Letter of Instruction to Your Heirs
When counseling parties who are drafting their Will and/or Trust, I often advise that they should consider writing a letter to their heirs, meant to be read after death, advising of specific issues that will help their family with the Estate. This letter can also be used to accomplish the provisions of Ark. Code Ann. Section 28-25-107 (1987), an Arkansas Law which allows parties to make a list of personal items of property, with designated recipients, attached to their Will subsequent to its execution. Specifically, the law allows parties, after they have completed their Will, to create a handwritten or signed list of items they would like to specifically pass to certain member of their family or estate. Using this process, a person can move forward with drafting a Will even at a younger age, without having to worry about changing the Will in later years simply because they acquire property that may not have covered in the earlier Will.
Writing this letter may assist with even more important issues, as well. The letter clarifies requests to be carried out upon your death and provides essential information, thereby relieving surviving family members of needless worry and speculation. Below is an example of items you may wish to consider:
“Dear Loved Ones,
*(obviously the letter will likely start with an emotional message to your family. Following these sentiments, the “business” part of your letter will begin):
Please allow this letter to serve as the correspondence contemplated by Ark. Code Ann. § 28-25-107 (1987), which allows me to make disposition of tangible personal property by attaching or associating with my Will subsequent to its execution a statement and list signed by me designating the devisees of items of specific tangible personal property. I desire to leave my coin collection to my Nephew, ____. I desire to leave all of my artwork in my home to my Wife, ____. (You can list as many items as you would like, here, whether or not they were included in your Will).
Further, I direct my Executor to a list of passwords and computer related information left in my safety deposit box with ABC Bank. This list also includes information concerning my various investment accounts, banking accounts, and other financial data necessary to probate my Estate. (We live in a complicated world, and all of your electronic data will need to be accessed after your death. So, make sure you have a list of websites, blogs, and any other electronic sources (with passwords) you frequently access, and leave this where your Executor can find it upon your death).
My safety deposit box also includes copies of my will; birth, baptismal, and marriage certificates; communion and confirmation certificates; diplomas; military papers; naturalization papers; and birth certificates for my children. It also includes copies of tax returns, leases, and additional personal financial data. Finally, it contains paperwork associated with the two businesses discussed further below.
I am a one-third owner of XYZ Business located in Little Rock, Arkansas. My Partners and I have drafted Articles of Incorporation and Bylaws which specifically detail how my interest in the business should be handled upon my death. Please work with my Partners to effectuate the terms of these agreements, which allow for my partners to purchase the business from my heirs based upon a formulated value agreed upon by the partnership as a whole. The line of credit for the business should be re-financed to remove my name. You will find additional paperwork associated with my business in the bottom left-hand drawer of the desk in my office.
I own investment property in North Little Rock, Arkansas. It is owned in a LLC, and the co-owner and I have completed an Operating Agreement which states that in the event of my death, my family will receive a liquidated payment in an amount specified by the agreement.
I have pre-arranged funeral services with ABC Funeral Home. It is my desire that I be buried next to my parents. I would prefer that in lieu of flowers, donations are made to the Humane Society of Little Rock. Please ensure that my obituary mentions by name all of my children and grand-children, including any that may have pre-deceased me.
Please notify the following organizations to which I belong of my death: Little Rock Chamber of Commerce, XYZ Professional Association, and the Board of Directors of the Humane Society. Please cancel my automobile insurance policy, disability policy, and credit life insurance. Also please cancel my credit cards with Generic Department Store and Generic Bank. I have a life insurance policy with Generic Insurance Company of Omaha, Nebraska. My spouse has a copy of the policy. (Include a list of all accounts, company names, and addresses). “
Write your letter clearly so that even a stranger could understand it. Be sure to sign and date your letter. As always, consult with our office concerning various additional ideas to be included with this letter, as well as to ensure you have a valid and complete Will, Trust, and effective agreements concerning your business and property holdings. Email me anytime at clcox@coxandsterling.com.)
Choosing the correct business entity in Arkansas
“Choice of entity” is terminology which references the legal form your business will take – legal creations which allow a business to take on an existence apart from its owners, even though the owners still control the business. Potential choices for your business include corporations, partnerships, limited partnerships, limited liability companies, and Subchapter-S corporations.
