​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:

• up to $35,000.00 of the value of the debtor’s or dependent of the debtor’s residence or burial plot, except if a debtor is 65 or older, they may exempt up to $60,000.00 if the property was previously owned with a deceased spouse (known as the “homestead exemption”)
• up to $5,000.00 of the value of any property if the debtor has not used their entire homestead exemption
• Professionally prescribed health aids for the debtor or a dependent of the debtor

• up to $3,500.00 in value of one motor vehicle
• up to $5,000.00 in value, plus an additional $1,000.00 for each dependent of the debtor, not to exceed $4,000 extra total for dependents, in household furnishings, household goods, clothing, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor
• up to $2,000.00 in value of professional books, implements, or tools of the trade
• up to $25,000.00 in funds in a 529 college savings plan.

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!

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:

• Plan participants who did not already turn 70.5 in 2019 now do not have to take required minimum distributions (RMDs) until age 72.
• 529 accounts may now be use for qualified student loan repayments up to $10,000 total.
• Up to $5,000 may be withdrawn from 401(k) accounts without penalty in order to have or adopt a child. The distribution, which is still subject to tax, can be repaid to a retirement account.
• Plans may offer qualified disaster distributions without penalty to participants who lived in a presidentially declared disaster area if taken before age 59 1/2, and participants are permitted to spread taxes on the distribution or repay it over three years.
• The age limit (70.5) for traditional IRA contributions has been eliminated. However, it appears to require that Qualified Charitable Distributions come from pre-70.5 contributions.
• One potential downside to the law is that inherited IRAs must be spent within 10 years of inheritance (the government wants to hurry up and get those taxes) regardless of the age of the owner at time of death. If the IRA owner died in 2019, the new law does not apply to the beneficiary. We previously wrote about the old law and estate planning here.
  • There are exceptions to this rule: spouses, minors, disabled individuals, chronically ill individuals, or beneficiaries within ten years of age to the decedent.
  • It is unclear yet whether a trust for the benefit of spouse and children is an exempted beneficiary.
  • When a minor child reaches the age of majority (18), the ten-year clock starts. It is unclear how trusts will be treated where there are multiple children of different ages.
  • The definition of a disabled individual is a person who is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” IRC §72(m)(7).
  • The definition of a chronically ill individual relates to the code section dealing with the deductibility of long-term care expenses. That section requires a licensed health care practitioner to certify that the individual’s limitation is indefinite but expected to be lengthy in nature, as well as one of three things:

                        (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:

• The business tax credit for plan startup costs will increase from $500 to up to $5,000 in certain circumstances. 

• There’s an additional $500 tax credit for three years for plans that add automatic enrollment of new hires.

• The cap on payroll contributions in automatic-enrollment safe harbor plans has increased from 10% to 15% of wages (employees can opt out of the increase). 

• Employers must now include long-term part-time workers as participants in defined-contribution plans if they have completed at least 500 hours of service each year for three consecutive years and are at least 21 years of age. However, these participants can be excluded from safe harbor contributions, nondiscrimination and top-heavy requirements. 
• Employers and plan sponsors are now more likely to include annuities as an option by reducing their liability if the insurer cannot meet its financial obligations.

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!