You Are Not Invincible - And Neither Is Your Durable Power Of Attorney

Don’t mistake “durable” for “invincible.” Several times in the past year I have been asked whether a durable power of attorney is still effective after the death of the principle. The answer is no – sort of.

A durable power of attorney (“DPOA”) terminates when the death of the principal becomes known to the agent. See MCL 700.5504.

While the principal is still living, a DPOA allows for the management of the affairs of a principal who has become incapacitated. This is a powerful tool, but it must be created before the principal suffers the onset of the disability, as at that point it is probably too late for the principal to have the capacity to sign a valid DPOA.

What are the alternatives to a DPOA? If property is owned in a trust, under many circumstances a successor trustee can take over during a period of incapacity. For property outside the trust, though, this would not be effective. The other alternatives to a DPOA are a judicial guardianship or conservatorship. These involve judicial oversight and creation, and are generally far more costly and less desirable alternatives.

While many people understand the reality of their own mortality, they do not consider the likelihood or even possibility of their temporary incapacity, and thus they overlook incapacity planning as part of their estate plan. However, incapacity planning is an important part of estate planning and a DPOA is a document that should be included in most estate plans.

Now a word of caution. This is not a document to be drafted without professional counsel. Care must be taken in drafting the DPOA not only to assure that it is effective and controlling when it is needed, but also to include restrictions as appropriate to avoid unintended tax consequences.

This is a good time for me to restate the important restrictions noted at the top of the blog – I cannot, and by way of this blog I do not, offer legal advice without knowledge of all of the relevant facts. This blog does not provide create an attorney-client relationship and does not provide legal advice. It is designed solely to raise issues that merit further discussion and exploration. It is of utmost importance that you contact your own attorney before taking, or refraining from taking, any action that can affect your legal rights.

Does A Michigan LLC Need To Maintain A Minute Book?

In short, yes.

As an attorney, one of the misconceptions I am commonly confronted with is the idea that a Limited Liability Company (LLC) is exempt from the need to maintain the kinds of records that would typically be found in a corporate minute book.

In Michigan, LLCs are required to maintain certain records. By statute, an LLC is required to keep numerous records at its registered office or principal place of business, including copies of tax returns, financial statements, operating agreements, and records relating to distributions and voting rights. To view the statute, click here.

The statute does not use the word “minute book”, but the requirements of the statute are items that you would expect to find in a minute book for a company.

Why is this important? First, because the statute says these records “shall” be maintained. Following the requirements of the statute is not optional. Of equal, or perhaps greater, importance, is that failure to maintain corporate formalities, including keeping proper records, is a key factor in determining whether an adverse party may “pierce the corporate veil”, thereby defeating the limited liability protection of the company and allowing the adverse party to directly take action against individual members.

One other item to keep in mind is that the requirements of the statute should be viewed as a floor, not a ceiling, meaning that as a matter of practice we recommend that our clients maintain more records then just the bare minimum required by the statute. This not only eases administrative work for the company over time, it is also provides the members with greater protection against claims that seek to pierce the corporate veil.

The recordkeeping requirements of the Michigan statute are not overly burdensome and the results of failure to comply with the statute can be significant. On at least an annual basis, our office reviews the records for not only the corporations we represent, but also the LLCs we represent. Give the annual records of your company the attention they need by performing an annual review or, if you have questions, contact me to arrange a consultation to review your company’s records and to help set up an efficient recordkeeping system for your LLC.

Ditch the DBA

For most businesses, doing business under an assumed name certificate filed with the county makes as much sense as using a rotary telephone. It may get the job done, but it is has many drawbacks and there are far more attractive alternatives.

Lets start with the basics. An individual can file an assumed name certificate with the county that allows that person to do business in the county under an assumed name. The form is simple and the filing fee is small. That may sound appealing until you realize that there are few benefits, and many downsides, to structuring your business in this method.