One of the primary considerations in selecting a business organization is protection of the owners of the business from liability. Other considerations include tax treatment (state and federal), management structure, future ownership, and capitalization. This blog article discusses some of the issues you should consider when forming a new business. The tax information provided is courtesy of Neil Denman of Denman and Associates, CPA. http://www.denmancpa.com/.
Sample Business Entities Available in Arkansas
- Corporation (Sub-S or Sub-C)
- Limited Liability Company
- Professional Limited Liability Company
- Partnership
- Limited Partnership
- Sole-Proprietorship
Corporations
- The corporation exists apart from its owners or shareholders. A corporation can buy and sell property, enter into contracts, sue and be sued. Elected officers and the board of directors manage the corporation. Requires Articles of Incorporation and Bylaws.
- Subchapter C Corporations – may have unlimited shareholders and may be traded publicly. The primary disadvantage to the C Corporation is double taxation, whereby (1) the corporation pays the taxes and net taxable profits and (2) its shareholders pays tax on all the money taken from company (income and payroll taxes).
- Subchapter S Corporations – generally known as “pass through” corporations, whereby the net income of the corporation is simply reported on the personal tax returns of the shareholders. There are limits on S corporation formation and ownership (one class of stock, may not have corporation shareholders, limited in number of shareholders) and it is difficult to deduct losses. The income is not subject to self-employment tax and the shareholders must be paid a “reasonable” salary.
- Corporations engaged in professional services must be formed under the Professional Corporations Act.
Limited Liability Companies (LLC)
- Combines many of the features of a partnership with those of an S Corporation.
- Allows income reporting on personal income tax returns of the ”members,” but with the liability protection of a corporation.
- Lacks many of the restrictions that apply to S Corporations.
- Governed by an Operating Agreement.
- May be “Member Managed” or managed by an outside Manager.
- Allows members to engage in management without risk of losing their limited liability status.
- Tax Information:
- Allows for tax flexibility, is easier to deduct tax losses and excellent for rental real estate.
- Income and losses flow-through the LLC and are reported on the individual member’s tax return.
- Operating earnings are subject to self employment tax.
- Special tax elections may apply to Limited Liability Companies.
Partnerships
- A General Partnership is an unincorporated business allowing the owners no legal protection (see Sole Proprietorship).
- Anyone involved in a Partnership should consider a thorough Partnership Agreement.
- Does not protect the personal assets of the business partners from claims against the partnership.
- Shares its profits and losses among the partners according to their ownership percentage.
- Tax Information:
- Partners are required to claim income or loss on their personal income tax return. It is easier for a general partner to deduct tax losses.
- Operating earnings are subject to self employment tax.
- Like LLCs, partnerships offer flexibility for tax purposes and are excellent for rental real estate.
- Special tax elections may apply to partnerships.
Limited Partnerships (LP) and Limited Liability Partnerships (LLP)
- Limited Partnerships consist of general partners and limited partners. The general partner(s) manages the business and have no liability protection. The limited partner(s) are usually investors that are not involved in the day-to-day running of the business and whose liability is limited to the extent of their investment.
- Limited Liability Partnerships are similar to Limited Partnerships, however all Partners often take an active role in the management of the business. The members are provided some liability protection from actions of the other partners, but not from their own actions. Generally utilized by groups of professionals such as doctors, lawyers, etc.
- Tax Information:
- Like LLCs and Partnerships, Limited Partnerships and Limited Liability Partnerships allows for tax flexibility, are easier to deduct tax losses and are excellent for rental real estate.
- All income and losses flow-through to the members and are reported on their individual tax return.
Sole Proprietorship
- The sole proprietorship is the default form of ownership for an unincorporated company with one owner.
- All aspects of the business are unavoidably personally associated with the owner of the business. The owner and the business are indistinguishable.
- All income, debts, and liabilities exist solely against the owner. Any legal action by or against the business will be in the name of the owner, personally, “doing business as” his company.
