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Stuart Bronstein Articles

Articles

Stu has written and published a large number of articles over the years. Here are a few of them that you might find helpful:

Probate Basics

Many people have misconceptions concerning estate planning. What is it really, and what is it for?.

A. WHAT IS PROBATE?

Some types of property require formal ownership documents. These include real estate, automobiles and stocks. Their ownership can only be changed by having the current owner sign the property over to someone else.But after a person dies (needless to say), he can no longer sign documents to transfer property. Probate is a procedure allowing a court to establish ownership of property after the owner dies.

Sometimes it is not completely clear how a person's property should be distributed after he dies. Perhaps (for example) a Will is vague or confusing, or someone claims to be a person's illegitimate child. In those kinds of cases as well, a court must determine the proper people to whom property should pass.

B. PURPOSE FOR WILL

The rules vary from state to state. In every state, though there are rules for what will happen to a person's estate if he leaves no Will. As long as there are known relatives, a person's estate will not be lost to the state if he has no Will.

When a person dies without a will, a surviving spouse generally has some rights. In some states these rights may give the surviving spouse the right to use property for her lifetime. In other states the survivor may end up owning some or all of the estate. Whatever the other spouse doesn't receive, however, goes to the children, if there are any.

Property held as "tenancy in common" is distributed just like anything else: when a person dies, his share in common property is distributed to his heirs. The other common owners continue as before.

Property in "joint tenancy," however, goes to the surviving joint tenant (other owner), whether or not there is a Will, and no matter what a Will may say. This is a traditional method of avoiding probate.

Some states have a method of holding property called "community property." Only husbands and wives can have community property, and only with each other. Generally each spouse is considered the owner of half.

In normal situations, the law generally passes property the way most people want. So a Will may not be necessary for designating who is to inherit property. If someone wants a their property distributed differently than the law provides, however, it can only be done by Will.

But a Will can do more than distribute property. For example, it is generally used to appoint a guardian for minor children, and an executor to handle the affairs of the estate before it is distributed.

If there is no Will, or a Will fails to appoint a guardian or executor, a court will appoint who the judge thinks is most appropriate. Usually this will be someone acceptable to the surviving spouse or children.

The court will also require the designated person to post a fidelity bond. The cost of the bond is paid by the estate, reducing what is left for the heirs.

To have control over who is appointed to be an executor or guardian, a will is necessary. And if a trusted relative or friend is appointed in a will, bond may eliminated, saving more for the heirs.

C. CONCLUSION

A will is a useful but not always necessary device for passing property to future generations. For those with estates of over $675,000 (going up to $1,000,000 over the next few years), taxes may be an issue. Without a will the government's share of your estate could be higher than it needs to be. See the chapter on estate tax planning for more information on how to eliminate or reduce those taxes.

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Property Basics

"If you don't have a Will, your property will all go the State."

I hear that from time to time. But while it is certainly a good idea to have a Will, property normally will not go to the State if you don't have one.

Well, what happens when there is no Will? The lawyer's answer is, as it is to most things, "it depends."

The simplest case is for what is designated as "joint tenancy" property. It passes from one joint tenant to the other immediately, automatically, with or without a Will, and irrespective of what a Will might say.

Bank accounts are often designated as joint tenancy accounts. And real estate brokers often recommend (sometimes incorrectly) that couples take title to their homes as joint tenants.

For other types of property, when a person dies without a Will his spouse may share the property with any children the person leaves behind.

When there is no spouse, the children (or grandchildren) will inherit everything. When there are no children, the spouse may receive all the property.

It gets more complicated when there is a living spouse and children. There is a big difference, depending on the state you live in.

In most states, property owned by spouses is known as "separate property." Each spouse owns what he or she earns, and the other has only limited rights in the other's property.

When one spouse dies the other spouse generally takes one half (if there is only one surviving child) or one third (if there are two or more children), and the children share the rest if the estate.

In addition a spouse may have some other rights, like the right to continue to reside in the marital home after the other dies, even if the deceased spouse was the sole owner of the property.

A growing number of states are using the Community property concept. What spouses earn while married is community property, and considered owned half by each.

Couples who have been married for more than a few years often have only community property.

When one spouse dies without a Will, all his community property automatically goes to the other spouse. Separate property is divided between the spouse and any children like in states that have no community property.

For a person without either spouse or children (or grandchildren), his property will go to his parents, if either of them is still alive. Otherwise it will be divided equally among his brothers and sisters.

Property will go to the State only when no relatives at all can be found.

As you see, the law distributes property pretty much the way most people do when they write Wills. So why bother to have one?

Without a Will you lose control over who manages your affairs and who takes care of any minor children.