One significant drawback to an assumed name certificate is that it does not provide the business owner with any limited liability protection. In contrast, for businesses that are formed in a way that provides limited liability protection, such as corporations and limited liability companies (“LLC”s), you are not personally liable for most debts and obligations of the business. If you do business under an assumed name filed with a county, you do not have this protection. You are the business, the business is not considered a separate entity, and you are liable for the obligations of the company.

In the past, using a business that provided limited liability protection, such as a “C” corporation, meant also having the cost of “double taxation,” meaning that income was taxed upon receipt by the corporation, and taxed again on distribution to the owners. However, there are now many forms of entities, such as S Corporations or LLCs, which allow a business to have true limited liability protection and enjoy the benefits of “partnership” or “flow-through” style taxation, as opposed to traditional “corporate” style taxation.

There are many other advantages to using a company that provides limited liability protection, such as an LLC, including the ability of the company to continue in existence after the death of an owner, increased options for succession planning and integration with an owner’s estate plan, potential options for tax planning, and value in the form of perceived legitimacy from third parties when dealing with an established company. Also keep in mind that businesses operating an assumed name should file the certificate in every county in which they transact business, in contrast to an LLC or corporation which is protected by a single statewide filing.

If you are a business owner currently using an assumed name certificate filed with the county and you have questions about converting to a more favorable form, or you are considering starting a new business and you have questions about choosing the proper form, I encourage you to contact me or your local trusted business attorney.

Protect Your Home And Your Credit

Your home is probably your largest and most important asset. It is also one of the most attractive assets to criminals and con artists. Not surprisingly, many states report that mortgage fraud is one of the most commonly reported complaints. The effect of mortgage fraud can be devastating, not only as a way of removing equity or destroying credit, but in some cases homeowners also unwittingly sign deeds giving away actual ownership and legal title to the house.

Special thanks to Emil Izrailov, a Certified Mortgage Planner with Kaye Financial Corporation, for providing a recent article that highlights a new twist in mortgage fraud, an “equity disbursement program” purportedly sponsored by the “CRA” (that sounds official, doesn’t it?):

Through direct mail advertising, consumers are being offered special "cash grant or equity disbursement" programs which claim to be linked to the Community Reinvestment Act (CRA) and, in some cases, even endorsed by the Federal Reserve.

The Federal Reserve Board cautions homeowners that "no such federal programs exist". In fact, the Federal Reserve Board does not "endorse or sponsor" any mortgage programs, and the CRA does not "entitle individuals to any grants or loans". Enacted in 1977, the CRA is a federal law designed to address unfair "redlining" practices in low-income neighborhoods, encouraging financial institutions to address the financial needs of the community as a whole.

Click here to download the rest of the helpful article.

How do you keep from falling victim to this or any of the other in a frighteningly wide array of mortgage fraud schemes including equity stripping, loan flipping, bait and switch and deceptive loan servicing? (For a further description of these and other schemes to guard against here is a link to a recent article from Nancy Kreisler). The best way to protect your home and your credit is a twofold process:

First, only work with an experienced mortgage professional who can provide exemplary references. You can even send an email directly to Emil Izrailov if you have questions about how to protect yourself from mortgage fraud or you are looking to obtain financing.

Second, before entering into any agreements for the sale of your home or for financing which is secured by your home, contact me or your other trusted attorney who is experienced in real estate, civil and consumer protection law. That attorney can review the agreements before you sign them to make sure that your interests, your home and your credit are protected.

Keep Your Estate Private

Have you read Anna Nicole Smith’s Last Will and Testament?

I have not read her will, nor do I intend to. For me, the noteworthy aspect of her will is not the contents of the document, but the fact that it is front-page news on the CNN website (This is not meant to be a criticism of CNN, as I expect it is likely to be widely publicized by countless other media outlets).

For those of us who are not celebrities, there is little danger of our will being published by the national media. But if you do not make arrangements to avoid probate, your will, or any other probate proceedings, are public record.

