The Weekly Scenario
The Weekly Scenario: Trust Decanting
What is trust decanting? Trust decanting is the act of distributing assets from one trust to a new trust with different terms for one or more beneficiaries of the first trust. As I have heard some practitioners say, ‘just as you can decant wine by pouring it from its original bottle into a new bottle, leaving the ‘unwanted’ sediment in the original bottle, the distribution trustee can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.’ For years, practitioners have struggled to find ways to change the terms of an irrevocable trust. However, through the decanting statutes that have been enacted in many jurisdictions, it is now possible to modify an irrevocable trust by having the trustee distribute the trust assets into a new or different irrevocable trust for one or more of the same beneficiaries of the first trust. Not all states allow decanting through their own state statutes. There are 31 states that have decanting statutes. Some states have laws with respect to decanting that offer more flexibility than others. There are rankings that are published to this end (feel free to reach out to me if you would like me to provide you a state ranking chart). So, what if the trust is in a non-decanting jurisdiction? Do you throw in the towel? No! We first look into the trust agreement to see if it has decanting language. Since decanting is a relatively recent phenomenon, it likely does not have such a statute. However, if it does, then one can likely utilize decanting through the authority granted in the trust agreement. Assuming no decanting language is in the trust, the trust may give the trustee the power to change the trust situs. If it does, then we can often move the trust to a new situs that allows decanting. If the trust does not give anybody the power to change the situs, then we look at the current situs statutes to see if there is a nonjudicial settlement agreement statute. If there is, we may be able to change the situs using that statute and then decant it under the new situs statute. Typically, clients are comfortable changing the trust via a nonjudicial settlement agreement statute, however, since the statute requires all interest parties to agree, it doesn’t always work. As a final remedy, we can petition the court for a trust reformation. Taking a case through the judicial system however, may be the most costly alternative. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
May 13, 2021
Family Law
Flying This Summer?
Nonetheless, we want to be cautious and take precautions from the time you enter the airport until you depart the airport at the end of your journey. One easy step is to register for TSA Precheck, which allows passengers to bypass crowded security lines, saving time and reducing the number of contacts. Secure your boarding passes online before arriving at the airport, which also minimizes the number of contacts you will have with airport employees. You don’t have the same level of good air filtration and airflow in the airports as you do in the planes, so you want to minimize the amount of time you spend in the airport. A carry-on bag minimizes the time spent in crowded baggage areas at both the beginning and end of your flight. Make sure that your carry-on is small enough to fit in the overhead compartment. If it isn’t, you may be able to check it at the gate. Although you will still have to deal with the baggage claim area upon your arrival, you can avoid dealing with that issue at the departure airport. If your flight is long, or if you have a layover, you should consider packing your own lunch and a snack. Many airport restaurants are not operating at capacity and packing your own food will minimize your contact with other passengers and employees as you stand in line to order. Collapsible storage containers are perfect for keeping food fresh, if you are not inclined to use plastic sandwich bags. Masks are still required on all airlines. You should bring four or five masks and change them out every three to four hours. It’s best to double mask or use an N-95 or KN-95 mask to assure maximum protection. Find one that fits comfortably, because you will be using it for multiple hours at at time. It’s also important that you wash your hands a lot when you can’t, use sanitizer. And, if you can, find one that contains a moisturizer since skin dries out in airplanes. Look for one that has at least 60% alcohol. Stay in your seat as much as you can to avoid contact with others on the plane. Although airlines report that they clean the plane between flights, it’s a good idea to wipe down the armrest, tray table, seat belt and general seat area when you first board the plane. Alcohol wipes are good for this, so put a few in a zip lock bag, so that you can easily access them and then dispose of the ones that you have already used. Check the labels to find those that kill 99.9% of the viruses. Public charging states make you more vulnerable to hacking and malware, and also require that you stand or sit close to other passengers, so bring along a portable charging device when you travel to assure that you will not run out of power for your phone, iPad or computer. If you travel frequently, consider investing in a charger that has a capacity of at least 10,000mAh. If you are taking a short, direct flight, a charger with an under 5,000mAh rating should work. Because your phone rests all over when you travel, consider investing in a portable UV light sanitizer that help keep it clean. That UV light can kill everything from bacteria and fungi to viruses themselves, although no one is sure that it will kill the Covid-19 virus. UV light can get into the nooks and crannies and is much more effective than wipes. It works like a mini-tanning bed for your phone. While the airlines often provide earphones, it is not as hygienic as bringing a comfortable pair from home. If you want to watch movies, bring headphones that can plug into the screen. Finally, consider bringing along a neck pillow. Choose one that provides a removable, washable cover. Once you reach your destination, toss the cover in the wash, so it will be ready for your next trip. Then, try to relax and enjoy your flight.
May 11, 2021
Real Estate
This Week in Real Estate: Ten Things Every Landlord Should Know
This Week in Real Estate’s current series is focusing on Leases. This week, we’ll focus on residential leasing and the Top Ten Things Every Landlord Should Know. 1. Become familiar with your jurisdiction’s Landlord-Tenant Code. 2. Don't rent to anyone before checking his or her credit history, references and background. Haphazard screening and tenant selection too often result in problems. 3. Get all the important terms of the tenancy in writing. Beginning with the rental application and lease or rental agreement, be sure to document important facts of your relationship with your tenants. 4. Establish a clear, fair system of setting, collecting, holding, and returning security deposits. Inspect and document the condition of the rental unit before the tenant moves in to avoid disputes over security deposits when the tenant moves out. 5. Stay on top of repair and maintenance needs to make repairs when requested.If the property is not kept in good repair, you'll alienate good tenants. And they may have the right to withhold rent, sue for any injuries caused by defective conditions, or move out without notice. 6. Respect the privacy of your tenants. Notify tenants whenever you plan to enter their rental unit and provide as much notice as possible. Make sure you are aware of your jurisdiction’s minimum notice requirements. 7. Disclose environmental hazards such. Landlords are increasingly being held liable for tenant health problems resulting from exposure to environmental poisons in the rental premises. 8. If you choose to obtain one, choose and supervise your manager carefully. If a manager commits a crime or is incompetent, you may be held financially responsible. Do a thorough background check and clearly spell out the manager's duties in writing to prevent problems down the road. 9. Purchase enough liability and other property insurance. A well-designed insurance program can protect your rental property from losses caused by everything from fire and storms to burglary, vandalism, and personal injury and discrimination lawsuit. 10. Treat your rental property like a business. It’s important to remain professional and consistent with your tenants. Everyone falls on hard times, but allowing tenants to not pay rent or break rules is a recipe for disaster.