If both parents die, a guardian will have to take care of the children. And someone will have to take care of their inherited property. It may or may not be the same person.

An administrator (known as an executor if named in a Will) is appointed by the probate court to be sure creditors are paid, assets are not wasted and everything runs smoothly until an estate is distributed among the heirs.

This should be someone you trust to carry out those duties properly. In a Will you can chose an executor. Without a Will, a judge will designate someone thought to be appropriate, normally a close family member. It may not be the person you would choose.

The law requires that an executor or administrator post a fidelity bond. It protects the estate in case the person chosen turns out to be a crook.

But the estate pays the fee for the bond. And if you appoint someone who you know won't steal from your heirs, you can avoid the requirement of a bond, leaving more money for your children. But to do so you need to have a Will.

Will a court choose an executor or guardian that you would? Perhaps. But only with a Will can you be sure.

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No-Contest Clauses

A "no contest" clause in a Will says that you really mean what you say. If anyone challenges the Will in court, it is common for a Will to say that person will get $1, or even nothing.

From the standpoint of the person writing a Will, a "no contest" clause makes a lot of sense. Sometimes, though, others may think the clause is unfair.

In one recent case a California man died leaving an estate (that he owned with his wife) of over $7 million. His Will sought to distribute not only his share, but also his wife's share of their property.

The Will did give his wife cash and property worth about $2.6 million, about a million dollars less than the value of her half of their shared property. It also had a no-contest clause.

Wife had a real dilemma. Should she take what the Will gave her? Or should she give that up and instead ask for her half of everything they owned together?

Out of caution, wife went to court, not directly to challenge the Will, but for an advisory opinion. She asked that, if she sued to prohibit the Will's gift of her community property to others, would it invalidate the $2.6 million gift to her?

On one level the clause seems unfair. Husband was taking wife's property and giving it to his relatives. Wife is left with half a loaf. And if she complains she could get nothing.

On the other hand, if Wife wins her suit, she will get her half of their property, perhaps receiving much more than under the Will.

The California Supreme Court held such clauses are to be enforced. They said that Wife can't have it both ways. They acknowledged that Husband's disposing of Wife's community property may not seem fair.

But Wife can sue and receive all her community property. The Court thought it reasonable that she could not both sue, and also retain the bequest given in the Will.

Or take another example. A couple owns two pieces of real estate. Aside from that their estate is small. They have two children who have never gotten along. In an attempt to minimize problems, their Wills leave one piece of property to their daughter, and the other to their son. The properties are of about equal value, and they want each child to have approximately the same as the other.

Many years later, after the parents both die, though, one of the properties is worth much more than the other one.

Should the son, whose property is worth half the one left to his sister, sue and try to equalize the inheritances? If he does, and loses, he may end up with nothing at all. That certainly isn't the result his parents intended.

No one can predict all the things that could possibly go wrong. But you should anticipate and provide for as many contingencies as possible. That is always important when drafting any sort of an estate plan.

Anticipation of problems before they arise is extremely important when writing a "no contest" clause. It may be just what you want. But it may cause some problems that might sabotage your estate plan.

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Life Insurance Basics

A cynic once described buying life insurance as betting you are going to die - and then hoping you lose.

Ballet great, George Balanchine, once told an insurance agent he wouldn't need money after he died. Instead he asked for $100,000 cash, promising to make payments until his death.

Whatever its reputation, life insurance does have some benefits. Its traditional purpose was to provide funds in case of the untimely death of a family's breadwinner.

That's still its primary purpose. But there are others as well. Different types of insurance have also been developed to suit different needs.

First, how does insurance work? Every so often a study will be done to determine the average life span for people under various circumstances.

Insurers use these studies, known as mortality tables, to determine how much to charge. If they sell policies to enough people, their average life expectancies should match the averages for society.

Insurers charge high enough premiums to pay benefits to the families of their clients who die, plus their own costs.

As we grow older, our likely number of remaining years shrinks. In order to amortize benefit payments over those fewer years, higher amounts must be paid for premiums each year.

Types of insurance are Term, Whole Life, Universal Life, and a variety of others. Basic Term insurance is generally the least expensive.

Term is simply insurance, no more. As we grow older our chances of dying increase, so premiums also go up.

Premiums for Whole Life, and other products, are generally higher than for Term. The excess goes into a sort of savings account, which Term does not have.

In future years when Term premiums would increase, interest earned on the savings portions of these other types of policies may pay some or all of the higher premiums.

What's the best way to use insurance? It depends on your situation. For a family with young children, the loss of either parent could prove financially devastating.

How much money would be required to replace the loss of income of one parent? And what would added day care and other helper services cost?

Aside from its traditional role of providing support to a family when a parent's income ceases, the most useful feature of life insurance is that death benefits are generally income tax free.

