context of estate planning emanates from my friend’s philosophy that “money is only a tool.”

Although it is often unexpected, when I initiate conversations with estate planning clients my goal is to begin each relationship by learning what each new client values.

Commonly, they are proud of the manner in which they have provided for their family and their intention to provide financial support after they die. However, they often worry that their descendants won’t use their inheritance wisely; and sometimes clients feel that their descendants don’t really need an inheritance anyway.

The concept of social capital solves many issues.  It allows you to contribute money to causes you believe in and set up your descendants to be caretakers of the capital for the future.  It benefits the descendant that doesn’t need your money by speaking from your heart to their own.  It benefits the spendthrift by substituting personal responsibility for temptation.

There are 2 schools of thought about the use of social capital.  Some clients are just not interested in the concept, believing they have supported their causes during their lifetime and it is their descendants’ turn to decide how to act.  Others see the use of social capital as a key tool to building a legacy through strength of character.  Depending on the client’s perspective there are different ways to use this tool.

One way is to purchase life insurance and name a favorite cause as the beneficiary.  This allows small amounts of premium dollars to blossom into a large gift that can provide major support for a favorite cause.  This works well in many situations, but it does not build responsibility in your descendants.

There are tax motivated strategies such as naming a charity as the beneficiary of a retirement account that has not yet been taxed.  Leaving the descendants post-tax assets and gifting the as of yet untaxed retirement plan can yield a good income tax and estate tax result.  Creating charitable remainder trusts as a technique to avoid capital gains on appreciated property is a good strategy when contemplating the sale of highly appreciated real estate or a business.  These strategies share the defect of providing social capital, but not involving your descendants.

A good way to speak to your descendants is to set aside a portion of your wealth in a donor advised fund and name your descendants as the advisors to the fund.  Your voice comes through because you leave your descendants the responsibility of making decisions about how, when, and to whom to give money.  It encourages them to honor your legacy by becoming involved in the causes they support.

However you choose to create a philanthropic legacy, you will be speaking in a clear voice to your descendants about your values and making a difference the way you decide best suits your own perspective.

(image courtesy of www.treasurechestproducts.com)

Back in December I blogged about estate planning not being about money and described the beginning of a journey to find the legacy you want to leave to your children, today I’m going to write about another part of that journey… finding your own voice.

Part of finding your legacy means looking for and putting your own voice into your documents.  Recently I blogged about George Washington’s Will and the way he breathed life into his estate plan by describing the importance of his swords bequeathed to his nephews and the even more important freedoms for which they stood.  Not all of us can be the father of our country, but all of us can bequeath the lessons of a lifetime and speak to our descendants through our estate plan.

Estate planning interviews that begin with how much money you have and to whom do you want to leave it are likely to end there as well.  Interviews that beginning by  listening to your own life’s story give you an opportunity to explore who you are, what you have done, and what is important to you.

When I was first starting out as an inexperienced estate planning attorney, I was often so in awe of my clients who were worth a lot of money that I couldn’t wait to try to impress them in return with the amount of knowledge I had and to use that knowledge to save them even more money.  I was so awe struck, that I neglected to appreciate the value of who they were.  If it was often a less than satisfying personal relationship for me, I slowly realized, it must have been mutually unsatisfactory for my clients as well.

I began to understand if I first learned who my clients were, I would soon appreciate what they valued, and it would become apparent how they had managed to accumulate the wealth and why they were now asking me to preserve it for their descendants.

Certainly passing along hard earned money is a priority for some clients, but poll after poll and personal experience say that what clients really want to deliver to the next generation is their own legacy.  Passing on the money is easy; passing on your legacy is harder.

I have experimented with various tools for getting my clients in touch with their values for estate planning purposes.  The best strategy is active listening.  The hard part is that it is so easy, it doesn’t seem like I am working, I am learning.  But as I learn from my clients, their voices ring in my head.  As I draft their documents, who they are becomes embedded within the corners of the document creating a monument that will live at least as long as the money.

What do you value?  Let me help you deliver those values to the next generation and maybe the generation after that.

President George Washington painted by G. Stuart, engraving by H.S. Sadd

At a recent symposium, the presenter described the almost magical way the father of our country turned his bequests of personal property into a legacy that lasted generations.

