Power of Attorney: 101

 

Power of Attorney: 101

The power of attorney, sometimes abbreviated POA, is an essential document to any estate plan. The purpose of the document is to grant an individual, the agent or attorney-in-fact, the power to act on your, the principal’s, behalf. In effect, a POA places the agent in the principal’s shoes, for the limited purposes outlined in the POA document. It is important to understand that there are two types of POA and that both are essential for a complete estate plan.

Types of POA

The two types of POA are (i) a POA that handles financial matters, known as a POA and (ii) a health care POA, also sometimes referred to as a health care directive.

POA (financial)

As mentioned above, the POA allows an agent to handle financial matters for the principal. The matters that the agent can handle are outlined in the POA document and can include, signing checks, selling property, and many other financial matters.

Durable, Limited and General

There are several terms that you will hear mentioned when dealing with the POA. Theses terms are durable, limited and general.

Durable means that the POA does not terminate upon the incapacity of the principal. In plain English, if for whatever reason, you, the principal, are incapacitated, such as by a comma, then the POA remains in effect and the agent can still act on your behalf.

Limited and general are mutually exclusive terms; a POA can either be limited or general, it cannot be both. If a POA is limited, which will usually be indicate in the title of the document, then the agent’s powers are limited (I know, somewhat obvious after you hear the explanation). If a POA is general, which will usually also be indicated in the title of the document, then the agent’s powers are much broader. Whether a POA is limited or general will usually be indicated in the title (for example, “Limited POA” or “General POA”).

Attorneys generally avoid the general POA, because it grants too many powers to the agent.

Health Care POA (HPOA)

A HPOA is a power of attorney that grants the agent powers over medical decisions for the principal. The powers can include whether to resuscitate the principal and whether to give pain medication.

Unlike the POA, a HPOA is almost always durable, because the only time you need someone to make medical decisions on your behalf is if you are incapable of making those decisions. However, I have known principals who granted their agent a HPOA that worked even when the principal was capable of making decisions for themselves, because they trusted the agent and just didn’t have the time, patience, etcetera to deal with doctors.

Lastly, a HPOA can also be used to specify burial instructions, organ donation, and other such medical issues.

Wrap-Up

Both POAs are important pieces of an estate plan, because they play central roles in the overall outline of an estate plan. An estate plan is a plan for when an individual is no longer capable of handling their own affairs; the trust document and will handle the distribution of assets, while the POAs are guides for an agent, when the principal is no longer capable of acting on their own behalf.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

Business Entities Part 3: Partnership

Business Entities Part 3: Partnership

There are three primary types of partnerships; a General Partnership (GP), a Limited Liability Partnership (LLP) and a Limited Partnership (LP)

Terminology

Whenever you hear someone talking about a partnership and not specifying whether it is a GP, LLP or LP, your default position should be that they are referring to a GP.

General Partnership (GP)

Formation

A GP is formed any time that two or more co-owners engage in a business for profit. This is the legal terminology for a GP. Simply, a GP exists when two or more people own a business together. This means that anytime that a business with two or more owners is not designated as another type of business entity (such as LLC or corporation) the business will be considered a GP.

Liability

Just like a sole proprietorship the owners of a GP are personally liable for all liabilities they incur while operating the business. Further, the partners are personally liable for the liabilities incurred by other partners of the GP, as long as those liabilities were incurred in the regular course of business.

Capital Investment

Unless otherwise stated in the partnership agreement, selling ownership interest in the business is not allowed without the consent of all of the owners. However, unlike a sole proprietorship you do have the possibility of selling ownership interest, either through the consent of all of the owners or through a provision in the partnership agreement stating such.

Limited Liability Partnerships (LLP)

Formation

A LLP is formed by registering the business as an LLP. However, in California only accountants, attorneys, architects, engineers and land surveyors may form an LLP.

Liability

A LLP is a form of partnership that avoids personal liability for business liabilities that are not personally incurred by that owner. Simply, an owner in a LLP is only liable for their personal liabilities, not for the liabilities caused by other owners of the LLP.

Capital Investment

Generally, capital investments are the same as a GP. However, the same restrictions on the type of owners in a LLP that apply at formation, apply to becoming an owner of an already existing LLP. For example, only an attorney may own an interest in a legal LLP. Therefore, you could not sell ownership interest in an legal LLP to a non-lawyer.

Limited Partnership (LP)

Formation

Just like a LLP, a LP is formed by registering the business as a LP. A LP has at least one general partner and at least one limited partner, but may have more than one of each.

Liability

Limited partners are not personally liable for any liabilities of the business, while general partners are personally liable. However, the general partners of a LP can be a LLC or corporation (two business entities that I will discuss in coming posts). Therefore, you could avoid liability even for the general partner.

Capital Investment

A LP is specifically designed to encourage investment in the company, this is why limited partners are not personally liable.

Tax Considerations

Just like a sole proprietorship, all partnerships do not face double taxation. As such, the profits earned from any form of partnership are only taxed once.