May 7, 2021
The Weekly Scenario
The Weekly Scenario: Required Minimum Distribution (“RMD”) under the SECURE Act
Is there a year of death for Required Minimum Distribution (“RMD”) under the SECURE Act? Even over a year in the passage of the SECURE Act, many questions remain about the correct way to handle the RMD in the year of death. The RMD for the year of death will only need to be taken if the IRA owner died on or after their required beginning date (RBD) and had not already taken all of their RMD. Under the new rules of the SECURE Act, the RBD is now April 1 of the year following the year the IRA owner reaches age 72. Note that all Roth IRA owners are considered to have died before their RBD. This means that there is never a year-of-death RMD required from a Roth IRA. Nothing needs to be withdrawn in the year of death. Example 1: Jane’s 72nd birthday is November 21, 2021. She died in December of 2021 without taking her 2021 RMD. Jane died before her RBD (April 1, 2022). Therefore, no RMD is required for the year of her death (2021). The RMD for the year of death is calculated as if the IRA owner had lived for that year. This means it will be calculated using the Uniform Lifetime Table. The requirement that a year-of-death RMD be taken is unaffected by the SECURE Act. This is because the changes made in the SECURE Act to the calculation of RMDs deal only with post-death RMDs. The amount of the year-of-death RMD is based on the IRA owner’s pre-death lifetime payments. Example 2: Dave, age 75, dies in 2021. The year-of-death RMD that must be taken from his IRA will still be calculated using the factor that corresponds to his age 75 on the Uniform Lifetime Table (22.9). If the year-of-death RMD was not already taken by the IRA owner, it must be taken by the beneficiary. It is not paid to the IRA owner’s estate (unless the estate is named as the beneficiary). The beneficiary will also pay the tax on the distribution. The SECURE Act’s requirement that non-spouse beneficiaries use the 10-year rule does NOT remove the beneficiary’s responsibility to take the year-of-death RMD. Example 3: Sam died in 2021 at age 81. He named his nephew Joey as his IRA beneficiary. However, Sam did not take his RMD prior to his death. Joey is a non-eligible designated beneficiary and is subject to the 10-year payout term. Joey is responsible for taking his uncle’s year-of-death RMD prior to the end of 2021. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
May 6, 2021
Labor and Employment
Pennsylvania Enacts Law Requiring Mandatory Police Officer Background Disclosures
Pennsylvania Act 57 of 2020 (enacted July 14, 2020) is a game changer in terms of what a Township Police Department must make public and disclose to prospective Police Employers concerning a former or present Township Police Officer. It is long, long overdue and should be welcome by all Townships, Police Officers and Police Unions. It makes all the sense in the world that before a Police Officer is hired, given lifetime tenure, a gun and the power to take life and liberty that the Township and Police Department know everything they can about the officer including all past discipline. The law now requires the Municipal Police Officer Education and Training Commission (“Commission”) to develop a database to hold separation records of all "law enforcement officers" in the Commonwealth (defined as "peace officers" in Title 18 Pa.C.S.A. § 501). The act requires the database to be operational by July 14, 2021 and temporary regulations that were established on March 14, 2021 [Pennsylvania Bulletin (pacodeandbulletin.gov)]. All too often Township Police Departments in their zeal to get rid of a bad officer, for expediency purposes, will agree to expunge an officer’s disciplinary record or let him/her resign in good standing before disciplinary charges are filed, agreeing to not disclose that discipline when the officer applies to another Police Department. The new Department, however, has no idea it is getting a “bad apple.” It is a vicious cycle that, if not broken, harms all Township Police Departments and the public they are entrusted to protect. While a Police Chief is thrilled to be rid of a problem officer, the Department could fall victim, if the next officer hired had his/her prior disciplinary record cleansed as well. Everyone should have empathy and consideration for others who could end up with the problem officers if proper disclosures are not made. This new law finally attempts to address this very serious issue brought about by the recent national publicity about problem officers and the desire for more public transparency and accountability. We expect that more states, if they have not already, will adopt similar legislation in the wake of public backlash against problem police officers. Under this law the Township must proactively maintain and make certain employment records available on the Township website for the public and other Prospective Employer Police Departments to view. Further, it provides a process whereby a prospective employer can go to court if the prior employer stonewalls on providing documents, a process that did not exist before. Municipal employers should consult experienced employment counsel for any assistance needed in complying with the new requirements. Any questions please contact, Gabriel V. Celii at Offit/Kurman, gcelii@offitkurman.com.
May 5, 2021
Family Law
Will New Legislation Approved by the Maryland Legislature Improve the Lives of Adolescents in High Conflict Custody Cases?
In high-conflict custody cases, parents often disagree about whether a child needs mental health treatment. Divorced parents often have joint legal custody of a child, which means that the parents have to agree on a decision regarding mental health treatment for their child. If the parents are unable to reach an agreement that a child requires mental health treatment, and it is necessary to ask the court to order mental health treatment, it can take close to a year to reach a trial date. A year is a very long time for a child to go without needed mental health treatment. Under prior law, a child age 16 or older had the same capacity as an adult (anyone age 18 or over) to consent to mental health treatment. Under the new law, any child age 12 or older who is determined by a health care provider to be “mature and capable of giving informed consent” can consent to mental health treatment. The new law provides, however, that a child under the age of 16 “may not consent to the use of prescription medications to treat a mental or emotional disorder.” Under both the prior law and the new law, a minor does not have the capacity to object to mental health treatment if it is authorized by a guardian or parent. In addition, a mental health provider may decide whether to provide information about mental health treatment to a guardian or parent, even if the child objects. It is unclear how often mental health providers will determine that a child between 12 and 16 is mature and capable of giving informed consent to mental health treatment, but the new legislation could help adolescent children caught in the middle obtain the mental health treatment they need. If you have questions about this or any other Family Law issue please contact Catherine H. “Kate” McQueen at (240) 507-1718 or kmcqueen@offitkurman.com.
