Piercing the Corporate Veil – Does Tax Election Matter

Many clients have heard about the legal concept of “piercing the corporate veil.”  Veil piercing happens when an inside creditor of an limited liability company (“LLC”) – a creditor with a claim against the business as opposed to a creditor with a claim against an owner of a business – asks the court to ignore the LLC, allowing the creditor to collect directly against the owners of the LLC.  Veil piercing appears to be even more common when there is a single owner of an LLC, especially where that single owner elects to be taxed as a pass through entity.

One of the primary reason that a client chooses to form an entity is that they are seeking liability protection.  If they are sued in the course of business, they do not want that suit to impact their personal and family assets.  This protection is very valuable.

A large percentage of the LLCs that I form in my practice are single member LLCs.  These clients are serious business people, with legitimate business ventures, but they do not have other members participating in their businesses.

I counsel solo business owners to proceed carefully.  Creditors’ attorneys seek ways to maximize their collection efforts, including using arguments in favor of piercing the corporate veil.  Solo businesses are more likely to be subject to these arguments, among other reasons, because of the enormous amount of control exerted over the business by the single member.

Recently there have been cases where creditors have attempted to pierce the corporate veil based, at least in part, on the LLC’s tax election.  The IRS check the box regulations allow an LLC to elect to be treated as a disregarded entity.  This means that the LLC income and losses are reported by the single member directly on that member’s tax return.  The Wyoming court was the most recent court to consider this issue, and decided that, one of the many relevant factors in determining whether the veil can be pierced is how the member chooses to be taxed.

I disagree with the idea that the tax election of an LLC should have a bearing on piercing the corporate veil.  The LLC’s election to be treated as a pass through entity is a legitimate tax decision made based on the IRS regulations.  However, given the uncertainty over whether a court will look at the number of member or the tax election of an entity, I counsel clients to consider that when deciding whether to make an S-Election, or whether to include additional member in their LLC.

Selecting the Key People in your Estate

One of the goals of estate planning is to keep control over your own property and affairs while you are still able to do so.  I work with my clients to ensure that is the case, but we also work together to select good people to take care of the estate if they can no longer manage it.  The key triggering events that would lead you to lose personal control would be disability, and of course death.  Appointments should be made to ensure that your estate is managed properly in the case of disability or death.

Appointments Dealing with a Potential Disability

The two most common health events causing a client to become disabled for estate purposes are strokes and dementia.  If either one of these, or another form of disability occurs, and you have not made an estate plan, a guardian would be appointed by a court to take care of your affairs.  This process can be both expensive and time consuming.

Good planning can avoid the need for court intervention.  The two primary estate roles in the case of a disability are the power of attorney and the health care agent.

The power of attorney is responsible for making financial decisions for you if you can no longer make them.  It seems like obvious advice, but one of the criteria for a power of attorney is that they would be good with money and finances.  As your power of attorney, they may be called on to make banking and investment decisions, pay your bills, or enter into important transactions like selling your home.  The more experienced they are with financial transactions, the better.

Another key issue for selecting a power of attorney is trust.  Your power of attorney will have control over your entire estate.  I explain to my clients that there is a difference between a power and a right.  The difference can be illustrated by an example.  While the power of attorney document may give someone the power to transfer property to themselves, in many cases they would not have the right to do so.  What this means is that the power of attorney has the power to do a lot of things, some of which they should not be doing.  There are legal actions that could be taken if this happens, but selecting someone that you trust with your property is important.

The other key role in the case of a disability is the health care agent.  The health care agent makes decisions about your health care if you cannot do so yourself.  The power is broad, and includes the power to make decisions about medications, procedures, life support, hiring and firing medical personnel, and even where you live.

In a surprising number of cases, gender plays a role in the decisions.  Whether this is right or wrong, I often see couples select a daughter for their health care agent.  There are many articles about the role gender plays in taking care of an elderly adult, so I will not go into that.  I do not encourage clients to make decisions based on gender, but I do talk about factors such as medical background, caring, and the ability to make difficult decisions regarding life or death issues.

Another factor to consider is where the person selected resides.  Can your power of attorney effectively manage your Minnesota property from California?  The answer can differ from situation to situation.

If they are married, my clients often select each other as their power of attorney and health care agent.  As a back-up, they often select an adult child, or trusted relative or friend.  Taking the opportunity to plan while you are healthy most often leads to good choices being made.  By comparison, waiting for a crisis can often lead to poor, high stress decisions, or worse, a court making the decision for you.