- The owner has sole control and responsibility of the business. A sole proprietorship is easily formed, allows important decisions to be made quickly, and typically has fewer legal restrictions. The business has limited life and cannot be transferred to others.
- State and local business licenses and permits are still required.
- Tax information:
- All income and losses are reported on the owner’s personal tax return
- All earnings are subject to self-employment tax. Self-employment tax is equivalent to Social Security and Medicare taxes. 15.3% of income is subject to self-employment tax (7.65% employee and 7.65% employer). Most credits will not offset the self-employment tax.
Corporate Formalities
Regardless of the choice of business entity, there are corporate formalities which must be followed pursuant to Arkansas law.
The Arkansas Code Annotated contains over 450 pages of legislative acts associated with corporate formation and governance. The advice and assistance of a lawyer, CPA and additional qualified professionals is crucial to ensure compliance with applicable law.
* All tax information was provided by Denman & Associates, CPA, PA, 310 Natural Resources Dr., Little Rock, AR 72205. Contact them by phone: (866) 362-3905, or visit their website here.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Thank you.
Doing Business in Multiple States: Foreign Corporations
Does your Arkansas business also conduct business in other States? If so, you may need to register as a foreign corporation. Most business owners know that in order to protect their assets it is advisable to properly incorporate their business as either a corporation, LLC, partnership, or additional corporate form available under Arkansas Law. Future articles on this blog will discuss differences between the various corporate forms. However, some Arkansas businesses fail to realize that after this step is completed, it is also important to consider whether their business should be registered in other States.
This process is called registering as a Foreign Corporation. The term may sound misleading, since we are not referring to registering the company outside of the United States. However, the term is used by most States when describing the process pursuant to which an out-of-state corporation is registered within the State.
Each State has separate requirements for registering your Arkansas company. Most States will require that you submit a filing fee of several hundred dollars, a Certificate of Good Standing from the Arkansas Secretary of State, and an application detailing general information about your company, including your primary place of business in the State where you are registering. Often the most difficult requirement is the listing of an “agent for service of process” for the new State. You will be required to list a local agent, which must be a resident of the new State (or another corporation created in the State). This might require you to retain a third-party company to serve as your agent, for an additional fee.
Please consult our office or legal counsel of your choice prior to initiating the process, because depending on the State where you are registering additional requirements might apply. Most States also have exceptions which may apply to your business and prevent the need to register. Common exceptions, depending on the State of registration, may include: businesses conducting an isolated transaction, soliciting orders by mail or telephone only, and businesses selling through independent contractors. Penalties and fines, including interest, may apply if you are conducting business in a State where you are not properly registered, so as always it is important to seek advice from your legal representative.
Simple Arkansas Estate Planning
Estate planning vehicles such as Wills and Trusts are necessary and useful options for many Arkansas residents. However, there is a simple tool most people can put into place immediately: having your bank and investment accounts designated “transfer upon death (TOD)” or “payable upon death (POD)”.
The term POD is generally associated with bank accounts (checking and savings), while TOD is more often used with investment vehicles (retirement, 401k, etc.) These accounts are essentially joint accounts for which a beneficiary has been designated. Upon the death of the account owner, the beneficiary acquires ownership. In most cases, this will allow avoidance of probate. Establishing a TOD/POD is simple, most financial institutions will have forms available. When determining whether this option is best for you, however, there are several factors to consider:
- The transfer is revocable, therefore the account assets are not controlled by the beneficiary. You retain control of your accounts. Further, some protection may be offered against creditors of your beneficiary.
- These accounts may restrict the way you name your beneficiaries, however, and limit the number of parties you can list as beneficiary. You are also restricted in your ability to name contingent or alternate beneficiaries.
- As referenced on this blog in the Intestacy Law Section, a spouse has the right to receive an elective share of all property in the Estate, regardless of your designation.
- TOD/POD designations may not be consistent with your estate plan, since these designations are not subject to your Will or Trust. Difficulties may ensue when only one Child is listed on the account, contrary to general testamentary provisions allowing for equal distributions to all Children. An even larger problem exists if you have minor Children under the age of 18, since you will not want a minor as beneficiary. All of these issues are more properly addressed in a Will or Trust, which will also allow you to place restrictions on your gift (such as the requirement the Child reaches the age of 21, or graduates college).