May 4, 2021
Real Estate
This Week in Real Estate: Leases
This Week in Real Estate will focus on a new series of discussions on a topic that is very important in the world of real estate: leases. Over the next several weeks, TWIRE will discuss what they are. What are the different types, and what are the provisions included in the lease that are frequently overlooked but could have major implications? A lease is a contract outlining the terms under which one party agrees to rent or lease property owned by another party. It guarantees the lessee’s, also known as the tenant, use and occupancy of a property or asset and guarantees the lessor, the property owner or landlord, regular payments for a specified period in exchange. Both the lessee and the lessor have rights and responsibilities and face consequences if they fail to uphold the terms of the contract. Leases are legal and binding contracts that set forth the terms of rental agreements in real estate and real and personal property. These contracts stipulate the duties of each party to effect and maintain the agreement and are enforceable by each. For example, a residential property lease includes the address of the property, landlord responsibilities, and tenant responsibilities, such as the rent amount, a required security deposit, rent due date, consequences for breach of contract, the duration of the lease, pet policies, and any other essential information. Not all leases are designed the same, but there are some common features: rent amount, due date, lessee and lessor, etc. The landlord requires the tenant to sign the lease, thereby agreeing to its terms before occupying the property. Leases for commercial properties, on the other hand, are usually negotiated in accordance with the specific lessee and typically run from one to 10 years, with larger tenants often having longer, complex lease agreements. The landlord and tenant should retain a copy of the lease for their records. This is especially helpful when disputes arise. Next week, we will discuss residential leases, specifically in the State of Delaware, and the Ten Things Every Delaware Residential Landlord Should Know.
April 30, 2021
Labor and Employment
Workplace Discrimination and Harassment Outside the Office
The breakdown of a concrete workplace where worker interaction was somewhat limited to the office during work hours has led to increased flexibility for workers and employers. In many cases, this flexibility has allowed companies greater access to skilled workers, led to a more productive and engaged workforce, and reduced overhead. However, the blurring of the lines between work and home has created additional compliance burdens, especially when communicating and enforcing harassment and discrimination policies. Difficulty ensuring that employees are compliant with workplace policies promoting healthy work environments did not start with the increase in remote work, but they have certainly increased since the world went remote a little over a year ago. Before the COVID-19 pandemic, employers were navigating the difficulties associated with employees’ behavior on social media. Many companies found themselves balancing their desire not to control or police employee behavior outside of work with the impact their outside behavior had on the company culture and exposure. For example, if a group of employees have connected on social media and an employee posts something discriminatory in nature and her colleagues see that post and bring it to the attention of the company, the company may face liability even though the post was made outside of work hours on an employee’s personal page. Now, with many employees working remotely, the ability for employers to prevent and address discriminatory and harassing behavior has become even more complex, and the impacts of such behavior have been more severe. A 2020 Pew Research Center study found that 41% of Americans have personally experienced some form of online harassment. Virtual harassment can take many forms, including sexually explicit jokes, use of derogatory terms through electronic communications, inappropriate use of memes and emojis, insistence on video calls after work hours, and a failure to maintain dress code during video conferences and calls. With fewer natural touchpoints between management and their subordinates, workplace harassment is more likely to go unreported. With this conduct taking place virtually within employees’ homes, employees are more likely to suffer more severe effects. So, what are employers to do? Employers should invest in training and adapt their policies to fit new and evolving office dynamics. Companies can mitigate many of the issues outlined above through clear expectations of employee conduct during work hours and outside work hours, a practical reporting structure that meets the needs of a remote environment, and regular check-ins with remote employees. More than ever, clear and consistent communication with employees is essential to a compliant and healthy work environment. Questions about this or any other legal matter, please contact Sarah at Sarah.Sawyer@offitkurman.com.
April 29, 2021
The Weekly Scenario
The Weekly Scenario: Uncertainty and Opportunity in 2021
Is Now the Time to Make a Substantial Gift? As I reported last week, we may soon see a rollback in the ‘Trump’ tax cuts. Such a roll-back might even be made effective retroactively to January 1, 2021. Most of the changes made by the Tax Cuts and Jobs Act of 2017, as related to individuals, are already set to expire after 2025. Under this act, we now have an estate, gift, and generation-skipping transfer tax exemption amount of $11,700,000 per person. This exemption amount is up from $5,490,000, where it stood in 2017 prior to the ‘Trump’ tax cuts taking effect. This means that until the end of 2021, an individual dying or making a large gift can pass up to $11,700,000 free of any federal transfer tax. Thereafter a roughly 40% tax on the fair market value of the estate or gift would be paid. For married couples, they can now pass up to $23,400,000 (federal estate/gift/generation-skipping). The individual exemptions may likely roll back soon to around $5 million per donor or even $3.5 million per donor. On November 26, 2019, the IRS issued a regulation under IR-2019-189 that there would have been no “clawback” for any gifts made in 2020. Thus, if an individual had given up to $11.5 million in 2020, and the related exemption amount was reduced in 2021 to something less than that, then the difference between those amounts would not have been added back when computing the value of the taxable estate when the donor later dies. This is the “use it or lose it” approach that many people talk about in trying to figure out whether to make a large gift. While it is likely the IRS would do this again; there are no guarantees. The analysis to figure out whether a gift might be beneficial to a family is difficult and requires many different factors. Some of the factors include the total estate value, the health of the family member, the income tax basis of the estate assets, the charitable giving goals, prior gifts, the desire to retain control over the use of assets, and the readiness of beneficiaries to receive a large gift. Keep in mind that a gift doesn’t have to be made directly to an individual beneficiary. It can be made in trust, for example, given a person access to the property but not ownership or control. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
April 28, 2021
The Weekly Scenario
The Weekly Scenario: What is a Spendthrift Provision?
