By Attorney Kelly Jesson
Creditors come in all shapes and sizes: ex-spouses, bankruptcy, personal and business debts, and claims involving real estate or professional malpractice. People in high risk professions or who deal with circumstances that are prone to litigation sometimes want to take steps to protect assets. However, this must be done before a dispute arises, because moving assets around afterwards can sometimes be deemed a fraudulent conveyance and voided by a court.
Unfortunately, there is no “magic wand,” and protecting assets oftentimes involves investing your earnings into protected accounts, such as life insurance and retirement. An individual’s retirement account is exempted from their own creditors (but not from a beneficiary’s creditors once the assets are inherited, which will be discussed in the next blog dealing with asset protection in estate planning). The cash value of a life insurance policy is also protected from the insured’s creditors, but again, not from a beneficiary’s creditors once the assets are inherited.
Additionally, the state of North Carolina exempts certain amounts of property from creditors:
One of the most important things you can do is title property as “tenants by entireties” (TBE). If a husband and wife purchase property together, by default, it is owned as TBE and is therefore protected from the creditors of just one of them, meaning a lien will not attach. However, if a creditor gets a judgment in both spouses’ names, a lien can attach. Also, if the spouses divorce or one passes away, a lien can attach if the remaining owner is the debtor. Another alternative or high-risk professionals is to have the low-risk spouse own the majority of assets because they will not be responsible for debts unless joint.
Another really important step is for self-employed people to form businesses and formalize businesses to protect assets. If you follow business formalities, business creditors cannot reach your personal assets for business debts. If you own investment properties, you are running a business. In fact, the definition of “operating a business” is pretty loose, and oftentimes people will move high-value assets over to LLCs for asset protection purposes. Again, you must follow business formalities (set up a tax identification number, maintain a separate bank account, have an operating agreement).
If you own a business but you have personal creditors, those cannot reach assets titled in the name of your business. They are limited to collecting only the distributions you receive from the business, which you control as the business owner. Distributions do not include your pay made through payroll, which is another reason to run your business like a business.
Finally, we’re often called by people to set up trusts to avoid creditors. General living trusts or revocable trusts are not protected from creditors of the grantor (the person who sets it up), although the funds could be protected from beneficiaries’ creditors after the grantor dies (the subject of our next blog). North Carolina residents have a few not-so-great options: First, they can set up an irrevocable trust for the benefit of others. For example, if you are married, you can create an irrevocable trust that benefits your spouse for his or her lifetime. Presumably, your spouse will take care of you while you’re married, so you will indirectly have access to the money you put into the irrevocable trust, although on paper it will no longer belong to you, so your creditors cannot reach it. This obviously has risks, but it is an option.
Another option is an asset protection trust. In an asset protection trust, the trustee has discretion to distribute money to the grantor as well as other beneficiaries. These trusts are not valid in North Carolina, although they are available in seventeen other states and other countries. However, North Carolina residents can pick the situs (jurisdiction) of their trust and where the trustee is located, meaning, for example, that you can state that Georgia law applies to your trust even though you live in North Carolina. However, lawmakers in North Carolina have questioned whether this practice is valid for asset protection trusts, and, therefore, there are some risks involved. Of course, transferring funds to another country is always risky.
If you are interested in implementing any of the above ideas in order to protect your assets, please give the attorneys at Jesson & Rains a call!
By Attorney Edward Jesson
Hearings were recently scheduled on a proposed North Carolina state bill entitled “An Act to Provide Consumer Protections Related to Roofing Repair Contractors.”
If passed, the law would have a big effect on the roofing industry in North Carolina--written contracts between roofing contractors and consumers would now be required. The proposed bill would require the following provisions to be included in these contracts:
1. The roofing contractor’s contact information;
2. The name of the consumer;
3. The physical address of the property being worked on and a description of the structure being repaired;
4. A copy of the repair estimate that addresses:
a. a precise description and location of all the damage being claimed on the repair estimate;
b. an itemized estimate of repair costs, including the cost of raw materials, the hourly labor rate, and the number of hours for each item to be repaired; and,
c. a statement as to whether the property was inspected prior to the preparation of the estimate and a description of the nature of that inspection.
5. Date the contract was signed by the consumer;
6. A statement that the contractor shall hold in trust any payment from the consumer until the materials have been delivered to the job site or the majority of the work has been done;
7. A statement providing that the contractor shall provide a certificate of insurance to the consumer that is valid for the time during which the work is to be performed;
8. If the consumer anticipates that insurance funds will be used to pay for any portion of the job, a disclosure from the consumer that states that the consumer is responsible for payment if the insurance company denies the claim in whole or in part and a disclosure from the contractor that he or she has made no guarantees that the claimed loss will be covered by an insurance policy.
