Year: 2017

Asset Protection or Estate Planning?

Our Costa Mesa office often gets inquiries from people that have already been to a lawyer regarding their will or estate. Sometimes, they already have something in place, but want to review it. And, often as not, it turns out that their previous plan no longer works for their current situation. Although all estate plans should be reviewed regularly, some of the following concepts might help to understand how you should move forward with your own situation, whether you have a plan in place, or are looking to make a plan.

All estate plans have two goals: asset protection and estate planning. Depending on your particular situation and desires, one of these might be more important than the other, but all plans will take care of both concerns. The issue is that these goals are often at odds.

Asset protection is primarily about protecting your estate from taxes, so that the maximum value is passed on to your loved ones. In some cases, however, you can use similar techniques to protect your property from future creditors.

Estate planning is about moving your estate quickly and easily to the people you want it to go to. While a Will does direct your property to the right people, it will put your estate into Probate Court, which has some cost and some delay. In some cases, a lot of cost and a lot of delay.

In an ideal plan, your estate will pass automatically upon your death to the right people without court, taxes or costs. If your estate is $5 million ($10 million for married couples) or less, this is accomplished with a living trust.

But if your estate is larger than that, or you wish to protect some of your property from future creditors, more complicated tools will have to be used. Almost all of these tools involve giving away your property now, before you pass. Often, you will retain some interest or control over the property for a while, but with restrictions. Depending on the particular tool used, the property may pass from your hands at a predesignated time, or at your death. But, unlike a living trust, you cannot change your beneficiary and you will be limited in your use of the property.

These are the things to think about when you review or make your estate plan. A knowledgeable lawyer can help you design the best plan for you.

C-Corporation or LLC?

            Most advisors, particularly those not familiar with both the law and tax sides of the incorporation decision, tend to advise using an LLC over a C Corporation. And, it’s true, often an LLC is preferable for tax reasons. However, this is not always true and any businessperson should pay attention to the differences before making a final decision.

            The Limited Liability Company, or “LLC,” is considered to have better tax treatment, because it avoids the “double taxation” problem of traditional C Corporations. For example, a C corporation with a profit of $1 million would pay about $340,000 in federal taxes on the profit, leaving $660,000 of profit. When distributed as dividends, this would get taxed again at 20% (sometimes 15%), for an additional $132,000 in tax, leaving an after-tax amount of $528,000. The same $1 million in an LLC would get taxed as direct income to the members, who are probably at the 40% (rounding up a tiny bit to make the math easy), so the after-tax profits are $600,000, a difference of $72,000 in favor of the LLC.

That’s the standard example explaining why the LLC is the better option. But not all businesses are alike. A C Corporation offers advantages, including tax advantages, in certain situations.

For example, most states charge a yearly “fee” on each LLC. This fee is not large, but it is mandatory and must be paid whether or not the LLC makes a profit. In California and some other states, it is also based on revenues, not profits. An LLC with high revenues, but not yet making much in profit would be charged thousands of dollars that are not charged to a C corporation. Also, assuming you are in the highest tax bracket, C corporations have low tax rates on lower levels of profit, often significantly lower than the 40% rate most LLC members would pay on same profit, regardless of double taxation.

Another benefit of the C corporation is that it pays the taxes itself. Let’s look at the $1 million profit scenario above. In a C corp, if the company needs to keep the profit in the company as a reserve or to expand or some other reason, it has the $660,000 in the bank, ready to go. The shareholders have no additional tax. Although, when the money does come out, there is more tax – that only happens when and if the shareholders actually receive any money. If this were an LLC, the members would have to pay the $400,000 in taxes, reported on their personal tax returns, regardless of how much money actually made it into their hands. In this situation, the C corporation has $60,000 more in the bank than the LLC after taxes.

Also, foreigners will see big benefits from using a United States C corporation over an LLC. Because the US has a worldwide tax policy, an LLC member who is attributed LLC earnings will have to file US taxes, including information on their worldwide income. Although, depending on the circumstances, the additional US tax, if any, will often be small, the reporting and additional work will have to be done. This is not true of a C corporation, even if it actually distributes dividends. This difference alone can make a C corporation more attractive, even if it results in higher taxes.

Are Both the Tenant and the Landlord Liable for ADA Claims?

Who’s to blame, the tenant or the landlord?

 

One of the first things we hear from our clients is they are not responsible for the alleged “barrier” on the property – it is the landlord’s or the tenant’s responsibility under the terms of the lease. This is always a difficult question to answer because the law is counter-intuitive about this situation.

In Botosan v. Paul McNally Realty, the Court addressed this question head on. In that case, Botosan, a wheelchair-bound person, claimed that he was denied access to a realtor’s office due to a lack of handicapped parking and sued both the landlord and the tenant under the ADA and Unruh Act. However, it turned out that the lease between the landlord and the tenant had allocated all responsibility for ADA compliance to the tenant. The landlords asked the Court to dismiss them from the case because it was not their responsibility. The Court ruled that it was their responsibility, at least as to Botosan. That didn’t mean that the landlord didn’t have a case against the tenants under the lease, but, as far as the disabled plaintiff was concerned, they were liable to him.

First, there is an exception to this rule. Tenants are not responsible for ADA compliance as to elements they have no control over. So, if the realtor was one of several tenants on the same property that shared a parking lot and had no control over the parking spaces, they could ask the Court to dismiss them. You can’t be held responsible for something you don’t have the power to change. But other than this one exception, both landlord and tenant have to see the case through to its conclusion and are jointly and severally liable for any amounts awarded by the Court.

That doesn’t mean the language of your lease is null and void, though. Either within the ADA suit itself or in a separate lawsuit, you can enforce the terms of the lease, including attorney’s fees and indemnification provisions. So, in the Botosan example, the landlord could get all of his expenses, possibly including attorney’s fees (depending on the specific wording in the lease), from the tenant. The only thing is that it would be a separate matter from whether the disabled plaintiff could recover from the landlord.

Generally speaking, turning a case from a two-way battle between the disabled plaintiff and the landlord/tenant into a three-way battle between all three ends up costing both the landlord and the tenant more. However, some landlords and some tenants are not cooperative, which can be an even bigger problem whose only solution is to start a new lawsuit to get the wayward defendant in line.

Why am I being sued for disability access?

The ADA lawsuit problem has been going on for decades. As a result, most commercial leases now include terms apportioning ADA compliance, often (but not always) solely to the tenant. As a landlord, it is important that you monitor your tenant’s compliance as well as your own compliance in common areas. As a tenant, it is important to notify your landlord of potential common area issues as well as making sure your own premises is accessible. But neither landlord nor tenant should believe that it is possible to hide behind the lease and avoid the ADA lawsuit. The Court won’t allow it.

What should I do about my lawsuit?

We have helped landlords and tenants fight against wrongful disability access lawsuits in Orange County, Inland Empire, Los Angeles and Northern California. If you think your business is being targetted by a professional litigant, contact an attorney right away by calling (949) 287-6901.