One of the best forms of asset protection we can provide is through a trust that contains a spendthrift provision. The general idea behind a spendthrift trust is to prevent certain beneficiaries from receiving their inheritances all at once. The risk is that the ‘spendthrift’ beneficiary will end up blowing through the money in a short period of time. The process of establishing a spendthrift trust is nearly identical to creating any other trust, except the trust instrument must contain a spendthrift provision. So what exactly does a spendthrift provision do? A spendthrift provision is a provision within a trust that limits the beneficiary’s access to trust. This restriction protects the trust property in two ways: First, it prevents a beneficiary from selling his or her interest in the trust property as a beneficiary to a creditor, and second, it prevents the beneficiary’s creditors from compelling the trustee to satisfy a debt by making a distribution except where this would void public policy like in the case of alimony, child support and some civil judgments. So, for instance, creditor X demands that Beneficiary 1 use the money to pay his debt of $20,000. Even if the beneficiary cannot pay off his debt, creditor X cannot compel the trust to pay a debt directly to creditor X if the trust is discretionary and contains such a spendthrift provision. However, once the trustee has made a distribution to a beneficiary, the creditor may then take the distributed assets from the individual beneficiary. In a discretionary spendthrift trust arrangement, the beneficiary's inheritance is, therefore, distributed in portions over an extended period of time. The beneficiary has no right to the money and can't spend it before actually receiving any of these distributions, and creditors and others can only reach the money that the beneficiary has actually received—not the portion of the inheritance that remains in the trust. The trustee would have discretion to decide when and why payments are made, or the creator of the trust can set these terms in the trust documents when the trust is created. There are some debts that courts do not allow spendthrift provisions to protect due to public policy concerns. For instance, a spendthrift provision will not apply to claims for alimony, child support, and back taxes. The courts favors these debtors because it is public policy to keep families from relying on support from the state when there are other resources that could provide support. If such great protection from creditors exists, why not simply create a spendthrift trust and name yourself a beneficiary? The reason is that most states won't allow this for public policy reasons. However, there are some exceptions where certain states allow something called ‘self-settled’ asset protection trusts where the person setting up the spendthrift trust can also be a beneficiary. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
April 22, 2021
Labor and Employment
Now Hiring: Getting Back to Work Amid the COVID-19 Pandemic
For much of 2020, my conversations with employers were around layoffs, furloughs, and terminations. With the uncertainty of the pandemic, many companies moved forward with mass layoffs and terminations. With businesses opening back up, individuals getting vaccinated, and more information about the virus, employers are bringing employees back and making new hires. With these are overall positive changes, there are also challenges with hiring or rehiring during a global pandemic. While there are the obvious complications associated with safety and COVID-19 compliance, many employers face complaints around who they rehired and who they didn't. Though employers are not required to reinstate employees they have laid off or terminated due to the pandemic; if they reinstate some employees and terminate others, their actions could come under scrutiny if they reflect a potentially discriminatory pattern. For example, suppose an employer laid off similarly situated men and women of all ages but only brings back the young men under forty. In that case, the company could face age and sex discrimination claims. Employers are particularly susceptible to these claims when they do not bring back otherwise qualified candidates without any history of poor performance or misconduct. Accordingly, employers should be mindful of who they are bringing back and why and look for potential problematic patterns that could appear discriminatory. Also, as a practical matter, in addition to avoiding a potential claim of discrimination, bringing back employees who are already trained and ready to hit the ground running can provide businesses with a leg up and allow a business to scale back up quickly. However, many individuals companies laid off have found other jobs. With many companies hiring simultaneously and many individuals still being cautious because of COVID, many employers are struggling to find qualified candidates. This is particularly true in the hospitality industry, where many employees, still reeling from the industry uncertainty caused by the pandemic, have left the industry in favor of jobs that are more likely to withstand the ebbs and flows of crisis. Main Takeaway: As many employers go into hiring mode, they should think strategically regarding whether they rehire, who they rehire, and how they attract new talent. Former employees who were laid off or terminated and aren't rehired may challenge the company's hiring decisions and claim they were discriminatory or retaliatory.
April 15, 2021
Labor and Employment
All of My Employees are Vaccinated. Can We Ditch the Masks?
Not Yet. Over the last three months, many employers, including large employers like Aldi, Amtrak, Instacart, McDonald’s, and Target, have been hard at work motivating employees to get vaccinated through incentive programs and education campaigns. Many businesses, especially small businesses with small workforces, wonder when they can start to lift COVID-19 safety protocols, such as mask-wearing in common areas and limiting in-person meetings. While we are the closest we have ever been since the start of the pandemic to scaling back these restrictions, in most states, we aren’t there yet. While the CDC has given vaccinated individuals the green light to visit with other fully vaccinated people indoors without wearing masks or distancing, a review of the CDC’s guidance is the start of the analysis, not the end. Many states, including the State of Maryland, still have mask mandates in place that impact employers. For example, in Maryland, Governor Hogan’s statewide mask mandate from July 2020 is still in place and requires that individuals wear a mask when “engaged in work in any area where…interaction with others is likely, including without limitation, in shared areas of commercial offices…” (View the Governor’s Order here: Executive Order 20-07-29-01) Governor Hogan’s Order does not contain any exceptions for vaccinated individuals, and willfully violating the Order is a misdemeanor punishable by up to a year in jail or up to a $5,000 fine or both. While changes to the Maryland mask mandate are likely in the months to come as more individuals are vaccinated, employers must continue to abide by the current order. Additionally, even when the rules on the federal and state levels loosen, employers will need to consider what makes the most sense for their workplace based on vaccination rates and the realities of their physical workplace to continue to keep employees safe. While restrictions are lifted nationwide, employers should be mindful of the risks associated with prematurely lifting restrictions in the workplace and continue to review their policies and procedures to ensure their employees are safe and comfortable coming to work. Main takeaway? Employers should continue to encourage their employees to get vaccinated, as vaccination is the best way for employees to stay safe and avoid contracting the virus. However, it is too soon to start removing other safety procedures in the workplace. Employers should continue to utilize COVID safety protocols, including liberal use of remote work, where possible, and mask and distancing mandates. Questions about this or any other legal matter, please contact Sarah at Sarah.Sawyer@offitkurman.com.
