BizLawBuz …. The Power of Know

Even in the current economic climate, there are silver linings to be found. The tax code allows you to gift $1,000,000 during your lifetime free of federal gift tax. That’s in addition to the $13,000 you can give per recipient each year. Historically, you may have thought only in terms of cash gifts, and many investors and business owners are cash-poor in this down economy. But the gift tax exclusion is $13,000 of value for any asset priced at fair market value, such as shares of publicly traded stock, or ownership in a closely-held or family business. For example, 1000 shares of a stock that might have been selling for $50 per share two years ago, but now trade at $13 per share, could all be gifted tax-free to any individual. If the stock recovers its value in a few years, the donor has effectively transferred $50,000 worth of stock on a tax-free basis—per recipient. Donor spouses can elect to gift together and double the exclusion amount, increasing it to $26,000 per recipient.

A gift of $1,000,000 worth of ownership interest in a closely-held company could be further discounted if it involves minority ownership where the gifting party doesn’t control the business. Lack of control and lack of marketability discounts reduce the value of the ownership interest by a calculated percentage, thereby enabling you to give away more ownership with the same $1,000,000 gift. Gifting your business ownership at discounted values in this depressed economy is an easy and effective way of decreasing a taxable estate, and if the transfer is structured properly, the donor can maintain control of the assets in the entity.

Any asset transferred as a gift retains its original cost basis; inherited assets, on the other hand, receive a step up in cost basis equal to the value of the asset on the date of the death of the owner. Capital gains taxes will be owed on the difference between the cost basis and the eventual selling price. The savings due to depressed asset values, however, could far exceed any later capital gains tax liability.

A recession may be the best opportunity for a business owner to divest all or a part of a family business, passing it to the next generation at a substantial discount free of federal gift tax. Consider taking advantage of the depressed economy while you can!

Heather Brenneman Miles

Many employers hire students as interns during the summer months and are perhaps questioning how those interns should be paid to ensure the employer’s compliance with the Fair Labor Standards Act (FLSA). If your interns are “employees,” FLSA applies, and the interns must be paid at least minimum wage. If the interns can be categorized as a “trainee,” however, they may be exempt from FLSA.

For an intern to qualify as a trainee, the intern’s position must meet the following criteria:

1) The training, even though it includes actual operations at the facilities of the employer, is similar to that which would be given in a vocational school;
2) The training is for the benefit of the trainee;
3) The trainee does not displace regular employees and works under close observation;
4) The employer providing the training derives no immediate advantage from the activities of the trainee, and, on occasion, the employer’s operations may actually be impeded;
5) The trainee is not necessary entitled to a job at the completion of the training period; and
6) The employer and the trainee understand that the trainee is not entitled to wages for the time spent in training.

If interns fail to meet any of the above criteria, they should be paid as employees, with at least minimum wage and overtime compensation when earned. Note that class credit is not considered wages and should not be substituted for wages.

Julie H. Pfitzenmaier

Under Michigan law, when homeowners are behind in their mortgage (in default), the mortgage lender basically has two options insofar as foreclosure is concerned. By law, all mortgages in the State of Michigan can be foreclosed by judicial action. Foreclosure by judicial action is a court proceeding that is both time consuming and expensive. As a result, foreclosure by judicial action of mortgages involving residential property is rare. The other option is foreclosure by advertisement. Foreclosure by advertisement does not involve the courts, is cheaper and quicker (generally, six weeks from the beginning of the process to the sheriff’s sale of the property, as opposed to upwards of six months for a judicial foreclosure.) Foreclosure by advertisement is only available to the mortgage lender if allowed by the terms of the mortgage. Provisions allowing foreclosure by advertisement are found in most, if not all, mortgages for residential property.