Summary

Overall, the different forms of partnership provide the same tax benefits as a sole proprietorship. A LLP and LP avoid a great deal of liability, while a GP, just like a sole proprietorship does not avoid any liability. Lastly, although this may be obvious, the moment that you have two or more owners in a business, the business is no longer capable of being a sole proprietorship and immediately becomes a GP, unless registered otherwise.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

Wills: 101

Wills: 101

In the public, the most well known document in estate planning is the will. However, thanks in large part to television and dinner table chit chat, most people do not know a great deal about the realities of wills and a lot of what they think they know is wrong.

Terminology

First, some important terminology. The testator is the person who makes the will, either on their own or through an attorney. A gift is any personal, including cash, or real property (land) that is given to someone in the will. A beneficiary is a person or entity that receives a gift in the will.

Types

In California, the three most common types of wills are (i) those drafted by an attorney, known as a Formally Attested Will or FAW, (ii) those drafted by the testator, known as a holographic will or holo and (iii) those drafted by the testator using a form created by the California government, known as a statutory will. There are other types of wills, but they are simply not as relevant as these big three, which can actually be narrowed down just to the big two, FAW and holo.

Formally Attested Will (FAW)

A formally attested will, a will drafted by an attorney, has the most requirements in order for it to be considered valid. The will must be in writing, this means no electronic media. The will must be signed, there are three ways to meet the signing requirement. The will must be witnessed by two witnesses, some states require three.

Although, there is only a requirement of two witnesses in California, many California attorneys will have three witnesses present in order to insure that the will is valid in other states.

Holographic Will (Holo)

A holographic will needs to be signed by the testator and the “material provisions” (California Probate Code section 6111) need to be in the testator’s handwriting. Also, although not a requirement, it is best that the will be dated, this will simplify matters later.

What are the “material provisions”? Generally, the beneficiaries and the gifts, or simply, who gets what.

Statutory Will

The California legislature has kindly created a form will that can be filled out by the testator and works similarly to a holo will. The advantage to a statutory will over a holo will is that the testator does not have to figure out what to include in the will since they are filling out a form.

Which Type of Will to choose?

This is a difficult question to answer generally. However, if you have a small estate, very small, and the ability to fill out a form or handwrite a will, then a holo will may be the best and cheapest option.

On the other hand, attorneys generally do not only draft a will for an estate plan. Estate planning has several other documents involved. This is relevant, because if you want to avoid probate, read here to see why I highly recommend doing just that, then a will is not enough.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

Business Entities Part 2: Sole Proprietorship

Business Entities Part 2: Sole Proprietorship

Formation

A sole proprietorship is the most basic form of business entity. There are no formalities, such as filing forms with the government, that are required. Although, there are some license and business registration requirements and you must comply with fictitious business name requirements. Otherwise, once you invest time and money in a new business, you are a sole proprietor.

Liability

In a sole proprietorship, the business and the owner are considered one entity. Therefore, the corporate shield discussed in part 1 does not apply. The owner of a sole proprietorship is personally liable for any liability of the business. Since the business owner is personally liable for the debts and obligations of the business, all of the owner’s assets are at risk. As such, some sole proprietors purchase insurance to cover against liability. Of course, insurance does not cover all circumstances and is limited in amount.

Capital Investment

Certain business owner’s choose to finance the growth of their business through outside investment, such as by selling shares of the company. Anybody that has seen the show “Shark Tank” has seen this mechanism in action. Think, “For $35,000, I will give you 10% of my company”.

Any business intending to grow using this method, or other types of outside investment methods, should consider forming a different type of business entity. The sole proprietorship is simply not set up for this type of investment.

Tax Considerations

One of the most significant benefits of a sole proprietorship is avoiding double taxation. As discussed in part 1, certain business entities face the issue of double taxation. However, the sole proprietorship is not considered an entity that is separate from the business owner and therefore does not pay taxes separately.

On the other hand, a sole proprietorship cannot take advantage of certain tax “fringe” benefits. Corporations can take advantage of these benefits, as will be discussed in the corporations part of this overview.

Summary

Overall, the sole proprietorship provides simplicity in operation, formation and taxation, at the cost of personal liability and losing out on “fringe” tax benefits.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

What is Probate?

What is Probate?

Previously, I had discussed the necessity of an estate plan as a means of avoiding probate. But, what is probate and why avoid it?

Probate Defined

Probate is the administration of a decedent’s estate through the assistance of a court. Now in English. When somebody dies and leaves behind property in their name, the heirs, the people that will receive the property, of the dead person, the decedent, have to go to court in order to receive the property. A court, known as a probate court, has to help the heirs, usually the family, divide up the property. You die owning property and a court has to help divide up your property.

Unfortunately, there is no choice in this matter. Excluding a few circumstances a court will always be involved in the process of dividing up the property, known as the estate. Hence why you actively need to avoid probate; it is basically an opt out system (only you need to opt out of it before probate even applies, before you die, unless you figured out how to communicate from the afterlife).

How Does Probate Work?