TOD/POD designations are a simple tool which may be attractive in limited circumstances. As always, you should consult with an attorney or financial services professional to determine the best option for you and your family.
Dying Without a Will in Arkansas
What happens if you die without a Will? What is the law of intestate succession? How does this affect Arkansas residents?
These are all popular questions in the world of estate planning. The answers may be found in several Arkansas statutes which are discussed in a very general terms within this article. For a full understanding of applicable law, see the notation at the end of this article. Arkansas law provides a procedure for “intestate succession” which is followed when you die without a Will (known as “dying intestate”). There are other times that intestate succession may apply, such as when someone has a Will that is not properly submitted to probate, or when property is not adequately addressed in an otherwise valid Will. These are rare situations, however, and for the most part intestacy is only an issue when someone dies without a Will.
So, again, what happens if you die without a Will? Your heirs can still proceed with probate, but the law of intestacy will direct the distribution of your assets (instead of your Will). As a preliminary matter, there are several statutory exemptions which must be addressed before your property will be distributed to anyone. The Court will first address (1) the dower or curtesy of your surviving spouse (these are generally known as “marital rights”, and will be discussed in future blog articles); (2) the homestead right of your surviving spouse; and (3) additional statutory rights and allowances to the surviving spouse and minor children.
After allowing for these exemptions, the remainder of your property will be distributed in the order prescribed by the Arkansas statute:
- First, to your children (or, if one of your children died before you, then to their children).
- Second, to your surviving spouse (unless you were married for less than three years, in which case the spouse receives only fifty percent of the estate).
- Third, to your parents.
- Fourth, the rest of your estate will pass to your surviving spouse, even if you have been married less than three years.
- Fifth, to your surviving brothers and sisters.
- Sixth, to your grandparents, uncles and aunts.
- Seventh, to your great-grandparents and great-uncles and great-aunts.
- Eighth, to the county where you resided at the time of death.
There are multiple additional complexities which arise when you die without a Will. Who will be responsible for initiating the intestacy process for you? How will they be paid? Will they need to file a bond with the Court? (the Answer is “yes”) How will they know where your assets are located, and the value of your assets? How will they know where to find all of your aunts, uncles, etc. as necessary under the intestacy law? Who will be the guardian of your minor children, and who will handle their assets until they reach a responsible age (and who will decide the proper age for your children)?
All of these problems are avoided by a simple Will, which will provide peace of mind and provide for a clear execution of all of your wishes upon death.
This article, as well as all other content contained on this Blog, should not be considered a substitute for legal advice. Please contact our office or the probate attorney of your choice for additional details concerning your Estate. The full text of the Arkansas Intestacy Law is provided on our Estate Law Page.
Arkansas Business Debts: How long does a Judgment survive in Arkansas?
Unfortunately, a common problem with many Arkansas businesses involves unpaid invoices. Many companies address the problem in Small Claims Court, or pursue other judicial alternatives to obtain a judgment. Once the lawsuit is filed and a judgment has been obtained, the question becomes: how long does the judgment last?
The basic answer is 10 years. In Arkansas, a filed judgment will act as a lien on all real estate owned by the debtor in the county where the judgment is filed for 10 years. Careful planning will allow you to “revive” the judgment for 10 additional years, but you must act within the period subscribed by law to take advantage of the extra time. What this means for business owners in Arkansas:
Don’t be afraid to pursue bad debts through the Arkansas Courts. 10 or 20 years is a long period of time for the debtor to be affected by your judgment, and payment opportunities may arise.- Make sure the judgment is properly filed in every county in Arkansas where the debtor may have assets.
- If you obtain a judgment, you need to have a long memory, because 10 years after it is filed you need to revive the judgment.
- Contact our office for additional information and assistance for all questions concerning Arkansas business law. Please see our Business Law Page for additional information concerning businesses in Arkansas.