Not only that, but the savings portion of non-Term products accumulate interest without tax.

What does that mean? You pay tax on interest earned on bank deposits and other investments. But you may not with savings attached to an insurance product.

So you may save money for a child's college education, for example, with life insurance. The savings portion may grow faster than an account that requires tax to be paid on interest earned. And if death causes savings to cease, life insurance death benefits may pay for college.

To be used, however, money saved as part of a life insurance contract must be borrowed. Interest payments, at least, must be paid back. If not, the IRS may treat it all as taxable income.

While life insurance not be subject to income tax, it generally is subject to the estate tax.

But even estate tax may be avoided. While the rules are fairly complex, it basically comes down to having someone else own the policy on your life.

Be sure to consult your tax professional if you want insurance proceeds to be excluded from your estate, however. If not done precisely correctly, it will not work, and will be taxed.

Life insurance may not be for everyone. But it certainly has benefits that, under the right circumstances, should not be ignored.

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Blended Family Blues

"It's not very romantic!" That's the reaction of many people to the idea of premarital agreements. To some, making one is like planning to fail. And they would rather plan to succeed.

Premarital agreements are often prompted by a partner who has been married before, and wants to avoid the problems that occurred at the end of a first marriage. To that extent it is planning to fail.

But even successful second marriages can produce bad feelings and expensive, divisive fights, which might be avoided with a little advance planning.

Problems come primarily when there are children from prior marriages. One recent case is illustrative.

Husband and Wife both had children from prior marriages. In their Wills, they agreed to leave everything to the other. But if the other had already died, the estate would be divided among both their children.

After Husband died, Wife changed her Will, leaving everything both spouses had accumulated, only to her children. Husband's children were left out. And there was nothing they could do about it.

In another case two people in their 80's married. Husband's property was already in a trust established with his first wife. When Husband became ill, Wife nursed him for the next year or so, until he died.

Instead of changing his Will, Husband set up a bank account to pass $50,000 to Wife. Because his property was all in trust, Husband's children (the trustees) confiscated the account before Wife got to it. Wife received nothing, even though Husband had intended to give her a gift.

In a third example, a widower married a woman who was wealthy in her own right. His old Will left everything he had to his children, and he felt no need to change it. But when he died a few years later, Wife ended up with one third of his property.

What happened? The law is not always what you expect, and people's wishes are not always carried out.

The couple in the first example had the right idea. They just did it incorrectly. A premarital agreement can require wills to distribute property in certain ways.

Another approach: a trust.

A trust is an artificial entity, like a corporation, which owns property for someone else's benefit. When both spouses have children from a prior marriage, A Q-TIP (Qualified Terminable Interest Property) trust can work.

A Q-TIP would have allowed Wife to have income from Husband's estate. But on her death the property would be distributed as directed by Husband. Wife could have only left her own property to her children.

In the second example, a premarital agreement or a new Will would have been required. Otherwise, Husband's children were entitled to the money he wanted to give to Wife. Intent to make a gift is not enough.

The children in the third example were surprised, because their father's Will said they would inherit his entire estate. But his property was not in a trust. And the Will was created before his marriage.

When someone gets married and does not make a new Will, the law presumes that he "forgot" to do so. It is normal that someone leave property for a spouse. So the law implies (and requires) a gift, unless a new Will expressly prohibits it.

If you have children from a prior marriage, or have not updated your Will since marrying, your estate planner can tell you what can happen, whether you want it to or not. If you are not happy with the possible results, you can change it. But do it before it's too late.

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Family Partnerships

Having a partner in business is very difficult. Most of the time it's harder than being married.

But a "family partnership" is a whole different animal, and is primarily for estate planning purposes.

It works well for people who might make annual gifts as a way of reducing future estate taxes. It allows you to pass more out of your estate, without having to produce cash for gifts.

Most people are aware that gifts up to $10,000 each can be given without incurring gift tax. For people with large holdings it's a good way to reduce the size of their estates.

For every two dollars you give away you can save up to one dollar in estate taxes, and sometimes more.

There are some problems with giving away cash, however. First, of course, is that you have to come up with the cash. That's not always easy to do.

And then you lose control over the gift. If you give money to a granddaughter, for example, she can take her boyfriend on a trip to Europe, and you can't do anything about it.

Is there a better way?

A family limited partnership works well for some people.

What is it? A family limited partnership is set up and funded by a person (let's call him the "Donor") who has enough property that saving estate taxes is a concern.

The Donor becomes the general partner of the partnership. This means that he maintains management and control over the property in the partnership. His beneficiaries are limited partners.

The partnership is funded with business or investment property the Donor owns. Then shares of the partnership are given away, in chunks worth $10,000 each.

