Law Posts – Page 3 – Segal Coaching LLC

Formula and Disclaimer Bypass Trusts Explained

As you may know, unless Congress acts, as of January 1, 2013 the federal estate tax exemption amount is scheduled to drop from $5.12 million to $1 million, and the maximum tax rate will increase from 35% to 55%. In addition, New York and Connecticut each levy state estate taxes on estates over $1 million and $2 million, respectively.

[Note: This post was written while I was a practicing attorney running a diverse solo law practice, and it is one of a small number of “legacy posts” that I have retained on the site. When published, this was one of my most popular posts. Since April 2015, I have been working as an executive coach and writer, and I am not currently available for legal engagements.]

Formula and disclaimer bypass trusts are irrevocable trusts used by married couples to minimize estate taxes on their combined estates. These credit shelter trusts work by channeling the assets into a trust for beneficiaries, such as the couple’s children or other family members.

Either type of trust may be a useful component of your estate plan, depending on your needs and goals. As with any planning, there are advantages and disadvantages to consider, as discussed below.

For the full memorandum, click on the link: Disclaimer and Bypass Trusts Explained

None of the information posted on this site constitutes legal advice or forms an attorney-client relationship. This is a public forum. Please do not post confidential or fact-specific information regarding your legal questions on this site. Any references to Law Office of Anne Marie Segal in the enclosed are references to my prior law office, now closed. Please seek legal counsel for any trust-related matters and do not assume that the information here is maintained on a current basis or applicable to your individual situation.

Confidentiality a.k.a. Non-Disclosure Agreements: What Type of Lawyer Do You Need?

A confidentiality agreement, also known as a non-disclosure agreement or NDA, is often the first step in a business transaction or employment relationship that involves sensitive information. In its simplest form, an NDA is an agreement by one or both parties (often called the “discloser” and “recipient” as applicable) not to disclose confidential information received from the other party to the agreement. In some cases, NDAs are more broad and include, for example, language that one party will not circumvent the other party in a transaction, solicit its employees or steal its trade secrets.

NDAs often have highly-technical legal language like the following (translation into plain English below):

“In consideration of your involvement in a possible transaction (the “Transaction”) relating to [Name of Company] (collectively, with their respective subsidiaries, the “Company” or “we” or “us”), the Company is prepared to make available to you certain information concerning the business, financial condition, operations, assets and liabilities of the Company, including information which may be non‑public, confidential or proprietary in nature. As a condition to such information being furnished to you and your Representatives (as hereinafter defined), you agree to treat any information (whether prepared by the Company or its representatives or otherwise and irrespective of the form of communication (i.e., whether written or oral)) which has been or is furnished to you or to your Representatives already or in the future by or on behalf of the Company (collectively, the “Information”) in accordance with the provisions of this agreement (this “Agreement”), and to take or abstain from taking certain other actions as hereinafter set forth.”

The above paragraph essentially means, with some nuances, that, “if we give you certain information, you will comply with this agreement.”

NDAs are generally short documents, from one to five pages or more depending on the size, industry and inclination of the parties, the jurisdiction governing the agreement and the nature of the information being disclosed. In most instances, negotiations are and should be judicious and prompt so that, once agreement is reached, the business deal, investment or relationship can go forward as intended. Sometimes, however, negotiations take weeks or months because the parties do not see eye-to-eye on the major points, one party has unreasonable demands or a well-meaning but incompetent attorney bungles the process. Unfortunately, legal ineptness in the field of NDAs is more common than one might imagine, since lawyers often fall in love with the negotiation process and a preferred “turn of phrase” rather than maintain the proper perspective that the NDA is simply an appetizer to the main course.

An experienced and skillful NDA attorney knows how to cut through the words on the page and drill down to the significant point for a particular client. An incompetent one simply works from a form or (worse) hampers the process by not understanding, knowing or caring about each party’s leverage and how to negotiate significant issues. Bad lawyering not only slows the NDA negotiation process but makes the business people (who retained the lawyer) appear inexperienced and unable to see the big picture. In the worst case scenario, it can lead to opportunities being missed or business relationships being strained or severed.