On May 20, 2009, Governor Granholm signed into law a series of three bills that amend Michigan law pertaining to foreclosures by advertisement. These new laws take effect on July 5, 2009. What these new laws seek to do is slow down the process of foreclosure by advertisement and provide the opportunity for negotiation and modification of the terms of the mortgage, all with a view to avoiding the foreclosure and allowing homeowners to remain in their homes. Under these new laws, a lender wishing to foreclose a mortgage by advertisement must first provide the homeowner with written notice designating a contact person who has authority on behalf of the lender to modify the mortgage. The lender must also provide a list of state approved “housing counselors” that homeowners may request become involved on their behalf to help negotiate a modification of the mortgage. These laws go on to specify a criteria to be applied in determining whether or not the homeowner qualifies for modification of the mortgage, allow for court involvement, and impose notice requirements and time parameters within which all of this is to take place. Stated simply, these new laws contain detailed provisions affording new and additional rights to the homeowner facing foreclosure by advertisement and imposing new and additional obligations on the mortgage lender.

From the standpoint of the mortgage lender, foreclosure by advertisement will become much more complicated on July 5, 2009. But, for the homeowner who pays close attention to the notices received and takes advantage of the opportunity for re-negotiation and modification of the mortgage, these laws greatly enhance the possibility that foreclosure may be avoided altogether.

Duane L. Reynolds

The case of Kennedy vs. Plan Administrator, the Plaintiff, Mr. Kennedy, executed a beneficiary designation form naming his spouse as his primary beneficiary of his retirement plan in the event of his death. Thereafter, Mr. Kennedy divorced his wife and his ex-wife waived any rights to any proceeds from the retirement account. In spite of Mr. Kennedy’s ex-wife’s waiver of her rights in the divorce decree, the U.S. Supreme Court recently decided that the beneficiary designation form, not the divorce decree, governs who should receive the balance of Mr. Kennedy’s retirement account as beneficiary. As a result, Mr. Kennedy’s ex-wife received the balance of his retirement account funds.

The facts and circumstances of the Kennedy case represents an oversight made far too often by divorced individuals who maintain retirement plans. Mr. Kennedy’s divorce attorney should have advised his client to remove his ex-wife as beneficiary of his retirement account. Based on the fact that the individuals were divorced, no consent form would have been required under federal law for the husband to remove his ex-wife as the beneficiary. Divorced individuals should also give attention to the beneficiary designations on life insurance policies and other accounts where a former spouse may remain listed as beneficiary. Failure to pay attention to these important details could result in proceeds from retirement accounts and life insurance policies being distributed to unintended beneficiaries.

Dan A. Penning

Special Note:

The above information was recently emailed to our clients. Shortly afterwards I received the appended information below from Eric Braund, CRPC, Financial Planner with Rehmann Financial in Traverse City, Michigan. The information was originally published in Money Magazine.

5 things to know about naming beneficiaries

BY ISMAT SARAH MANGLA, MONEY MAGAZINE — 03/12/09

Don’t want your intended heirs to have to chase after their money? Better make sure they’re listed on your financial accounts.

(MONEY Magazine) — Your estate plan is in place. Or is it? Not if you have out-of-date beneficiaries on your financial accounts. The Supreme Court has agreed to hear the case of a woman suing her late father’s pension plan for money she believes should be paid to her, not her mother - who was still listed as the sole beneficiary even though she forfeited rights to his pension in their divorce. Know these things to avoid a similar mess.

1. Your will has no jurisdiction.Accounts with beneficiary designations - such as IRAs, 401(k)s, insurance policies and annuities - aren’t governed by your will, says Allentown, Pa. investment adviser Kevin Brosious. So even if you wrote an ex out of your will eons ago, he or she would still get, say, your IRA if you never changed its beneficiary. Lesson: Review choices periodically, especially after major life events. Also, don’t leave beneficiary forms blank. Accounts then go to probate court for distribution, and rules on who gets what vary by state.

2. You can - and should - name a runner-up. Just as the Miss America judges pick a No. 2 just in case - remember Vanessa Williams? - so too should you pick a contingent beneficiary for your accounts. Otherwise, if your primary beneficiary dies before you, the account goes to probate. Naming a No. 2 also gives the primary the option to execute a qualified disclaimer, which passes the inheritance to the contingent without gift taxes, says Steve Hartnett of the American Academy of Estate Planning Attorneys.