Let's say you have an apartment building with a market value of $1,000,000. Simple arithmetic indicates that one percent of that value is $10,000.

Realistically, however, no investor in his right mind would pay that much money for a one percent interest in a limited partnership that only owns that building.

The reason? First of all an owner of a small part of that partnership would have no control over what is done with the investment.

He would have no right to have his interest bought out. And if the apartment were sold, he would not have any right to receive any part of that money, or to determine what the next partnership investment would be.

How much would an investor pay for a share of the partnership? There are a lot of factors to be considered, and a professional appraiser would be needed to determine the actual value.

Suffice it to say that the value could be from 10% to 50% lower than what you might expect from just doing the arithmetic.

Why should you care?

Just this: if a $10,000 portion of the partnership is really worth only $8,000, then a $12,500 portion would be worth $10,000. Instead of making gifts worth $10,000, you can make gifts with an underlying higher value.

With two parents making gifts to three children and their spouses, up to $120,000 can be given away each year without gift tax. Five years of cash gifts in this example can reduce an estate by $600,000, which might reduce estate tax by $300,000.

With a 20% discount, the total value out of your estate after five years will be $750,000, possibly saving $375,000 in taxes, or $75,000 more than if you make only cash gifts.

If the gifts in the partnership go on for a longer period of time, the savings will be even greater.

Is a family limited partnership for everyone? By no means. Your personal situation should be analyzed thoroughly to determine if it makes sense for you.

For those who can benefit by it, however, it is an excellent planning tool that can save much more money than it costs.

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Joint Tenancy???

Real estate agents often advise married couples to take title to real estate as "joint tenants." If one dies, the property will automatically belong to the other without the cost and delay of probate.

That may be bad advice in any state in which married couples hold their property as community property. At least in California, for property passing to a spouse, no probate is necessary anyway.

And when held as community property rather than joint tenancy, a large income tax savings is possible.

It works like this: The cost of property when purchased is called its "basis." When property is sold, its basis is subtracted from the sale price to determine taxable income.

When a person dies, the basis of his property is increased ("stepped up") to current market value.

For example, a house is bought for $20,000. Let's say the owner dies when it is worth $100,000. The property's basis goes up to $100,000 at that time. His heirs can sell for $100,000 and have no taxable income.

A married couple that takes property as joint tenancy (or tenants in common) can benefit only partially from the stepped up basis rule. When one dies only half (or the proportion owned) of the basis is stepped up.

For a $100,000 house bought for $20,000, the basis of the deceased spouse's half would go up from $10,000 to $50,000. The surviving spouse's basis would remain at $10,000, for a $60,000 combined basis on both halves. A sale at $100,000 would mean $40,000 in taxable income.

When property is instead held as community property, the rule is different. When one spouse dies, the basis is increased for both halves. In our example the basis would become $100,000 on the death of one spouse. The surviving spouse could sell it and pay no income tax on the profit.

And now in California there is no excuse for a married couple to take title to property as joint tenants. California has a method of holding title called Community Property with Rights of Survivorship. Functionally it has the benefit of joint tenancy - avoiding probate. But for tax purposes it has the benefit of community property - lower taxes.

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The Old Homestead

They say that everyone who owns a home should record a homestead. But is it always so?

A homestead protects an amount of equity in your home from creditors. There are actually many things which are exempt in addition to homesteads.

Household furnishings, appliances and personal effects are exempt, if actually used in your principal place of residence. Items of especially high value may be taken, but you will be able to keep the cash value a court decides is reasonable for such an item.

Health aids and prosthetic devices are exempt, if actually used for their intended purpose.

Up to $1,200 in value in a motor vehicle is exempt.

Jewelry and heirlooms are exempt, but only up to a value of $2,500.

Business equipment, tools, etc., are exempt, up to a value of $2,500.

Life, health and disability insurance policies are exempt. Up to $4,000 in loan value is also exempt on life insurance.

A single individual is entitled to an exemption of $50,000. A homeowner who is married or lives with family may be entitled to $75,000.

A $100,000 exemption is allowed for those over 65 years old and the disabled. Persons over 55 with incomes of $15,000 ($20,000 combined income for a couple) also qualify for this amount of exemption.

There are two kinds of homestead exemptions. One (declared) requires recording a Declaration of Homestead with the county recorder. The other (automatic) does not require recording.

A homestead will not prevent unpaid creditors from selling your home if your equity exceeds the homestead amount. But the creditors can only get the excess. You will get to keep cash in the amount of the exemption.

The automatic homestead exemption was enacted to echo the effects of the declared homestead, without requiring the paperwork. But they are not exactly the same.

When a person stops residing in a declared homestead, the exemption will not automatically apply to another property. In order to get the exemption, the homestead must be re-recorded on new property.