Finding the right attorney to negotiate NDAs for your firm can be a challenge. They are often short and straightforward agreements that do not require major legal “firepower”, yet they require close attention by a careful reader so that nothing is unnecessarily given away in the process. One example that is common in form NDAs is that a discloser attempts to make all information shared under the agreement confidential, whether or not such information is related to another company, covered by another agreement (such as one with a third party, which may have different or conflicting provisions) or already possessed by the recipient. Another common provision states that the recipient cannot share the information received with other parties to a transaction (including, for example, joint investors, lenders or advisers), which language may be buried in the small print on a back page but nonetheless binding unless revised.

While lawsuits involving NDAs are relatively rare, it is better to have the “insurance” of a proper drafted document than take the risk of costly disputes and/or threats down the road. In addition, in many cases NDAs with the larger companies are “take it or leave it” documents, so it pays to know in plain English what you are signing.

None of the information posted on this site constitutes legal advice or forms an attorney-client relationship.

Lessons from Hurricane Sandy: Business Continuity

As a business lawyer, I track not only the legal aspects of business but also how people live, breathe and think about their businesses. After Hurricane Sandy, business continuity is one issue that is, or should be, on the minds of all business owners.

I spoke with a restaurant owner in my hometown of Stamford, Connecticut in the days before the hurricane and asked him what where his plans for the coming storm. His answer: “Pray that it misses me, because I will lose thousands of dollars of frozen food.” He didn’t even begin to mention the potential loss of revenue if his doors were shuttered for a week or more, either unable to imagine it or unwilling to foresee the risk.

Unfortunately, all too often business continuity planning – preparing to keep a business operating and mitigate losses during a hurricane or other disaster – is seen (if considered at all) simply as an expense rather than an opportunity. If you own a business, here are some thoughts about how to ramp up your business continuity efforts.

1. Evaluate the Risks. The first question is always what risks are greatest to your individual industry and business. In the restaurant example, maintaining current inventory and access to alternate suppliers (if a main supplier is unavailable) are two major and obvious factors, but there is much more to consider. Let’s start with the workforce. How will the restaurant’s manager communicate with employees in the case of a disaster or other emergency? Have any been cross-trained in the event that staff is limited and has there been a dry run of the management pyramid as the staff fulfills their new roles? How will mundane tasks be met, such as washing dishes and taking out the trash? Is alternate staff available? Then there’s technology. How much of the business relies on technology and what will happen if the power fails? Have you secured an alternate means of processing credit cards, for example, or planned a manual backup? There’s also the site to consider. If the site of the restaurant becomes unavailable or suffers a security risk for any reason, does the business need to close or can meals be delivered to customers in another manner (e.g., takeout)? What other risks may face your business?

2. Invest in a Backup Power Source. While we can all debate whether major storms and other disasters are becoming more common, after Hurricane Irene, Hurricane Sandy and other worldwide events, it is clear that businesses need access to power when the lights go out. Decide how much backup power generation is sufficient in different scenarios that could face your business and investigate how you can secure access to the resources needed to run it, such as natural gas or gasoline. If you cannot afford a generator, can you share one with another local business? If you choose to go that route, make sure to sign a contract outlining the rights and responsibilities of each business, including how much power the generator owner and second business can pull at any given time and how this will be monitored.

3. Review Insurance. Does the business have sufficient insurance in the specific areas that cause risk? Flood insurance is a prime example. If your business could experience flooding and is not insured against that risk, it is time to review and update your policy.

4. Review Contracts. If your business contracts require delivery of goods or services at a specific date and time, include “force majeure” clauses in your form contract and any other significant agreements. These clauses vary in their language, depending on the subject matter of the contract, but generally state that if a force outside of your control (i.e., a “higher force” or “force majeure”) causes a delay in or impossibility of performance, you are excused from the contract for the duration of the event.

5. Plan How to Communicate with Employees. Mentioned in the risk-analysis above, businesses need a tested means of communicating with employees in the event of a disaster. Which employees have access to landlines, cell phones and email, and does everyone use them on a regular basis? Is there a backup emergency phone number for each individual? Who maintains the employee list, and what is the plan if that person is incapacitated? Can you outsource this function and does it make sense to do so?