Probate proceedings are less burdensome then they were in the past, but there are still many good reasons to avoid probate, including to protect your privacy. As an attorney who spends a significant portion of my practice dedicated to estate planning and administration, probate avoidance is one of the most common goals of my clients, and there are more options then ever to help clients achieve that goal. To avoid probate and protect your privacy, contact your trusted estate planning attorney.

The Problem With Going Paperless

Does anyone know your password to your online accounts? If not, they should.

That’s right, this is not a warning about security, this is a warning about the problem of making sure that your survivors have access to needed information in the event of your death or disability.

There is a growing trend towards managing assets online, oftentimes leaving your heirs with a lack of paper records and making them entirely dependent upon having access to your online accounts. If you don’t leave behind your user names and passwords, your information can be held so securely that it would require a court order, and costly legal proceedings, for your survivors just to gain access to the information. Special thanks to Michigan attorney William Josh Ard of Howard and Howard in Ann Arbor for bringing a recent article on this topic to my attention. As the author notes:

Keeping track of account passwords and Internet passwords is hard enough. Now imagine what can happen once a loved one is gone.

More and more people are using the Web to manage their financial and personal accounts. However, they don't think to leave behind user names and passwords with a trusted resource.

You may also recall the recent well-publicized court battle between the survivors of a Marine killed in Iraq and Yahoo, after the family, which did not have the account password, was denied access to the email account.

To avoid unnecessarily making your information inaccessible in the event it is needed by your loved ones, be sure to keep a current and complete list of all your accounts and login information. The list should be comprehensive, including everything from email accounts to bank accounts, investment accounts, credit cards - any other account that is password protected. Then, decide who else will receive or have access to the list, such as your spouse, adult children, financial advisor or estate planning attorney.

These problems apply equally to individuals and businesses. If your business depends on online accounts, make sure that the information on those accounts will be accessible to future owners, managers or employees who may need to take over the accounts with little or no advance notice.

Do you have a comment on this article or a suggestion as to how to maintain records of your online comments? I invite you to contact me or post a comment below.

Residential Land Contracts 101

In Michigan, sellers of residential property are more interested than ever in finding ways of making their property attractive to prospective buyers. Many sellers are offering leases as an option. Another alternative is to offer a sale by land contract. As an attorney who handles real estate transactions, from time to time I am asked by clients or prospective clients to review the fundamentals of a land contract. That prompted me to post the following primer.

What is a land contract? A land contract is both a method of financing and an agreement for the sale of an interest in real property. Payments are usually made in installments, and the interest rate cannot exceed 11% unless it qualifies for an exemption. Keep in mind, though, that the land contract itself does not convey legal title to the buyer (legal title is transferred by use of a deed). There are various reasons a buyer and seller may choose to enter into a land contract.

Why would a seller want to use a land contract? One reason is that, unlike a traditional sale whereby legal title is transferred at closing to the buyer and the mortgage holder retains a security interest, when a sale of real estate is conducted by way of land contract the seller retains legal title to the property until the conclusion of the land contract, and thus the seller retains the right to use the property as collateral during the course of the land contract (although this right may be barred by the language of the land contract). Another potential advantage for the seller relates to the seller’s remedies in the event that the buyer defaults. Should the buyer default, the seller has the remedy of “forfeiture”, by which the seller can recover possession of the property, retain all the payments the buyer has made to date under the contract, and the seller can avoid the lengthy process of a foreclosure sale.

Why would a buyer want to use a land contract? The most common reason for a buyer to agree to purchase property by land contract is because the buyer, as a result of their credit history or inability to make the required down payment, cannot obtain a traditional mortgage.