3. Retirement accounts have quirky inheritance rules. With IRAs and 401(k)s, there are advantages to naming a spouse over a child. Your partner can roll over such accounts into his or her name, thus postponing distributions and taxes until age 701⁄2. But if your kid inherits, she must start taking distributions - and paying tax on them - the year after your death, says San Diego estate attorney Roy Doppelt. (Regardless of estate taxes, retirement account recipients pay income taxes on payouts.) Also, avoid listing your estate as beneficiary. By law, heirs then must empty the account within five years, which could cost them investment gains and bump them to a higher tax bracket.

4. Naming a minor is a quick ticket to probate. In most states, the court must supervise the distribution of money left to kids under 18 - a slow and potentially costly process. But you can circumvent probate by having an attorney set up a trust in the child’s name (cost: usually $750 to $1,500), says Helen Modly, a financial planner in Middleburg, Va. A trust also lets you have more control - for example, you can require that Junior graduate from college before getting payouts.

5. Changing beneficiaries is easier than changing the filter in your coffee pot. Many financial firms make beneficiary forms available online. You can also call to request them. (Or if this task will end up last on your long todo list, give your estate attorney permission to contact the institutions for you.) To name a new beneficiary, all you’ll need is the person’s birth date and, sometimes, Social Security number. Make copies of any form you submit, and request written confirmation. Store a master list of accounts and beneficiaries with the rest of your estate documents.

TM and © 2009 Cable News Network and Time Inc. and/or their affiliated companies. All Rights Reserved.

Tool and die makers – and the manufacturers who use their products – need to be familiar with special lien rights that can be created and enforced under the Michigan Special Tools Lien Act. The Act was passed by the Michigan legislature to give toolmakers greater protection than the traditional mechanic’s lien alone provides.

The Act sets forth procedures allowing toolmakers to create a lien on any tool they fabricate or improve. Among other things, toolmakers need to be marking the tool itself to reflect the lien and also making sure to provide notice of the lien, including UCC Financing Statements, to both their customers and the end-users of the tool. Additionally, the Act sets forth certain procedures by which toolmakers can claim possession of the tool, which offers considerable leverage when negotiating unpaid balances for work performed.

Protections under the Act are not automatic. Rather, toolmakers must make sure they comply with certain statutory requirements to avail themselves of the rights available to them. Similarly, those dealing with toolmakers need to make sure they understand the exposure they face by risk of the provisions of the Act. You can find the Act at www.legislative.mi.gov (MCL 570.541-.571).

Feel free to contact Wright Penning & Beamer with questions about how it works or about how your business may be impacted.

Dirk A. Beamer

When screening job applicants, employers routinely inquire about an applicant’s criminal record. While such inquiries are permissible, an across the board policy against hiring people with criminal convictions may not be.

Data shows that certain minority groups are disproportionately represented among the ranks of people with criminal convictions. Accordingly, a blanket policy against hiring people with convictions is statistically more likely to discourage hiring among those minority groups. Because of the “disparate impact” these policies can have on minority groups, they are coming under fire from the United States Equal Employment Opportunity Commission (“EEOC”).

Speaking at a recent meeting of the Labor and Employment Law Section of the State Bar of Michigan, the regional field director for the Detroit office of the EEOC announced plans to challenge employers with blanket policies against hiring applicants with criminal records. The Detroit office of the EEOC has already commenced litigation in federal court in Grand Rapids against a retail chain that follows such a policy.

Employers will be wise to review their own policies and hiring practices. Decisions based on criminal history should be made on a case-by-case basis and only where there is a rational, specific correlation between a criminal conviction and the applicant’s ability to perform the job at issue. For example, someone convicted of embezzling funds can safely be ruled out as an applicant for a cashier’s position. Someone with a fifteen-year-old conviction for drunk driving cannot be as easily eliminated from consideration for that same cashier’s position.

One option for passing the EEOC’s scrutiny is to make a job offer provisional pending a criminal background check. By delaying the inquiry into the criminal history until after an applicant has been found otherwise qualified for the job, the employer minimizes the risk of being found to have used criminal history as an excuse for eliminating qualified applicants based on race.