The statutory (non-recorded) homestead, however, follows you wherever you are, without having to go through the paperwork to maintain it.

Still, there are benefits to recording a formal declaration of homestead.

For example California state courts say that the statutory exemption is lost in a foreclosure sale. If the foreclosure nets more money than is necessary to pay the mortgage holder, the balance is not protected from creditors.

Federal (e.g. Bankruptcy) courts, though, usually allow the exemption to apply to foreclosure sale proceeds, and will prohibit creditors from getting at it.

When a home is sold voluntarily, the exemption applies to the sale proceeds for six months for declared homesteads. But there is no protection on voluntary sale if the statutory homestead is relied on.

If you do not have a declared homestead but would like the benefits of one, it is best to record the declaration before a judgment is entered against you, or before you file for bankruptcy. Otherwise only statutory homestead benefits may be available.

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Resolve That Conflict

It is a part of life that, from time to time, we have disputes with others. Both in our business and personal lives, we are guaranteed to have conflict from time to time.

Differences of opinion and disputes arise between spouses, friends and others. Most of the time we can talk out the problem. Sometimes we can't.

When we can't, a situation may become extremely stressful and expensive.

In a vast majority of cases disputes don't involve a good guy and a bad guy. Instead people with different recollections or understandings argue about what their rights and obligations are. Or what they should be.

For example, take this interchange between a husband and wife:

H: What's for dinner?
W: Nothing. We have to shop.
H: OK.

Now, what just happened? Wife thinks there has been an agreement that the two of them would go out to dinner and then shop. Husband thinks that dinner will be by informal snacking, and his going along to the store is optional.

Who's right? Did they really have an agreement?

Each person is making assumptions based on his own perceptions. Each acts in good faith, not meaning to mislead or get an advantage over the other.

Even though both people try to do the right thing, a misunderstanding can lead to a fight.

How should we deal with such situations?

First we need to acknowledge that things like this happen, in personal as well as business contexts. Next we need to be careful to do what we can to avoid it before it happens.

Let's look at premarital agreements for a moment. They are supposed to be part of the solution. Sometimes they are actually part of the problem.

Many people think premarital agreements are unromantic: that people who have them are planning to fail. Sometimes that is true. When viewed in this way, people may not deal effectively with the real issues. And the agreement itself may lead to conflict.

In my opinion premarital agreements should be viewed in a very different way. It should be an agreement between people who love and trust each other enough to come to reasonable agreements in advance, just in case they are unable to do so later.

Instead of being seen as one person imposing demands on the other, it should be a living document that both participate in. It should have rules not only for how a marriage will break up, but how it will succeed.

It would not be unreasonable to include in a premarital agreement, for example, how often the couple will go out to dinner, or who takes out the trash.

The way to avoid problems before they start is to make any agreement as complete and explicit as possible before it is finalized. The idea is to resolve potential conflicts in advance, while you are friendly and motivated enough to talk about how to deal with potentially touchy situations.

One very common example comes from business leases. Most of them have a statement that there may be no painting, building or altering the premises, or putting up signs, without the prior consent of the landlord.

If you want to rent space that has that sort of a lease, get the landlord's agreement to signs and whatever work you want to do in advance. If you wait until later, after the landlord has what he wants, he may have little motivation to give you what you want.

Be creative. Don't be shy. Think of what could possibly go wrong and deal with it before it does. (Lawyers are particularly good at this, and it's a good idea to have one help you to develop your agreements.)

It will be a whole lot easier and cheaper than having to hire a lawyer later to sort things out.

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Business Leases

Business people often take their leases for granted. Sometimes there is a feeling that a "standard" lease has normal and reasonable terms that don't need to be reviewed or negotiated.

Unfortunately it's not always that simple. Unexpected but avoidable problems can come up. Here are some things to do before you sign a lease.

One thing that commonly causes problems is a lease options to renew. When rents in the area have increased faster than your lease allows, your landlord will not permit exercise of the option if he possibly can avoid it.

There are many different ways an option can work. And it is a good idea to know exactly what your lease says about it. Do you give written notice? When do you exercise it? If you get it wrong you could lose your lease.

Nearly all leases say that you cannot be in default when you exercise an option. So be sure all your rent is paid and all your other lease obligations have been satisfied before you exercise the option.

Some leases say that an option must be exercised within a certain time before the end of the lease (often 30 or 90 days). Others say that the option must be exercised more than a certain time before the end of the lease.

Again, know exactly how and when to exercise your lease option. Follow the rules exactly or you could come out a loser.

Business leases often charge rent on a "net" basis. It means that, in addition to rent you also agree to pay some of the landlord's costs. These could include maintenance and management costs, and even some taxes.