6. Have Built-In Redundancy. If you are reliant on data, plan to backup that data and your central server as needed. Keep copies of important records offsite or online. If you are heavily reliant on other service providers to run your business, such as an Internet provider, find out if their own backup plans are sufficient to allow customers to continue to do business with you if the service provider’s systems fail.

7. Test. A business continuity plan has little value on paper. Make sure it actually works. Have Plans A, B and C in place about how your business can be run, and test each one quarterly or annually.

8. Disseminate. Similarly, a plan has no value if the key players do not know about it. Make sure your significant employees are clued into the business continuity plan, know their roles and can implement it if needed.

Preserving Limited Liability as a Single-Member LLC: Some Crucial Considerations

If you plan to start or have recently started your own business and are considering a single-member LLC (i.e., a limited liability company of which you are the sole owner), it is tempting to cut corners on the formalities, cost and time investment that may be associated with administering a “real business”. After all, no one can dispute profits, control or any aspect of the company with you, so why do you need the hassle? Successful or not – including the scary and exhilarating bits – it’s all yours.

The main problem if you fail to treat your LLC as a real business is that, when you actually need the limited liability protection that the LLC is meant to afford, the courts may not treat it as one either.

The Concept of Limited Liability

If you are going into business for yourself, there is no requirement to form an LLC or any other legal entity. There are quite a number of small businesses that operate as sole proprietorships, especially in the early days of the business when there is little or no revenue generation. The reasons to form an LLC or other entity vary, from simply appearing “more professional” to raising capital or engaging in tax planning, but obtaining limited liability status is certainly a key motivator.

In contrast to the single-member LLC, a sole proprietor simply operates a business in his or her own name. Let’s say Katie Lynn designs handbags, for example, and sells them from her home. Her business transactions are all done through her own name. Katie has personal liability for her own conduct as well as any debts of her business. If she purchases fabric, rents display space or incurs other liabilities that she later cannot afford to pay, Katie’s creditors can come after her home or other personal assets.

If Katie forms a limited liability company – let’s call it KL Designs LLC – she can now take a step back from the business if – and this is the important point to note – she takes appropriate care in the operation of her LLC. Simply forming an LLC one day and making no other changes to her business operations will not afford Katie the protection she expects. She needs to run KL Designs LLC not as an extension of Katie Lynn but as a separate entity or “legal person”.

Veil Piercing

The risk that Katie now runs, as the sole owner of an LLC, is that she has spent time and money to create KD Designs LLC but will be liable for its debts nonetheless. To be clear, there are instances where an LLC owner can be personally liable despite any entity status, including:

– personally and directly injuring someone,

– personally guaranteeing a business loan or other liability, or

– intentionally or recklessly committing fraud or illegal acts.

An LLC owner can also be personally liable if he or she does not treat the entity as a separate legal entity. In that instance, a court can hold that Katie or another business owner is essentially operating as a sole proprietorship and disregard the LLC status. Below are some ways sole member LLCs can protect themselves against “veil piercing”, which is the legal term used to analogize that the entity is simply a facade or “veil” covering the owner rather than shield against liability.

Operating Agreement

The central document for an LLC is the operating agreement. An operating agreement sets forth the obligations of the member(s) with respect to ownership percentages, capital contributions, profits and losses and other rights and responsibilities. It also overrides any default rules on the governance of LLCs in the relevant jurisdiction, which may or may not be what the owner(s) intended. As a sole owner of an LLC, having an operating agreement and following what it requires to authorize or take action by the entity are the first steps to demonstrating that the business is separate from one’s individual affairs.

Funding the LLC and Insurance

Undercapitalization – i.e., lack of sufficient funds to operate the business – is another reason a court may pierce the veil of an LLC and hold the owner(s) personally liable for the company’s debts. LLC owners need to invest sufficient cash in the business to fund its expenses and should hold sufficient liability insurance to cover lawsuits and claims (which will also be available to cover instances where the limited liability status is not respected).

Separation of Business and Personal Assets

An LLC owner should obtain a federal employer identification number (EIN) and keep bank accounts and financial accounting separate for the LLC and his or her personal assets. The absence of corporate records and commingling (mixing) of business and personal assets are two factors that courts consider in determining whether the piercing-the-corporate-veil test is met.