Beware of the “standard” land contract. There are many optional provisions for a land contract, including sections relating to prepayment penalties, rights to encumber, duty to place a deed in escrow, disposition of insurance proceeds, payment of taxes and insurance, rights to assign and remedies in event of default. Also, if you have an estate plan, be sure that the way in which you buy or sell property is consistent with that plan, particularly if your plan involves use of one or more trust agreements. Before entering into a land contract, or any other significant real estate contract, be sure to consult with an attorney who can make sure that your rights are fully protected.

Don't Disinherit Your Heirs By Mistake

Did you mean to disinherit your newly born child? Probably not. But to avoid mistakenly omitting a loved one from your estate it is most important to understand that your will only controls a fraction of what you own.

Many assets will likely pass outside of your will, including assets that are owned jointly (with rights of survivorship), assets held in a trust, and those which have controlling beneficiary designations, such as retirement accounts or life insurance. It is becoming more common for these assets to be the most valuable items in an estate. That makes it more important then ever to make sure that your beneficiary designations are current and consistent with your overall plan.

A recent Newsweek article highlights this important topic:

Your will tells the family how you want your property distributed when you die. But here's something you might not know: your will—and your wishes—can be overridden by other forms you've signed and forgotten about. Take the beneficiary form that came with your life-insurance policy. If it names your two children as beneficiaries and later a third child is born, only the first two will get the money. To include the third, you'll have to change the form.

The article discusses many other pitfalls that can affect you and your heirs in the event that your estate plan is incomplete or out of date. As an attorney who has worked with clients who have been the unfortunate victim of this scenario, I can confirm that this is a very real problem.

The best way to avoid family conflict and to make sure that your heirs are properly taken care of, make sure to not only work with an estate planning attorney to prepare your plan, but also to periodically work with your attorney to make sure that all of your assets will pass according to that plan. That is the best way to make sure that where you have a “will”, you also provide the way.

Transportation Lawyers Blog Launch

I am excited to announce the launch of the Transportation Laywers Blog. The primary contributor will be Alex Miller, an attorney with over 30 years of experience, much of it dedicated to the needs of the transportation industry. From time to time I will also be happy to add my thoughts and comments. This is a fantastic new forum and source of information for anyone with an interest or questions related to transportation law. Visit often, subscribe and spread the word!

Let Me Help You Avoid Probate

You read the title right - this attorney is giving free suggestions on how to help keep you out of court. Interested? Read on.

One of the goals of estate planning for most people is to avoid probate. To understand “why”, you have to start with the “what”, meaning, what is probate? Probate is the process of a court transferring the title of a decedent’s assets to his or her beneficiaries or heirs.

Why do you want to avoid probate? Because it is costly and time consuming. It can cost thousands of dollars in costs and fees and it can take many months to complete.

Why else do you want to avoid probate? To protect your privacy. Probate proceedings are public record, and with more and more court records becoming available online, it will be easier than ever for those records to be accessed by the general public.

The good news is there are ways to avoid probate.

The first way is to use the process of naming beneficiaries or transfer on death or payable on death (“TOD” or “POD”) designations. Michigan has a statute that clarifies this right. This method of contractually transferring title upon the death of the owner of the asset is available for items such as bank accounts, life insurance policies, and retirement accounts. If beneficiaries are designated, upon the death of the owner of the assets the financial institutions will transfer the assets directly to your beneficiaries so long as your beneficiaries follow their processing requirements.

But not all assets can be transferred using beneficiary designations. This is where a trust can be used to avoid probate. If the trust is properly created and funded, it will avoid probate as the successor trustee is able to privately manage your assets in the event of your passing.

Did you catch the word “funding”? That could be the most important word in this posting. The process of changing title of assets so that they are under the control of the trust is called “funding” the trust. A trust provides a plan for management and distribution of assets and designates the person, the trustee, to carry out that plan. But if an asset is not properly conveyed to the trust, then the trust has no control over that asset, and it is likely that a probate estate will need to be opened.

Probate proceedings are less burdensome then they were in the past, but there are still plenty of reasons to talk to your attorney about how you can avoid probate. So talk to your attorney about designing an estate plan to avoid probate, or to make sure that your existing estate plan will keep your estate out of probate court.