With a net lease, maintenance and other charges will increase rent in future years. And unexpected increases can be more expensive than you are prepared for. Property taxes can pose a particular problem.

Proposition 13 limits tax increases as long as property is not sold, even for commercial buildings. And a building may have greatly increased in value since it was purchased. When property is sold, the resulting tax increase can lead to a very high rent increase.

What Can You Do?

If a proposed lease requires you to pay a portion of property taxes, ask for it not to apply to tax increases caused by a sale of the building. If the landlord is not planning to sell, he may agree to that term. If he is planning to sell, you need to know that a large increase of rent is possible.

Lease assignments are another source of problems. While they do not come up frequently, people generally want to assign their leases either when they sell their businesses, or want to go out of business at that location before the end of the lease term.

Commercial leases may impose arbitrary restrictions on assignments. Landlords sometimes disallow assignments except in exchange for exorbitant payments or for other terms that might seem unfair or unacceptable.

At that point, however, the business owner is over a barrel. There are few options, none of which are good.

To avoid the problem, before you sign a lease be sure it does not impose restrictions on assignments unless consent to assign "cannot be unreasonably withheld."

That kind of provision allows the landlord to be sure any replacement tenant will be satisfactory, financially and otherwise. At the same time, the tenants can't be forced to comply with unfair terms.

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Litigation Basics

Lawyers are like plumbers. You need one at the worst possible time, for something that shouldn't have gone wrong in the first place.

And they cost much more money than they seem to be worth.

Legal costs are seldom higher than when you are involved in litigation.

Some of the things that involved in litigation seem fairly ridiculous. But most are legally required. And most have been established to allow for the possibility (at least) of a fair trial.

And then, once in a while, there are those lawyers who play "hardball." They make life for their opponents very difficult. And very expensive.

In doing so, of course, they also make life for their own clients more demanding. And much more expensive.

(I have never understood why people wanted to use hardball litigators. Certainly it harasses your opponent. But it will cause much more trouble and expense to you as well. Generally not a productive use of your time and money.)

Sometimes you can't avoid litigation because someone else is suing you. But there is one way to reduce those costs. Purchase a good insurance policy.

There are few things you can be sued for that may not be covered, at least to some extent, by insurance.

Generally insurance policies will pay for your legal defense when you or a family member or employee accidentally injure someone else. Not all claims seem to fall within generally accepted insurable categories.

However, plaintiffs' lawyers are very creative. And they are often desperate to throw everything imaginable into a complaint. Part of the purpose of doing so is intimidation.

But they also don't want to miss any opportunity for recovering money, no matter how unlikely it may be.

How does this help you? Well, very often one of the things thrown into a complaint could be considered insurable. When that happens, an insurance company is generally required to pay for a defense of the entire action. At least initially.

I was involved with one case recently that was a partnership dispute. Each partner thought the other wasn't living up to his obligations.

When one sued the other for breach of contract, the complaint included allegations that one partner had made some less than kind remarks about the other.

Normally contract disputes are not covered by insurance. If they are it is only because you have paid an additional (and probably very large) premium.

But claims of slander are often covered. There was such coverage in this case. And, as a result, insurance paid for a defense of the entire lawsuit.

The insurer did reserve its right to go back later and ask for repayment for some of its costs. But in the end it did not ask for reimbursement, and even helped pay off part of a settlement.

In another case, a lawyer sued a client for a $60,000 fee. And the client sued back for malpractice.

After a 14 week trial, the jury awarded each side $60,000 against the other.

Shockingly, the total attorneys fees and costs from both sides amounted to more than $700,000. And that was before the appeals.

By far the majority of that sum was paid for by insurance companies.

How do you know if you have a good policy?

Read it carefully. Understand what it says. Understand what is included and what is not. Ask a lot of questions.

Most important, however, DO NOT believe anything your agent or your insurance company says about your coverage unless you have it in writing. Insurers often look for any loophole available to avoid coverage, no matter what they may tell you before you buy.

Finally, and no matter how distasteful it may seem, consider having your insurance policy reviewed by a lawyer who deals with them.

Because if you want to avoid having to pay a lawyer possibly hundreds of thousands of dollars later, it is often helpful to pay a lawyer a small fraction of that before there is trouble.

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Pierce That Corporate Veil

One way people get into trouble by allowing their corporate veils to be pierced. When that happens the benefits of incorporating can vanish.

But just what does it mean to pierce the corporate veil? And if it happens, just how badly can you be stuck?

One way to help avoid some huge losses is with insurance. But insurance doesn't cover everything.

So corporations were invented.

A corporation is a legal fiction. It is an entity that is considered to be separate from everyone and everything else.

Without a corporation if your business owes money, you owe that same money. Some people don't like that.