Transacting Through the LLC

All agreements and business transactions should be conducted through the name of the LLC. If we consider our example above, all contracts, invoices and other documents that Katie enters into on behalf of her handbag business should be in the full name of KL Designs LLC (including the “LLC” designation) and signed by Katie in her capacity as president (or another title) of the company.

The above considerations are crucial for any owner of an LLC, including a single-member LLC, who wants to preserve the limited liability status that an LLC is intended to afford.

The Effectiveness of a Non-Compete that is “Subject” to an Employment Agreement: Why Legalese Isn’t Always a Waste of Time

Imagine, as I was asked recently, that you were an ex-employee of a company and attempting to determine whether you would prevail in a certain lawsuit. The situation involves a non-competition agreement (non-compete) you signed with a company, and you do not believe you should be bound by it. The company is suing you to enforce it. The non-compete says it is “subject to an employment agreement to be completed within 30 days.” The employment agreement, in fact, was never signed.

Is the non-compete binding? In other words, is the enforceability of the non-compete subject to the existence of an executed employment agreement or are the provisions simply subject to contrary language in an employment agreement, if completed and signed within the 30-day period? Obviously, these are two conflicting interpretations of the same language, and either could be valid. A separate question would arise if an employment agreement was in fact executed, but it was done so more than 30 days after the employment agreement.

At the outset, there are many preliminary questions to ask before considering the potential outcome of the case, including the following:

– In which jurisdiction was the agreement signed, and are non-competition agreements binding in the jurisdiction?

– Was there sufficient consideration to create an enforceable agreement?

– Is the agreement otherwise enforceable as drafted?

– Does any other language in the agreement itself contradict the language above? For example, is there an “integration” clause that says the agreement contains the entire understanding of the parties with respect to the subject matter of the agreement?

– What interest is the company trying to protect (e.g., confidential information, competing employment, customer lists or another restriction)

– In what circumstance did this arise, i.e., were you fired or did you leave voluntarily?

– Have other cases been decided in the relevant court(s) that deal with the same or a similar point?

– Do we know anything else about the intent of the parties (you and the company) when the non-compete was signed?

– Do other employees have non-competes with the company and are these generally enforced if violated? Do you know (or can you find out) if they contain similar language?

The questions above and others would help determine your likelihood of prevailing in the lawsuit. Assuming the plain language of the agreement and the limited facts above, I believe you would have a strong argument that your non-compete is not an enforceable agreement, because the formation of the contract was subject to a condition that was never fulfilled, i.e., the execution of an employment agreement within 30 days. The company would counter that you were employed nonetheless, and that “subject to” language is therefore superfluous.

If this case were actually at trial, you would need to consult further with a competent attorney to determine what goals the company had in bringing the lawsuit against you and what strategy should be employed to attempt to diffuse, fight or settle the suit.

Of course, there is another crucial lesson to take away from the above scenario. When you draft a contract, you have to get the language right, and you have to do what you say you’ll do. In other words, good drafting and attentive follow-up, by you and/or your lawyer, are essential.

Lawyers often get a bad rap for focusing on “legalese” and “fine points”. However, thousands and sometimes millions of dollars are spent trying to interpret what people meant when they wrote something, and which party has the better argument that its interpretation of a clause is the correct one. While lawyers cannot foresee every situation that may arise and how to draft a “bulletproof” agreement that will withstand any dispute, experienced ones can steer you out of circumstances in which off-the-shelf or borrowed contract language turns out to be penny wise and pound foolish. Don’t assume that language you found on the Internet or that “worked” for (or was never tested by) your brother-in-law’s business in another state five years ago will work for you today. Even language recommended by your attorney to use with a previous employer may not fit your current employment arrangement, since the circumstances may be different

Finally, if your lawyer was paying careful attention when the above (hypothetical) non-compete was drafted, you would not be in this scenario. The non-compete would have specified whether a signed employment agreement was a condition precedent to an enforceable non-compete or simply governed in the case of conflicting provisions. In addition, the employment agreement referenced would have been signed and kept on file, or the non-compete would have been amended to delete or change the reference if the employment agreement was not signed in the requisite time period.

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