April 15, 2021
The Weekly Scenario
The Weekly Scenario: What to Know About the “For the 99.5% Act” and the “Sensible Taxation and Equity Promotion (STEP) Act"
There are many potential tax law changes that may be coming to a theatre near you. I can’t get too far into the weeds in this blog, but I’ll address two current proposals that may be of interest. About three weeks ago, Senators Bernie Sanders (D-VT) and Sheldon Whitehouse (D-RI) introduced what they refer to as the “For the 99.5% Act.” As the name implies, the Act is focused on the top 0.5% of Americans. Under current law, the estate and gift tax lifetime exemption amount is $11.7 million per person (indexed for inflation), with amounts transferred in excess of this amount (this does not include annual gift tax exclusion gifts of $15,000 per person) subject to a 40% tax. The estate and gift tax exemptions are currently unified, meaning amounts not used via gifts during one’s life can be applied to offset estate tax upon death. The current exemption levels were doubled by the Tax Cuts and Jobs Act (TCJA) of 2017 and are expected to “sunset” or return to pre-TCJA 2017 amounts at the end of 2025. Some of the most significant provisions of the 99.5% Act are as follows: Reduces the estate tax exemption amount to $3.5 million per person but continues to index it for inflation. Reduces the gift tax exemption to $1 million per person (the system would no longer be unified). Increases the estate and gift tax rate (40%) to: 45% of an estate between $3.5 million and $10 million. 50% of an estate between $10 million and $50 million. 55% of an estate between $50 million and $1 billion. 65% of an estate over $1 billion. Eliminates valuation discounts for non-business assets. Eliminates the use of “Defective (for income tax purposes) Trusts.” Restricts the funding of Grantor Retained Annuity Trusts (GRATs) and imposes a minimum term of 10 years. Limits on "Generation-Skipping” while also imposing a maximum term of 50 years. Reduce the annual gift tax exemption (as mentioned above) from $15,000 per donee per year to $10,000 per donee per year. About the same time, Senators Chris Van Hollen (D-MD), Corey Booker (D-NJ), Elizabeth Warren (D-MA), Bernie Sanders (D-VT), and Sheldon Whitehouse (D-RI) introduced what they call the Sensible Taxation and Equity Promotion (STEP) Act. Under the current law, when an individual dies, the cost basis of property would receive a cost basis adjustment being adjusted to its Fair Market Value (FMV) at the date of death. When gifting appreciated property, the cost basis would carry over to the recipient. Some of the most significant provisions of the STEP Act are as follows: Property transferred by gift or bequest is treated as sold for its FMV, with the gain (or loss, but only if transferred via bequest) being recognized currently. There would be a $100,000 exclusion for gifts and a $1 million exclusion for transfers at death. There is a deferral period of 15 years built in to pay the tax. The exclusion of up to $250,000 per person on the sale of a principal residence would continue. All ‘non-grantor' trusts would have to pay tax on unrealized gains every 21 years (although trusts created in 2005 or earlier would have their first “deemed realization” in 2026). Gifts or bequests to spouses or charities would be exempt. The effective date of these proposed changes would be January 1, 2022. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
April 15, 2021
Real Estate
This Week in Real Estate: LLC and LLP Asset Protection
Pursuant to most LLC and LLP statutes, there are three types of asset protection provisions— a liability shield provision, “pick-your-partner” provisions, and charging order provisions. Essentially: Liability shield provisions protect the personal assets of partners, members and managers (except contributions to the entity) from liability for claims by third parties against their LLC or LLP. “Pick-your-partner” provisions protect the management rights of members and partners from the members' or partners’ creditors. Generally, charging order provisions limit a judgment creditor’s recourse to a members' or partners’ basic economic rights, in other words, their right to allocations of income and losses and their right to distributions of cash and other assets. As This Week in Real Estate has discussed numerous times, the Delaware LLC Act is the preeminent act in the country. Section 18-303 of the Delaware LLC Act provides in its entirety as follows: 18-303 LIABILITY TO THIRD PARTIES (a) Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company. (b) Notwithstanding the provisions of subsection (a) of this section, under a limited liability company agreement or under another agreement, a member or manager may agree to be obligated personally for any or all of the debts, obligations and liabilities of the limited liability company. See 6 Del. C. § 18-303. Similarly, for LLPs, Section 15-306 of the Delaware RUPA. This provision provides in its entirety as follows: 15-306 PARTNER’S LIABILITY (a) An obligation of a partnership arising out of or related to circumstances or events occurring while the partnership is a limited liability partnership or incurred while the partnership is a limited liability partnership, whether arising in contract, tort or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for such an obligation solely by reason of being or so acting as a partner. (b) Notwithstanding the provisions of subsection (c) of this section, under a partnership agreement or under another agreement, a partner may agree to be personally liable, directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for any or all of the obligations of the partnership incurred while the partnership is a limited liability partnership. See 6 Del. C. § 15-306. Here are the most important things regarding statutory liability shields: Statutory liability shields do not confer limited liability on LLCs or LLPs themselves, but only on their members or partners. In any claim against an LLC or an LLP, all of its assets will be at risk, and the most important way for an LLC or LLP to protect against this risk is by acquiring and maintaining adequate liability insurance. Statutory liability shields do not protect LLC members or managers or LLP partners from liability for personal misconduct. LLC members or LLP partners may be personally liable for claims against their entity on veil-piercing grounds. Liability shields do not protect partners, members and managers from claims by members that they have breached their fiduciary or contractual duties to the entity. Under many acts, including the above Delaware LLC Act § 18-303(b) and Delaware RUPA § 15-306(e), members and partners may waive their limited liability in their operating or partnership agreements or otherwise.