But your employees aren't responsible for business debts. Neither is your brother-in-law who lent you money to help pay the rent.

Similarly, a corporation is responsible for its debts. But its employees aren't. Neither are its investors.

All that means that, if your corporation runs up huge debts, creditors can only get the company's assets. Anyone else's separate assets, even a corporation's shareholder, employee or director, are immune from the corporation's creditors.

Well, almost. There are times when people other than the corporation may be responsible for its debts.

If you don't take your small corporation seriously and observe all of the corporate formalities, a court may decide it doesn't need to either.

To avoid piercing your corporate veil, the main rule is to treat your corporation as if it is General Motors. Hold regular board meetings and shareholders meetings. Keep good books. Don't mix your finances with the company's.

Clip coupons. Have proxy battles. Take greenmail.

One thing that has gotten people into trouble is being sloppy about using the precise corporate name.

There was a case several years ago with a one-person corporation called Mars Sales, Inc. But the business was sometimes referred to only as Mars Sales.

The corporation and its owner got sued on a contract that had left out the "Inc." in the company's name.

Because of that, when the owner tried to avoid personal responsibility, the court disagreed. They said he did not accurately disclose his employer's identity. So he was personally responsible for the business debts.

The most popular way that corporate veils are pierced involves bank accounts. People sometimes forget the separateness of the corporation, using business money for personal purposes. Or personal money for business purposes.

For example, say you are at the grocery and have taken the corporate check book by mistake. If you use the corporation's money to buy your groceries it is called "commingling."

You can't do that with General Motors. And when you do it with your own small corporation, courts will have no sympathy.

You should also have regular board and shareholder meetings, even if you are the only shareholder and board member. If you don't, a court again might conclude that you are not taking the corporation seriously enough.

And a court won't take the corporation seriously, either.

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To Co-Sign or Not to Co-Sign

Many of us are asked from time to time to co-sign or guaranty a note. A child wants to buy a car or house, and we are asked to help out. But too many people find out too late what it really means.

The law is actually much more complex than there is room to discuss here. For example there is a legal distinction between a guarantor and a co-signor. In practical effect these generally involve the same rights, so, unless specified, they are used interchangeably in this article.

For many people, guarantying a note seems to be akin to merely vouching for their credit. You know the borrower is a good person who always repays loans, so you sign a guaranty for that reason.

Unfortunately the reality may be different.

As a guarantor, you are actually insuring that a debt will be repaid. Most of the time loans do get paid.

But not always. When they don't, unexpected and unfortunate things can happen.

When you sign a guaranty, you can be personally responsible for payment of a debt. All of it. This could include principal, interest, attorneys fees, court costs and more.

A guarantor (as opposed to a co-signor) is liable immediately when the borrower defaults. The creditor is not required to notify you or ask for payment before he sues. Before you ever hear of the problem, you may become responsible for several times the amount owed.

I was involved in a case recently in which a woman had co-signed a car loan for her son. Later Son joined the navy and was sent to San Diego. Needless to say, he didn't either need or want his car, or the payments he had agree to make.

Mom took the car back to the dealer, which added $4,500 of equipment to make it more saleable. The dealer then sold it for $1,500 less than the balance left on the loan.

The dealer then sued Mom for $6,000. Court costs and attorneys fees could have doubled or tripled the debt. She had never realized the implications of co-signing the loan.

Luckily she got away without having to pay a penny. But the story seldom ends that way.

Sometimes a guarantor is asked to put up his own home as collateral. Again, many people don't think there will be a problem. They know the debt will be repaid, and don't think much more about it.

But sometimes people lose jobs or have other problems. If the borrower fails to pay, the guarantor may, and sometimes does, lose his own home. A commercial lender treats its own financial well being as more important than your ability to live out your years in any sort of comfort.

Filing a homestead will not help. In general, nothing but paying off the lender will end your obligation as a guarantor.

If the debtor files bankruptcy or negotiates a low payoff, his or her obligation to pay the remainder of the debt ends. But the guarantor's obligation continues.

A bankruptcy filing prohibits attempts to collect against the bankrupt. But the creditor may be able to sue the guarantor immediately.

There are certain protection the guarantor (as opposed to a co-signer) has. You may be relieved of liability, for example, when:

  • The original note is altered or extended without your consent
  • Additional funds are loaned without your consent
  • The creditor fails to exhaust its remedies against the debtor

Normal guaranty agreements, however, relinquish all these defenses. So, as a practical matter they do not apply.

When called upon to co-sign or guaranty an obligation, take it seriously. Read the note or guaranty agreement, and know what it means. Know your rights and obligations.

Defaults do happen. Realize that it might happen to you, and be prepared for when it does.

