Soon-to-be-business owners often ask us if there is any reason to form their businesses in Delaware instead of North Carolina because they’ve heard or read that corporations frequently form their businesses there. Lately, there’s been a lot of interest in incorporating in Nevada and Wyoming due to aggressive advertising.
For most small business owners, incorporating in a state other than your home state will have very little benefit to you and the business and will likely cost you more money. Not only will you have to file annual forms with both states every year, which costs money, you’ll have to get a Certificate of Authority to do business in North Carolina after your formation paperwork has been approved in the other state, which also costs money. Depending on the state, the formation paperwork could cost considerably more than North Carolina.
Some people recommend incorporating in Nevada and Wyoming because those states do not have a corporate tax or a personal income tax. This fact may be insignificant if your business is an LLC, not a corporation, because an LLC oftentimes does not pay corporate taxes. If your business is paying corporate taxes, it may have to pay them anyway because the corporation is based out of and does business in North Carolina. Furthermore, whether you pay personal income tax depends on the state where you live. North Carolina has a personal income tax. Forming in a tax-free state will not save you money on taxes if you live and work in another state.
The reason why so many large corporations form or convert their business to a Delaware corporation is because Delaware has a sophisticated corporate law and a Court of Chancery that only hears corporate cases. Based on these thoroughly-developed statutes and judicial opinions, corporate directors and officers are able to better understand their fiduciary duties and shareholders know what to expect. Delaware also has a reputation of being pro-management.
Nevada has recently amended its corporation law, which now resembles Delaware’s. However, at one point, Nevada touted that it is even more pro-management, limiting director’s and officer’s liability only to violations involving intentional misconduct or fraud. Shareholders may want to be cautious of Nevada corporations.
For most small businesses, these facts are insignificant because they are single member or family-run LLCs. There are no boards of directors or shareholders. However, if a small business expects to grow rapidly and has an eye towards getting venture capitalist funding or an IPO, it may want to consider forming in Delaware. Investors may require that those businesses convert into a Delaware corporation. If it is highly likely that will happen, the business may save some money by forming that way initially. This is a rare case, and converting a business to a Delaware corporation is not very expensive.
So in conclusion, like a lot of things we write about, do not always believe what you hear! There are little to no advantages to forming your business in other states, and it is likely that doing so without guidance from an attorney can result in additional costs to you. Please give us a call if you would like more information.
This is the last article in our Revocable Living Trusts (RLTs) series. Although there are a lot of myths and misunderstandings about RLTs, there are some circumstances and some individuals who can benefit from a RLT.
1. You are the owner of a closely-held business. Business interests are oftentimes considered estate assets. Therefore, an owner’s interest in a business may be “tied up” in probate after they pass. There might not be an agreement in place for who will operate the business and how it will be operated. A business owner might transfer his/her interest to a RLT making it easier for a trustee to immediately start running the business at the owner’s death.
2. You have a fair amount of assets, and you want to control what your surviving spouse does with his/her inheritance and/or control what happens with the inheritance after your surviving spouse dies.
You can place property in a RLT with contingencies on it, like your surviving spouse only getting a certain amount of money per year. Your RLT can provide that at the death of your surviving spouse, your children will inherit whatever is left in the RLT. This is a preferred method for people on their second marriage. If you leave property outright to your surviving spouse, the surviving spouse’s estate plan will dictate who gets the property he/she inherited at the surviving spouse’s death, which may leave children from a first marriage without anything.
I say “fair” amount of assets because, as previously mentioned, most of a decedent’s property passes outside of probate anyway. Children can be designated as beneficiaries if a second marriage is involved. If there are not a lot of probate assets, it is not going to be much of a concern what the surviving spouse is inheriting. Also, a surviving spouse is entitled to $20,000 - $30,000 spousal allowance anyway, which can come out of RLT assets. A RLT is not necessary to plan for minor children because wills can include a testamentary trust, stating that children are not to inherit until age 21 or 24, for example.
3. You own property in multiple states. If you own property in multiple states, when you pass away, your executor will have to probate your estate in every single one of those states. Those costs can really add up. Titling the real estate in the name of the trustee will prevent that from happening.
4. You have a lot of property that will pass through probate. As previously discussed, most of what someone has when they die passes outside of property (jointly owned property, retirement, life insurance). If you have a lot of property passing through probate, the court costs could be higher than normal, and a RLT may avoid some of those fees.
5. It is likely that you will become incapacitated in the future. The trustee of a RLT starts acting for the grantor upon the death or incapacity of the grantor. Thus, a trustee can step in and handle an incapacitated person’s finances even while they are still alive.
There are cheaper alternatives to drafting a RLT, though. A durable power of attorney allows an agent to handle an incapacitated person’s financial affairs. Guardianship is another alterative, whereby a loved one is appointed by the court as an incapacitated person’s guardian over the person and/or over the estate (meaning finances).
There are pros and cons for all three options. The benefit to using a RLT for anticipated incapacity is that the trustee can be given much more powers in a RLT than a guardian or agent under a power of attorney. The benefit to using a durable power of attorney is obviously its price, and unlike a trustee, an agent under a power of attorney is normally not compensated. A guardian can be compensated, but only with court approval. I consider the court supervision required with guardianship to be a “pro,” but others might consider it a “con.” The trustee would likely have to hire an attorney and a CPA to assist him/her with the administration of the trust during the grantor’s incapacity, which results in more cost to the grantor’s estate because those costs are considered trust expenses to be paid out of trust assets.
One final point – the trustee of a RLT only has power over an incapacitated person’s trust assets. A loved one might still have to go seek a court appointment to be guardian over the incapacitated’s person (meaning physical custody).