April 9, 2021
The Weekly Scenario
The Weekly Scenario: Designating a Beneficiary on a Vehicle Title
Like an individual retirement account or life insurance policy, a vehicle owner can designate a beneficiary to receive ownership of a Maryland titled vehicle upon their death. Since the designation is made prior to the death of the individual, the vehicle will not be considered part of the estate; therefore, Letters of Administration (obtained as a result of opening a probate estate matter) will not be required for transfer. What are the requirements (and clarifications): The vehicle must be solely owned and currently titled in Maryland; Only one beneficiary can be named; which can be either an individual or a business entity; A beneficiary must be designated prior to the death of the vehicle owner; A beneficiary may be added, even if the vehicle is subject to a lien. When the vehicle is transferred to the beneficiary all liens must be satisfied, or a letter of permission from the lien holder must be provided to change ownership to the beneficiary; The designation of a beneficiary does not affect the ownership of the vehicle until the death of the vehicle owner; The owner of the vehicle may choose to delete or change the designation of a beneficiary or sell the vehicle at any time prior to their death without the consent of the beneficiary. Once a beneficiary is designated, a corrected title will be delivered to the vehicle owner. All previously issued titles will be voided. In addition, no inspection is required if the beneficiary is an immediate family member (spouse, child, or parent of the deceased). In addition: The vehicle registration may be transferred if the vehicle is transferred to a member of the immediate family. All other transfers will require the purchase of new registration plates; At the time the transaction is submitted for processing a death certificate must accompany the title. If the MVA has received notification of the vehicle owner’s death from the Department of Health and Mental Hygiene, the death certificate would not be required; There is a fee to add, delete or change a beneficiary to a vehicle title record. The beneficiary designation form is available on the MVA’s website. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
April 8, 2021
Business
The Terrifying New York Definition of a Franchise
As Published in the New York Business Law Journal Licensing is big business. Brand owners may license selected product lines, create brand extensions, enter new markets or simply enhance their brands through licensing. But few brand owners know that the New York Franchise Sales Act (“NYFSA”), by its terms, regulates licensors who provide no marketing assistance and impose no requirements other than quality control. The definition of a “franchise” under the NYFSA is extremely broad.[1] It covers far more business arrangements than anyone would reasonably consider to be a franchise. This anomaly puts New York franchise law in “left field” as the late Rupert Barkoff noted in his excellent article published in the New York Law Journal on May 1, 2012.[2] This is an understatement. The NYFSA, which has not been revised since it went into effect in 1981, is not even in the same ballpark as similar legislation in other jurisdictions. Barkoff called this anomalous New York definition of a franchise “terrifying.” In order to sell franchises anywhere in the U.S., a franchisor must prepare a detailed franchise disclosure document that includes audited financial statements. A franchisor located in New York, or a franchisor that intends to sell franchises to buyers in New York, must register the offering with the state Attorney General’s Office before the franchisor may lawfully sell franchises from or in the state. The franchisor must then make the required disclosures to each prospective franchisee and wait 10 business days (or 14 calendar days in the other dozen or so states that regulate franchise sales) before entering into the agreement or accepting any payment. Failure to comply with the NYFSA can result in enforcement action by the New York State Attorney General’s Office and private actions by franchisees for rescission, damages, injunctive or declaratory relief, attorneys’ fees, and costs. Willful violation of the NYFSA can lead to punitive damages and criminal liability. Not only can a simple trademark license agreement be a franchise in New York. A marketing consulting agreement can also be a franchise. So can a distribution arrangement where the distributor must pay an initial fee to the supplier to gain the right to distribute in a specific market or territory. To put this another way, outside of the business arrangement that we all know as a franchise is a large “gray” area in which the arrangement is at risk of being a franchise under New York law. In short, the NYFSA is a trap for the unwary. Most people would not think of consulting with a franchise lawyer before entering into a trademark license agreement or a marketing agreement. Yet failure to comply with the NYFSA can give ammunition to an aggrieved licensee in a dispute with its licensor or result in prosecution of the licensor by the New York State Attorney General’s office. The broad definition of a franchise cries out for change in the law. A Two-Prong Definition Impedes Business in New York The definition of a franchise under most franchise sales laws contains three elements: a fee, a trademark and a marketing plan prescribed in substantial part by the franchisor. The franchise sales laws of Maryland and Virginia are typical examples.[3] These definitions, unlike the New York definition, are also similar to the definition of a franchise under the Federal Trade Commission’s trade regulation rule on franchising (the “FTC Rule”), which also contains three elements.[4] The New York definition of a franchise has just two elements.[5] One element is either a trademark or a marketing plan prescribed in substantial part by the franchisor. The second element is a fee. Each of the franchise sales laws, of course, has various exemptions and exclusions from the definition of a franchise.[6] Both prongs of the NYFSA’s definition of a franchise raise issues. Starting with the first prong, what does it mean to grant “the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor” without a trademark? A marketing consultant may provide a marketing plan to a client to enable that client to launch a business. Certainly, the client will pay a fee. Is this a franchise? When does such an arrangement constitute a “grant” of the “right” to engage in a business? The statute is not at all clear on what type of arrangement this prong of the definition is intended to cover. The second prong is easier to understand but is extremely broad. The plain language of the statute covers many license and distribution arrangements that would not be considered franchises in other states. Any trademark license granting someone a right to engage in a business in consideration for a royalty would fall within the definition of a franchise under the NYFSA. So would a distribution arrangement with no grant of trademark rights in which the distributor pays a one-time fee to the supplier to purchase the distribution rights. These are not the types of business arrangements that anyone unfamiliar with New York law would expect to be franchises. For licensors who receive proper legal advice, this broad definition is an impediment to doing business in the state of New York or with a person located in New York. The proper advice in many of these cases is that the broad scope of the New York law creates risk and imposes a degree of uncertainty. This advice would discourage some from locating their business in the state. Why would a licensor choose to be subject to the extensive franchise registration and disclosure requirements in New York when the company can avoid these requirements by locating in or licensing into any other state? Why would a consultant based in New York or working with a New York client provide a marketing plan to enable the client to launch a business? For Traditional Franchisors, New York’s Broad Definition of a Franchise is a Non-Issue Companies that offer traditional franchises have no issue with the broad definition of a franchise under the NYFSA. Franchisors know that they must prepare franchise disclosure documents in accordance with the FTC Rule and, when necessary, also in accordance with the requirements of the NYFSA and the franchise laws of other states. Franchisors register their franchise offerings in New York as they do in other states and they make the required disclosures to prospective franchisees. The broad definition of a franchise under the NYFSA also does not adversely affect franchisees or prospective franchisees in traditional franchise arrangements. They receive the required disclosures from their franchisors regardless of the law’s overly broad definition of a franchise. The “terrifying” aspects of the New York definition apply only to those who would not be considered franchisors under the FTC Rule or the franchise sales laws of any other state. Narrowing New York’s broad definition of a “franchise” to conform to the definition in other states would have no effect on franchisors or franchisees as those terms are commonly understood. Does the Broad Definition Serve a Useful Purpose? In practice, relatively few litigants raise the issue of noncompliance with the NYFSA against trademark licensors or marketing consultants. The Attorney General’s Office seldom prosecutes business arrangements that are not