There are several stages to probate, including determining who receives property and paying off creditors of the decedent. One of the first steps to any probate is determining the extent of the decedent’s estate; before you can determine how to divide up the estate, you of course need to know what makes up the estate.

In order to properly commence probate a petition must be submitted to the court. The petition outlines several of the necessary details for the probate to proceed.

How Long Does It Take?

The best case? The simplest probate will take anywhere from eight to twelve months. This is a probate that involves little issues with heirs, creditors, and discovering the extent of the estate.

The worst case? I recently heard of a probate that started nineteen years ago! And is still going! This is a rare case and should not be taken as the norm, but it is a possibility.

Final Note

In a future post I will elaborate on the common methods to avoid probate. However, I want to correct a commonly held belief: having a will does not, by itself, allow you to avoid probate.

In fact, originally, probate was the term used for presenting your will before the court. Having a will only aids probate, but you still have to go through the probate process.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

Business Entities Part 1: An Overview

Business Entities Part 1: An Overview

This will be a five-part overview of the different types of business entities, spread out over several weeks. Part 1 will cover the general topics that apply to all business entities. The remaining parts will each focus on a different type of entity.

The Types of Entities

There are four main types of entities: (i) the sole proprietorship, (ii) the partnership (both limited and general), (iii) the corporation (both C-corp and S-corp) and (iv) the limited liability company (LLC).

What is a Business Entity?

A business entity is a legal tool used to conduct business. Each business entity carries a different legal definition to your company. There are different tax and non-tax considerations for your business depending on the entity you choose.

Non-Tax Considerations: the Corporate Shield

The most significant non-tax consideration pertains to the corporate shield. Traditionally, a business owner is personally liable for the liability of their company. This liability includes lawsuits against the company and debts incurred by the company. For example, if the business does not have enough assets to pay off a debt, the owner of the debt can come after the personal assets of the business owner, such as his house, car, etcetera.

The corporate shield (there is also such a shield for LLCs) is a legal mechanism that protects business owners against being personally liable for liabilities of their business. This means that a debt or lawsuit of the business will not be paid from the personal assets of the business owner. However, keep in mind that the shield does not protect the business owner if the business owner is personally the cause of the debt or lawsuit. As an example, if the business owner accidentally hurts a customer, that customer can sue both the business and the business owner.

Tax Considerations: Double Taxation

The most significant tax consideration pertains to double taxation. This issue arises when dealing with C-corps, what is generally known as a corporation. In a corporation the earnings and profits are taxed, then the after-tax earnings and profits are taxed a second time when they are distributed to shareholders as dividends, hence the term double taxation.

Other Considerations

There are other considerations to take into account when choosing the type of business entity for your company. For example, there are restrictions on who can be an owner of certain types of business entities and the minimum and maximum number of owners for certain types of business entities.

Each of the parts of this overview that follow will cover one of the business entities mentioned above and explain the different tax and non-tax considerations in relation to that business entity.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

Why Everyone Needs an Estate Plan

Why Everyone Needs an Estate Plan

Everyone needs an estate plan. This is not a sales pitch for lawyers. Quite the contrary, creating an estate plan makes lawyers lose out on money. Who doesn’t love that idea?

Avoid Probate

By creating an estate plan, you get the wonderful pleasure of avoiding probate. Probate is a long process that I will discuss in future blog posts. Suffice to say you should try to avoid probate.

Also, avoiding probate is the way you save money. Under California Probate Code Section 10810, an attorney gets paid $4,000 for an estate worth up to $100,000 and the fees keep going up based on the value of the estate. What this code section tells you is that the smallest of estates (an estate up to $100,000) will pay more in probate fees than the average estate plan will cost, even if you go through an attorney.

In addition, an attorney cannot charge a client more than the code section permits. This means that some attorneys will not want to take on a probate for an estate that is small, because the time commitment substantially exceeds the attorney’s hourly rate.

In short, don’t leave your family having to pay an attorney probate fees, when it is so much cheaper to create an estate plan.

Your Family

The benefits to your family are even more important than any legal or financial benefits of creating an estate plan. With a proper estate plan, you ensure that instead of leaving your family with a mess, you give your family at least some peace of mind.

All the different components of an estate plan allow you to make sure that your assets are divided properly; it assures that there will be no doubt as to your wishes; and it assures that your family will be taken care of when you eventually pass away (hopefully many, many years from now).

How To Create Your Estate Plan

Now that you understand at least some of the importance of an estate plan, how should you go about creating your estate plan? There are many options out there. Although it may sound self-serving, the best way to create an estate plan is through an attorney. Honestly, why else would people go to law school and spend years perfecting the profession? Either because we are sadists or because legal matters require expertise, or maybe both.

If you can’t afford to have an attorney create your estate plan (although see above in “Avoiding Probate” why it is cheaper in the long run) there are many online services that can either guide you through the process or create an estate plan for you. Also, there are many books that will guide you through the process.

Although, I will tell you, you get what you pay for.

At the end of the day, create an estate plan. You will definitely sleep better at night knowing that you are not leaving a mess behind for your family.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.