Appointments Taking Effect at Death

Your will makes at least one, and sometimes more, major appointments that take effect upon death.  The primary selection is for someone to act as the personal representative of your estate.  Your personal representative’s job is to gather all of your property, pay your bills, taxes and expenses, and then distribute your remaining property to the people you have selected in your will.  This is often done in a court procedure called a probate.

The personal representative should have the necessary skills to manage your property and bills, work with your attorney, and participate and stay informed about the probate action.

If you are a parent, even more important than the personal representative is the selection of guardians for your minor children.  The guardians will act as substitute parents if you can no longer do so.  This can be a difficult decision, and one that spouses often disagree on.  One guide is to try to select people who will not only love your kids, but also people who have the same parenting values as you do.

The Role of Trustees

This piece would not be complete without mentioning the role of a trustee.  Depending on the type of trust that you use, a trustee can have a role in both the case of a disability or death.  This can include all of the financial and property management aspects of your estate.

A trustee is a person, or a company, that is given power and legal responsibility for your property and financial affairs.  Most of the time, my clients who have trusts will act as their own trustee during their lifetime.  However, in the case of a disability or death, the pre-appointed successor trustee can step in quickly and make necessary decisions.

Your successor trustee can be an individual, or a professional trustee.  Many banks have trust departments and can offer you trust services, but finding a trustee that fits your situation is important, and I would encourage you to discuss this with your attorney.

All of the appointments discussed in this article are critical components of an estate plan.  If you have questions about estate planning, you can contact me by email at ckelly@cameronkellylaw.com, or by phone at 651-705-6277

 

Will a Basic Estate Plan Work for Me?

A Simple Plan. 

Estate planning is a wonderful, flexible tool for providing for death and disability.  At its best, an estate plan can provide for your family, control the timing of estate distributions, avoid unnecessary estate and income tax, maximize your estate, and provide protection from creditors.

However, not everyone wants a complex plan.  Many of my clients want a simple plan; one that provides for the basic needs of their family.  These clients ask me what they need in order complete their plan.

What is an Estate Plan?

A commonly used definition of estate planning is:

I want to control my property. I want to take care of myself and my loved ones. At my death, I want to give my property to whom I want, when I want, and the way I want. And in the process, I want to save as much in taxes, costs, and attorney fees as I can.

This definition blends both simple and advanced planning objectives.

For example, giving property to the person you want may seem simple.  The complexity comes from doing it at the time and in the way that you want.

Take the case of a parent with minor children.  If that parent passes away while the child is still a minor, property transfers to the child under the Minnesota Uniform Transfer to Minors Act.  That act requires the property to be held by a trustee until the child attains the age of 21.  That age is perfectly acceptable to some parents, and unacceptable to others.  The parent’s willingness to accept the transfer at the age of 21 would be a factor that determines whether a “simple plan” is appropriate.

The definition suggests any number of ways that a client can choose to control their estate: by controlling the ages that beneficiaries receive property, modifying the amount of control a beneficiary receives over the property, protecting a child’s inheritance in the case of blended families and remarriage, minimizing estate taxes, etc.  A client who is willing to relinquish these and other controls may request a basic or simple estate plan.

The Essential Documents.

There is a difference between a simple estate plan, and one that is simply incomplete.  Too many times I have seen clients come into my office to review an estate plan that consists of only a will.  Sometimes those wills are well drafted, and sometimes they are not.  However, whether or not the will is well drafted, their estate plan is incomplete.

A good estate plan, even a simple one, deals with both death and disability.  A will alone deals only with death.

Every client who hires my firm for estate planning receives documents that plan for death and disability.  This includes, at a minimum, a will, power of attorney, and a health care directive, but will usually also include HIPPA releases, a living will, property lists, memorial instructions, and other documents meant to help in the handling of the client’s estate.

While a will provides for the client’s death, the power of attorney designates a spouse, family member or friend to make your financial decisions for you.  If you are disabled, who will pay your utilities, manage your checking account,  or pay for your health care?  Picking a power of attorney to help with these functions is disability planning, and part of every good estate plan.

Another piece of disability planning is picking someone, your health care agent, to make your health care decisions for you.  This is done in a health care directive.  In that document, you provide instructions, and give that person the power to direct your care.  The power only exists in situations where you can not make your own decisions, and that person is required to make decisions consistent with your wishes.

Having a power of attorney and a health care agent are just as important to your estate plan as drafting a will.  Even if you are opting for a basic estate plan, you should do your due diligence, and make sure it is complete

Conclusion

A basic estate plan is not for everyone.  For most of my clients, there is a benefit to more advanced planning.  However, if you do decide to purchase a basic plan, make sure that planning is complete.

If you have questions about estate planning, you can contact me by email at ckelly@cameronkellylaw.com, or by phone at 651-705-6277