While there are some benefits to having an RLT in certain circumstances, there are risks that need to be considered. Hiring a professional to draft the trust, assist you with funding the trust, and consistently advise you as to the trust is why RLTs are expensive. You should never purchase a form trust and blindly start putting assets into the RLT without consulting professionals. Here are some of the risks:
a. You may lose creditor protections for singularly owned property. Example: Your husband is in an auto accident that results in an injury to the other party. The car is titled to the trust. The injured party gets a $100,000 judgment for his injuries. All of your property is in the trust, meaning that all of your assets are subject to the collection of the $100,000 judgment.
b. You may lose liability protection for singularly owned property. Example: Your husband is in an auto accident that results in an injury to the other party. The car is titled to the trust. Because you are joint owner of the trust with your husband, you are jointly liable for the accident as owner of the car.
c. Retitling retirement assets to trust may result in early distribution fees. Also, if you title a non-probate asset into a RLT (like retirement assets), you may lose creditor protection. You'll want to make sure only the beneficiary designation is the trust, not that the trust owns the asset.
There are certain circumstances where a revocable living trust is beneficial to the owner. However, for many, it is just not necessary, and it may create more costs. Like any estate planning, a consultation with a professional is worthwhile.
This is a follow up to the last article which explained Revocable Living Trusts (RLTs). In today’s article, I will describe some of the myths surrounding RLTs. In a couple of weeks, in the third and final article in this series, I will review when having a RLT is a good idea or a bad idea.
People are typically interested in RLTs because they have been told they can “avoid probate,” and probate is expensive and takes a lot of time; they can avoid paying taxes; they can avoid paying their creditors; and that trusts are private. A lot of these claims are myths, or at least not entirely accurate.
Myth Number 1. You can “avoid probate” with a trust, and you will want to because probate is expensive and takes a lot of time.
The only way to avoid probate is for all of the decedent’s estate assets to be titled in the trust at the time of death or pass outside of probate another way (like a beneficiary designation). Often, what happens is a trust is created, funded, and then the grantor gets additional assets during his/her lifetime that are not subsequently added. Sometimes, trust documents are created by someone and no assets are put in the RLT at all! I see this happen quite a bit--especially if you have purchased the document from an internet “legal document” company and have not done any other work. People assume that with the document, your estate is magically handled when you die! Not true at all. An attorney will draft a will along with the trust to ensure that there’s a will in place in case there are assets not in the trust when the grantor dies.
If there are a lot of assets not in the trust when you die, the existence of a RLT will actually double costs at death because the estate will go through probate and then go through the administration of a trust (resulting in additional attorney’s fees, CPA fees, and trustee fees). Property will also have to be retitled twice (title from decedent to trust, and then to beneficiary, instead of just to the beneficiary at death).
Secondly, even if probate is necessary, it is normally not as expensive or time consuming as the myth would have you believe. A lot of those “horror stories” you hear are from people who passed away without a will or who live in other states. In North Carolina, the court fees for a formal probate administration is $120.00 + $.40 for every $100.00 in receipts and disbursements through the probate estate. For example, for an estate with $100,000 of receipts and disbursements, the total court costs would be $520. Attorney’s fees will add several thousand dollars to this figure; however, sometimes, attorneys are not needed to probate an estate. Attorneys are always needed to assist in the administration of a trust. The trustee will still be paid for his/her time, just like an executor in a probate estate. Other professionals like CPAs will still need to be hired.
It is likely that the size of your probate estate will be smaller than you think because most property that someone owns passes outside of probate anyway. The largest assets that a person owns is life insurance, retirement, and real estate. Life insurance and retirement passes outside of the probate estate if beneficiaries are designated. If a husband and wife own real estate or joint bank accounts, that property will pass to the surviving spouse automatically after the first spouse’s death. These assets will not be countable by the court when determining court costs (the $.04/$100 equation).
Finally, there is likely to be a little less of a delay with beneficiaries receiving property after the grantor dies if it goes through trust, but not much. When the grantor dies, loved ones still have to gather assets, pay taxes and debts and final expenses, and retitle assets. To ensure all debts are paid, notice to creditors is normally run in a newspaper and three months passes for beneficiaries are paid. Probate takes 6-12 months, so there may be a difference of 1-6 months with using an RLT.
Myth Number 2. Assets in RLTs are safe from creditors.
Again, property titled in the name of an RLT is considered part of your probate estate when you pass and will be available to satisfy creditor claims if you pass away owing money to creditors.
Myth Number 3. Trusts are completely private, unlike wills which are public.
This myth is a half-myth. Most trust agreements have language in the trust prohibiting the trustee from making the contents of the trust public, so if you wanted to keep beneficiaries’ identities secret, you could probably achieve that. However, property owned by the trust is not secret. DMV records and deed records are public records. Someone looking at property records will see that the “Trustee of Jane Doe Trust” owns real estate at Lake Norman. These records are mostly online. Beneficiaries are entitled to copies of the trusts. As of today, probate court records are NOT online. If someone wanted to pull a copy of a decedent’s will or probate court file, they would have to physically go to the courthouse and make a copy.
Further, this privacy comes at a cost. Probate is a court supervised process, whereby the court ensures that debts and expenses are paid, the executor follows the decedent’s instructions as outlined in the will, and beneficiaries receive their inheritance. With the administration of the RLT being private, the court has little supervision over the trustee.
Despite the information in this article, there are several circumstances when having a RLT is a good idea (just not for the reasons stated above). A RLT can be a valuable planning tool for owners of closely held businesses, people with grown children and multiple marriages, and owners of real estate located in multiple states, to name a few. I will review why in the next article and discuss some of the risks involved in setting up a RLT without consulting estate planning professionals.
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