He described the portion of Washington’s Will that bequeathed his swords to his nephews.  Instead of a simple listing of the items and the recipients, he wrote the following words:

“To each of my Nephews, William Augustine Washington, George Lewis, George Steptoe Washington, Bushrod Washington, & Samuel Washington, I give one of the Swords or Cutteaux of which I may die possessed; and they are to chuse in the order they are named. These swords are accompanied with an injunction not to unsheath them for the purpose of shedding blood, except it be for self defence, or in defence of their Country & its rights; and in the latter case, to keep them unsheathed, and prefer falling with them in their hands, to the relinquishment thereof.” [Emphasis Added]

With those simple words he created a lasting legacy far more important than the value of the property bequeathed.  In a single sentence he defined his character and his hopes, dreams, and aspirations not only for his nephews, but for future generations yet unborn.  Imagine the honored place those swords must have taken in the lives and homes of the recipients and the lessons of freedom taught future generations.

I recently sat with a long time client who was grieving over the loss of his friend of over 50 years as we discussed what to do with his friend’s personal property which consisted of a lifetime of collecting crystal and works of art.  I explained his mundane choices as the executor of the estate of distributing the property to friends or relatives who treasured something from the decedent, keeping it for himself as a remembrance, or selling it.  We began discussing the value and the potential liquidation value.  Suddenly, the conversation turned very somber and my client slowly began telling me a story.  “Mark,” he said quietly, “I don’t want any of that stuff, I have my own stuff.”  He paused, lost in thought, and then continued.  “He loved that stuff.  I had no interest in it.  But he studied the prices at retail stores and then shopped at second hand stores.  He would find a piece he liked and he would carefully examine it.”  My client slowly demonstrated a shopper holding up a piece with his hands and he slowly turned the imaginary piece over and around as he examined it.  “He would often buy it for 20% of what it would have cost new.”  Between the words and the hand gestures, by the time he finished telling the story and composed himself, I knew what he intended to do with the collection that only a few moments before he had described as “just stuff.”

Our lives make a difference.  Many of us have an under developed appreciation for what we bring to the lives of those around us.  Your Last Will and Testament can be written in your own voice so that the value of what you leave reflects the value of who you are.  Contact me for more information about how to put your own voice into your estate plan and emulate George Washington in posterity.

Pablo Picasso's "Death of Casagemas"

On July 13, 2009 Arizona governor Janet Brewer signed HB 2616 into law.  The law, hailed by the right to life movement as a great victory, intrudes on your right to privacy and injects the state into the midst of the dying decision of every Arizonan without a living will that expresses the intention to die with dignity.

The law requires every petition for the appointment of a guardian for an incapacitated person to contain a statement that the authority may include the authority to withhold or withdraw life sustaining treatment, including artificial food and fluid.

The law forbids any surrogate without written authority from the patient or a court order from consenting to or approving the permanent withdrawal of artificial administration of food and fluid.
The law provides an automatic stay of not less than 5 days to allow the entry of any order allowing food and fluid to be withheld or withdrawn to be appealed

The law creates a presumption that the absence of a living will means the patient in an irreversible coma or persistent vegetative state did not intend to have food and fluids withheld or withdrawn and the patient intended that all procedures, including medically invasive procedures, be administered in an attempt to prolong the patient’s life.  The law provides stringent guidelines for rebutting the presumption.

Personally, I do not believe the state or any strangers should be involved in any medical decisions, including the most difficult and emotional decisions facing loved ones when the patient is dying.  I believe in the right to privacy, including the right to exercise life and death decisions for your spouse, parent, or child, when that decision is supported by overwhelming medical evidence.  I think your doctors are a better source of information than your government.

However, I respect your right to disagree, and now the state of Arizona gives you a clear choice:  If you do not want food and fluid to be artificially administered once you are in an irreversible coma or persistent vegetative state, you should be certain you have a living will that clearly announces your intentions and a valid health care power of attorney appointing the people you want to direct your medical care if you are unable to do so.

If you fail to create a living will, you and your loved ones may endure the pain and suffering of the full weight of the judicial system oppressing you at your most vulnerable moment.

Protection or meddling?  You decide.

Living Wills, health care powers of attorney, and HIPAA declarations are part of every estate plan prepared by our firm.  We will explain to you the effect of each document and assure that your choice will be plainly heard when needed.