You may have been told that you need to protect your assets by placing them into a “trust”.  While there are many types of trusts, the most common is a revocable trust, which is also sometimes referred to as a “living 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.  Determining whether the Estate Tax may apply involves an analysis of the applicable exemption provided by Congress.   For 2013, the applicable exemption is $5,250,000.  This means, generally, that anyone who dies in 2013 can declare over $5 million in assets free from the Federal Estate Tax.

Any amount left in your estate (including proceedings from life insurance) minus the applicable exemption for the year of death, is potentially subject to the estate tax.  A trust does not avoid the estate tax, but does allow a married couple, through proper use of a Bypass Trust, to claim the exemption twice- once for each spouse.

Since the over $5 million exemption presently excludes many estates from the tax, the more popular justification for forming a revocable trust is to avoid probate – the sometimes costly and lengthy legal process generally necessary to administer the estate of a person upon death.  Some 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.  A typical Probate will take 6-12 months to complete, often limiting the ability to access assets during the completion of the proceedings.  If assets are property titled in name of a Trust, then upon death those assets avoid probate entirely.  Further, since probate records are available to the public a trust provides the additional benefit of privacy.

Trusts may also provide a limited 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 Cade Cox of Cox, Sterling & McClure at 501-954-8073 or at clcox@csmfirm.com

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.

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. Issues to be addressed may include language you would prefer to be included in your Obituary, financial information, military records, and the location of valuable personal items or family heirlooms.

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.  Consider whether to place this in your safe or safety deposit box, and whether to inform your Spouse or other loved  one as to its location.  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@csmfirm.com.)

In Arkansas a will may be “attested” or “holographic”.  The more common form of will, an “attested” will,  is signed before witnesses and generally prepared by an attorney.  “Holographic” wills, which are done in handwriting, will be covered elsewhere in this Blog.  Oral wills are not recognized in our State.

An “attested” will must be signed not only by the testator (the person making the will), but also must be signed by two witnesses.  The witnesses must be at least 18 years old, and generally must not be considered “interested parties”, i.e. the witnesses should not be named as heirs in the will.  The will must be signed or acknowledged by the testator in front of both witnesses – and in order to eliminate the need for witnesses to later testify during Probate – the signature of the witnesses should be notarized.

In some circumstances separate instruments may also be incorporated into the will by reference – provided that Arkansas statutory requirements for incorporation by reference are met.

Contact our office anytime for additional information on whether you may need a new will, or updates to your previously created documents.

If you wish to use the security deposit to cover the expenses of any damages the tenant has caused, or if any rent remains unpaid, the law requires you provide notice to the tenant before keeping the security deposit to cover those expenses. You must account for all of the security deposit you keep by making a written list detailing the repairs and damages that the tenant caused. Any amount of the security deposit that is not a documented expense must be returned to the tenant.

You must send the notice and payment to the last known address of the tenant. If the letter containing the notice and payment is returned, you still must make a reasonable effort to find the tenant, such as by phone or email. Once you mail the letter, however, and 180 days have passed without any sort of response, you may keep the payment only if you are still unable to locate the tenant.

Failing to provide the tenant with his notice and security deposit will subject you to penalties. If you fail to provide the tenant with a list of expenses the security deposit will be applied against, or fail to return the security deposit, the tenant may receive double the amount of the security deposit in addition to any other property or money belonging to the tenant and other costs the tenant incurred while waiting for the notice required by Arkansas law. This means that if the tenant paid $1,000 for a security deposit, she could receive $2,000 if you fail to comply with the law. Additionally, if the tenant has incurred any fees, penalties, or other costs while waiting for the return of the security deposit, you may be liable for those as well. If you are unable to return the list of expenses or the security deposit within the 60 days because of a dispute between you and the tenant regarding the amount the tenant may receive from the security deposit, you won’t be required to return double the amount of security deposit – but will be required to return the portion that did not go the expenses incurred as a result of the tenant.

Certain landlords are exempt from these requirements, but only those who, as individuals, own five or fewer rental properties and who do not use other individuals or corporations to manage the property in some way. For those who are covered – remember that a little bit of documentation will go a long way and protect you from losing out on the expenses in maintaining your rental properties.

The Arkansas Department of Workforce Services published an official notice earlier this year concerning the issue, which you can find here.

Our Firm, Cox, Sterling & McClure, represents businesses of all sizes with respect to issues concerning commercial litigation, business reorganization, employment law, and business transactions.  For additional information please contact me at clcox@csmfirm.com.

Under Arkansas Law, both the Personal Representative (the party named in your Will or appointed by the Court to handle your Estate) and the Attorney may be awarded a fee for the work associated with the Probate.  (See here for a copy of the applicable Arkansas Law authorizing fees and costs associated with Probate).   In the event of a $200,000 Estate, the applicable allowable Attorneys’ Fee is $6,050.  For a $400,000 Estate, the allowable fee can reach $11,550.  Again, this is in addition to the fee allowed for your Personal Representative.  Filing fees in excess of several hundred dollars are also associated with opening the case, publishing notice to creditors, etc.   Alternatively, a Trust can be established for a fraction of the cost, which avoids Probate entirely and provides additional benefits as discussed elsewhere in this Blog.