Arkansas Residents see no Estate Tax in 2010, but repeal of “Step Up Basis” is cause for concern
Believe it or not, as we enter 2010, there is no Estate Tax. As discussed in other articles: What is the Estate Tax? and When Does the Estate Tax Apply?, the estate tax (assessed upon death) in prior years generally only affected persons with large estates. For example, in 2009 the tax only affected estates with assets in excess of $3.5 million. For this year, however, it will not affect anyone, no matter how large or small the estate. Unless Congress acts quickly to stop this repeal, any large estates opened in 2010 will see significant tax advantages. 
There is another issue, however, that could offset this advantage and negatively affect many more estates. In addition to the temporary repeal of the Estate Tax, there is also the repeal of a tool which generally helps most people who inherit an estate: “step up basis”. This comes into play for those who inherit assets through another person’s estate; for example, when a family member leaves you stock, a business, or real estate upon their death.
When you eventually attempt to sell the property which has been left to you, a tax is implemented determined by your “basis” in the asset. Under former law (which expired on December 31st), your basis was the value at the time of the transfer (at the time the person who gave it to you died). So, if a family member left you stock valued at $50,000.00 at the time of death, and then you sold it later for $75,000.00, you would be taxed on the difference of $25,000.00 (since your basis would be established at $50,000.00 at the time your family member died). This is called a “step up” in basis, since the law allowed you to “step up” the basis to the date of the transfer to you.
Compare this to a situation where no “step up” is allowed (as is the case under current law): when you sell that same stock for $50,000.00 you will be charged with the basis of the person who transferred the asset to you (this is called ”carry over” basis”). It is likely that the person who left you the stock upon her death paid significantly less for the asset. The same $50,000.00 in stock left to you may have been bought by your family member for $10,000.00. Therefore, when you sell the asset for $75,000.00, you would be taxed on $65,000.00 in gains.
Even with the appeal, there remains an exemption amount of $1.3 million, total, which may be spread among all assets transferred in one estate. Therefore, many smaller estates will not be affected. With the repeal of the estate tax and coinciding repeal of “step up” basis, this will be an interesting year for estate and property law.
Arkansas Property Law Update: Probate of Real Estate and Capacity to Enter into Real Estate Contract
Recent Decision Concerning Probate Interest in Real Property
The Arkansas Court of Appeals recently issued a decision in an interesting case concerning a probate claim against real property. In Butler v. Butler, 2009 Ark. 660, the Court addressed the claim of a son attempting to gain a 1/5th interest in his father’s property 20 years after his father’s death. Horace Butler died in 1986, holding a 1/5th interest in real property. The remaining 4/5th interests were held by Horace Butler’s siblings, each of whom was also deceased. Grant Butler filed a Petition to Quiet Title, alleging that as Horace’s heir, he was entitled to a 1/5th interest in the land. The children of Horace Butler’s siblings objected, claiming that Horace had no known children.
To prove his claim, Grant Butler submitted testimony of a 91-year old man who stated that Horarce had told him that Grant was his son. Grant also submitted a copy of his birth certificate. The trial court ruled that the documentation provided was sufficient, and the Court of Appeals confirmed.
Recent Decision Concerning Capacity to Enter a Real Estate Contract
Can an 86-year-old incapacitated person enter a contract in their own name to sell real estate? This was the issue presented in a recent decision before the Arkansas Court of Appeals in Lilian H. Ashton Trust v. Caraway, #2009 Ark.App. 806. The facts involved an 86-year-old land owner who signed a contract with a party she had never met to sell over 80 acres of land located in Arkansas. Several days after signing the contract, the land owner gave power of attorney to her son, and the son attempted to rescind the contract stating that the buyers had “taken advantage” of his mother. The Court ruled in favor of the buyers, holding that the contract was valid.
In Arkansas, there is a presumption of law that every person of minimum age is sane, competent, and capable of entering a contract. Since the 86-year-0ld in this case had provided no “real testimony” as to her lack of capacity, and since she had participated in complicated negotiations, the Court found that she had failed to prove incompetency.
Complex issues often arise when dealing with real property interests. If you are experiencing legal issues concerning real property, please contact our office. For additional information concerning Arkansas law and how it relates to your property, please visit the Property Law Page.
Do you need a Trust?