Do You Plan To Work Forever?

Nobody lives and works forever so succession is inevitable for every business. But owners can get so busy in the day-to-day workings of the business that they never set aside the time to plan for the future.

If you’ve worked hard to build a business, make sure you have also put together a plan for an orderly transfer of ownership. Poor or non-existent planning has resulted in the end of many businesses and, particularly in the case of family owned businesses, can lead to financial problems and even breaking families apart. Failing to plan can also result in excessive estate taxes and in some cases the need to sell the company or valuable assets in order to pay taxes, administration expenses and debts.

A key part of a succession plan is often a buy-sell agreement, sometimes referred to as a shareholders agreement. This agreement can be used to provide a market for each owner’s interest in the event of certain triggering events (such as death or disability), promote continuity and stability, potentially freeze the value of an owner’s interest for business or estate tax purposes, help to retain S-corporation status and serve as a way to resolve a dispute or deadlock among owners. If nothing else, the agreement can be used to lay the groundwork for long-term planning.

Planning is a process, and it’s never too early to start. To preserve your business for the future, do the practical thing and start working on you succession plan today. To further address this topic or to talk about the options that are available, please contact me to continue the discussion.

New Years Resolution

The blog is back! I'm getting an early start on one of my New Years Resolution - to regularly update this blog. I look forward to expanding the blog in 2007 both in the topics that I will cover and in the participation that I encourage from you.

What is one of your resolutions for 2007? Let me suggest something that is far more rewarding then organizing your closet - update or create your estate plan.

If you have always been putting off creating your estate plan as something to do "someday," well, this is the ideal time to turn "someday" into a firm date in January! If you have a plan that is more than 3 years old, schedule a time to review your plan.

Make sure that you are still comfortable with your selection of fiduciaries, such as agents under a power of attorney, personal representatives or trustees. Also decide if it is appropriate to make any changes in your plan of distribution to your beneficiaries. And if you have a trust, make sure that it is properly funded, so that any new assets you may have acquired are properly titled.

There is nothing more gratifying then knowing you have done everything you can to take care of your loved ones. The start of the new year is the perfect time to set a date to review or create these important documents.

As an attorney I am happy to help with your estate plan. As for cleaning that closet, sorry to say you are on your own...

Ready To Write 600 Mortgage Payment Checks?

A new product is available from many lenders – a 50-year mortgage. Is it right for you? Probably not.

The primary attraction of the 50-year mortgage is that it allows for lower monthly payments. But these lower monthly payments come at a great cost, which for most homeowners would significantly outweigh the benefit.

Three characteristics of the 50-year mortgage that should give any borrower pause before entering into the loan are: (1) slow growth of equity; (2) the substantial amount of extra interest over the life of the loan; and (3) the risk of adjustable rates.

If you take a 50-year mortgage, then be prepared to build equity at a painfully slow rate. Consider a $200,000 50-year, 7.5% mortgage. After the first ten years of payments, you would have paid almost $150,000 in interest payments, and you would have accumulated less than $5,000 in equity. In contrast, consider if you had taken a $200,000 loan at 7.5% interest for 30 years, after the first ten years of the loan you would have paid almost $7,000 less in interest and you would have built over $26,000 in equity.

Clearly the equity builds at a much faster rate under the 30-year loan. This is an important advantage, as one of the main benefits of home ownership is to build equity over time. Also keep in mind that you would be paying an enormous amount of extra interest over the life of a 50-year mortgage. Using the example above, you would pay $264,845.87 extra in interest over the life of the loan!

Of course, the monthly payments on the 30-year mortgage would be $118 higher than the 50-year mortgage. But when taking into account the faster equity growth and the enormous saving in interest expense, it is plainly worth the slightly higher monthly payment.