The new law, if passed, will also give the consumer the right to cancel the contract if the consumer’s insurance company denies the claim. Further, it will prohibit various practices from roofing contractors, including offering to pay insurance deductibles for the consumer or offering the consumer anything of value in order to display a sign or any other type of advertisement at the consumer’s property.
It is important to note that the proposed law specifically excludes licensed general contractors or subcontractors working underneath a licensed general contractor from the definition of “roofing repair contractors.”
While the new law would create an extra requirement that roofing contractors in NC may not be happy about, we always recommend having written contracts in place between contractors and the consumer. Too often the only written documentation is a cost estimate and, if there are any disputes, there are no provisions in these cost estimates for handling those disputes. The proposed law may also strengthen the reputation of the roofing industry by weeding out unscrupulous roofing contractors.
Jesson & Rains will continue to keep our clients updated on the passage of this law and are happy to assist with the drafting or review of any construction contracts. You can follow the status of the law yourself at: https://www.ncleg.gov/BillLookup/2019/S576.
By Attorney Kelly Jesson
Business owners around the country are starting to reopen their businesses up to employees and customers. However, regardless of government announced “phases,” businesses owe a duty to their employees and customers to keep them safe while on the premises. Lawsuits are starting to pop up, according to Market Watch.
What can you do to limit your potential liability? Businesses should follow healthcare and government recommendations, such as wiping down surfaces, frequent hand washing, wearing masks, socially distancing, etc. These recommendations sometimes change, so business owners should stay abreast of updates. Keeping your employees from getting sick on the job in the first place is key: in a worker’s compensation case, all the worker has to do is prove they were injured on the job and there’s a causal connection between the two. For example, a grocery store cashier may have a claim due to exposure to the public. A worker’s compensation claimant does not need to prove that the business was negligent.
For businesses that don’t have a large volume of public traffic (such as law firms), owners may ask patrons to sign a document before coming into the premises stating that they do not have COVID-19, are experiencing no symptoms, and they have not been around anyone with COVID-19 or who has otherwise been experiencing symptoms. While patrons can, of course, lie on these forms, at least it’s one additional step that business owners can show that they are taking to
protect their employees and other customers. Showing that you are taking the necessary steps to keep people safe is important in defense of personal injury lawsuits, where the plaintiff has to show not only causation (that they caught COVID-19 at your business) but negligence (that you failed to act with reasonable care).
A defense to a negligence action is “assumption of risk.” Some business owners may ask patrons to sign waivers of claims, saying that the patron is “assuming the risk” of contracting COVID-19 by coming to their establish. For example, someone who voluntarily eats at a restaurant or goes to a nail salon knows that there is a risk that they may be infected, and a business is not guaranteeing 100% that they will not be infected, because there’s no way to do that.
Governor Cooper provided business owners with extra protection a couple of weeks ago when he signed the Coronavirus relief bill. The act provides for limited liability for businesses deemed “essential” under the Governor’s prior stay-at-home order. If an employee or customer gets COVID-19 from spending time at an essential business, the business is not liable for damages unless it is “grossly negligent” or worse. Gross negligence is a higher standard than simple negligence. Instead of a plaintiff showing the absence of reasonable care in a negligence lawsuit, a plaintiff would have to show the conscious disregard for reasonable care to prove that a business was grossly negligent.
While essential businesses should be comforted by this law, we are of the opinion that this should not change how they do business. In fact, if they consciously fail to abide by social distancing and cleaning protocols, they could arguably be grossly negligent.
If you have any questions about how to prepare your business for reopening, give Jesson & Rains a call!
By Attorney Kelly Jesson
It’s hard to think about celebrating small businesses this month when so many are suffering due to coronavirus-related closures and illnesses. During this time of crisis, we’re right here with you, navigating these unusual waters.
We thought this would be a great time to feature one of our clients, Help Mask A Hero, who saw a life-or-death need and immediately sprang into action to fill the gap! Help Mask A Hero, Inc., is a North Carolina non-profit corporation, with its 501(c)(3) status pending. Founded by Charlotte’s own Dr. Lakesha Legree, owner of Elev8 MD Wellness Center, PLLC, and several other anesthesiologist colleagues, Help Mask A Hero uses donations to purchase coveted N95 masks to ensure that our frontline healthcare workers are receiving the PPE they need to treat COVID-19 patients AND stay healthy themselves. Help Mask A Hero also accepts donations of masks and other protective equipment. Help Mask A Hero has been featured all over major national news channels. We are so proud to serve them!