You may have been told by an accountant, financial advisor, insurance agent, attorney, or other trusted advisor that you need to protect your assets by placing them into a “trust”. While there are many types of trusts, it is likely that your advisor is referring to a revocable trust, which is also commonly referred to as a ”living trust” or a “loving trust”. In basic terms this trust is a tool pursuant to which a person, during their lifetime, may transfer assets into a trust which will then be distributed to his or her family or lawful heirs at the time of death.
Revocable trusts are powerful tools which may accomplish a variety of goals including reduction of the estate tax, avoidance of probate, and the protection of assets. Issues concerning the estate tax are discussed in more detail here and here. Any amounts left in your estate (including proceedings from life insurance) minus the applicable exemption for the year of death ($1 million for 2011), are potentially subject to the estate tax. A trust does not avoid the estate tax in full, but does allow a married person to delay payment at death and likely reduce the tax effect upon his or her spouse through proper use of a Bypass Trust.
A second major advantage provided by a revocable trust is the ability to avoid probate – the sometimes costly and lengthy legal process generally necessary to administer the estate of a person upon death. Please see additional articles available on this blog concerning issues associated with probate. Many probate lawyers will charge your family a percentage of the assets which pass through the Estate, regardless of the amount of work which may be necessary to complete the probate. The legal costs, in addition to the wait associated with the Court system, make trusts an attractive alternative for many people. Upon death all assets properly conveyed to a trust avoid probate entirely, and since probate records are available to the public a trust provides the additional benefit of privacy.
Finally, trusts may also provide a measure of asset protection for the family or heirs of the deceased person. By including a “spendthrift provision” in the trust, creditors of the beneficiaries may be prevented from reaching the assets placed in the trust. This might also be used to prevent a younger heir from reaching the full amount of his or her inheritance, which can also be accomplished by placing an age limit on the date of distribution.
There are other benefits to creating a revocable trust, such as avoiding potential issues which may arise upon a future physical or mental disability and the benefit associated with allowing your family to retain control over your assets upon death. The largest advantage, however, may be the peace of mind associated with knowing that your wishes upon death are specifically, properly organized and detailed in a manner causing the least amount of potential stress and difficulty upon your family or heirs. For additional information on how a trust may benefit you and your family, please contact Cox, Sterling & McClure at 501-954-8073 or via the Internet at coxandsterling.com.
Business Law Updates
Recent Decision Concerning the Purchase of a Business
In Sunbelt Business Brokers v. James, 2009 Ark. 659, the Arkansas Court of Appeals ruled that the purchaser of a business was not defrauded due to information produced by the business broker and allegedly relied upon by the purchaser to her detriment. The purchaser had acquired two Subway franchises pursuant to a transaction brokered through Sunbelt Business Brokers. When the businesses ended up not being as profitable as she hoped, she sued under the theory that the cash-flow form furnished by the broker was erroneous. The Court ultimately ruled that the purchaser did not “justifiably rely” upon the information, to her detriment, as required for a finding of fraud. Of specific note was the fact that the purchaser was a financial-services advisor with extensive accounting experience, and that her husband was a Certified Public Accountant.
Under Arkansas law, to prove fraud, a Plaintiff must show: (1) a false representation of a material fact; (2) knowledge by the Defendant that the representation is false; (3) intent by the Defendant to induce action by the Plaintiff; (4) justifiable reliance by the Plaintiff, and (5) damages.
Update on Small Claims Court Jurisdiction
In Arkansas, any dispute involving an amount of under $5,000.00 may be brought in Small Claims Court, more properly known as District Court. In Small Claims/District Court, the filing fees are significantly less, and attorney involvement is rare. The Arkansas Court of Appeals recently clarified that if attorneys’ fees are sought in the action, the amount of attorneys’ fees requested, when added to the amount of claim, must not exceed $5,000.00. Piper v. Potlatch Federal Credit Union, 2009 Ark. App. 701. Under Arkansas Law, you do not have to include interest when calculating the amount for jurisdictional purposes, however the Piper decision clarified that attorney’s fees must be included in the calculation.
Please visit the Business Law Page for more helpful information pertaining to Arkansas businesses.
Cade Cox