Also keep in mind that most 50-year mortgages currently offered by lenders provide a fixed rate for the first 5 years, after which the rate becomes adjustable. That means that after 5 years your monthly payment could increase.

With all the potential hazards, who should consider a 50-year mortgage? An ideal borrower would be someone who plans to stay in a home for less than 5 years, and does not want to take an "Interest Only" or "Option ARM" loan. With a 50-year mortgage you do not run the risk of owing more than you borrowed, which is a real possibility with some Interest Only or Option ARM loans that allow a borrower to pay even less than the interest due each month.

While this new product may be a good alternative for a small percentage of homeowners or investors, for most people, entering into a half-century mortgage IS NOT PRACTICAL.

Save Thousands On The Sale Of Your Home By Working With An Attorney

The beginning of summer is also Home Buying Season. For most of us, our home is our biggest investment, so the process of selling or buying a home is not only exciting, it can also be stressful. One of the biggest decisions is whether to work with a real estate agent or represent yourself (for sellers, this means a "For Sale By Owner" or "FSBO" transaction). Another option you may not have considered, but that may be your best option, is to sell your home by owner, and to work with an attorney.

When deciding whether to work with an agent, sell by owner, or by owner with an attorney, there are many important considerations, including costs, savings, and the level of your comfort in handling the responsibilities and risks involved in the transaction.

In the United States, 6% is considered a "standard" residential real estate commission, and it is typically split 50/50 between the listing agent and the buyer's agent. To put that into numbers, on the sale of a $250,000 home, the standard commission would be $15,000 paid by the seller at closing. Clearly, there are significant savings to be had by avoiding the need to pay a 6% commission. There are also significant risks.

If you are willing to do the work required to represent yourself as a buyer or seller, you can save a lot of money. I know, because not only am I an attorney, I am also a licensed residential real estate salesperson in Michigan (although I have chosen to have my license held in escrow with a holding company while I am committed to the full time practice of law), and I recently represented myself in the sale of my condo and the purchase of a home for my family. In my experience, the money that I saved made the extra work well worth the effort.

But with all the legal work and other issues involved in the sale of a home, how do you make sure that you are saving money and protecting yourself in the transaction? THE PRACTICAL THING TO DO is to talk to an attorney before you sign any paperwork.

The cost for the legal services will be thousands, or tens of thousands, less than the cost of using an agent, and you will make sure that your interests are protected. The price for legal services can vary significantly, but it should be easy to find an attorney who can provide a significant level of expertise at an hourly rate of $125 - $225 per hour. At those rates, 10 hours of service would cost a seller between $1,250 and $2,250 per hour, a savings of more than $12,000 using the example provided above!

It may be tempting to use "forms" from friends or associates as a substitute for consulting with an attorney, but remember that this is the largest transaction that you will probably ever be involved in and it is not a matter of "fill in the blanks." An attorney will give you the documents you need, and advise you as to the many requirements that you may not have even considered. As an illustration, most preprinted purchase agreements will not help a seller in Michigan comply with the Sellers Disclosure Act, the Lead Based Paint Disclosure Act, or help the seller with questions relating to title insurance, financing or inspection contingencies.

The right attorney can answer your questions, prepare or review the required paperwork, and guide you through every step of the process. Just as importantly, with their knowledge of other professionals in the industry, they will be happy to refer you to the individuals or companies that you may need along the way, such as mortgage brokers, inspectors, and title agencies. So go ahead and take advantage of the chance to save tens of thousands by selling your house by owner – just make sure to do the practical thing and talk to an attorney first.

Practical Law - Where It All Begins

Welcome! You have found the place on the web where legal issues will be discussed and presented in a simple, practical manner. I look forward to your questions and comments. Be sure that if you have a question, there are many others who share your concern, so please share your thoughts.
I hope that through the use and growth of this blog that individuals, families, consumers, professionals and businesses will have a better understanding of the law, and with that understanding a better ability to put the law to their advantage.