If you’d like more information, or to donate yourself, please visit: https://helpmaskahero.com
To honor our healthcare workers, we are offering a discount for those who need their estate planning documents drafted. Please give Jesson & Rains a call for more information!
President Trump signed a new law in December that has taken effect this month called the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). It includes a wide array of changes to retirement accounts that both individuals and business owners should know.
For individuals, here are a few highlights:
(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of
daily living for a period of at least 90 days due to a loss of functional capacity,
(ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in
consultation with the Secretary of Health and Human Services) to the level of disability described in
clause (i), or,
(iii) requiring substantial supervision to protect such individual from threats to health and safety due
to severe cognitive impairment.
Business owners should be aware of the following:
A financial adviser would be the best person to contact if you have any questions about how the SECURE Act affects your retirement, and a CPA would be a good person to contact regarding business credits. However, if you want to discuss how eliminating the IRA lifetime stretch might affect your estate plan, give Jesson & Rains a call.
By Attorney Kelly Rains Jesson and Associate Attorney Danielle Nodar
Forming a corporation in the state of North Carolina is pretty easy to do yourself, but that may get business owners into trouble. Numerous corporations exist without any bylaws and without issuing any shares (especially those who do-it-themselves). Failing to complete all the steps can have negative consequences.
A corporation is owned by its shareholders. Shortly after a business is incorporated, it should issue shares to the owner(s). If there are no shares issued, there are no shareholders, and thus no owners. Why do so many business owners fail to complete this step? Probably for two reasons: (1) they don’t know this is the way it works and (2) in order to incorporate, all the Secretary of State’s office requires is that Articles of Incorporation be filed with its office. It does not require proof of bylaws or shares.
Shareholders do not manage the business just because they are shareholders. The Board of Directors manages the business. For small, family businesses, the shareholders and the directors are often the same people. However, these are still two distinct roles. Most business owners that have not issued themselves shares are simply acting like directors of the corporation.
To incorporate, the incorporator (could be a future director, shareholder, or third party, like an attorney) files Articles of Incorporation. North Carolina law states that if no directors are named in the Articles of Incorporation, the incorporator shall hold a “meeting” (can be informal) to name the initial directors. “The incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation.” N.C.G.S. § 55-2-06 (emphasis added). The law states that there SHALL be bylaws, not that there MAY be bylaws. The bylaws govern the management and affairs of the corporation. The bylaws state how shares will be issued, how directors will be named/replaced, and how the company is managed.
So why should you care?
First, the liability protection corporation owners enjoy is at risk if you do not follow the corporate formalities required by North Carolina law. You risk having a creditor ask a court to “pierce the corporate veil,” making you personally liable for debts and judgments of the corporation. When a court “pierces the corporate veil,” it determines that the corporation and owner are basically the same, with the corporation serving as merely a shell for the owner to act. If this finding occurs, your personal assets can be used to satisfy corporate debts, which defeats one of main purposes of owning a corporation in the first place.
Second, you will probably not be able to obtain an SBA loan if you do not have bylaws. These loans are backed by government guarantees. The government wants to make sure it is not lending to an entity that has not been set up properly. The SBA wants to make sure the bylaws do not contain provisions that make the loan risky.
Finally, another reason why we talk to our clients about shares and bylaws is for estate planning purposes. When a person passes away, they leave their property to beneficiaries. Shares of corporations are personal property. If a business owner has not issued himself or herself shares of the corporation, what is there to pass to their beneficiaries?
Further, as we explained above, corporations are managed by the board of directors and not the shareholders. Therefore, even if a shareholder owner passes their shares to their beneficiaries, that does not mean that the beneficiary now suddenly starts managing the company as a new director. If you are the sole director of your corporation, who will take over management when you pass away or are sick? The bylaws of a corporation will govern what happens when a director passes away or otherwise becomes unable to act.
We can do some pretty creative estate planning with owners of corporations. We can help them restrict management or ownership of shares to family members. We can ensure that their shares stay out of probate through using trusts, saving their families money.
For assistance with drafting bylaws, issuing shares, and implementing an estate plan, give Jesson & Rains a call!
Subscribe to our newsletter.