The law was developed to protect small businesses and sub-contractors involved in construction in Arkansas, by ensuring that they had a direct way to recoup losses from a property owner in situations where they were not paid by a general contractor or builder.  In basic terms, the law allows these parties to place a direct lien on the property owner, even if the owner never contracted with the party or agreed to payment.  The law written to protect one group, however, often has serious repercussions on another class of equally important Arkansas, innocent homeowners.

If you are building a home or conducting repairs, and the builder or general contractor you have selected fails to pay the sub-contractors and material providers, it is likely you will be ultimately responsible for the costs.  In many instances it does not matter if you have already paid the builder, are current on your construction loan, or that you were never even aware the party was working on your home.

The law allows for a “pre-judgment remedy”, which means the sub-contractor  or material provider does not have to go to Court, prove their case, or allow you a defense.  If they properly follow the law, a lien will attach to your home and they can even initiate foreclosure.  In some limited circumstances, the lien holder can assert priority over your mortgage, causing you further legal difficulties because your mortgage company will then mandate that you pay the lien or face foreclosure from your lender.

Because the law provides such a drastic remedy, the process must be followed with precision in order for one to prevail themselves of the protection afforded. Here are some basic principles to remember:

• In a residential setting, a lien cannot be enforced under the law unless the home owner has received a specific, written notice making the owner aware of the potential for a lien, at least 10 days before the lien is filed at the Courthouse.  This is generally titled “Notice of Intent to File a Lien”.
• Before anyone can file a lien, the homeowner must be provided with a notice titled “Important Notice to Owner.”  This may be provided by any of the subcontractors or material providers, or the general contractor/builder.   Notice by any one party may be used to the benefit of all subcontractors and material providers.
• The notice must be either signed by the homeowner, or delivered via certified mail.  The Notice must provide the following language:

“IMPORTANT NOTICE TO OWNER
I UNDERSTAND THAT EACH CONTRACTOR, SUBCONTRACTOR,
LABORER, SUPPLIER, ARCHITECT, ENGINEER, SURVEYOR,
APPRAISER, LANDSCAPER, ABSTRACTOR, OR TITLE
INSURANCE AGENT SUPPLYING LABOR, SERVICES, MATERIAL,
OR FIXTURES IS ENTITLED TO A LIEN AGAINST THE
PROPERTY IF NOT PAID IN FULL FOR THE LABOR, SERVICES,
MATERIALS, OR FIXTURES USED TO IMPROVE, CONSTRUCT,
OR INSURE OR EXAMINE TITLE TO THE PROPERTY
EVEN THOUGH THE FULL CONTRACT PRICE MAY HAVE
BEEN PAID TO THE CONTRACTOR. I REALIZE THAT THIS
LIEN CAN BE ENFORCED BY THE SALE OF THE PROPERTY
IF NECESSARY. I AM ALSO AWARE THAT PAYMENT MAY BE
WITHHELD TO THE CONTRACTOR IN THE AMOUNT OF THE
COST OF ANY SERVICES, FIXTURES, MATERIALS, OR LABOR
NOT PAID FOR. I KNOW THAT IT IS ADVISABLE TO, AND I
MAY, REQUIRE THE CONTRACTOR TO FURNISH TO ME A
TRUE AND CORRECT FULL LIST OF ALL SUPPLIERS AND
SERVICE PROVIDERS UNDER THE CONTRACT, AND I MAY
CHECK WITH THEM TO DETERMINE IF ALL MATERIALS,
LABOR, FIXTURES, AND SERVICES FURNISHED FOR THE
PROPERTY HAVE BEEN PAID FOR. I MAY ALSO REQUIRE THE
CONTRACTOR TO PRESENT LIEN WAIVERS BY ALL SUPPLIERS
AND SERVICE PROVIDERS, STATING THAT THEY HAVE
BEEN PAID IN FULL FOR SUPPLIES AND SERVICES PROVIDED
UNDER THE CONTRACT, BEFORE I PAY THE CONTRACTOR
IN FULL. IF A SUPPLIER OR OTHER SERVICE
PROVIDER HAS NOT BEEN PAID, I MAY PAY THE SUPPLIER
OR OTHER SERVICE PROVIDER AND CONTRACTOR WITH A
CHECK MADE PAYABLE TO THEM JOINTLY.
SIGNED:

• An “accounting” must be filed by the party claiming the debt within 120 days “after materials were furnished or the work or labor done or performed”. 
• If a lien is filed, the lien holder then must file a foreclosure within the next 15 months, or be forever barred from pursuing foreclosure.   

Additional relevent timeframes apply, and as always it is advisable to speak with a legal professional concerning your particular facts.  Please contact me anytime for more information at clcox@coxandsterling.com.

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.)

“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.

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.