commonly understood to be franchises. The reason may be that these business arrangements do not require the protections that the NYFSA affords to prospective franchisees. Maybe we should view trademark licensors and certain marketing consultants in New York as we do drivers who speed on a highway. Drivers often speed. Only a small number are prosecuted. But speeding is dangerous. A simple trademark license agreement or marketing consulting agreement is not. The sparse enforcement of the NYFSA does not change the fact that the threat is always there. An enforcer can arbitrarily decide at any time to enforce it. Why should a licensor or consultant have to run this risk? The fact that the Attorney General’s Office does not apply the law to arrangements that are not commonly understood to be franchises also indicates that the Attorney General’s Office may not view the broad definition as a necessity. Cutting back the definition so that it conforms to the laws of other states would not significantly change the enforcement activity at the Attorney General’s Office. Nor would it change the way private litigants behave. A revised NYFSA could eliminate the registration and disclosure requirement for businesses that lie in the “gray” area of the New York definition today while retaining the Attorney General’s broad anti-fraud jurisdiction for these businesses. If necessary, the state might even consider enacting a “business opportunity” law, as roughly half of the states have done, which would regulate some business arrangements in the “gray” area but have far less onerous registration and disclosure requirements than a franchise law. The broad definition of a franchise has been a part of the NYFSA since it became effective in 1981. New York was the last state to enact a franchise sales law, and that law has never been amended. One commentator noted in 2012 that the NYFSA “was crafted to attack a vast criminal invasion of the franchise arena which transpired in the 1960s and 70s (including significant organized crime involvement) and to safeguard New York’s reputation as the financial capital of the world.”[7] In other words, the NYFSA was written expansively in order to give the Attorney General broad latitude to prosecute bad actors who might run off with initial franchise investments of would-be franchise buyers. The same author noted in 2020 that on its 40th anniversary, the NYFSA “achieved its intended purpose – the eradication of massive fraud and criminality that had permeated the then-nascent franchise arena.”[8] Even if there was a need for a franchise law with such broad application in 1981, there is no such need today. Undoubtedly, the FTC Rule, which went into effect in 1979, also played an important role in cleaning up an industry that was riddled with fraud, as did the franchise laws of other states, which were all enacted in the 1970s before the FTC Rule became effective. Time for Change Most business owners want to comply with applicable laws. If by chance or good fortune a business owner based in New York or planning to do business in New York happens to consult with a franchise lawyer before entering into a trademark license agreement or a market consulting agreement, that business owner might be advised either to seek a discretionary exemption or to locate the business outside the state of New York and to consider not entering into the contract with anyone who is located in New York. This sounds extreme because it is. Franchising is a respected way of doing business. Franchising is also an important part of the U.S. economy.[9] With some careful revising, the NYFSA can make franchising a far more important part of the New York economy than it is today. The broad definition of a franchise under the NYFSA today is the single most important reason to change this law. It is high time for New York State to change its definition of a “franchise” to conform more closely with the franchise sales laws of other states. [1] N.Y. General Business Law (GBL) Article 33, Section 681.3 defines a franchise as follows: "Franchise" means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which: (a) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, and the franchisee is required to pay, directly or indirectly, a franchise fee, or (b) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchisee fee. [2] “New York Franchise Act: Out in Left Field,” by Rupert M. Barkoff, NYLJ 5/1/2012. [3] Section 14-201(e)(1) of the Maryland Business Regulation Code provides as follows: “Franchise” means an expressed or implied, oral or written agreement in which: (i) a purchaser is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor; (ii) the operation of the business under the marketing plan or system is associated substantially with the trademark, service mark, trade name, logotype, advertising, or other commercial symbol that designates the franchisor or its affiliate; and (iii) the purchaser must pay, directly or indirectly, a franchise fee. Section 13.1-559(A) of the Code of Virginia (the Retail Franchising Act) defines a “franchise” as follows: "Franchise" means a written contract or agreement between two or more persons, by which: 1. A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services at retail under a marketing plan or system prescribed in substantial part by a franchisor; 2. The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and 3. The franchisee is required to pay, directly or indirectly, a franchise fee of $500 or more. [4] 16 CFR Section 436.1(h) provides as follows: Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that: (1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark; (2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and (3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate. [5] Note 1 supra. [6] See Exemptions and Exclusions Under Federal and State Franchise Registration and Disclosure Laws, Leslie D. Curran and Beata Krakus, Editors (ABA Forum on Franchising, 2017). [7] “In Defense of the New York Franchise Act,” by David Kaufmann, NYLJ June 26, 2012. [8] “New York Franchise Act Turns 40 – A Look Back,” by David Kaufmann, NYLJ June 25, 2020. [9] See, e.g., https://www.franchise.org/franchise-information/franchise-business-outlook/franchise-business-economic-outlook-2020
April 6, 2021
Intellectual Property
Is Genericide Still A Thing? Maybe We Worry Too Much About 'Proper Use Of Trademarks'
As Published in The Legal Intelligencer – Special Section March 2021: Intellectual Property By: Laura Winston Earlier this year, the comedian Seth Meyers was making a joke about a politician on his talk show "Late Night with Seth Meyers." In doing so, he referred to a well-known brand of popular plastic building bricks as “Legos.” Mr. Meyers was immediately flooded with online comments telling him that the plural of Lego is Lego. He took to the airwaves again on the topic, thanking the commenters but adding, “It’s too late for me…I’m not going to walk home and tell my kids `Clean up your Lego’”. Not long after, the owner of the world-famous LEGO trademark got into the act via a tweet, saying, “Hey @SethMeyers, let us blow your mind...the plural is not `Legos.’ It’s not even `Legos.’ It's actually `LEGO BRICKS!’" @LEGO_Group, Twitter (February 11, 2021), https://twitter.com/lego_group/status/1359856214591627269. If you have questions about this or any other legal matter, please feel free to contact Laura Winston at 347.589.8536 Reprinted with permission from the March 30, 2021 issue of The Legal Intelligencer. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
April 5, 2021
Business
Avoiding an Adverse Tax Impact on Death of an S Corporation Shareholder
As Published on American Bar Association – ABA Tax Section I. Introduction One of the main reasons to consider a partnership for owning a business rather than an S Corporation is the adverse impact upon death if the business is held by an S Corporation. Now there are solutions to this problem for S Corporation shareholders that tax advisers need to add to their toolbox. These solutions convert the tax status of the business from an S Corporation to a partnership for federal tax purposes, in a federal income tax-neutral manner. This can be accomplished through liquidation in the case of a deceased shareholder or reorganization prior to death of a shareholder. A. Upon the Death of an S Corporation Owner Specifically, upon the death of an S Corporation owner, the heirs are denied the benefits of receiving a step-up in bases in underlying corporate assets to fair market value. In a partnership, the heirs receive a full income tax-free step-up in basis for all of the underling partnership assets and the benefits of obtaining the income tax shelter from new large depreciation deductions. However, in an S Corporation when the owner dies, the shareholder heirs only receive a step-up of basis in the corporate stock equal to the fair market value of the company at the date of death. The underlying S Corporation assets retain the same pre-death tax bases even though the decedent estates in both cases have the same federal estate tax implications and costs. Therefore, the S Corporation heirs should consider promptly liquidating the corporation to also achieve an income-tax neutral stepped-up basis for the company’s assets. This same technique can also be considered if a surviving shareholder buys out the estate of a deceased shareholder. If you have questions about this or any other legal matter, please feel free to contact Herb Fineburg at 267.338.1376 or Charles McCauley, III at 484.531.1712. Read the full article below.