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Small Claims Court Basics

Small claims court can be used for all sorts of disputes: neighbor problems, consumer against merchant, business against business, collecting debts and more.

The good news: No attorneys are allowed. Procedures are informal. A free attorney-advisor is provided by the court. Trial can be concluded within two months as opposed to years.

The not so good news: You can generally sue in Small Claims Court for only up to $2,500. You can sue for between $2,500 and $5,000, but not more than twice each year.

For best results, sue only for your specific cash loss. Add in all amounts of money which you did lose, or may lose in the future.

You must sue in the county where the defendant lives, where an accident occurred, or where a contract sued on was entered into or to be performed.

If you are sued in the wrong court, inform the judge by letter. If he or she agrees, the case will be dismissed.

Before you sue, you must send a written demand to the person who owes you money. If you are then not paid, fill out a Small Claims Court complaint form. Some courts may send you one by mail.

The complaint must be "served," or delivered to the defendant. It has to be done at least 10 days before trial if the defendant lives in the county, and 15 days if he lives in another county.

It can be served by the county sheriff, generally for a modest fee. A process server, friend or someone else (other than the Plaintiff) can also serve it.

The court clerk can serve the complaint by mail, getting a return receipt from the post office. Unless suing a corporation, this is not recommended. If someone other than the Defendant signs the return receipt, you may have to serve it again.

If you are sued, you may have complaints against the Plaintiff. You may resolve your claim at the same time (subject to the $5,000 limit). Get a cross-complaint form from the court clerk.

The trial date may be inconvenient. Write a letter to the court and ask for a different date. If the judge thinks your reason is good enough, a new date will be chosen.

At trial you will be given a chance to tell your story. Write it out in advance. Keep it to two typed pages double spaced. Shorter is better!

Tell your story to a friend you trust. If your friend finds problems, address them. If your friend breaks out laughing during your story, you may not succeed in court.

At the trial, bring all documents (contracts, bills, checks, etc.) which support your case. If you have any witnesses, bring them as well.

In busy courts you might be waiting several hours before your case will be heard. Take advantage of the time to help prepare for your own trial. Listen to other cases before yours. Find out what kind of information the judge wants to hear.

When it's your turn, tell your story. Do not read it. When your opponent is talking, do not interrupt. If the judge has any questions, answer them simply and directly. Expect your entire trial to last no more than five to ten minutes.

Generally, the judge will not make a decision on the spot. The court clerk will notify you of the judgment by mail within a few days.

If you are a defendant and do not like the outcome, check with the small claims advisor for information about appealing. If you are the plaintiff and do not like the outcome, you are out of luck. Plaintiffs have no right to appeal from small claims judgments.

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Trust Basics

Everywhere you turn people advocate trusts. This includes publications such as the Wall Street Journal and the New York Times. But what is it really about? Do you really need one?

What Trusts Do

Estate planning trusts primarily do three things. First they avoid probate, with the costs and delays that go along with it.

And trusts can avoid income taxes that can be imposed on property that passes to heirs by joint tenancy.

Finally, for married couples a trust can avoid a marital penalty that is part of the estate tax.

Avoiding Probate

Things like houses, cars and bank accounts must go through probate when the owner dies. Probate costs start at nearly 5% of the value of assets for estate of $1,000,000 or less, and are slightly lower for larger estates. That means more than $47,000 for an estate of $1 million and $68,000 for an estate of $2 million.

The average California probate can last up to two years, though sometimes they last a lot longer.

Trusts pass property in a less formal, private way that can save both time and money. Joint Tenancy

The traditional way to avoid probate is to use joint tenancy. This method of holding title passes title immediately, without probate.

But income tax on the sale of property received in joint tenancy can be more than the tax for probated property. Trusts can avoid probate but still avoid those taxes.

The Marital Penalty

For people living past 2010, estate tax is imposed on every person who dies owning property worth more than $1 million. You would think that married couples could pass $2 million tax free to their heirs.

However the tax law is structured so that married couples generally only get to use one exemption instead of two. That can result in up to $500,000 in unnecessary taxes.

A trust can avoid this marital penalty, and thus save a huge amount of money for your heirs.

Conclusion

If you have assets worth more than $100,000, the law says your estate will go through probate.

A trust avoids probate. It can allow your assets to be distributed to your heirs much sooner and less expensively than can be done otherwise.

If you are married and own anything that has gone up in value (whether real estate, stocks, antiques or anything else), a trust could save your heirs income tax on the appreciated value.

Finally, if you are married and, with your spouse, own property worth more than $1,000,000, a trust can save you up to $500,000 or even more.

No, a trust isn't for everyone. But it can be helpful to many.

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Stuart A. Bronstein, Attorney at law