April 1, 2021
Family Law
Divorce in New Jersey- Equitable Distribution
Originally posted on 3/12/2019, no content changes. Equitable distribution is the division of the marital assets and liabilities between the parties. The equitable distribution of the marital assets and liabilities is fundamentally a three-step process. The assets and liabilities acquired during the marriage must be identified. The assets and liabilities must be evaluated either by review of the account statements or other documentation, the use of appraisers or the utilization of a forensic accountant, and The method and respective percentages of the distribution must be determined. Unlike several other states (most notably California), New Jersey is not a community property state. In community property states, the assets and liabilities are divided equally regardless of any other circumstances. New Jersey is an "equitable distribution" state, meaning that the assets and liabilities acquired during the marriage must be "fairly" distributed between the parties. What is "equitable" under the facts and circumstances of a particular case is not simply a subjective determination of fairness or equity. If it were, almost every person would argue that "equitable" means that they should receive a higher percentage of the assets. They would argue that because of their perceptions as to why the marriage ended, their perceptions as to their work efforts during the marriage and their general sense of "being victimized" justifies them receiving a higher percentage of the assets. Those perceptions are, however, largely irrelevant, and the specific statutory factors which must be considered are: the duration of the marriage; the age of the parties; the physical and emotional health of the parties; any income or property brought into the marriage by each of the parties; the standard of living established during the marriage; any written agreements made by the parties either before or during the marriage; the economic circumstances of each party at the time the division of the property becomes effective; the income and earning capacity of each party; each party's educational background, training and employment skills, work experience, absence from the job market; parties' respective custodial responsibilities for the children of the marriage; the contribution of each party to the education training and development of the earning power of the other party; each party's contribution to the acquisition or dissipation of the martial assets, including:the other parties' contribution as a home maker; the tax consequences of the proposed distribution; the value of the property or asset; the need of the parent who has physical custody of a child to own or occupy the marital residence; the debts and liabilities; the need to create a trust or other fund for foreseeable medical educational expenses; and the extent to which either party deferred achieving their career goals. You should familiarize yourself with each of these factors. If there are facts or circumstances in your case which you feel relate to any of the factors, you must call them to the attention of your Attorney. As your case progresses, your position with regard to the distribution of the assets must focus upon an analysis of these factors, not your own feelings as to what is "equitable." If your case is ultimately decided by a Judge, the Judge's decision will include a specific analysis of each factor and its relevancy to the facts of your case. Therefore, in order to have some projection as to what a Judge may decide, you must analyze your case in the context of these factors. It is also important to consider that not all assets must be divided in the same percentages. It is entirely possible that some of the assets in a case could be divided equally while others, because of the relevancy of any one or more of these factors, may be distributed other than equally. For example, it is not unusual that the value of a small business or professional practice may not be divided equally between the parties. The person operating the business or professionally engaging in the practice may receive a higher percentage of the value. In some instances, the person with specific needs for certain assets, such as the household furnishings to maintain a home for the children, may receive all or substantially all of the household furnishings. Thus, it is not only important that all of the marital assets and liabilities be considered but that each asset be individually analyzed. There are also assets which may not be subject to equitable distribution and will be retained by one of the parties. Assets which are received by one of the parties by way of a gift from a third party, inherited assets or assets which are owned prior to the marriage may remain the property of the person who received, inherited or owned the assets prior to the marriage. If there are such assets, the question then becomes whether any increase in their value during the marriage is distributable. If the increase in value is solely as a result of increased market conditions or inflation, it usually will not be subject to equitable distribution. If the increase in value is the result of the efforts of one or both of the parties, it generally will be subject to equitable distribution. For example, if one of the parties owned a home at the time of the marriage and that home was renovated or improved by the parties' work efforts and/or financial investment during the marriage, the increase in value resulting from those improvements may be subject to marital distribution. If, on the other hand, the pre-owned asset was a bank account which increased in value solely as a result of interest on the account, the increase in value may not be subject to equitable distribution. If an inherited, gifted or prior owned asset is placed into joint names, sold or transferred into another asset, which is then placed in joint names, it may lose its status as an exempt asset and be converted into an asset subject to marital distribution. It is impossible to discuss all of the alternatives which may exist regarding prior owned, gifted or inherited assets in a particular case, but the point to emphasize is that you must inform your Attorney that such assets exist so as to allow them to analyze the particular circumstances surrounding those assets, and advise you as to what if any part of the value of that asset may be exempt from or included in the marital distribution. In terms of valuing the assets, some assets are very simple to value, others much more complex and the majority somewhere in between. Bank accounts, stock brokerage accounts, 401(k) accounts, or other accounts are easily valued by simply obtaining the most recent account statement. Small businesses and professional practices are very complex and difficult to evaluate. Their value can only be determined through the opinion of a competent forensic accountant who will examine the financial statements, income tax returns and nature of the business or practice and can then provide an expert opinion as to its value. Many assets may not be as simple as account statements nor as complex as small businesses but may, nonetheless, require the use of an expert or competent appraiser to determine their value. For example, a competent appraiser may have to be engaged to render an opinion as to the value of a home. Actuaries or pension experts may be engaged to offer similar opinions as to the value of pension or retirement accounts, and sometimes there are collectibles, art objects or other personal property of sufficient value to warrant retaining an appraiser as to their value. Again, it is impossible to discuss all of the alternatives as to the valuation of assets which may be subject to equitable distribution. What is, however, important is to know that you have the right to see the account statements or to obtain other competent expert opinion as to the value of the assets, and you should never settle a case without at least a reasonable level of due diligence to document and determine the value of the assets being distributed For more information on this topic, please contact Megan Smith at msmith@offitkurman.com.
August 3, 2019
Page 35 of 35
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